Complete Guide to Optimizing Addressable Spend

Analyzing addressable spend and optimizing strategic sourcing and procurement processes can reduce business costs and provide other benefits when improvement ideas are implemented. Learn what addressable spend is and how to calculate and improve your company’s spend under management by lowering the total addressable spend. 

What is Addressable Spend?

Addressable spend is that segment of business expenditures, including inventory purchases, that are controllable by procurement. Addressable spend can be identified and analyzed to reduce costs and improve quality through better strategic sourcing and procurement processes, also known as spend under management.

Why is Addressable Spend Important?

Addressable spend is important because you can use proven techniques in strategic sourcing and procurement to reduce these identifiable costs and upgrade product quality, thereby improving gross margin, profitability, and competitive advantage in your business. 

How to Calculate Addressable Spend 

Calculate addressable spend as a percentage of total spend for better spend management. Use this percentage for addressable spend as a procurement KPI. Track the improvement percentage in addressable spend costs by month and year-to-date. If there is variability in the timing of your business spend, calculate addressable spend on a  trailing 12 months-basis. 

For example, if the total spending in your business for a defined period of time is $1 million and the addressable spend is $770 thousand, calculate the addressable spend percentage as 77%. 

How to Identify Addressable Spend Items

A company can identify addressable spend items by conducting spend analysis using procurement data, contracts, purchase orders, and supplier invoices flowing through accounts payable. Procurement automation and AP automation software provide some useful spend analysis information. 

The distinction between addressable spend items and non-addressable spend items is whether business results can be improved for an element of spending through better supplier sourcing and procurement processes. 

Addressable Spend Strategic Tips

Strategic and tactical tips for improving addressable spend are:

1. Develop an addressable spend strategy and procurement policies with stated, measurable goals.
2. Communicate to gain employee and stakeholder support for the addressable spend initiative.
3. Use or obtain the right procurement and spend management automation software. 
4. Perform industry benchmarking and apply best practices for procurement.
5. Perform spend analysis on identified addressable spend. 
6. Continuously re-evaluate supplier performance and vendors. 
7. Improve strategic sourcing. 
8. Reduce vendors and consolidate orders for higher volume discounts. 
9. Review and renegotiate contracts with suppliers and vendors. 
10. Analyze data to determine and resolve quality issues. 
11. Gain control over maverick spend.
12. Track KPIs to measure addressable spend goals achievement. 

Generate Addressable Spend Strategy

Determine total company addressable spending and category goals for improving addressable spend in a measurable way. Addressable spend strategy is an essential procurement strategy. 

Company Communication

Communicate goals and methodology to the procurement team and inform the entire company of the initiative to reduce addressable spend. 

Software Use

Use or select automation software that tracks and measures business spend by category and data from your procurement software and integrated ERP systems. 

Industry Benchmarking and Best Practices for Procurement

To reduce addressable spend in your company, benchmark the cost structure of competitors in your industry. View a webinar and attend a seminar on best practices for procurement. Find software that uses these best practices. 

Spend Analysis

Identify and classify spend categories as addressable spend vs. non-addressable spend. Perform an ongoing spend analysis project that includes real-time analysis by addressable spend category and track trends over time. Consider ways to reduce costs for each addressable spend category. 

Strategic Sourcing

Improve strategic sourcing activities to include competitive bids from at least 3 vendors with good customer references to save money and improve quality. Your company may improve supplier suitability by writing RFPs (requests for proposals) for suppliers to answer and submit with the chance to be awarded business orders. Understand the difference between sourcing vs procurement. 

Reducing the Number of Vendors

Consolidate orders with the best vendors to reduce the number of total vendors, get higher volume discounts, and lower administrative time and costs for supplier management.  

Contracts Review and Renegotiation

Improve supplier contract terms through a contract review and renegotiate contracts for better terms when possible. 

Ongoing Supplier Performance and Vendor Evaluations

Perform post-purchase, ongoing supplier performance and vendor evaluations for quality, on-time deliveries, pricing, and financial stability of existing suppliers. If your business has environmental goals as part of an ESG initiative, you can also assess each supplier and vendor’s sustainability rating. 

Data Evaluation to Determine Supplier Quality

Analyze customer returns, purchased product reviews, engineering report data, product recalls, and customer service reports to determine any quality issues relating to purchased retail or wholesale inventory or parts used in manufacturing. With these data-driven insights, you can upgrade your supply chain providers to achieve higher quality for better sales and cost reduction by avoiding product returns or manufacturing rework. 

Gain Control over Maverick Spend

Some company expenditures are too small in amount to justify the cost of preparing and approving purchase orders through the procurement department, but your company will still benefit from spend compliance. 

Issuing controlled purchasing cards (p-cards) to employees for spending on small, routine purchases and using some preferred suppliers that are pre-approved vendors for ordering will let your company gain control over this maverick spend, also known as tail spend. The spending cards will track these employee purchases and provide spending controls. 

Track KPIs for Addressable Spend

Goal measurement through data analytics is essential to achieve optimization from your company’s addressable spend initiative. Establish and track KPI metrics and other spend analytics trends for addressable spend improvements. 

Reasons to Optimize Your Addressable Spend 

Reasons to optimize your addressable spend are:

1. Better visibility into spend data for savings potential
2. Cost-cutting opportunities
3. Cash flow improvement from savings opportunities
4. Higher bottom-line profitability and gross margin
5. Fewer vendors to manage as a procurement function
6. Higher volume discounts
7. Better pricing through contract renegotiation and better contract management
8. Higher quality
9. Better supplier and vendor management
10. Higher level of motivation of the procurement department, procurement performance,  and contributions to company results

Automation and Addressable Spend

Automation software for procurement and AP will help you streamline processes and track and manage your company’s addressable spend. 

Track Business Spend and Improve Efficiency and Financial Controls

Tipalti’s procurement and AP automation software automatically tracks your business spend and provides other benefits, including increasing efficiency for cost savings and de-risking processes with better financial controls over spend to reduce fraud risk and errors. 

Gain Multi-Entity Visibility by Entity and Geography 

With Tipalti procurement and AP automation software working on one platform that’s integrated with your ERP system, you’ll be better informed. Your company will have multi-entity spend visibility by business entity (and all entities combined), geographic location, currency, and payment method. 

Save More Costs with Advanced FX Solutions

It can choose more Tipalti products for cost savings when making cross-border FX payments and from hedging AP invoices against currency volatility. 

Gain Scalability for Growth with Less Hiring Needs

Tipalti’s automation solutions are scalable for rapid business growth. Its provided efficiencies help your business keep the required level of hiring lower. 

Improve Business Results with More Time for Strategic Projects

With Tipalti, your procurement, accounts payable, and finance departments will have more time from streamlining the purchasing process and payables to pursue strategic projects improving business results and lowering total costs. 

AI-Driven Business Intelligence

Tipalti AP automation software includes Tipalti Pi, an AI-driven real-time intelligence engine that incorporates ChatGPT for making queries about spend management. 

Conclusion 

Addressable spend can be controlled and improved by the procurement department to reduce costs and improve cash flow, profitability, quality, and supplier relationships. 

Optimize your company’s addressable spend through:

1. Spend analysis and category management
2. Procurement process improvement 
3. Contract renegotiation 
4. Ongoing vendor evaluation 
5. Quality analysis
6. Measuring addressable spend percentages and amounts, trends, and KPIs
7. Using the right software automation tools

To reduce addressable spend, discover related content about best procurement practices.