In order to remain competitive and continue growing your company, you need to maximize the value of every dollar you spend. It’s that simple.
Procurement is one of the biggest areas where organizations lose money. In fact,a CEB study found that the average large company loses as much as $14 million each year due to poor procurement management and strategy.
The good news is that, no matter how much money you may be wasting today, you can improve your procurement program and therefore make your company stronger and more effective.
To do that, you first need to gauge where things stand.
What’s the maturity level of your procurement program? If you’re not sure how to answer that question, don’t sweat it: We’ve got you covered. Let’s take a look.
Level 0: Nonexistent
Companies that are loosely managed and on the smaller side may have procurement programs that are essentially “nonexistent.” There isn’t necessarily a procurement department per se; all purchasing decisions are made by the CEO or another executive. There isn’t a purchasing budget in place either. On average, indirect spend accounts for $200,000 or less each year.
Level 1: Emerging
Organizations that have moved to Level 1 have some sort of procurement system in place. In some cases, these systems are paper-based. In other instances, they are patchwork systems that usually exist in Excel or SharePoint. As a result of this, companies here see some reduction in fraud and maverick spending. Members of the procurement team adhere to an approval process, at least slightly. But beyond that, there is little visibility into their spend and, as a result, budgetary constraints are usually not considered. Here indirect spend accounts for $1 million to $2 million each year.
Level 2: Evolving
At this level, organizations have moved past the old-fashioned paper- and spreadsheet-based procurement systems and have deployed modern e-procurement solutions. Thanks to this technology, some of the purchasing and payment processes have been automated. Companies here are focused on further reducing maverick spend—if not eliminating it altogether. They are also interested in accelerating the entire requisition process to become more effective. At this point, they haven’t yet focused on optimizing their spend and getting the best deals.
Level 3: Maturing
Companies here are making serious progress on procurement optimization. They’ve started to integrate automation into the requisition process to push and pull relevant information and avoid duplicative efforts. Things like inventory controls, budget management, and invoices may be automated here. Organizations are also focused on ensuring contract compliance; they are starting to make sure that the lowest prices they’ve agreed upon are enforced. At this level, organizations are able to optimize their purchasing departments and eliminate unnecessary headcount. This enables them to lower their costs and become more agile—which makes it easier to scale as needed.
Level 4: Optimizing
Best-in-class organizations have fully optimized their procurement departments. With systems in place to rein in maverick spending and eliminate fraud, these organizations can focus their attention on negotiating better prices with their vendors. Using spend analytics, companies at this level are always looking for ways to get more favorable deals when they negotiate contracts. Additionally, they are almost always able to take advantage of early-payment discounts, thereby lowering their operating expenses. Companies at this level tend to have at least 2,000 employees, and their indirect spend accounts for about $50 million annually.
To figure out where your company stands, you first need to assess the procurement processes you have in place and see if you can figure out the level of maverick spending your organization is currently experiencing. Do you have a fluid procurement system in place? Or is it more of an ad hoc arrangement? Determine how quickly your company is able to complete the requisition process and quiz your employees to see how knowledgeable they are on your systems and procedures.
Once you’ve determined which level you’re operating on, you can then develop a plan that leads your company to Level 4. Once you’re there, you’ll have more resources at your disposal that can then be invested in innovating and expanding your operations.