Savings in procurement start at the source. Why then do most procurement teams over-spend and wait for the organization’s balance sheet to take a hit before starting to take savings seriously? Many support a procurement process that is so complex and confusing that it discourages employees across the organization from spending in a compliant way.
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Spend compliance when intuitively embedded into every step of the procurement process seems like a cake-walk. An e-procurement solution that has spend compliance as one of the foundational elements dictating it, does just this. It takes away the onus of cost reduction and sometimes cost avoidance from individuals or singular departments within an organization. Responsibility is moved to an underlying process that makes savings the governing mandate.
Symptoms of poor spend compliance
An organization plagued with poor spend compliance evidence clear symptoms:
- A large chunk of the indirect spends booked are maverick (unplanned or unbudgeted for).
- Employees make purchases of items they fancy from suppliers of their choice although they might not be thoroughly vetted before-hand.
- Contracts with meticulously negotiated discounts and other terms remain unrealized and the organization’s best suppliers become uninterested to continue offering them in the future.
- Accounts payable department spends most of its time tallying invoices and matching them to POs while drowning under a mountain of paperwork.
Companies lose an average of 8% of pre-negotiated savings due to noncompliant purchases, according to a report from the Hackett Group. For instance, a company with $1 billion in indirect spend out of which 25% ($250 million) is noncompliant or maverick spend, loses 8% ($20 million) to unrealized savings.
Due to inefficient, manual and paper-based processes, organizations with an average performing procure to pay (P2P) system incur nearly four times higher PO cost and over two times higher invoice processing costs compared to those with top performing systems. Lack of a process driven by real objectives of the procurement and finance teams is to blame.
Guided buying: Guide purchasers toward
Purchase requesters in an organization could come from any department – product, sales, administration, finance, or others. While an on-field sales manager Emily is busy achieving her targets, she has no time to evaluate suppliers who offer best prices for furniture that she needs at an event venue. Emily, though, could be anyone in the organization, from a desigh engineer buying PC board samples to a factory worker sourcing replacement parts.
In this and scores of other such cases, a miracle called Guided Buying.While making an online request for procuring furniture, Emily will first be introduced to suppliers that that already have ties in the form of negotiated contracts with her organization. Since her organization runs several sales and marketing events every year, they have identified two specific suppliers and got great deals from them. Emily picks one of them that has a warehouse close to her event venue (easy!) and completes her request.
The procurement team is more than happy because they just realized a part of their contract with one of their preferred suppliers – by the way, this supplier is already on-boarded and verified against compliance requirements so Emily can rest assured that her furniture gets delivered on time and in good quality. Her organization’s Accounts Payable department can be at peace too, knowing that the supplier will only send them an invoice against a formal purchase order.
What went right here?
Contrast this with a traditional procurement process where Emily would have had to call up at least five to ten furniture suppliers, make an excel sheet comparing costs, and select the seemingly cheapest option. Or worse, she would confirm the order with the first supplier she called up. The repercussions of this would then be borne by the procurement team with a significant addition to their pie of non-compliant purchases.
The miracles don’t end here
An argument could also be made for a fresh requirement Emily would have for something her organization hasn’t sourced before aka a non-catalog purchase. She identifies a supplier but there is no guarantee that it would provide her value for money while abiding to all supplier compliance requirements.
A competent e-procurement solution would make her share all details of the supplier and submit verification documents for its smooth on-boarding. Her request would then have to be approved at multiple levels – manager, head of department, procurement team and so on before it gets confirmed. However tedious this process sounds, automation ensures that all these steps can be completed within one, or sometimes less than one day.
While a certain number of non-catalog purchases are expected every year in any given organization, the best part about great e-procurement software is that it limits this number over the longer term. Once the procurement team notices that Emily and her colleagues have an increasing number of non-catalog purchases from printing vendors, they will make a mandate for negotiating larger contracts with one to two printing vendors before the new financial year. This means they don’t just reduce their maverick spends while realizing contracts to fuller potentials, but also straight up avoid paying for costlier buying options.
Instead of making spend compliance the unachievable goal, make it the default process