Learn procurement's role in defining and calculating spend under management, and how to drive cost savings and value for your organization.
Procurement professionals apply the term spend under management (SUM) to measure and communicate their team’s impact on the organization at large. While the definition can vary, it’s generally defined as the percentage spend that falls under procurement’s management. Some organizations may define SUM as any spending that leverages preferred supplier contracts.
Before we delve into the details of spend under management, it’s important to understand the different components of spend within an organization:
- Addressable (or total) spend
- Spend influenced, and
- Spend under sourcing
What is addressable spend?
To help paint a clear picture, imagine that your organization’s total spend is represented by a two-tiered chocolate cake.
Addressable spend is the cake in its entirety – the two layers topped with thick chocolate icing. It comprises every last dollar that an organization spends with commercial suppliers on direct and indirect materials and services each year.
The only expenditures excluded from addressable spending are tax payments, charitable donations, employee base salaries and bonuses, dividends, stock repurchases, securities, and organizational memberships.
It’s important to clarify that addressable spend means all sourceable spend and not simply the products and services that are strategically sourced by procurement professionals.
What is spend influenced?
Spend influenced is the bottom tier of the chocolate cake. Because only a small amount of icing has trickled down to this layer, it ends up being the least desirable part of the cake.
Spend influenced is the area of spend within an organization’s addressable spend in which procurement teams exert some influence either by overseeing or managing the sourcing process and enforcing procurement policies and processes.
For example, procurement policy might require a buyer to obtain three quotes when purchasing goods or services over a certain price threshold. It’s also extremely difficult to calculate this metric if an organization has no clearly defined buying policies.
What is spend under sourcing?
Spend under sourcing encompasses the cake’s second tier. This layer is considerably more saturated with chocolate icing, and it’s all the better for it.
Spend under sourcing is the area of spend within an organization’s addressable spend which is covered by formal sourcing strategies, including documented category plans.
Category plans might include approaches such as specified geographic sources of supply, business process sourcing decisions, recommendations related to goods and services that require multiple suppliers, “buy splits” among the targeted supply base to mitigate supply chain risk, and recommendations related to alternative sources of supply.
What is spend under management?
Now comes the best part; the final component of the cake is the layer of icing on top. This represents the area of spend within an organization’s addressable spend that is fully managed by procurement professionals, from the supplier selection process to negotiations on pricing and contractual terms.
Once you segment an organization’s spend into these sub-categories, it’s not hard to see where the confusion surrounding SUM comes from. Some organizations only apply this term when goods and services are obtained via robust procurement processes. Others simply equate SUM with their preferred supplier program.
It’s perhaps most helpful to equate SUM with strategic procurement. Just because a buyer adheres to the processes outlined by procurement, it does not mean they are sourcing strategically. Spend under management will largely be comprised of preferred or strategically sourced suppliers managed by procurement professionals. But if buyers are well-informed and properly adhering to procurement’s guidelines and regulations, preferred suppliers should also feature heavily within the “spend under sourcing” or “spend influenced” layers.
For a small organization with no official procurement policy for its buyers, the percentage of SUM will likely be a lot lower, and spend will likely be divided into just SUM and addressable spend. Meanwhile, for an organization with robust procurement processes and policies, SUM will overlap with spend influenced and spend under sourcing.
To keep things simple, some organizations refer to SUM as “spend with preferred suppliers.” But whichever way you choose to look at it, the higher the percentage of SUM, the better.
Why is SUM important?
Driving SUM within your organization improves efficiencies, reduces cost, encourages collaboration between vendor and buyer as well as between cross-functional teams, and improves procurement productivity.
Calculating the percentage of spend under management is also an important way of communicating procurement’s value-add to your organization’s leadership team. But what constitutes a good level of SUM? It’s actually pretty difficult to say because procurement influence differs so hugely across organizations, as does the definition of spend under management. Some teams might strive to meet 80%+ SUM while, for others, 40% is considered a big achievement.
How to bring more spend under management
Below, we outline how to bring more spend under management using six of the best practices.
Sourcing and managing suppliers
Your procurement team’s sourcing strategy might favor a strategic, project-based, long-term contract, or one-off spot-purchase approach. It typically involves a competitive process and will be overseen by procurement leaders or a cross-functional category team.
A strategic sourcing strategy is key to ensuring vendors with the potential to deliver the most value. Suppliers that can ensure quality, reduce risk, provide great service and fair prices should be identified as preferred suppliers. In turn, they should be effectively and consistently managed.
Once onboarded, procurement teams must allocate substantial SRM activities to ensure these suppliers continue to deliver value. This includes performance monitoring, regular communication and collaboration, and timely contract reviews.
If a preferred supplier contract is automatically renewed at the end of a year, procurement cannot reasonably claim this as SUM. They won’t have given any consideration to changing circumstances, opportunities for re-negotiation, or alternate vendors.
To drive more SUM within your organization, you’ll also have to focus on encouraging buyers to choose the right vendors. How can you make it easier for them to find and spend with your preferred suppliers? Consider offering incentives, implementing better technology, or providing additional education and training.
Proper purchase authorization
Formal approval requests aren’t always necessary. Buyers are often authorized to make certain low-value purchases or claim expenses (e.g. for corporate travel).
When authorization is required, make sure buyers are getting it right. This provides an opportunity to identify and prevent maverick spending.
Proper purchase authorization refers to spending that complies with a company’s purchase approval policies. The purchase is approved and an invoice arrives before an order is placed. This enables procurement teams to validate invoices and improves visibility across the organization.
Coding systems
Departmental expense and purchase history accounts can consist of hundreds, if not thousands, of detail items. A failure to accurately code transactions makes it difficult for procurement teams to manage their budgets. It also leads to confusion or inaccurate information surrounding how much is being spent where, and results in bad sourcing decisions.
Implementing a robust coding system will reduce human error and enable procurement to better analyze SUM. Ideally, buyers should be able to quickly access pre-existing information on suppliers, contracts, goods, and services. Being able to do so negates the need for them to manually enter this data.
Contractual terms
The value unlocked through a preferred supplier program is heavily reduced if the original terms are not upheld by your buyers. You can easily end up spending more or losing out on additional favorable terms, like expedited shipping or volume discounts.
One way to minimize this risk is to require buyers to reference the relevant contractual terms when a purchase is made. To improve compliance, procurement must ensure contracts are documented well, up to date, and easily accessible.
Improved efficiency
How easily are buyers able to apply the correct procurement processes? Clunky and confusing manual processes frustrate buyers. They also add significant indirect costs to the business as a result of time wasted. For this reason, efficiency must not be ignored when it comes to defining or calculating SUM.
Procurement teams should identify where and how their processes can be better streamlined. This could be accomplished through employee education, contract management, supplier engagement, sourcing strategy, catalog management, or technology implementation. Another viable option? Partnering with a group purchasing organization (GPO).
The more effective the systems in place, the more scope procurement professionals have to SUM across the organization.
Increased visibility
For organizations to properly bring more spend under management, purchases must be visible during two different time periods:
- The request-to-payment period
- The historical period (several years after a purchase is made).
Long-term historical data is especially beneficial when it comes to performing accurate spend analyses. The more details of each transaction that are included, the better. Without an eProcurement system, it becomes very difficult to manage the sheer volume of data.
Need help gaining visibility into and effectively managing a larger portion of your organization's spend? Una can help. Contact us for a free cost analysis today.
