There are a variety of reasons why dark purchasing flourishes within an organization, including decentralization, lack of visibility and dependence on manual systems. Too many procurement professionals — over half of respondents to an industry survey—purchase supplies for their organization on their own, either through approved vendors or by buying and then filing an expense report. This “non-PO practice” is just one reason why dark purchasing is able to thrive in any business environment.
Dark purchasing occurs when expenses are incurred outside of your company’s established procurement practices. They often take place with unapproved vendors and can result in redundant or unnecessary purchases. Dark purchasing most often occurs in the indirect spend category because that is often handled at the functional or business unit level of a business rather than at a corporate procurement level. The characteristics of dark purchasing are summarized as follows:
Procurement System Weaknesses
The common reasons why dark purchasing may occur are:
The occurrence of purchasing activities without clear standards
Decentralization process without a system that covers all types of spending in the organization results in purchases of the same or similar goods across multiple suppliers. So, you cannot get the benefits that should be obtained, such as discounts for large purchases. This condition forces you to pay more for the items you buy.
In negotiating a price with a vendor, the quantity of the purchased item leads to the effect the buyer has on the selling price. It could happen since the suppliers will become more interested in partnering with you.
Handling indirect spending will lead to irresponsible spending or unauthorized purchases from vendors. So, there is no clear information on where people in the company spend the money.
Dependency on manual systems
If you are still using manual and paper-based processes, you do not have transparency and visibility into what is being spent, as well as the working capital that is available to you. Not only does automating the entire spending process, including indirect spending, allow you to focus on your core competencies and reduce the number of hours needed to manage the spending process, but it also prevents employees from manipulating elements of the process. Manipulating any part of the procurement process increases your financial risk.
Without a system that encompasses all types of spend within your organization, you end up with fragmented buying where the same or similar items are purchased from multiple suppliers. When you have fragmented spend, you lose some of your competitive advantages because you are not able to take advantage of things like volume discounts. As a result, you end up paying more for the things you purchase. If you are negotiating the price with a vendor, the more you plan to spend, the more power you have over pricing. In essence, you become a more attractive business partner to the supplier.
How To Get Rid of Dark Purchases
SRM can automate your entire expense process and allow you to focus on the business instead of low-level details. It helps to reduce the amount of time it takes to manage the expense process. Moreover, it prevents employees from doing manipulation during the transaction process because this action can increase your financial risk.
Using SRM, you can make sure that all purchases are through your company’s approved vendors. Indirect spending tends to occur in small quantities so it may go unnoticed. It is mainly as they appear in many departments. Using SRM for all company expenses will not only eliminate dark purchasing but also increase profits. Purchasing automation aims to streamline the demand and procurement process, increase visibility and transparency in transaction activities, and improve control and security.
SRM that allows centralized control presents the opportunity to connect vendors with purchasing activities between departments through a unified system and allows for more comprehensive control and optimization of goods. Through SRM, the purchasing division can coordinate each department’s needs before doing a transaction to receive a better price.