How It Happens and How to Counteract
Procurement is rising on the priority lists of both corporations and governments. The two foremost examples are:
– In December 2014, the US government reported a reduction of more than USD 55 billion in contract savings in fiscal year 2013 over the previous year. The savings was part of a four-year decrease in the cost of federal contracting.
– Novartis, a global healthcare company, has reported procurement savings of USD 1.6 billion in 2014 and is expected to see even greater procurement savings in 2015.
‘Strategic Sourcing’ has played a key role in the success of procurement teams in both of the above-mentioned cases. A dent in this key game plan is “maverick spending.”
Maverick spending can be defined as a purchase made outside of the preferred route. These are ad-hoc purchases, made outside a negotiated contract with a preferred supplier.
What is the solution?
Maverick spending is the result of the gap between operations and procurement teams. This lack of understanding of each other’s functions causes the damage. The procurement team must understand the operational value of their function and drive value out of the purchases rather than through cost savings. Maverick spending can be reduced by following these guidelines:
The procurement team must develop clear value definition in conjunction with the operation team for achieving organization-wide goals.
- Non-procurement professionals must be trained in procurement procedures, and be responsible for any non-compliance.
- Purchasing directions must be clearly developed at the organizational level with respect to inventory checks, purchasing permissions, routing and approvals and reporting.
- As much as possible, purchasing power must be restricted to the procurement team.
- P-card purchases must be restricted, regulated, and audited regularly.
- Suppliers must be audited to check the contract adherence and learn the gaps in delivery and requirements.
- The P2P process must be simplified and tailored according the needs of the end-user community.
Use Mavericks to Solve the Maverick Spending Problem
Maverick spending is a gold mine for understanding failures in the procurement system (with a big “S”). It’s absolutely a critical KPI: in order to reduce it, you have to not only define it (which can be more complicated than you think), but also identify all of the root causes that impact it.
It must be acknowledged that maverick spending cannot be avoided completely. Maverick spending is a necessary evil. It provides flexibility to the end-user to take the opportunity to experiment with new products. Sometimes, this small experimentation leads to identifying new products and suppliers that increase purchasing options for the organization in the future.
At ISS Group we recognized the need for such Business Process Improvement (BPI) solutions well over a decade ago, and today, ISS Group continues to deliver to the QAD EA community Agile Business Process Improvement (BPI) solutions, such as e-Procurement, which digitize business processes to connect people and processes via the cloud, mobile devices, and social networks, for Mid-market and Divisions of Fortune 1000 Manufacturing and Distribution organizations.
STAY TUNED for an upcoming presentation on Managing Pricing Controls and Eliminating Maverick Spend…!