Supplier Discovery’s Hidden 150 Billion Dollar Problem: What 80% of Procurement Pros Are Still Doing Wrong - Veridion

Supplier Discovery’s Hidden 150 Billion Dollar Problem: What 80% of Procurement Pros Are Still Doing Wrong

By: Miriam Cihodariu - 09 July 2024

Global procurement encompasses a vast and complex network of activities, and money is lost at various transit points of this network, for various reasons, often rooted in mismanagement and suboptimal practices. In this walkthrough, we will show you why there is $20 billion lost globally at the supplier discovery stage alone and how this can be mitigated. 

How come the global losses from procurement mismanagement are so big? 

According to Spend Analytics, 20% of the tail-end spend globally is mismanaged due to lack of controls or poor contract negotiations. 

Firstly, mismanagement of funds occurs due to inadequate monitoring and control, leading to inefficient spending, fraud, and corruption. Organizations may overpay for goods and services, lack transparency in transactions, or engage in unethical practices, which can result in significant financial losses.

Secondly, poor optimization of supply chains contributes to financial losses in procurement. Inefficient logistics, overstocking, and underutilization of resources can lead to increased operational costs. 

Additionally, disruptions in the supply chain, whether due to natural disasters, geopolitical events, or other factors, can result in delays, increased expenses, and lost revenue. Failing to adapt to changing market dynamics and emerging technologies can also hinder cost-effectiveness and competitiveness.

#1. Public procurement numbers

The numbers pertaining to public procurement spend are more easily tracked, for obvious reasons. Private procurement is more obfuscated by companies and organizations that want to present only the best angles, while public spend is under a lot more scrutiny, from more than just a board of investors or shareholders. 

Therefore, let’s start diving first into public procurement numbers, although we’ll look into the private ones too afterwards. 

Public procurement (spend done by governments alone) was estimated to be at $13 trillion globally in September 2020, and our own data estimates it to be now well over $17 trillion, especially with the recent spike in military procurement spending. 

We can also use GDP (Gross Domestic Product) to get some insight into how much the funds available for public spending are growing from year to year.  

As you can see from the chart below, the only two dips in global GDP in the past decades were caused by the 2009 economic crisis and the 2020 pandemic hit. After the pandemic severity reduced, in 2021, the global economy has picked up its speed and global GDP values started being on the rise again. 

Image source: Statista

In 2022, the global GDP was around $100 trillion, so public spending has definitely risen with it as well. 

Public procurement constitutes a substantial portion of GDP in both high- and low-income economies. Across the globe it represents 15% to 30% of the GDP of many countries.

Therefore, we can estimate that public procurement spending was at least $20 to 25 trillion last year, and expected to keep rising. 

Let’s see how much money is lost (mismanaged) along the way. 

Corruption and mismanagement of public funds

The most well-known cause of mismanagement in public spending is, of course, corruption. Because of its moral implications, corruption is widely discussed and awareness of it is high. In spite of its popularity as a hot topic, it’s still difficult to put a number to it. Some sources like to estimate corruption damages to $2.6 trillion, or 5% of global GDP (Gross Domestic Product). 

The World Bank cautions against putting a number to the phenomenon, for two good reasons. Firstly, the actual losses are very difficult to estimate given the shady nature of the corruption business itself. Secondly, corruption is argued to have deep-seated, long-term impact in various and difficult to foresee aspects of a people’s welfare. 

Poor Supplier Discovery

Finally, we arrive at one of the root causes of losses in public spending: poor supplier discovery. Certainly not as flashy or talked about as corruption, but responsible for far more funds lost nonetheless. 

In some South East Europe countries, it is estimated that 90% of public supplier contracts are costing 25% more than they should, and not due to any corruption taking place, but because searching for alternate suppliers in order to optimize spending is never very high on the priority list. 

As you will see, that is one of the main problems in private procurement as well.

