How do you ensure compliance with purchasing policies while improving control of budgets?

Charlotte Sutton
Charlotte Sutton,
Take just 5 minutes to clarify to yourself the scope and objectives of the business process.
Explore the process…

The process you mainly want to explore is the way in which your organisation authorises purchases for what is generally called indirect goods and services – i.e. everything your organisation purchases to support operating the business, not including raw materials or products purchased in high volume for manufacturing or re-sale. In other words:
  • Routine commodity items such as office or maintenance suppliers
  • Routine outside services such as office cleaning, landscape maintenance, temporary help, etc.
  • More technical items such as computer equipment or software where an expert buyer may be involved in addition to the employee who needs the item
  • Capital items and specialised services (note: normally, the full process for these items will also include processes covered by “Sourcing” and “Supplier Engagement”)
The scope of the business process is pretty straightforward:
  • Employee purchase request or requisition
  • Manager authorisation (or denial)
  • PO placement
  • Receipt of goods or acknowledgement of service completion
The primary goal of this process is to ensure only necessary and appropriate purchases are made; that they are made with clear managerial visibility of the impact on budget; and that they are made with preferred suppliers (i.e. suppliers with negotiated purchase agreements) whenever possible.

How are you performing today?
Ask yourself and your team how you are doing today. Consider this simple “rough cut” approach to estimating bottom-line impact that could be achieved with improvement:
  • What is your ‘addressable’ annual spend? Total annual spend except payroll, taxes, depreciation and amortisation, rent, utilities and maybe a few others categories where further savings are not possible. Everything else is ‘addressable’ with Spend Control.
  • What percentage of addressable spend could be avoided? e.g. If managers always had the opportunity to approve or deny purchases based on how necessary the item or service really is, whether or not that item or capability is already available somewhere in the company, current standing against budget, etc.
  • What percentage of addressable spend is spent with suppliers with whom you do not have price agreements? e.g. Purchases made by employees from their favourite website or store and purchases where spot agreements could be negotiated if they were put through a competitive bidding process but are not.
  • What is an ‘average’ percentage price reduction that you gain when we negotiate volume discounts or perform competitive bidding processes? This will vary widely by spend category and situation, but a ‘round number’ percentage will do for the purposes of this rough estimate. 

Therefore, what is the amount of potential savings that can be achieved by ensuring all spend is authorised? 
Addressable spend (a) x Percentage that could be avoided (b)

Therefore, what is the amount of potential savings being lost due to purchases being made ‘off contract’ and with no competitive bidding process? 
Addressable spend (a) x Off-contract spend (c) x Average price reduction (d)

Note: Negotiated purchase agreements are not always just about ‘price’. They often involve gaining the best overall value, including price, quality, reliability, associated services, etc. A ‘total cost’ savings can be calculated, but that goes beyond our simple ‘rough cut estimate’ process here.

Click here to read part 2: “Purchase Authorisation: What is holding you back…”

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