What is Spend Leakage?

Spend leakage refers to the extent of category spend with suppliers that do not feature on the pre-approved suppliers list. It is usually denoted as a percentage of the total spend and predominantly experienced in ‘indirect categories' where stakeholders opt to offer business to alternate sources. 

With ever increasing demand for goods and services, businesses must keep an eye on their supplies to ensure they can always meet customer demand. However, this is difficult as it can be hard to precisely ascertain the volume of product that leaves a factory or plant and makes it to the market. 

Spend leakage is the term used to describe a company or organization's unintended or uncontrolled money flow.

Understanding Spend Leakage  

Inventory and production costs are the most common sources of spend leakage in a supply chain. Inventory costs are the expenses associated with purchasing or holding inventory, such as material, labor, and overhead. Production costs are the expenses related to producing a product or service, such as wages, transportation, and equipment depreciation.

Money gets wasted when inventory or production costs exceed what is being sold or produced. This waste can negatively impact the company's financial performance and ability to meet customer demand.

Steps to Reduce Risk of Spending Leakage  

Assess Your Inventory and Production Levels Closely:   

Too much inventory or production can lead to overspending.

Control Your Spending on Materials and Labor:   

Ensure you order enough materials to avoid the waste of money and labor hours.

Properly Account for Transportation Costs: 

Companies can underestimate the cost of transporting goods by as much as 20%. This inaccurate estimation can lead to high transportation costs.

Track Your Financial Results Regularly:   

When you understand where your money is going and why you can make more informed decisions about how to spend it and reduce the risk of spending leakage.