#2. Private procurement numbers

In 2017 it was estimated that losses caused by procurement fraud in the private sector are amounting to $3.7 trillion. Our own estimations indicate that today procurement fraud is a problem that costs organizations worldwide close to $5 trillion*, but that’s not even the biggest leak in procurement.

Leaving aside the issue of procurement fraud that allegedly spiked up with 13% in the private sector in 2022, and poor spend control that currently plagues around 40% of businesses and places further financial strain, the main culprit behind losses in private procurement is also due to poor supplier discovery and supplier management, just like in the public sector.

In other words, companies are losing money because they go for the suppliers they discover easily, or that they already know about, instead of optimizing suppliers for cost effectiveness, for alignment with overarching company goals (in sustainability or CSR – Corporate Social Responsibility – areas) and for better business. Here is why that happens.

How do private institutions fare in supplier discovery?  

Right now, according to Veridion data insights and the procurement experts we are collaborating with across multiple sectors and organizations, more than 80%* of private companies are still discovering suppliers in 3 main ways:

  • Searching on google – Yes, it sounds almost unbelievable, but there are still procurement departments that rely on simple search engines for supplier discovery and often just go for the first choice that somewhat matches their combo of product, certification and logistic requirements. Even if that leaves aside supplier comparisons, benchmarking and everything else that comes with having access to the full picture.
  • Searching on supplier aggregators – A step above simple Google search, supplier aggregation databases like ThomasNet are OK for getting an idea of a market, insufficient for refining your search based on more granular criteria like actual components in the product you need supplied, ISO standards and other certifications, and so on. 
  • Through recommendations and word of mouth  – Like in almost all other business fields, the power of networking and inertia are undeniable. But when a company chooses its suppliers only through personal recommendations, without having access to the full picture of supplier discovery, unnecessary costs and a dangerous lack of backups are unavoidable. 

Needless to say, none of these are sound methods for discovering the best suppliers for a seamless logistics flow or for cost effectiveness. Not when you could have access to a macro scale, intelligent supplier discovery data API such as the one we provide at Veridion to procurement departments worldwide. 

How is manual supplier discovery leading to financial losses?

Manual supplier discovery is a significant contributor to financial losses in procurement because it hinders organizations from identifying and partnering with the most cost-effective and reliable suppliers. Here are some ways in which this problem can lead to financial losses:

  • Limited Supplier Options: When organizations have a limited pool of suppliers to choose from, they may miss out on better deals, quality, or reliability that other suppliers could offer. This restricted choice often results from a lack of visibility into potential suppliers, making it difficult to identify the best fit for their needs.
  • Inadequate Competition: Without a diverse range of suppliers to compete for contracts, organizations may face less competitive pricing and less incentive for suppliers to improve their products or services. This lack of competition can lead to overpriced contracts and missed cost-saving opportunities.
  • Quality and Reliability Issues: Inadequate supplier discovery may lead to partnerships with suppliers who do not meet quality or reliability standards. Poor quality products or services can result in costly rework, repairs, or delays in production, while unreliable suppliers can disrupt supply chain operations and lead to increased expenses. A 2021 report indicated that companies worldwide lose around 15-20% of their sales revenue each year due to poor supplier performance. 
  • Missed Innovation and Efficiency: Failing to discover innovative and efficient suppliers can result in missed opportunities to improve processes, reduce costs, and enhance product quality. Forward-thinking suppliers can provide new solutions, technologies, and methods that drive efficiency and savings for the organization.

McKinsey and Interos estimate that, as of 2021 and ongoing, businesses lose $184 million annually due to supply chain disruptions, and companies affected by it can lose up to 45% of a year’s worth of profits. 

We add to these figures our own internal estimations of $20 billion lost globally to manual supplier discovery practices, deriving from multiple factors that ultimately lead to quantifiable monetary loss: 

  • Poor optimization of supplier costs
  • Unnecessary logistics costs (derived from not choosing a better optimized route or supplier location)
  • Potential disruptions of supply chain caused by preferential relationships with single supplier sources
  • Longer supply chain recovery times caused by not having back-ups
  • Increased spending with alternate measures taken to achieve compliance / sustainability or CSR goals. 

