I want to return once again to the subject of dark purchasing, “the shadowy area where items purchased cannot be easily justified by capital outlay or by material inventory.” I’ve talked about this phenomenon in previous blog posts, but the benefits of gaining control over all your purchasing are so great that I want to offer a few more insights.
There are a variety of reasons why dark purchasing flourishes within an organization, including decentralization, lack of visibility and a dependence on manual systems.
To review, dark purchasing occurs when expenses are incurred outside of your company’s established procurement practices. They often take place with unapproved vendors and can result in redundant or unnecessary purchases. Dark purchasing most often occurs in the indirect spend category because that is often handled at the functional or business unit level of a business rather than at a corporate procurement level.
All too often, there is little knowledge about how the procurement process works within an organization. Lack of knowledge equates to lack of control. It doesn’t help that procurement is too often viewed as a tactical rather than a strategic part of the business.
If you are still using manual and paper-based processes, you do not have transparency and visibility into what is being spent, as well as the working capital that is available to you. Not only does automating the entire spend process, including indirect spend, allowing you to focus on your core competencies and reduce the number of hours needed to manage the spending process; it also prevents employees from manipulating elements of the process. Manipulating any part of the procurement process increases your financial risk.
Without a system that encompasses all types of spend within your organization, you end up with fragmented buying where the same or similar items are purchased from multiple suppliers. When you have fragmented spend, you lose some of your competitive advantages because you are not able to take advantage of things like volume discounts. As a result, you end up paying more for the things you purchase. If you are negotiating the price with a vendor, the more you plan to spend, the more power you have over pricing. In essence, you become a more attractive business partner to the supplier.
Increasing your buying power increases your organization’s competitive advantage, and the best way to do that is to better leverage your spend. Make sure 100% of your purchases, even the indirect ones, are going through your preferred vendor partners.
In the past few years, businesses have implemented piecemeal technology solutions from third-party vendors specializing in various components of the procure-to-pay process. A better approach is a single-source solution that can support all end-to-end financial processes including indirect spend management.
Using one process for all your spend will not only eliminate dark purchasing but also improve your bottom line.