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Yes, You Can Manage Non-Contracted Spend

Non-Contracted Spend.PNGAccording to a recent whitepaper by The Hackett Group, roughly 42% of overall indirect spend by companies today is tactical. Usually, tactical spend includes non-strategic goods and services that are lower cost, one-time buys with unique purchase requirements that existing company suppliers can’t always meet. Purchases are often unplanned, and items may be uncategorized by procurement.

Because these “spot buys” fall outside standard procurement processes, it typically takes companies 2-3 weeks to source them – too long given that many of these requests are urgent, last-minute, or reactive; characteristics that traditional procurement systems and processes aren’t designed to handle. Equally important, the Hackett Group found that procurement professionals handling these requests often need to sacrifice savings to keep stakeholders happy, and they are plagued by the lack of definitions and policies around tactical spend.

But does it have to be this way? Should you accept this status quo?

An untapped opportunity for procurement

According to The Hackett Group, the answer is no. When companies make the effort to actively source tactical spend, they typically save between 2-5%, which adds up quickly given the percentage of spend we’re talking about. In addition, they realize efficiency improvements that lower the cost of procurement and save weeks of time and effort.

There are lots of ways to go about realizing these benefits – for example, by creating a global buying desk or center of excellence for tactical spend, using an external service provider, or implementing new technologies designed to optimize the process. Most notably, e-sourcing solutions have evolved significantly in recent years to support tactical buying – and make it faster, easier, and less costly.

Business networks and supporting technology can help

Sundar Kamak – vice president of procurement and business network solutions at Ariba, an SAP company – explained in a recent SIG webinar that business networks connect people, systems, and processes between companies to simplify business commerce. The processes supported by these networks can be optimized for strategic and tactical spend – whether you need to discover and connect with new suppliers, collaborate on requests and contracts, or gain insights into supplier performance.

For examBusiness Network.PNGple, Kamak explained how network-based solutions seamlessly integrate with ERP applications for easier supplier identification and bid execution for tactical spend. With this kind of technology, you can use your existing ERP system to generate an RFQ and then publish it on the network.  Suppliers can get invited to respond or be auto-matched based on the information provided on their network profiles.  Interested suppliers provide responses within the application, which you can then easily compare to select the best quote. Once a supplier is selected, the purchase order automatically gets sent back to the procurement system. The result is a closed-loop system – powered by business networks – that is fast, transparent, and effective.

The benefits are considerable. Customers of business networks providing this kind of service are realizing:

  • Quick ROI because software is easy to configure and end users require little training
  • Increased savings – with potentials of up to 2-5%
  • Reduced processing time for tactical spend enabled by highly automated processes
  • Faster, easier discovery of potential new suppliers
  • Seamless information handling, process support, and transparency
  • Complete visibility and control that improves compliance

Proof points with leading organizations

Companies across all industries are using business networks to manage spot buys faster and more effectively – and they are seeing significant benefits. For example, JM Huber was managing a complicated sourcing process across a broad range of products spanning seven businesses, 24 manufacturing plants, five R&D centers, and seven administrative centers. Procurement was managing over $750M in spend across five continents in direct and indirect categories, but plant buys were with local suppliers; the company struggled to find enough qualified suppliers in remote plant locations, so there was little competition to drive down costs.

JM Huber started using a business network in 2007 to run sourcing events, discover new suppliers, and compare quotes for strategic and non-contracted spend (spot buys). This technology-enhanced process for tactical spend has cut sourcing lead time down from several weeks to several days. The software has helped reduce cost by either expanding or consolidating suppliers in different areas, as needed. Productivity is higher because plants can leverage available resources outside the plant to conduct sourcing events through the business network, quickly and efficiently. Users typically receive bids from seven to as many as 15 suppliers for a single sourcing event – without having to research suppliers on multiple sites to find one who can deliver the items needed at the quality and speed needed.

With leading purchasing departments focusing on maximizing spend-under-management, it’s a no-brainer to extend that focus to tactical spend. While in the past, the right tools were lacking, today, business networks – by offering the right tools to lower costs and increase efficiency – are the future of business.

Ceylan Thomson runs marketingfor SAP Business Networks. You can follow her on Twitter at @ceylanthomson.

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