Taking Control of Your Unmanaged Indirect Spend

AnyData Solutions

Spend Matters welcomes this guest post from Scott Dever, vice president of member development at Corporate United.

When I sit down with procurement executives at our member companies, I often hear them describe the same priority: to become more relevant and more significant to the overall business, to deliver greater value to the organization.

Targeting areas of unmanaged indirect spend is a key way procurement leaders can deliver value and maximize savings, and ultimately extend their reach and influence. Traditionally, this unmanaged spend has challenged procurement for a number of reasons. Decentralized decision-making and fragmented buying creates a lack of visibility into spending, supplier proliferation and limited opportunities to support competitive sourcing.

But increasing spend under management enables teams to realize many worthwhile benefits, including incremental cost savings, supply base consolidation (also reducing the cost to manage your suppliers), greater competition, reduced risk and increased spend with preferred suppliers.

We’re going to explore options for bringing more spend under procurement influence, but first, let’s look at the different areas of unmanaged spend:

  • Unmanaged spend on existing agreements: Spend volume that leaks away from preferred suppliers. For example, you may have an office supplies contract in place but some are still using their p-card at Costco.
  • Top of the tail: Includes non-contracted spend, large one-off purchases or unmanaged spend above your bidding policy, and could also include several smaller categories that your team may not have the resources or expertise to manage effectively.
  • Middle of the tail: Often includes spend that may be below a competitive bidding policy threshold, or of a value that doesn’t justify procurement support.
  • Bottom of the tail: Includes small, one-off purchases and spend with low dollar amounts.

Now that we’ve broken down the different segments of unmanaged spend, let’s consider how we can improve in each area and bring more of that spend under management.

1. Unmanaged Spend on Existing Agreements

An easy way to drive improvements here is to identify spend that is outside of contracts by reviewing p-card data and invoices from suppliers that compete with your preferred supplier.

The goal is to make it easy for people to buy from the preferred supplier, and difficult to buy anywhere else. Ultimately, people want to do the right thing. The challenges are that staff often are uninformed or view the approved channel as too difficult.

2. Top of the Tail Spend

This is where you’ll find the biggest opportunity for improvement. First, look for opportunities to create new categories and implement an agreement. If you have good spend visibility, you can use it to identify categories that perhaps haven’t previously hit your radar or ones in which there’s an opportunity to consolidate under a single supplier agreement.

Another area of spend in the top of the tail is one-off requirements. This could be requirements for equipment, services or products that are purchased infrequently. A support team, or sourcing desk, can provide great value to internal stakeholders and help bring additional spend under procurement influence and create additional savings. A policy that requires competitive bids over a certain value can help drive demand for the sourcing desk.

3. Middle of the Tail

Much like the top of the tail, this segment also comprises spend that could be rolled into existing agreements and one-off purchases. There may be opportunities to expand the scope of your existing agreements by adding subcategories, like coffee service or cleaning supplies, to your office products agreement.

The spend value for one-off purchases in this segment typically won’t justify procurement support. But your team can establish processes or guidelines to help the organization make smarter purchasing decisions and self-manage this spend.

4. Bottom of the Tail

When it comes to the bottom of the tail, you really want to automate as much as possible. A p-card solution may be a good option if you manage your program well. Additionally, leveraging marketplaces for these small one-off purchases can help you consolidate into fewer suppliers of record.

Thinking Outside of the Box

In addition to the points above, there are even more ways that we’re seeing procurement teams think outside of the box and generate new opportunities for value. Many organizations are looking to group purchasing organizations (GPOs) to take their indirect spend management to the next level. This strategy is especially effective when it comes to unmanaged spend on existing agreements and top of the tail spend. Leveraging a GPO’s aggregated buying power can help your organization secure even better pricing and terms. And, the right GPO will take on category management activities to ensure that your program is running at an optimal level and help drive compliance.

Once you can accurately classify and account for your unmanaged indirect spend, your team will find many opportunities to bring more spend under procurement influence and create additional value for your organization.

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