Here is how we reached this figure.

According to McKinsey, “at most organizations, hunting for new suppliers is a daunting, manual process. On average, it takes about three months to complete a single supplier search, with a sourcing professional logging more than 40 hours of work—and yet able to consider only a few dozen suppliers from a total population of thousands.” 

We were able to narrow it down even further. According to an internal case study we did together with one of our data customers, we concluded that traditional supplier search takes on average 7.3 hours only to identify suitable supplier candidates (per supplier event). 

In contrast, using the Veridion APIs to query our data resulted in procurement professionals only spending 0.14 hours on average per supplier event (one supplier candidate discovered).

This means a procurement professional could save 7.16 hours of work by choosing to use smart data capabilities for supplier discovery. 

Not to mention that more than double potential suppliers were uncovered this way. Sometimes manual search can’t even finish the job, no matter how many more extra work hours are allocated to the process. 

Next, let’s see how many procurement people are currently working the markets, how many supplier events are taking place for each procurement professional (how many suppliers is a procurement professional discovering in, say, a month) and how much a work hour costs on average for this professional category. 

As recent as the past quarter, there were reports of around 83,800 procurement professionals in the UK, 12,000 in Singapore, 210,646 in the United States, with a projected 8% year-over-year rise. The Barrett Group estimated in 2022 that there were around 182,000 procurement executives in the US, EU, UK, and Middle East (ME). Taking Asia into account as well, we estimate that the number of procurement professionals worldwide currently exceeds 270,000

In organizations that still use manual research and traditional world-of-mouth or aggregator search as the basis for procurement, a procurement professional generates around 22 supplier events per work month (per 160 hours of work). This equals around 264 procurement events per procurement manager per year. And that’s the optimistic projection, based on the organizations where procurement is top-performing. 

The average pay per hour for a procurement manager sits at $60 for the United States, and the global numbers provided by CIPS indicate that it’s a pretty consistent projection to hold on a global level as well. Given the growing demand for procurement managers, the pay for a skilled procurement manager is bound to be considerably higher in other parts of the world as well. 

But even a skilled procurement manager can’t compete with smart data technology. Here is how much money is lost annually in procurement considering all the above:

Time difference between manual supplier search vs. Veridion-enabled supplier search X number of supplier events per procurement professional X average cost of work hour in procurement  X number of procurement professionals worldwide = our estimate of global losses

This translates to:

7.16 X 264 X $60 X 270,000 = $30,621,888,000

This means that more than $30 billion are lost annually only through the continued use of manual search methods for supplier discovery and procurement, instead of a solution like Veridion data for procurement

This needs to be multiplied by 5, because our internal case studies with customers indicate that suppliers identified through Veridion’s APIs are 5 times more likely to fit the requirements and to move forward to an actual signed contract, compared to supplier candidates uncovered through traditional means. 

So the global procurement losses derived from system inertia at the supplier discovery stage are in reality closer to $150 billion

If we add to this all the other procurement losses explored above from sub-optimized supply chains and over-inflated costs due to preferential relationships with a limited number of suppliers, we would probably some astounding numbers well into trillion territory, lost through procurement practices that are not yet empowered with smart data. 

The Veridion Solution to More Effective Supplier Discovery

Replacing manual processes with a digital and data-empowered solution can help you reduce up to 30% inspection cost and up to 70% auditing cost, only by virtue of having more transparency in your supplier management.

But the real wonders of cost-saving derive from making sure you are choosing the right suppliers in the first place. Unlike relying on chance matches from Google search and other equally unreliable sources, a professional source of procurement-optimized data such as the Veridion API for procurement can cut down costs dramatically, while making your operations smoother and more efficient. 

Download our data sample (check button in the top right corner of the page) or schedule a consultation with us directly to see how Veridion data can transform your procurement operations. 

*Numbers based on Veridion’s internal assessment derived from existing public data and the money we saved for Veridion procurement data customers.