14 Aug Savings Methodologies: Mistakes Made & Lessons Learned
If you are a corporation or mobility company that has been challenged to effectively measure international moving savings, this article is for you. Tracking savings on international moves is challenging, and I hope to provide you some insight into why it is so challenging, discuss approved procurement savings methodologies, and offer a path forward to easily measure your actualized savings.
There are several generally accepted savings methodologies that procurement departments use.
The most common methodology is direct comparison to a previous purchase. With a direct comparison, procurement creates a baseline that shows what the organization spent on previous goods and services. That baseline is compared to the new pricing terms, and the projected savings are calculated. Some organizations will measure actualized savings, where the actual goods and services purchased after the deal has been signed are measured against the baseline to determine the final savings.
Unfortunately, a direct comparison methodology doesn’t work very well for moving in general because each move is different. The components that determine pricing including the origin, destination, date of the move, move type, weight, volume, and supplemental services. A move that occurred today will never be identically replicated, so making an apples to apples comparison that is easy with commodities is not possible in international household goods moving. If you ever see an international moving savings report using this methodology, there is a good chance it’s invalid.
Unintended Consequences with Direct Comparison Savings
I learned about flaws in calculating international move savings the hard way. In a large international moving RFP, I bid out a client’s moves from the prior year as they occurred. Some international movers bid so aggressively on the moves in RFP that they appeared to create >30% in savings. I was excited about the potential of claiming this savings and advised my client to select this supplier. In retrospect, I made a rookie mistake that is all too common in the household goods industry.
A large part of the problem was that the scope of the RFP probably only represented a small portion (~40%) of the client’s total moves. As a result, the bidder priced as aggressively as possible, knowing that they would lose money on the scope of the RFP, while substantially marking up costs that weren’t in the scope of the RFP.
There is no reasonable way to request pricing for every origin, destination, shipment size combination, and all the supplemental services that may be required. The net is that many RFPs create pricing games to measure savings that will never actualized. Pricing games drive inefficiency and incentivize movers to act without integrity. For all the reasons mentioned, measuring savings via a direct comparison is often flawed and should typically be avoided.
Another typical savings methodology far more challenging to measure products and services is to leverage a “market basket”. This is best used in environments that have numerous items where it would be unreasonable to directly measure savings on all of the items. In this case, a market basket of representative goods and services are used to reflect the whole portfolio of spend.
To determine savings, you identify the approximate quantity for each item in the market basket, determine the savings for those items, and then extrapolate the percentage saved to the total portfolio of spend.
Unfortunately, this still doesn’t work well for the moving industry. Even though the market basket is designed to simplify the quantity of calculations, it oversimplifies the calculations, so it’s still not reasonably possible to make an apples to apples comparison for move pricing.
A valid but flawed savings methodology that is commonly used is a competitive bid. Competitive bids are often used by procurement when there hasn’t been a previous purchase to create a baseline. Unfortunately, competitive bids typically require more effort and often net a worse savings result.
Often, this methodology will have each mover meet with the transferee to perform a survey. This adds time, inefficiency, and it negatively impacts the transferee experience. It also drives higher costs for movers that are ultimately passed onto the clients.
In this environment, savings are calculated from the average competitive bid rather than a baseline. Unfortunately, because of the increased transaction costs in a competitive bid environment, the value to the organization is lower.
A Better Way
After using these savings methodologies, I realized there had to be a better way. In meeting Ryan and seeing what PricePoint did, I dove into I solution I saw changing the industry.
A methodology that wasn’t available five years ago was the ability to easily compare door-to-door move pricing to the entire moving market average. By calculating the average market pricing from over 250K anonymized moving and freight tariffs, it’s possible to make an apples to apples comparison and create a baseline against the market average.
We measure the market average in real time for each component: the origin, destination, move type, weight, and volume. Any supplemental costs are removed, as those will remain difficult to make an apples to apples comparison for the next year or two. By comparing a statistically significant size, we can then determine the baseline by measuring the average percentage moves are above or below market.
To determine the actualized savings, the ongoing moves are compared similarly to market average, and the actualized savings is calculated by subtracting the current percentage below market from your baseline.
This innovative approach to measure move savings enables procurement and mobility departments to actualize savings effectively, without the negative consequences associated with traditional international household good RFPs.
If you are interested in learning more about how we can help you simplify move pricing and innovatively measure savings for your clients, let’s talk.