In the world of business, procurement plays a vital role in the overall functioning and success of an organization. One of the key terms in procurement is Spend Under Management (SUM).

This term refers to the percentage of total company spending that is actively managed according to procurement strategies and policies.

Understanding this term and its implications can greatly enhance the efficiency and effectiveness of a company’s procurement processes, especially for small companies that may not have a dedicated procurement department.

It’s important to note that Spend Under Management is not just about controlling costs, but also about maximizing value. It involves a strategic approach to managing company spending that goes beyond mere cost-cutting. This article will provide a comprehensive explanation of Spend Under Management, its importance, how it’s calculated, and strategies for increasing it.

What Is Spend Under Management?

Spend Under Management (SUM) is the proportion of a company’s total spending that is actively managed through procurement strategies and policies.

Active management means that the spending is strategically handled to maximize value rather than simply monitored. SUM includes activities like strategic sourcing, supplier consolidation, contract management, and other practices that align with the organization’s objectives.

Importance Of Spend Under Management

Spend Under Management serves as a key performance indicator (KPI) for procurement teams.

A high percentage of SUM suggests effective management of procurement resources, supplier relationships, and purchasing power, ultimately leading to cost savings and other benefits. Conversely, a low SUM may indicate inefficiencies or missed opportunities in procurement processes.

For the calculation of Spend Under Management, the calculation is straightforward: divide the actively managed spend by the total company spending and multiply by 100 for a percentage. For instance, if a company’s total spend is $1 million, and $800,000 of it is actively managed, the SUM would be 80%.

Key Concepts And Definitions

To fully understand SUM, it’s essential to grasp a few related concepts:

Addressable Spend

Addressable spending refers to expenditures that can potentially be brought under active management through strategic sourcing or contract agreements.

Unmanaged Spend

Unmanaged spending, also known as maverick spending, includes purchases made outside of standard procurement processes, often without authorization, which can lead to missed savings and inefficiencies.

Impactable Spend

Impactable spending refers to the portion of addressable spending that procurement can influence through negotiation, supplier consolidation, or process improvements to achieve cost savings and value.

Strategies For Increasing Spend Under Management

Increasing SUM involves bringing more expenditures under structured management. Here are several effective strategies:

1. Formalizing Purchasing Processes

Establishing clear procurement policies and approval workflows helps reduce unauthorized spending and ensures consistency in procurement activities.

2. Building Strong Supplier Relationships

Developing collaborative, strategic relationships with preferred suppliers allows companies to leverage favorable terms and long-term value.

3. Leveraging Technology For Spend Visibility

Using procurement software and spend analysis tools helps procurement teams monitor and track spending in real time, which is crucial for maintaining SUM.

Benefits Of Effective Spend Management

An effective SUM strategy benefits organizations in various ways:

Risk Mitigation

Active management reduces unauthorized spending and aligns expenditures with company policies, leading to greater control and reduced financial risk.

Cost Optimization

By strategically managing spend, companies can identify cost-saving opportunities and negotiate advantageous contract terms.

Improved Vendor Relationships

Effective management fosters strong supplier relationships, enabling better pricing, service, and supply chain resilience.

The Role of Technology In Spend Under Management

Digital Tools For Enhanced Spend Visibility

Procurement technology such as E-procurement platforms and spend analysis tools enable greater visibility and control over company spending.

Streamlining Procurement Processes

By automating manual processes, companies can reduce errors, minimize unmanaged spending, and ensure that spending aligns with company goals.

Measuring Spend Under Management

Measuring SUM requires specific KPIs and metrics to gauge procurement’s performance and alignment with organizational goals.

KPIs And Metrics

Metrics such as cost savings, procurement cycle times, and supplier performance are commonly used to track the effectiveness of spend management strategies.

Assessing Performance

Regular evaluations of procurement practices and spending trends help organizations stay on track and identify areas for improvement.

Challenges In Managing Spend Under Management

Effective management of SUM often encounters challenges. Common obstacles include:

Common Obstacles

Resistance to change, lack of visibility into spend, and limited resources can hinder effective management of SUM.

Solutions And Best Practices

Implementing procurement software, conducting regular audits, and training employees on spend management are ways to overcome these challenges.

Future Trends In Spend Under Management

As procurement continues to evolve, SUM strategies are adapting to incorporate new tools and approaches.

Evolving Procurement Strategies

Increasingly, procurement leaders are focusing on data-driven decision-making and supplier performance to maximize SUM.

Innovations In Technology

With advances in analytics tools and automation, companies are better equipped to manage spending and maintain strong supplier relationships, leading to enhanced cost control and operational efficiency.

Conclusion

Spend Under Management is a foundational concept in procurement that can significantly enhance an organization’s financial health and operational efficiency.

By adopting SUM strategies and using technology to maintain visibility, even companies without a dedicated procurement team can realize substantial benefits, including reduced risk, cost savings, and stronger supplier relationships.