E-Sourcing Forum » Missing Links Take a Chunk Out of a Bottom Line

Missing Links Take a Chunk Out of a Bottom Line

March 5th, 2008 at 06:55am David Bush - Iasta

According to a recent article in Supply & Demand Executive, too often indirect costs – such as utility supplies, insurance, and staff expenses – slip under the radar, and this can have a significant negative effect on the bottom line. However, these indirect costs are often more easily controllable than direct costs, especially with a basic e-Procurement, EIPP, or P2P system, and simply attacking a small handful of missing links can allow a company to reign in these costs in such a manner as to meaningfully address the bottom line.

The article highlighted five key factors:

Maverick Spend
Maverick spend occurs when an employee buys off-contract or off-policy. Maverick spend can be addressed by removing ad-hoc purchasing capabilities and implementing systems that force preferred suppliers and / or policies to be followed.
Contract Visibility
Most organizations have dozens (upon dozens) of contracts that lock the organization into hundreds of thousands, millions, or tens (upon tens) of millions of dollars of spend – but very few have full visibility into those agreements, their overall value, or their expiry dates. This will prevent
unwanted evergreen renewals, lost rebates, and penalties that come with failure to adhere to terms and conditions.
Intuitive Systems
The purchasing staff should be free to focus on core, strategic value-add activities and not have to waste valuable time trying to figure out how to use the system (which they will end up being inclined to bypass if it’s too difficult to use).
Indirect Cost Control
Make sure you have at least a basic e-Procurement, EIPP, or P2P system in place to minimize the time that needs to be spent on tactical buying and the possibility that someone will buy off-contract or off-policy.
Integration and Control
Make sure the systems are integrated into your ERP, SRM, and / or financial systems to ensure employees have access to complete, transparent, real-time information.

It’s not everything you can do, especially since there’s no mention of proper strategic sourcing of indirect categories, but it’s certainly a good start.

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Entry Filed under: General, Supply Management Best Practices

1 Comment Add your own

1. Eric Strovink | March 5th, 2008 at 2:29 pm

I think this misses the boat by a wide margin. It is not necessary, or often even effective, to implement an e-procurement system in order to bring spend under control — what actually works is taking a hard look at current spending by category (to ensure that it is in line with benchmarks from comparable companies), combined with compliance reviews at the PxQ level to ensure that contract terms are being met by incumbent vendors.

Those two initiatives will identify strategic opportunities (from the spend data) *and* return money to the bottom line in the form of refunds and credits (from the invoice review).

Adding a rogue spend (contract) dimension to the spend cube will identify the organizations that are doing a poor job of controlling spend; so will taking a hard look at T&E data. A few pointed telephone calls to the heads of poorly-performing organizations will correct the situation, if the calls are made by senior management.

As one practitioner remarked to me, “A key benefit of monitoring spend is the perception that spend is monitored. You can reduce demand at least 10% with just a modest and minimally-publicized monitoring effort, because non-compliant spenders will immediately change their behavior.”

You can then take your time implementing an e-procurement system, if you decide to — but e-procurement by itself won’t solve your spending problem.

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