If you’re in procurement, you know that optimizing addressable spend is essential for businesses looking to drive efficiency, reduce costs, and create value.

As a reminder, addressable spend refers to the portion of your company’s expenditures that procurement can influence through strategic sourcing and supplier management.

By implementing the effective strategies outlined in this article, your organization can unlock new savings opportunities, streamline processes, and mitigate risks.

So, read on as we explore six proven strategies that can help you make the most of your business’s addressable spend and maximize the impact of your efforts.

Addressable Spend Analysis

Optimizing addressable spend starts with knowing what your procurement team can and can’t actively manage, control, or at least exert its influence over.

Hence, when preparing for addressable spend analysis, it’s essential to first determine what expenses are non-addressable and exclude them from your analysis scope.

Typically, this includes expenditures for employee salaries, taxes, legal fees, utilities, and other fixed costs that cannot be influenced through procurement activities.

By focusing the spend analysis only on addressable categories, procurement teams can gain actionable insights and develop strategies to optimize areas where they have leverage.

However, this requires a careful approach so as not to exclude some costs, such as travel or IT services, that might be addressable.

This is underscored by Nils Lundgren, Head of Sales Nordics at Onventis:

Illustration: Veridion / Data: LinkedIn

Another concept relevant to efficient spend analysis is the distinction between addressable spend and spend under management (SUM).

Essentially, SUM refers to the portion of addressable spend that’s already governed by procurement through formal processes, such as strategic sourcing, supplier management, and contract oversight.

The goal of spend analysis is to identify which addressable expenses are not yet under management and bring them under procurement’s control to maximize savings and efficiency.

With these principles in mind, you can conduct an effective addressable spend analysis.

For starters, ensure all spend data is collected, categorized, and made easily accessible to stakeholders in one centralized platform.

To achieve this, it’s best to use either a dedicated spend analysis tool or an all-in-one procurement management software with spend analysis capabilities.

Source: Veridion

Such solutions generally enable you to:

• gather, cleanse, and categorize all spend data in one place,
• distinguish between non-addressable and addressable spend,
• detect addressable spend currently not under procurement management,
• identify spend trends, key spend categories, and cost-saving opportunities.

By leveraging these capabilities, you can ensure that your addressable spend analysis is both comprehensive and effective.

Ultimately, this sets the stage for implementing all other strategies for optimizing addressable spend, including supplier consolidation, which is covered next.

Supplier Consolidation

Consolidating the number of suppliers your organization works with is one of the key strategies for optimizing addressable spend.

The logic behind supplier consolidation is straightforward.

By reducing the number of suppliers, your procurement team can:

• lower costs by negotiating better pricing and terms with fewer, higher-volume suppliers,
• minimize administrative costs and complexity related to supplier management,
• strengthen supplier relationships by focusing on key strategic partners.

In the words of Jennifer Tripp, a former global sourcing manager at Specialty Resources, this is how a company can increase its purchasing power:

Illustration: Veridion / Data: Specialty Resources

In addition to improved purchasing power, Tripp adds that supplier consolidation also reduces transactional expenses and cuts down on overall freight and shipping costs.

The process starts by identifying where there is room for supplier consolidation.

A typical example is office supplies, where procurement is often decentralized, i.e., left to individual business units, departments, or locations to handle independently.

In such cases, consolidating office supply purchases through one supplier capable of servicing all business units can significantly save pricing and administrative costs.

And here’s a real-world example showing the effect of supplier consolidation.

One case study explains how Guild Mortgage Company achieved several benefits, from savings to fewer work hours:

Illustration: Veridion / Data: Staples

While the logic of supplier consolidation is sound, the process of getting there presents some risks, especially in critical supply categories.

Since consolidating suppliers increases your reliance on fewer partners, it’s crucial to ensure that these suppliers are reliable, scalable, and able to maintain consistent service quality as demand increases.

That’s why, when negotiating with preferred suppliers for consolidation, your procurement team must be diligent in evaluating their capacity, capabilities, and financial health.

To mitigate risks and ensure effective supplier consolidation, your procurement team should:

• ensure that all supplier data is accurate, comprehensive, and up-to-date,
• benchmark supplier prices and KPIs against market standards.

Both of these processes can be streamlined with the help of supplier-sourcing enablers like our Veridion.

Source: Veridion

In addition to the fast discovery of new suppliers, our data service enables your team to enrich existing supplier data with the latest market information and benchmark it against other similar suppliers on the market.

In addition, you can use Veridion to assess supplier risks before consolidation and to monitor them after consolidation.

Ultimately, when done strategically and with necessary contingencies, supplier consolidation can lead to significant cost savings, streamlined processes, and stronger supplier relationships.

Concurrently, it allows procurement teams to focus on optimizing a larger portion of addressable spend.

Category Management

Category management is another effective strategy for optimizing addressable spend by organizing procurement in categories rather than individual products or services.

This categorization enables your team to treat each addressable spend category as a strategic business unit, allowing for tailored sourcing strategies.

A practical example of category management can be illustrated through a sporting goods retailer preparing for the Little League season.

Instead of treating each item—such as baseball bats, gloves, and uniforms—as separate purchases requiring individual supplier negotiations, the retailer organizes these products into a single category: baseball equipment.

Illustration: Veridion / Data: Surefront

By consolidating procurement under the baseball category, the retailer can negotiate better pricing due to bulk purchasing and streamline supplier management.

Or, a multinational company might group technology spend (laptops, software, peripherals) into a single category.

Treating this as one category enables negotiation on a larger scale with global suppliers, allowing for better pricing and streamlined vendor management across regions.

