In corporate organizations, the procurement process for direct procurement (direct spend) and indirect procurement (indirect spend) is not set up in the same way. To put it better: while a structured procurement process is usually in place for direct procurement, this process is often lacking for indirect procurement. Why is this? And what disadvantages do corporate organizations experience?
What is the difference between direct procurement and indirect procurement?
In most corporate organizations, a buyer focuses primarily on direct procurement. Direct procurement refers to all purchases made by an organization that are directly related to the core process. For a large manufacturer, this includes the machinery and parts needed to make a product.
In addition to direct procurement, a buyer also has to deal with indirect procurement. This involves all the things needed to support that core business. Think office supplies, laptops or desks.
The idea is that procurement management with direct procurement can really make a difference because direct procurement, unlike indirect procurement, directly affects sales figures. Moreover, direct procurement accounts for a lot more than indirect procurement. Therefore, in many corporate organizations, indirect procurement does not get the attention it deserves.
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Corporate organizations miss opportunities through maverick buying
I find that many corporate organizations miss opportunities here. Hybrid working has shown that. Many employees are setting up home offices as a result of the corona pandemic. Often with financial support from their employers who provide a special budget for this. In many organizations, employees are given the freedom to order their own (adjustable) desk, office chair or monitor.
No extensive sourcing process by Purchasing precedes this, as is common with direct procurement. The "We'll see the invoice appear" mentality may be pleasant for employees, but the organization experiences several disadvantages when this indirect procurement leads to maverick buying. This means that an expense is uncontrolled; there is no contract or preferred supplier associated with it. For several reasons, this does matter:
1. More favorable supplier conditions.
Of course, employees find it convenient if they can choose their own supplier when they want to purchase an office chair. But the larger your organization is, the less control there is over these costs. Ten, maybe twenty suppliers will be written to supply a hundred office chairs.
By making purchasing agreements with two or three of these suppliers, you can command a substantial discount and thus save costs.
Instead of letting employees choose their own suppliers, encourage them to make these arrivals through a central procurement portal, at your organization's agreed upon more favorable supplier terms.
2. Reduced waste of valuable FTEs on invoice processing.
Still, I sometimes notice that a procurement manager expects that the aforementioned cost optimization will not achieve much. But cost optimization doesn't stop with better supplier terms. The greater the proportion of maverick spend in your organization, the greater the proportion of unexpected invoices your finance department has to process on a daily basis.
Manually, because correct accounting requires creating a supplier and order for each of these invoices. This is a costly waste of FTEs. Especially if we assume that some of those invoices lack a reference and require quite a bit of research to figure out if the invoice can be entered.
When orders are placed through a purchase portal, purchase orders are created automatically and expenses become predictable. Invoices no longer come out of the blue, allowing Finance to budget on time to make payment on time as well.
The better the process is set up on the front end (at the time of ordering), the greater that time savings can be. The invoice is then nothing more than a summary of everything that happened earlier in the purchase-to-pay process.
💡LEESTIP : Maverick buying gives Finance in particular a headache
3. Maverick reduction makes organization compliant and transparent
When organizations lack visibility into their spending, it also indirectly means that their purchase to pay process is not sufficiently predictable. This is because with maverick spend, that expense comes unexpectedly. Organizations risk failing to meet contractual agreements with suppliers and may not even be compliant with laws and regulations.
This may come to light during audits. Consider checking whether the amount was posted to a traceable cost center and therefore the cost can be accounted for to the IRS.
If an organization addresses maverick buying and manages to reduce the proportion of maverick spend, it also means that a greater proportion of the spend has been accounted for at the front end of the process. Approval at the back end of the process (at the invoice level) is no longer necessary because it has already been done at the order level. This makes audits not only easier, but also cheaper.
4. Greater visibility into suppliers' CSR policies.
Supplier management today is often not purely about assessing suppliers' value for money, but also their CSR policies. For example, a CO2 performance index can be used to assess whether suppliers are committed to sustainability. But also consider factors such as the degree of social return or the handling of human rights.
If you do not combat maverick buying, there is a risk that employees will choose a supplier that you do not yet know and therefore you do not know whether it fits your own organization's CSR ambitions. When employees use a purchase portal, you do know this because you have been able to monitor your suppliers.
Getting started with spend under management
To what extent does your organization have visibility into the suppliers from whom your employees purchase products or services? What steps for improvement can you still take? Feel free to contact me to exchange thoughts.
Curious about what an online central platform could look like that allows employees to place orders on their own from preferred suppliers? Then check out my demonstration right away.
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Christian Willemsen |
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