Finding the Missing Link
Many companies today are scrutinizing their direct costs of sale, such as materials and labor, in an attempt to drive profitability. However, the indirect costs, such as utility supplies, insurance and staff expenses, can easily slip under the radar. Too many organizations have very little visibility into these costs or an understanding of the controls that could be implemented to manage them, despite their impact on the bottom line.
The irony is that indirect costs can be much easier to control than direct costs. A purchase-to-pay (P2P) system will enable the company to undertake company-wide planning that can address issues such as maverick spend, contract visibility and economies of scale. If a purchase-to-pay system is able to integrate with other systems, including enterprise resource planning (ERP) systems and supply chain management (SCM), the visibility can deliver significant savings.
Addressing the Missing Link
There are a number of key factors which, if addressed, can help to deliver a positive impact on the bottom line:
1. Maverick Spend
Maverick spend can be addressed by simply removing any ad-hoc purchase capabilities from anyone that needs to place an order within the organization. This will ensure that employees only purchase goods and services from preferred suppliers with which the purchasing department has negotiated a discounted pricing contract. Regardless of corporate procurement guidelines and processes, whenever staff need to buy goods or services they will find the easiest way to do this. An effective spend management solution will provide the easiest route, but one that has the appropriate controls in place to ensure maverick spend is kept in check, without direct involvement from the employee.
Spend control is often hard to enforce unless some control mechanism, a component of any best-in class e-procurement solution, is put in place. Control mechanisms will prohibit impulsive purchases and will put into place an approval process that allows for authorization at the right level and stage, prior to the order being placed, when the spend is committed. Maverick spend issues will then be addressed before it is too late. The key to this is to ensure the control process is invisible to the user. The process of buying goods and services should be as easy and intuitive as possible.
Without the right systems in place, companies can encounter what's known as a "reverse purchase order" process, which occurs when orders are placed without being noted in any form, electronic or paper-based, at the time of order. Once the invoice comes in it will be unclear where it came from, whether it is a duplicate, if it is within the budget and who it was approved by, if approved at all. To address this issue, which can cost a company thousands or even millions of dollars, efficient systems need to be put in place to ensure that the purchase order process is undertaken in the correct manner.
2. Contract Visibility
Most organizations are tied into multiple contracts that can be worth many thousands of dollars, but many will not have full visibility into those agreements, their values or expiry dates. With different departments in the business controlling contracts for different goods and services, a company needs to have a central view of its spending commitments, if only to appropriately allocate budgets.
A system that provides a central view over contracts will address such issues as corporate governance, accountability and traceability, which if not identified could be the difference between meeting or missing financial targets. Contracts that are automatically renewed can also cause headaches for individual departments as the supplier, who has its contract renewed automatically, might not carry the same goods or services anymore. Also, costs connected to that contract may not necessarily be allocated in budgets, which can cause significant issues.
3. Strategic Activity for the Purchasing Team
It is essential that procurement systems are intuitive, so that anyone who needs to make a purchase can do so easily and in line with policies that are set out by the organization. The purchasing staff will then be able to focus on their core, strategic value-add activity, such as contract management and supplier relationship management (SRM).
While the purchasing teams will still oversee audits, management reports and their day-to-day activity, most of their time will now be spent on strategic activity like the negotiation of major purchases and the setting up of long-term contracts.
Control over Indirect Costs
Gaining control over indirect cost is possible. Anglesey Aluminium a UK-based smelter of aluminium is a good example: The organization needed to report, monitor and control expenditure to deliver cost efficiencies. The P2P solution complemented the plant's existing manufacturing systems and addressed an area of spend that was previously difficult to control. It also automated the entire P2P process at Anglesey and replaced a manual system in which requisitions took up to 11 days to reach the purchasing team. The purchasing and management teams are now able to obtain information from the reporting, price and budget checking capabilities to analyze spend at all stages of the purchasing process, putting them in a better position to make decisions and drive accountability throughout the organization.
Because the organization now has complete visibility over all its spend staff have become more accountable and maverick spend has been reduced.
Integration, Control and Visibility
Integration of any e-procurement system into ERP, supplier relationship management or financial systems will ensure that employees have access to information that is complete, transparent and delivered in real-time. This is a major challenge for most organizations, but it is this requirement that will unlock the positive bottom-line impact for which so many businesses strive.
About the Author: Terry Wilcox is Commercial Director at Proactis, the Spend Control Company. www.proactis.com.