3 Ways GPOs Ease Indirect Spend Complexity
Even when procurement is fully centralized, it is difficult to get control over ad hoc indirect spend. This is where leveraging a GPO can help.
When more than half of procurement professionals say that they spend a disproportionate amount of time and resources managing maverick spend and suppliers,1 it is time to rethink your procurement strategy.
Give procurement the freedom necessary to play a more strategic role in the company.
If the goal is to convert procurement from a cost center into a strategic partner in the company, it is vital to get specific procurement functions under control. When it comes to indirect spend, supplier consolidation, contract management, and spend visibility are key to any sourcing strategy.
Indirect spend can make up 40% percent of total spend and can involve a multitude of non-core products and services requiring hundreds of separate supplier relationships. Negotiating contracts with a large supply base while driving compliance can be a daunting task. But working with a group purchasing organization (GPO) can simplify that complexity and provides procurement greater control over spend.
On the surface, that may sound counterintuitive. How could procurement get greater control by sourcing through an outside agent? The answer lies in the ability to leverage the spend volume of several organizations to your advantage. GPOs leverage the cumulative purchasing power of their members to negotiate the most advantageous pricing and terms with a wide range of suppliers. Very large corporations will utilize their purchasing power to negotiate optimal terms with their supply chain. But most companies do not have that level of spend, especially in indirect and therefore can benefit from the leverage that a GPO sourcing channel can provide.
3 indirect spend issues that can be brought under control through a GPO.
One thing is important to note…not all group purchasing organizations are the same in the benefits and solutions they offer. It is necessary for companies to do their due diligence to ensure that the GPO they belong to is a leader in the following three areas:
- Contract negotiation and management – As noted above, GPOs leverage the purchasing power of their members to obtain the most advantageous pricing. But besides pricing, companies should consider the amount of time they no longer have to spend negotiating and managing contracts. GPOs will not only deliver on price, they will also save time in the sourcing process by pre-negotiating the terms and conditions with suppliers. GPO contract managers will also track and measure supplier performance in order to mitigate risks and market test pricing. As needed, they will re-negotiate contracts and seek out additional suppliers as market conditions change. All of which will free up time for sourcing managers to focus on other areas of their sourcing plan.
- Supplier consolidation – When it comes to indirect spend, companies can find themselves dealing with a large number of suppliers. For companies that have multiple offices and facilities in different cities and states, this problem increases exponentially as individuals in those areas may transact on their own. That can mean interacting with a multitude of suppliers with little to no oversight. Through the use of a GPO, companies can now direct their employees at all locations to purchase from a list of approved suppliers that are able to fulfill orders at contracted prices regardless of order origination. Spend consolation through fewer suppliers provides both improved pricing leverage as well as better visibility to your supply base.
- Visibility into spend – Spend management is where companies really need to explore the capabilities of the prospective GPO. I can’t stress enough the importance of working with a GPO that has the technology that provides real-time visibility into all transactions to the line-item level. Then, and only then, will procurement be able to truly evaluate all spend, providing the ability to manage it properly. That knowledge, along with the analytical capabilities the solution should offer, will enable better decision-making from all stakeholders.
See how you can gain greater control over your indirect spend management.
1“Gauging Indirect Spend Management, GPO Adoption, and Best Practice in 2016,” ProcureCon Indirect West, p. 6.