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This extract is a preview taken from the Making Procurement Simple series. To read the full article and find out more about making procurement simple, click here.
Businesses may occasionally run out of essential items, but it seems as though employees never run out of explanations or excuses as to why they have to make one-off purchases. “We needed it straight away.” “Our usual supplier doesn’t stock this exact part.” “I tried, but I couldn’t find it in the catalogue so I gave up and got it elsewhere.” “The brand I bought is better quality so it’s better value.” These will all be familiar refrains to the ears of many procurement professionals.
What that means is, there’s nothing “one-off” about the need for “one-off” purchases. So if procurement doesn’t get a firm grip on them and treat them as an integral part of the sourcing process, the results can be costly.
At the same time, however, procurement must pay heed to the difficulties employees often face when trying to get hold of the things they need to do their job. If their regular catalogues or sources of supply don’t carry what’s needed, or if they’re too difficult to use and search when looking for unusual items, then it’s little wonder when employees take matters into their own hands, buying what they need wherever they can get it, even if it means having to disrupt their own working day to do so.
There’s nothing wrong with employees having the freedom to make their own purchases rather than do everything through procurement. But it has to be within a procurement-driven, customer-friendly framework that devolves power but increases transparency.
According to the Hackett Group, a consultancy, as much as 15% of companies’ indirect spend consists of ‘maverick’, one-off purchases by people who don’t work in procurement. That’s a huge percentage and one which brings the scale of non-sourced, non-contracted supplies sharply into focus – even though such purchases don’t, individually, often add up to very much.
Not only can this ‘tail spend’ prove problematic for strategic sourcing, it can also lead to compliance issues as well as leaving procurement vulnerable to mounting costs which can, if left unchecked, spiral out of control.
"Tail spend items can be a significant chunk of money,” says Jason Seibert, shared service centre manager at Westinghouse Electric Company. “When combined with the transactional costs [associated with these purchases] there is a real impact on the efficiency of the procurement process. Without managing tail spend properly, you can find yourself doing a lot of non-purchase order procurement such as using T&E [travel and expense] cards and submitting an expense report.”
That long tail can be expensive because purchase and payment processing costs don’t decline in proportion to the amount of spend with each supplier. Time spent on invoices or dealing with coding errors typically correlates to invoice volumes, not their individual value.
Getting spending back under control
That’s a classic illustration of the problems that one-off purchases can present, not only for a budget but also for an over-arching procurement strategy. In short, it’s taking power away from procurement and placing it in the hands of individuals across the business.
The benefits of managing it well, therefore, can be significant. “Eighty per cent of the money with any buyer is usually [spent with] 20% of their vendors – so that extra 20% [of spend] that’s lying out there can be significant dollar amounts,” says Barry Eisenberg, business development, contracts and e-procurement at B&H Photo Video. “Clearly getting that spend under control should be a priority.”
So what can companies do when the item employees require hasn’t been restocked in time or isn’t included in the company’s authorised catalogue? With a solution such as Ariba Spot Buy, they can give employees a simple, consumer-like way to find and buy non-sourced and non-contracted goods from online marketplaces such as eBay – all while simultaneously enabling the procurement organisation to maintain control and visibility.
“A macro-trend in B2B procurement is reducing the time and effort for finding and buying items that are not sourced but still essential for employees to effectively perform their jobs,” says James Tucker, senior director at SAP Ariba. “There are often gaps in the content of what end-users require – searches within the company catalogue that don’t find what you’re looking for.”
This is an extract. You can read the rest of the article here.
The Making Procurement Simple series is produced in partnership with Ariba, an SAP company.
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