Cost Savings | Pepsi Productivity

Framework for Recognizing Cost Savings vs. Annual Operating Plan (AOP)

The purpose of creating this framework is to clearly distinguish cost savings vs AOP (Annual Operating Plan) assumption by establishing consistent principles, methodologies, and reporting practices. It ensures that only procurement-driven, substantiated savings are recognized, excludes uncontrollable factors like volume changes, and provides a transparent way to track and credit value creation beyond planned productivity targets.

We are formalizing recording and reporting of Cost Savings vs AOP from a functional point of view

Definitions & Scope

Term	Definition
Annual Operating Plan (AOP)	The baseline financial plan that incorporates inflation, productivity targets, and forecasted volumes.
Cost Savings vs AOP	Financial benefits achieved beyond AOP expectations, driven by procurement actions, and supported by data (e.g., inflation mitigation, contract negotiations)
Productivity	Planned and targeted initiatives embedded in the AOP, representing expected performance improvements (e.g., supplier re-sourcing, value engineering, automation)
Managed Spend	Spend categories under procurement control, where sourcing, negotiation, and supplier management can influence outcomes.

Guiding Principles

Procurement Managed Spend Focus

Framework applies only to managed spend categories.
Non-procurement managed spend is excluded due to limited procurement influence.

Substantiated Inflation Requirement

Cost savings must be based on substantiated inflation (Directs: Commodity indices; Indirects: Market Assessments)
Inflation not substantiated in AOP = no cost savings, even if prices drop.

Exclusion of Volume/Consumption Changes

Savings must exclude impacts from volume changes (business-driven)
Focus is on rate or unit price improvements, not usage reductions.

Initiative-Based Attribution

Use a bottoms-up, initiative-level approach for large spend areas (projects, contracts, etc)
Tail spend may rely on top-down assumptions when detailed data is unavailable.

Cost Savings as Non-Targeted Value

Cost savings are not part of formal targets but are tracked and recognized to encourage initiative.
Treated as stretch objectives, not hard commitments.

Methodology for Calculating Cost Savings

Establish Baseline Use AOP inflation assumptions for managed categories. Procurement will document assumptions upfront when AOP is locked.
Validate Inflation Assumptions Based on external indices or market inputs, validate and document detailed assumptions with finance.
Identify Procurement Action Ensure cost change is driven by procurement initiative (e.g., contract renegotiation, sourcing)
Exclude Non-Procurement Impacts Remove savings due to business-driven changes (e.g., volume, project delays)
Document Evidence Keep audit trail for savings calculation (e.g., contacts, supplier quotes)

Reporting and Recognition

Both P&L Productivity and Cost Savings vs AOP will be recorded and reported in PowerSteering

Metric	External Reporting	Internal Recognition
Productivity in AOP	Tracked and reported	Used for goal setting and performance evaluation
Cost Savings vs AOP	Not externally reported	Internally tracked and recognized functionally
Total Value Contribution	Only productivity reporting	Used for procurement team recognition and incentive alignment

Difference between Productivity and Cost Savings vs AOP

Productivity

A cost reduction initiative which leads to Year-Over-Year (YoY) real P&L savings in fixed and variable costs excluding the impact of volume leverage, market deflation and forex gains

Cost Savings vs AOP

A cost reduction initiative which leads to real P&L savings in fixed and variable costs vs a clearly established AOP; excluding the impact of volume leverage, market deflation and forex gains

Key defining factor is the baseline of Prior Year vs AOP. Baseline should be clearly defined and measurable to count as Productivity or Cost Savings vs AOP. Any other hypothetical measure such as reduction vs quotation from suppliers, reduction vs market rates, etc, does not have any bearing on the calculation.