The term “dark purchasing” has been coined to describe the shadowy area where items are purchased outside of standardized processes and can’t be easily tracked to capital outlay or material inventory. I talked about this in a previous blog post.
Dark purchasing doesn't just happen. There are things within your organization that allow dark purchasing to flourish. Two big factors are non-standardized processes and human error. Allowing indirect spend to be handled in a decentralized manner or by functional areas of your business makes it easier for rogue spend — purchases from unauthorized vendors or those outside of dollar parameters — to happen on a regular basis.
Indirect spend is likely to happen in the dark because it typically involves 80% of all suppliers even though it may only account for 20% of all purchases. Indirect purchases tend to be in smaller amounts so may go unnoticed, especially since they happen across multiple departments. No one person in the organization may ever see the full scope of the indirect spend.
A report from Accenture found that every procurement dollar in indirect spend that is brought under management control can represent a savings of as much as 10% to 20%. That is a compelling reason to develop standardized processes and procedures for indirect spend as you have for your direct spend items.
Human error is the other big factor that makes dark purchasing a reality. This is especially true if you are still using manual processes in your accounts payable department. All too often, companies fail to automate accounts payable and don't take advantage of the benefits automation brings to payables which include making it an integral part of the procure-to-pay process.
According to the Institute of Finance and Management, only 13% of companies responding to a survey had “straight through processes with virtually no human intervention.” It is easy to see how human error can occur when you realize that email, fax, phone and “free-form documents” are still being used in the accounts payables process.
When there is no consistent way to track invoices and payments, they fall into the area of dark purchasing. You need a system in place that supports both your direct purchases and your indirect ones. This helps optimize cash flow and gives you a more accurate picture of what you are actually spending.
Having the proper procedures in place for all of your purchases — both direct and indirect — and automating your payable process will keep all of your spend in the light of day.