Spend Matters welcomes a guest post from Pranav Padgaonkar of GEP.
Spot spend has traditionally been a hurdle in procurement’s goal of maximizing “spend under management.” It is unpredictable yet resource-intensive. It has one of the lowest returns on procurement investment. Traditional solutions range from endless tactical negotiations by junior buyers to outsourced agreements with procurement providers. These are at best short-term solutions that come at a high cost to procurement.
To narrow the focus of discussion, the issue is not tail spend. These low dollar purchases should be handled tactically. The issue is also not spot spend on repetitive commodities such as MRO supplies or office supplies, which can be treated as a market basket. The issue is largely “spot services” – factory repairs, equipment upgrades, spill clean-up, IT implementations or migrations, niche training/consulting, R&D testing services, and so forth—as well as materials involved in these categories.
Dealing with spot spend requires a shift in one’s mindset. The traditional mindset is “all spend is an opportunity.” This can drive a minimal reduction in spot spend through negotiations. The more effective mindset here is “spot spend is a problem.” This approach treats spot spend as a symptom of a deep-rooted issue needing correction. Finding and addressing these root causes will lead to a solution by either eliminating spot spend or integrating it into categories that are already under management.
Here are a few examples:
- Spot spend in die castings, custom packaging, etc. points to a need for cost-plus models and long-term formula-based pricing agreements with suppliers based on materials and labor used.
- Spot spend in equipment repair points to inadequate preventive maintenance, and calls for a collaborative effort with engineering to enhance the PM plans to reduce unplanned outages and subsequent spend.
- Spot spend in facility services points to a need for an integrated facility management provider with an exhaustive agreement on not SLAs and rates, but also their role in planning and scheduling.
- Spot spend in IT, such as ERP customization, often points to a disconnect between the firm’s business direction and IT strategy. Procurement can work with IT to provide cost-benefit analyses and tweak the IT policy to prevent unplanned or recurring IT projects.
- Spot spend in temp labor is symptomatic of production planning being inaccurate or too high-level. An effort with sales and corporate planning departments can ensure that plans trickle down to grass-root level sourcing categories and can be sourced effectively.
With this mindset of eliminating spot spend, procurement can maximize spend under management, free up procurement resources entangled in endless spot negotiations, and most importantly, provide the organization with useful early warning indicators of issues that need fixing.
That said, the root cause for high spot spend can also be systemic to the industry – startups and high growth dynamic firms, firms with a volatile customer base, and firms that offer bespoke products are particularly prone to high spot spend. These are factors beyond procurement or organizational control. Procurement leaders need to exercise their best judgment in separating these systemic causes from ones that are in the organization’s control and to determine and address spot spend effectively.
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