What is Spend Leakage?- Definition

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

Understanding Spend Leakage

Spend Leakage is the extent of mainly Indirect Spending with non-approved, non-preferred, or non-contracted Suppliers. It is usually expressed as a percentage of total Indirect Spend.

New technologies have great potential to boost performance. However, procurement decision-makers are asking which tool they need to bring real added value to their companies. We can help you distinguish between creating and retaining value.

• Solutions that help identify and create value by providing better spend visibility and improving sourcing. These include automated expenditure analytics, category analytics, and supplier selection solutions, for example.
• Solutions that help prevent value leakage by boosting the Procure-to-Pay process and improving performance management. These include Procure-to-Pay or supplier performance management tools, claims-management systems, and compliance-monitoring systems, for example.

What are the potential causes of spend leakage?

Overestimating

It is not unusual for the spend baseline assumptions used by procurement to be either too low or too high; either way, it is not an excellent commercial start, leaving money on the table due to low forecast or suppliers wanting to re-negotiate prices due to forecast spend being too high. These assumptions usually occur because of inadequate bench-marking, poor understanding of current and forecasted spending, or misconceived ideas about what is driving the costs that affect savings. Ultimately, these problems arise from a lack of information, and while the data is available, it is usually inaccurate and at too high a level to be meaningful. Using artificial intelligence, you can very accurately counteract these issues using high-quality purchasing data at a granular level.

Dubious budgeting

This is a common issue in larger companies. A particular department can estimate its potential/ expected savings, which can be intentionally watered down when amalgamated with cross-departmental budgets. There is an unwritten end goal of providing a budgetary cushion to make sure budgeting expectations are met. Once again, a lack of organizational buy-in can be the cause of this type of behavior. But, what this can result in is the total amount of savings never appearing. A corollary to this tactic involves the lack of a mechanism for capturing the additional savings created if the savings initiative exceeds expectations. In this case, the actual target savings are achieved, but any extra savings not budgeted for are simply spent elsewhere. Robobai uses the latest technology to provide the relevant data and ensure compliance to stop this from occurring from the outset.

Poor demand management and compliance

Savings can disappear when companies buy goods and services from vendors other than those identified by the procurement process, usually preferred or contracted suppliers. The reason companies are using AI platforms like Robobai is because it allows them to find the best, cheapest, and most reliable supplier for required purchases. This will only produce results if companies are fully compliant and don’t go off track and start using local suppliers for simple, ad-hoc purchases. These add up and affect the overall predictions in savings.

Explore Additional Resources to Know More