Off-contract indirect spend by stakeholders is the bane of the procurement team. How can you boost compliance and clip the wings of MRO procurement mavericks?
“It’s always worrying as a procurement professional when you overhear the word ‘eBay’ mentioned in a nearby telephone conversation,” says Kevin Cheetham, Category Manager at brick manufacturer Ibstock. While Cheetham and his team are dedicated to removing off-contract or maverick spend on MRO products from their purchases, the issue is a common one for many procurement colleagues across all industries.
Recent research by RS and the Chartered Institute of Procurement and Supply showed that 40% of procurement and supply professionals listed ‘ensuring contract compliance with preferred suppliers’ as one of their day-to-day challenges. Indirect procurement can be particularly vulnerable to off-contract spend due to the often urgent need for parts to repair machines and keep operations running. In addition, procurement professionals report a culture among maintenance engineers of purchasing from local suppliers that they know.
“It’s important to communicate with stakeholders and show them the benefits of compliance” Richard Jeffers, Technical Director for Northern Europe, RS
The bigger picture
In some cases engineers are, understandably, simply looking for a quick fix for the parts that they need. However, the bigger picture for the organisation as a whole is that off-contract purchases are hard (or impossible) to track, usually purchased at list price and, particularly in the case of internet purchases, have no guarantees of the quality of the parts or their source.
“We have a well-defined contract and contractor model, but what we do find with MRO is a need to have items at short notice in case equipment has broken down,” says Rob Woolley, who served as Directs Category Manager at Cadent. “At Cadent we had issues with maverick spend historically, not intentionally but because necessity tends to mean that rather than using our contracted channels they have called into a local tool stockist, bought something and then expensed it or raised a retrospective purchase order. This area has and continues to improve with our guidance.
“We heard references to Google and eBay – I had an example where the engineer said, ‘I looked on the internet and I can find it for a pound cheaper,’” adds Woolley. “It’s that lack of understanding that it’s a pound cheaper on the purchase price, but if you go ahead and buy it, you won’t have the correct terms in place, we don’t know about the warranty and the part might be counterfeit and fail.”
“An off-contract supplier might be a pound cheaper on the purchase price, but we don’t know about the warranty and the part might be counterfeit and fail” Rob Woolley, Directs Category Manager at Cadent
At Ibstock Brick, Kevin Cheetham can point to an impressive level of compliance on MRO spend, which is currently around 95%. “Our compliance levels are very good, but that doesn’t mean it isn’t a constant battle,” he says. “We analyse the data every quarter and then have to engage with any sites where there is leakage.
“Our efforts have been really helped by having top down support,” he adds. “Procurement is set out with its plan of using preferred suppliers and the board are supportive of our efforts to maintain that compliance. In addition, we use rebates and go to great pains with our finance people to ensure that these are funnelled back to the sites, which rewards good practice.”
Richard Jeffers, Director for Industrial Digital Solutions at RS Components, believes that organisations need a mix of carrot and stick to achieve compliance. “In my time in industry, the only way I managed to block maverick spend was by leaving suppliers and eventually going to find the engineers and saying ‘If you put off-contract purchases through on expenses, they will come out of your wages,’” he recalls. “However, it’s also important to communicate with stakeholders and show them the benefits of compliance – that’s where suppliers like RS can help because we can provide data and an external voice to help make the case for on-contract spend.”
For many procurement departments, the support of their preferred suppliers in winning over stakeholders could prove invaluable as they look to change an established culture. The rewards are worth the effort, though, as compliance leads to cost savings, greater efficiency and a more competitive business in the long run.