Tim Cook, CEO of Apple once said:
“….what we will not do and never have done is stand still or turn a blind eye to problems in our supply chain. On this you have my word.”
Tim Cook is a striking example of a leader who rose through operations and supply chain leadership before becoming CEO. Prior to leading the company, his role covered procurement, manufacturing, logistics, and global operations — essentially the entire operational backbone of the company. He is credited with optimising the company’s procurement and supply chain that became central to its mind-boggling growth and success.
Procurement, often operating behind the scenes, is one of the most critical functions in organisations. Procurement teams make decisions that are crucial for the organisation to run its operations smoothly — the sourcing of products, components, and services.
However, there are a number of ways in which procurement teams end up losing money and value when hidden costs go unnoticed. Let us look at a few such costs that should be carefully considered while making procurement decisions.
Poor contract management
Studies have shown that organisations lose billions of dollars annually due to ineffective contract management. Contracts are legally binding agreements that define the terms under which the products or services are to be supplied and the rules of engagement between the two entities. Contracts typically outline scope of work, delivery timelines, pricing and payment terms, compliance requirements, and termination clauses. However, one of the overarching issues seen in procurement is that contracts once signed are often neglected and not actively monitored. If contracts are not watched carefully and enforced, they could lead to revenue leakages. Missed discounts, overpayments, unclaimed penalties for service level agreement (SLA) breaches, delayed contract renewals are some of the ways that could compound to large losses for organisations. It is not all bad news however, with many companies using contract management software to set reminders for important dates such as audits, renewals and price adjustments.
Supplier-switching cost
At times, decisions are made by procurement teams to switch suppliers due to cost, quality, or certain strategic reasons. While changing suppliers is at times necessary, frequent switching is something that needs to be considered very carefully. In many cases, it is better to continue with the same supplier by negotiating better deals since switching suppliers comes with certain costs that might not be very obvious. For instance, the procurement team has to spend time evaluating and qualifying new suppliers, preparing new contracts, and training internal teams to work with the new supplier. Further, shifting to new suppliers could cause delays during the transition period. Any initial quality inconsistencies could lead to production slowdowns and in turn, customer dissatisfaction.
Poor demand forecasting
Ordering supplies for an organisation calls for a very delicate balance to be struck. If quantities ordered are in excess, capital gets tied up in surplus inventory that might not even be used and also result in increased storage and warehousing costs. The situation could be the opposite at other times. Procurement teams could end up ordering less, which could result in production disruptions or service delivery. Stockouts may happen, necessitating emergency purchases at premium prices.
Logistics and freight costs
This is one area where the costs could quietly escalate and result in huge losses. It is important to note that logistics and freight often come with extra charges under specific situations. These could include fuel surcharges, urgent delivery fees, customs clearance fees, or storage costs if goods arrive late or sit in a warehouse. These hidden costs could adversely impact a procurement team’s budgets and affect overall purchasing plans. To prevent these costs, it is crucial for procurement teams to communicate regularly with logistics teams and understand all the possible charges and look for ways to mitigate them.
Maverick spending
Maverick spending happens when employees purchase goods and services outside of approved procurement processes, contracts, or preferred supplier lists. Though such spending may feel minor, it could seriously dent and undermine the effectiveness of procurement systems. Procurement teams negotiate favourable payment terms and volume discounts with suppliers, but when teams buy outside those agreements, it results in the loss of negotiated savings. Buying outside approved vendors could also result in the violation of regulatory requirements and the bypassing of compliance checks, which could cause serious damage.
The hidden costs in procurement are not always visible but their long-term impact could be substantial. All procurement teams must be aware of such costs and proactively plan on controlling these cost leakages. By focussing on reducing these costs, companies unlock substantial savings and generate measurable business value.
How Infosys BPM can help
Infosys BPM enables organisations to strengthen sourcing performance while transforming transactional efficiency. We combine strategic category management with process optimisation to drive measurable savings and operational control. By integrating tail spend management, automation, and touchless transaction models, we help reduce manual effort and improve procurement efficiency. Our intelligent sourcing and supplier management capabilities are designed to deliver year-on-year cost savings and provide end-to-end support across the sourcing lifecycle.
