There are two important steps procurement must take to ensure that they are getting optimal performance from their suppliers.
Ensure that pricing is consistently market tested and align service levels to meet the demands of the organization. However, complacency with your suppliers can lead you off the performance path.
When it comes to direct spend, procurement professionals typically know what they’re spending, down to the smallest item. Production of core products is the engine that makes a business grow, so those in charge of negotiating and purchasing are focused on supplier pricing, terms, delivery, and overall capability and compliance.
However, when it comes to indirect spend, that’s an entirely different picture. Those day-to-day items and services that keep business moving (printer inks, paper, IT equipment, travel and more) are often purchased with little concern for the cumulative cost to the company.
These costs can be substantial and often times can be up to 40% of total spend. Since indirect spend can deal with so many suppliers on small ticket items, contracting and oversight can be burdensome. We call this situation “dark purchasing” and controlling it can lead to company savings of up to 25% annually.
Why complacency is a problem.
The complexity of managing and controlling indirect spend can lead to an attitude of “if it ain’t broke, don’t fix it.” However, if you do not have a clear picture of your indirect spend, and you are maintaining an “as is” purchasing process, you are ensuring that it will stay “broke.” But there are two very important things you can do to gain the necessary control and drive down overall costs.
If you work for a company with multiple locations, it’s likely that purchasing can be occurring on an ad hoc basis with employees choosing to deal with local suppliers rather than consolidating the purchasing across multiple locations. Since this can result in hundreds of suppliers submitting thousands of invoices, complexity and a lack of transparency can lead to overpayment and a lack of compliance from both the employee and supplier. For large corporations, that list of indirect suppliers can actually reach into the thousands.
Instead, procurement should take a hard look at all of its suppliers and consolidate them into a more manageable list. By doing this, procurement creates greater leverage with its supplier base by driving more spend through fewer suppliers. The end result will be a more attentive supplier that you can work with to improve pricing and service levels. By creating this partner relationship it also moves the purchasing from one-off transactions to a more strategic relationship with you and your suppliers.
Testing the market
Once procurement has created this consolidated list does not mean the job is over. It is just as easy to become complacent with a smaller list of suppliers as it is a larger one. And it is not just procurement that can get complacent. If a supplier feels overly confident with your continued business, it may focus on getting new business instead of growing yours. So procurement should always be challenging complacency by consistently looking at their suppliers’ performance, pricing, and services to identify areas of continuous improvement. This can be achieved through regular supplier business reviews as well as regularly market testing both pricing and services. Having a clear view of current market conditions, and your suppliers’ place in that market, will ensure that you have optimized your supplier relationships as well as the money you spend with them.
While consolidation and market testing are vital steps to improving supplier management, and getting control over indirect spend, neither of these steps should be looked at as a “punishment” for suppliers. Procurement and suppliers should work as a partnership, keeping a constant line of communication in place to avoid impacts to the end user.
Key to achieving consolidation and a fully tested market will be visibility into your transaction details. This can be provided by the suppliers; however it is best if you can capture it as part of your process. Some organizations gain this visibility through the implementation of an e-procurement system, while others rely on data files from their accounts payable group. Either way, it is key to have visibility at this detail level to make sure that you understand where money is being spent and with whom. Only then will you be able to get a handle on indirect spend and create “win-win” relationships with your suppliers.