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Part VI: Shining a light on 'one-off' purchases

Key Takeaways

  • A large proportion of companies’ indirect spend – possibly as much as 15% - consists of one-off purchases made by people who aren’t in procurement. This ‘maverick’ spend results in reduced transparency, less efficient purchasing and higher transaction costs.
  • The need for one-off purchases can’t be eliminated, but there are tools, such as Ariba Spot Buy, that can leverage the information generated by one-off purchases and highlight employees’ buying patterns and behaviour.
  • Procurement needs to understand the reasons why one-off purchases are made – such as urgency, lack of availability with current suppliers, or difficult-to-use interfaces that make it time-consuming to find essential items.
  • Greater insight into ‘one off’ spend not only means greater control, it generates opportunities for procurement to step in and buy more efficiently.
  • Spend management tools generate information that can provide better price transparency, increasing procurement’s buying power for other purchases.

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.”

Insight into employee spend behaviour

“Over the last year I’ve interviewed over 50 companies to understand how they manage non-sourced catalogue spend, and have found that typically over 5% and in some cases as much as 50% of their spend falls under this category,” Tucker says. “They are all looking for a solution that will simplify the process of finding and buying non-sourced goods.”

The main advantage offered by Ariba Spot Buy is that companies are able to not only gain greater visibility of all their off-catalogue spend but are also offered an invaluable window into the buying patterns and behaviour of their employees. It might, therefore, help them anticipate up-coming sourcing opportunities, Tucker says.

“As an example, one customer told me they were recently provided with a new Surface Pro 3 tablet device,” he says. “They wanted a docking station and an extra power cord and unfortunately when they searched their company catalogue they were unable to find these items. This is just one example of a spot buy – something needed that wasn’t available in the company catalogue.”

It turned out, however, that many other employees had the same need, and used Ariba Spot Buy to get these items. “Employee activity provided a trigger for the procurement team to source the accessories,” Tucker says. “Ariba Spot Buy not only reduces the time and cost to buy these items, but it also improves the insight and control that procurement has over what people are buying.”

In the past, procurement cards have traditionally been seen as the best solution when it comes to buying one-off items. The additional data provided by solutions such as Ariba Spot Buy, however, provides organisations with a far better opportunity to carry out a more in-depth spend analysis.

“Typically on a P-card you’ll get the total amount of the spend, the date and who the vendor was – but it doesn’t tell you what you’ve bought,” says Tucker. “You can now get that ‘level-3’ detail – you’ll know the vendor, you’ll know the cost, the taxes, the shipping, you’ll have all the analysis at your fingertips.”

Market intelligence

With so much potential non-contracted spend, it’s little wonder that this is an area which has concerned procurement organisations still battling to be the masters of their own destiny. As Seibert explains, though, Ariba Spot Buy – a solution that Westinghouse first piloted in May 2015 – can also double-up as an important market intelligence tool and one that provides procurement with an invaluable bargaining chip.

“You can search your existing catalogues and the eBay marketplace from within SAP Ariba for the particular item you’re looking for,” Siebert says. “We have found examples on the open public market on eBay for less than what we’re paying under a contract. We don’t complete the purchase on Ariba Spot Buy based on the search but we use that market intelligence to go back to our supplier and say, ‘What’s happening here? Why are we seeing this item on the open market at a substantially reduced rate?’”

Beyond that, Westinghouse is also now in a position to use the data gleaned from Ariba Spot Buy to be able to see the emergence of commodity patterns and supplier patterns – enabling the company to go back to their suppliers and add items to their Ariba Procure-to-Pay solution.

“For us it has been a win-win all round,” says Seibert. “We’ve taken a very controlled approach to who has access to Ariba Spot Buy. With Ariba Procure-to-Pay we utilised a big-bang approach as there were many other modules and facets of the P2P program to coordinate and deliver concurrently. With Ariba Spot Buy we had the opportunity to take a pilot approach and thoroughly measure the user experience. We have a small set of users across multiple sites and the feedback has really been phenomenal. We are eagerly awaiting the EMEA versions of Ariba Spot Buy so we can finalise our deployment approach globally.”

This would give much greater visibility into one of procurement’s final frontiers– and bring maverick long tail spend firmly under control.



 

This article has been written by an experienced journalist, commissioned by Procurement Leaders. It is part of a sponsored editorial product, published in partnership with SAP Ariba. Commissioned by Procurement Leaders.

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