Additional benefits that arise from this are enhanced supplier relationships and improved inventory management.

Of course, to implement category management effectively, your team needs a clear spend taxonomy—a structured system that defines and organizes spend categories.

While there are many ways to categorize your spend, the taxonomy needs to reflect your organization’s procurement structure and purchasing patterns.

Since this can be a complex and time-consuming process, consider using specialized category management software, such as Cirtuo.

Source: Cirtuo

Such solutions can help you establish a taxonomy that fits your company’s specific addressable spend categories, enabling you to develop actionable category strategies.

This approach allows your team to manage spend more effectively at the category level and apply targeted strategies that optimize spend for each specific area.

Depending on the size and complexity of your categories, it’s advisable to assign knowledgeable category managers who can oversee sourcing, supplier relationships, and cost-saving initiatives within their specific areas of expertise.

Overall, with the right structure in place, category management can be an efficient strategy to optimize addressable spend and drive better procurement outcomes across your organization.

Demand Management

Another effective way to optimize addressable spend is through demand management, a strategy that aligns procurement decisions with your company’s actual needs.

The goal is to control costs and avoid unnecessary spending by ensuring that your company purchases only what it needs when it needs it.

By doing so, demand management helps eliminate over-purchasing, reduce waste, and prevent the stockpiling of excess inventory.

For example, a manufacturing company might monitor production schedules closely and adjust material orders in real time to match demand.

By ordering raw materials or components in smaller, more frequent batches, the company can avoid holding excess inventory and reduce related carrying costs.

In fact, while carrying costs vary by industry and company size, they are typically estimated to account for 20–30% of total inventory value.

Illustration: Veridion / Data: Oracle NetSuite

These high carrying costs make effective demand management crucial for controlling inventory-related expenses, namely by reducing waste and lowering storage costs.

An added benefit of demand management is that it frees up funds for other business needs, rather than tying up capital in excess inventory.

So, what does it take to implement demand management successfully?

In essence, three things:

• leveraging historical demand data,
• monitoring current market trends, and
• using advanced demand forecasting tools.

While no forecasts are 100% accurate, these actions can help you predict future demand as accurately as possible.

From there, your company’s procurement needs can be aligned with actual demand.

By aligning procurement decisions with real-time demand, companies not only avoid excess inventory costs but also gain better leverage in negotiating contracts for frequently ordered materials.

However, effective demand management hinges on a critical element: the involvement of key stakeholders to align insights and secure cross-departmental buy-in.

We’ll cover this in more detail later, so stick around to learn how it plays a pivotal role.

Contract Management

Effective contract management is another strategy that can help in optimizing addressable spend.

It involves creating and managing supplier contracts to ensure all terms and deadlines are met.

Key aspects include tracking contract performance and adjusting agreements based on supplier adherence and market conditions.

For example, renegotiating contracts with suppliers to include clauses for bulk-purchasing discounts or performance incentives can directly reduce procurement costs while ensuring supplier accountability.

This approach minimizes risks through robust governance and control over supplier contracts, preventing costly lapses and non-compliance while maximizing the value derived from these agreements.

To implement contract management efficiently, it’s highly recommended to use contract management software.

While this may seem obvious, a 2024 survey by Jaggaer revealed that companies lacking automation face significant challenges in areas essential for effective contract management.

Illustration: Veridion Data: Jaggaer

For those companies, implementing contract management software would allow them to:

• enhance contract oversight,
• ensure compliance with the agreed terms,
• perform regular contract reviews and updates,
• streamline contract renewals and terminations.

Moreover, when such a solution is integrated with other procurement tools, business systems, and external market intelligence sources, this enables teams to extract valuable insights for supplier negotiations.

To recap, streamlining contract management by leveraging advanced tools can significantly improve operational efficiency, enhance compliance, and enable procurement teams to better control addressable spend.

Stakeholder Collaboration

We could say that fostering stakeholder collaboration is an overarching strategy that ultimately enhances all the other strategies outlined in this article.

For instance, when establishing a spend taxonomy, the expertise of stakeholders across other departments, such as operations and finance, will ensure that the categorization is comprehensive and aligns with broader business objectives.

While the involvement of stakeholders is important for a holistic approach, precedence should be given to strengthening collaboration between procurement and finance departments.

That’s because these departments play a central role in managing budgets, forecasting expenses, and ensuring that procurement strategies align with financial objectives.

Despite this, a CPO Viewpoint study of over 200 companies revealed that both sides have some reservations when it comes to collaboration.

Illustration: Veridion / Data: Medius

The disparity between these figures highlights the need for more proactive efforts to bridge the communication gap between procurement and finance teams.

For both teams to work together more effectively, several strategies can be implemented, including:

• organizing regular joint meetings to align on key priorities and objectives,
• integrating financial systems to provide real-time visibility into spending and budgeting,
• establishing clear communication channels to ensure both departments stay informed and work towards common goals.

Of course, collaboration should extend beyond finance to include operations, marketing, and IT departments, ensuring that procurement strategies are aligned with organizational goals across all functions.

And luckily, the abovementioned practices can improve collaboration with other relevant departments as well.

Ultimately, strong stakeholder collaboration ensures procurement is aligned with your organization’s business objectives and considers the needs of various departments.

This leads to more informed purchasing decisions and ensures that all departments work synergistically toward optimizing addressable spend.

Conclusion

At its heart, optimizing addressable spend is about strengthening procurement’s control over expenditures and promoting smarter, more informed decision-making across your organization.

With the right tools and a strategic approach, companies can turn procurement from a cost center into a driver of value and efficiency.

Then, the potential for savings and operational improvements is immense, creating a ripple effect that benefits the entire organization.