The Simple Change That Could Save Businesses £1.6trn
Procurement waste is an expensive drain on businesses, but what can you do about it?Jermaine Haughton
Companies around the world are losing up to £1.6trillion each year due to the failure to correctly manage their procurement waste, according to new research.
Published by global enterprise platform Blur Group Plc, the white paper, Identifying and Overcoming Procurement Waste, urged managers to be more aware and active in controlling procurement and supply chain spending, and reduce waste.
The report found that overspending on procurement fraud, unmanaged contracts, uncontrolled spending and lax internal management and delivery processes is costing companies more than the GDP of the UK, the fifth biggest economy in the world.
“Indirect spend is the last great wilderness of financial possibility,” said Philip Letts, CEO of Blur Group. “The scale of procurement waste is huge and indirect spend is the area we’ve identified with the most potential to achieve immediate and long-term sustainable efficiencies and savings for a business.”
One area particularly susceptible to waste is through the procurement of business services.
This part of indirect spend covers a variety of categories, including marketing services, IT, professional services and property management. The research revealed the top barriers to effectively managing procurement waste include poor communications, planning, data, processes and oversight.
However, the report shows that managers can regain control of their procurement costs and make substantial savings for their companies, of up to 5% of indirect spend or up to 3% of overall spend, without resorting to traditional methods of controlling costs, such as reducing staffing requirements or eliminating opportunities for innovation.
Letts said: “We know that CEOs’ top priority in 2016 is cost reduction and we know that procurement waste is a factor for every enterprise, whether they choose to recognise and tackle the issue or not. Whether it’s to prepare for impending economic difficulties or to improve overall profitability, cost reductions are an essential concern for every executive. I firmly believe that an effective cost reduction programme must start by focusing on the elimination of procurement waste. Indirect spend should be the first area of focus.
“As a procurement partner to many enterprises, we are already seeing the benefits that effective processes bring in the short and longer-term. The more sophisticated global enterprises are now seeing improved indirect spend as a successful strategy to eliminate unnecessary spend within their business and increase profitability. They are looking at existing spend and purchasing behaviours across their business, particularly for business services, to achieve immediate and long-term savings without cutting staff.”
Letts added: “The reality is, in times of economic uncertainty, it has been easier for organisations to implement cost-cutting strategies that involve staff reductions and impose limits on strategic spend. A blind eye has been cast on indirect spend procurement which is fragmented across multiple budget holders.
“This kind of purchasing, often for bespoke services, is delicate – it’s less controlled, less systemised, and not as transparent. No business likes to admit to internal inefficiencies, but leading companies are now looking at their indirect spend and the purchasing behaviours within it, and seeing that process efficiency and elimination of waste is achievable through accessible cloud technology and managed services.”
Here are five practical tips for managers striving to identify and overcome procurement waste:
- Implement competitive bidding - work with a procurement partner to help you get the best value for your investment of time and money
- Digitise the purchase of business services - improve the ability of procurement teams to deliver quickly against the needs of the enterprise
- Develop a fraud prevention strategy - including digital procurement, whistle-blower policies, managed bidding processes and a compliant process for vetting suppliers
- Create strong supplier relationships - ensure strategic sourcing, strong alliances with key suppliers and innovation
- Adopt a business services catalogue - with vetted and up-to- date suppliers to streamline the sifting, selection and delivery process