4 Types of Procurement Spend and How to Manage Them

We know that procurement has become more strategic – in addition to possessing cost-management capabilities, procurement is also seen as value-generating and a source of competitive advantage.

However, focusing on spend remains a top priority for procurement leaders. And one of the most important ways to reduce spend is to bring more spend under management.

But here's the catch: you can't manage what you can't see.

To make informed decisions about spend, a comprehensive understanding of spend categories is essential. Here are the four kinds of spend that are critical to increasing your company’s bottom line.

1. Direct Spend

Direct spend or direct procurement refers to all costs directly associated with the procurement of raw materials and goods needed for production. Direct spend typically represents the largest percentage of total spend in an organization. Activities such as supplier relationship management, vendor risk management, inventory optimization and logistics come under direct spend.

Unlock the potential within your supply chain by fostering innovation through close partnerships with suppliers. Leverage spend analytics to discern trends and pinpoint areas for optimization, empowering your procurement team to wield greater buying power.

2. Indirect Spend

Indirect spend includes the expenses and overheads that are not directly attributable to the final cost of a product. These are divided into several categories such as operations, services and technology and analyzed to identify opportunities for savings.

Indirect spend management best practices are as follows: Maintain visibility over indirect spend to curb maverick spending and tail spend which can affect your bottom line. Conduct a thorough examination to identify cost-saving opportunities, eliminate redundancies, ensure compliance, and streamline procurement processes.

Also Read: Reasons Why Your Procurement Team Can’t Do Without Spend Management Software

3. Maverick Spend

Maverick spend occurs when purchase deviates from the organization’s procurement rules, and goes around the usual procurement processes. Rogue spend undermines procurement’s ability to negotiate favorable terms, risks compliance breaches and squanders potential cost-saving opportunities.

Forming alliances with other departments and educating internal stakeholders to avoid maverick spending are essential. Collaboration between procurement and departments can reduce rogue spending while identifying other possible cost savings.

4. Tail Spend

Tail spend includes the enormous number of transactions that are low in individual volume but will collectively result in a sizable amount of expense. Due to its complexity and decentralized nature, tail spend is notoriously difficult to manage.

Implement technology solutions to streamline the tracking and management of tail spend. Proactive management not only trims costs but also offers a competitive advantage, as evidenced by companies leveraging technology to achieve substantial savings.

To Sum Up

Managed well, these four spend areas can bring a wave of financial gain into your business. With the use of data, relationships and technology, you can navigate procurement with increased clarity, continually reducing costs in a sustainable way, as well as helping to create real strategic value for your business.

Here’s how GEP can help you manage spend.