Procurement leaders are often expected to be experts in every category. There’s pressure to manage your company’s complex spend cube, reduce risk and cut down on costs, all with limited resources. While organizations are looking to increase savings, improve efficiencies in their supply chain and manage supplier risk, a group purchasing organization (GPO) can be a guide to accomplishing these goals and more. One key way to leverage your GPO to attain these goals is to put your indirect spend under a microscope and evaluate where you can streamline and strategize to reduce costs.
To fully understand indirect spend and how it impacts your organization's efficiency and bottom line, you first need to understand what factors into it. Indirect spend is the costs associated with purchasing goods or services that in the end don’t factor into the solution your organization provides. These are items such as office supplies, travel expenses, fulfillment orders, maintenance costs, food and beverage, etc. As you can see, indirect spend purchases are necessary items, meaning you cannot eliminate them all together. The key here is finding ways to lessen the cost of these items and overall reduce your bottom line.
Keep reading to dive into how to manage indirect spend and increase savings by taking control of maverick and rogue spending.
Increase Spend Under Management
There are hundreds to possibly thousands of purchases taking place throughout the year across a variety of categories. As a leader in procurement, managing a massive amount of spend means gathering and benchmarking data and analytics from multiple suppliers. By getting a handle on both tail and maverick spend and gaining coveted spend visibility, you can discover prominent cost savings and potential for innovation, such as new technology, supplier consolidation or a new process to streamline procurement.
Before we look at the ways a group purchasing strategy can help you do this, let’s take a closer look at tail and maverick spend.
Tail spend refers to the amount a company spends on purchases that make up about 80% of transactions but cover only 20% of total spend. It typically gets ignored and goes unmanaged. The other 80% includes strategic and mid-tier spend where major cost reductions can be found but the tail is made up of mostly high-volume/low-value purchases with several suppliers. Purchases are usually non-core, but still essential to the smooth operation and the financial success of a business.
What tail spend includes varies depending on the industry, sector and size of the organization, but generally includes:
- Maverick or “rogue” purchases outside contracts
- Purchasing card buys
- E-catalog spend
- Minor local and petty cash items
- Spot or one-off purchases
- Any other low-value purchases that bypass procurement
Maverick spend, or rogue spend, is mainly found under the tail spend umbrella in high frequency/low-cost purchases. It involves items purchased from suppliers outside of your approved procurement policy. Maverick spend can be minor leakage from negotiated contracts or grow into a larger problem of uncontrolled spending. Most often associated with categories prominent in manufacturing, this unregulated spending can account for 25% to 80% of your organization’s total spend.
Rogue spend can open your organization to many types of risk, including operational, reputational and fraud, and can lead to loss in volume discounts and rebates if the supplier relationship goes unmanaged.
How Can I Reduce the Cost Indirect Purchases?
Although these costs may seem small, they can have a huge impact on your company’s bottom line. With current supply chain disruptions and other inflationary costs, it’s important to decrease and monitor these costs as well as maverick and rogue spending.
This is where procurement’s influence (or expertise) comes into play. Including a group purchasing organization in your strategy ensures you have access to industry-leading suppliers, mitigate risk, and provide overall time and cost savings for your organization. All in all, there are many benefits of working with a GPO to manage indirect spend. From subject matter experts to supplier relationships, a GPO is a unified front, which eases supplier communication and provides organizations with more time to focus on core business strategies.
Simplified Supplier Sourcing
A GPO can identify savings and cost reductions without sacrificing quality when your business is selecting suppliers for your indirect spend program.
In the early stages, a GPO should act as an advisor and enable in-depth conversations with the suppliers you’re considering. Questions to ask suppliers include:
- Can they provide insightful data?
- How is their company performing?
- Who is an ideal customer?
After selecting your suppliers, set program goals and objectives and determine the best way to measure progress. The more insight you give them into your company, the better the onboarding and implementation will go.
Once you have a program in place, it’s time to announce the program and gain adoption. This is a critical time for companies in a more decentralized environment. Share information about early wins and find those early adopters who can be your program ambassadors.
To get maximum value from current programs, ensure you align your company’s objectives to your spend categories. Consolidating your programs will help you better manage the contract components with your supplier and validate savings to explore further opportunities. Utilize your GPO’s vast portfolio of category offerings, from corporate services to manufacturing materials to aggregate your indirect spend.
Our members report that in leveraging the purchasing power of our category offerings, on average, annually, they save anywhere from 8% up to 39% in spend on indirect materials and services.
So, Why Should I Use a GPO to Battle Indirect Spend?
Working with a GPO is a proven way to reduce indirect spend, and more importantly, working with the right GPO is the best way to ensure category management is expertly handled from sourcing to performance and beyond.
A GPO that manages negotiations with suppliers from materials to pricing and ensures compliance all the way through, will centralize and automate the process giving your business a holistic picture of overall spend, while optimizing your organization’s efficiency so your organization can stop leaving money on the table.
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