The access and availability of real-time data has immense value for businesses. Particularly across their supply chain, knowing where the “good buy” can be found is as significant as developing a new business operation entirely. This idea of finding the good buy is built into procurement best practices.
Furthermore, purchasing and procurement activities are constantly becoming a competitive factor for companies. Especially within manufacturing, on average, a high volume of supply turnover is around 50%. As a result a number of sophisticated techniques and systems have been developed to help businesses reduce costs and compete better.
However even with the best intentions in mind, it can be easy for any business regardless of size to lose sight of where their sources of waste lay. Among those sources of waste, and one of the more difficult to find and fix is “maverick” spending. So what is maverick spending then?
Maverick spending is the expense resulting from purchases that are breaking the rules established by corporate procedures. Maverick spending either intentionally ignores defined Procurement processes or are simply by purchasing mistakes that aren’t in accordance with previous negotiated purchasing terms.
What can businesses do to eliminate or at least curb this phenomenon?
Forrester cited three essential options businesses can use to reduce the prevalence of maverick spending:
- Focus on purchasing from suppliers who have pre-approved prices by the organization (eg. Framework Agreements, e-catalog etc.).
The main goal is not to lose the already discussed discounts and benefits. As such some companies use electronic calatogs to achieve this goal. E-Catalogs prove useful because they are online portals that anyone can use to purchase approved standard commodity items, such as stationary, computer equipment, tooling, hardware and etc. The use of these catalog lists ensures a proper negotiated price between vendors and buyers is maintained, and generally can offer significant discounts compared to market prices. Another advantage is the simplification of the passive payments cycle. Suppliers and approvers are able to control and manage their work-flow in a manner that reflects the organizations processes. Moreover, the negotiation of item prices in an e-catalog will allow a significant reduction in inventory turn-over and delivery times.
- Enable purchase approval systems.
Organizations need to have policies and systems that will allow employees to purchase goods and services without constant supervision. The work-flow of purchase approvals should therefore take into account the responsibilities of the buyers and the responsibilities of management to control the approved budget.
- Reduce delays and errors when processing invoices.
The accounting department of most companies spends more than 25% of their time resolving errors (such as invoices that do not refer to a PO or misalignment on the quantity and / or the price, than expected).
As noted by Forrester, companies that combine tools of e-procurement and e-invoicing can achieve excellent performance in terms of compatibility with twice the probability than any other.
Forrester has some great suggestions, but let’s analyze the maverick spending phenomenon in more detail.
Only a few companies have an effective and controlled process of their Purchase-to-Pay cycle (P2P). Having an effective P2P cycle allows these businesses to draw maximum benefit from all sourcing initiatives. Without a structured P2P process, businesses might find themselves facing an extremely common problem called “Maverick Spending.” It’s not rare to find cases in which up to 80% of all invoices generated come from “uncontrolled purchases.” An ineffective P2P cycle can also produce a number of other problems across payment activities, supplier management, data management, enforcing terms and agreements, fraud.
Even though the introduction of an e-Procurement system can produce undeniable advantages by greatly reducing the Total Cost of Ownership, it will only reduce a small part of maverick spending. In fact the only way to solve maverick spending is to fine-tune the processes and procedures of an organizations P2P cycle using proper checks and balances. Here are four simple tips to improve your P2P workflow and reduce maverick spending:
- Separate and isolate individual roles and responsibilities within the buying process.
Most employees love the opportunity to contact suppliers and negotiate their price of purchase. However this behavior is the main cause of uncontrolled spending. When employees (requesters) have a need to purchase an item, they should only have the power to submit a request with detailed specifications (technical and otherwise). The buyers must then approve or reject the purchase on behalf of applicants. The role of buyers as an operational role will allow businesses to easily serve multiple purchase requests within a business.
- Adapt different P2P processes for different types of purchase needs (Segmentation).
P2P processes must be designed to cover all possible types of buying and taking into account the different roles involved. For example, the purchase of inventory items for revenue-generating businesses activities (I.E, wholesalers) will not follow the same process of indirect purchasing towards office supplies.
- Every purchase order must match an invoice and receipt.
This may sound ambitious, but without a proper purchase order, the expenditure won’t be entered into the ERP system. As a result, the terms and conditions of trade as well as the payments needed won’t be communicated to the supplier. Furthermore at the time of delivery of the goods, any possibility of combining the receipts with the bills can be avoided.
- The P2P process must be clear and well-understood
For a P2P cycle to work, everyone must understand how it works. Of course the easiest way to buy something is to pick up the phone and call a supplier, but this bypasses any good purchasing best practices. At the same time no one wants to take responsibility and try to change this behavior. If businesses were to gain control of the internal purchasing processes, they would be able to eliminate maverick spending. The rules for proper purchasing must be clear and well communicated.
Organizations that fail to adopt structured purchasing measures will have to expect a continued loss across their bottom line. The CPO should work with the CFO to establish a strong and widespread P2P strategy because it is directly related to cost reduction, risk mitigation and optimizing billing procedures.
This is a guest post by Sergio Giordano, a career procurement professional with more than 30 years of experience. If you’re interested in sharing your knowledge with Procurement Sense readers please contact us.