If your procurement organization is not managing your indirect spend, then probably you are missing out on a significant source of cost savings!
In many companies, procurement mostly focuses on managing the direct spends which is a big chunk for company’s annual expenditure. Although indirect spend represent a smaller percentage than the direct spend but it does hold a lot of potential for savings.
Indirect spend consists of all the materials and services that businesses need in order to operate. In that context, marketing and other professional services like travel, IT, HR, facilities, utilities as well as the basic consumables like paper, paper clips & other office supplies falls under the indirect spend category. So the question now is that despite of being necessary commodities, how to tackle with such expenses?
Successful management of indirect spend categories requires a different blend of skills and expertise from procurement teams.
Why Indirect Spend Is A Challenge?
Well, why indirect spend management is a challenge is ambiguous? Below are the points which I have highlighted to help figure out the reason behind indirect spend being a challenge. Read on!
- Maverick spending or non-contractual spending that is done on ad-hoc basis is a huge contributor of indirect spend.
- Indirect spends are difficult to evaluate and are not subjected to indirect inspection which makes the quality measurement difficult, if not impossible. In certain cases, delivery of indirect goods and services are not even mentioned in company’s ERP system.
- The indirect spend having smaller spend-average may go unnoticed. Purchases range over a wide variety of product categories & suppliers, the purchase volume is not necessarily large. The lower average spend per supplier means procurement lacks weight in contract negotiation to drive lower pricing.
Tame Your Indirect Spends With These Measures
While managing the indirect spend is more challenging, the potential influence on the business makes it worth the effort. Here I am mentioning some steps which you can start to bring those expenditures under control.
Involving procurement in these indirect categories can take several different forms. It may involve buyers taking complete responsibility for sourcing the category, buyers leading cross-functional teams that negotiate agreements and manage supplier relationships, or even buyers contributing in purchasing decisions!
- Assisted Purchase
This provision offered by Cormsquare helps substantially reduce the indirect spend costs. All one need to do is to contact us and provide the information regarding the purchase, rest of the job will be done by our Assisted Purchase Executives. You can even negotiate with the suppliers.
- Group Buying
Group buying is not a bad deal either when the attempt is to cut the indirect spends. Nonetheless, the party has to make a smart decision after having contemplated the needs and goals of business!
- Spend Categorization
It is recommended to categorize all the indirect spends under the standard set of direct spend category. Improving procurement across indirect services categories offers significant opportunities for savings. However, data, tools & capability must be chosen carefully to meet the specific needs of these spend categories.
- Spend Impact & Ownership
An important precondition to consider is to determine the presence of at least one budget holder for whom there is something at stake.
If you miss any significant importance for entity, you might struggle to find any ownership to bring it forward. Dearth of this importance and ownership is a defensible argument to get the requirements arranged locally.
- Category Strategy
Applying coordinated procurement practices on Non Product Related (NPR) yield quick savings and efficiency but is not achieved by mere pooling the volume and implementing the international frame agreements for all spend categories. Key success factors involve strategies per spend category and the availability of procurement specialism.
The procurement specialist guide the budget holders with in-depth knowledge of market and purchasing experience to make the correct and most sensible choices.
- Invest In eProcurement Technology
Make the investment with automated transaction classification capability. eProcurement solutions are capable of automatically analyzing and classifying the transactions using the user’s free word item search items.
- Network And Benchmark
Grow your network with procurement teams in other companies to understand which indirect categories and which specified supplies they have succeeded in moving toward more organized competitive sourcing and spend management disciplines.
A recent study by Fortune magazine has found that, on an average, indirect spend is a substantial proportion (up to 50 percent) of a company’s purchases and therefore can no longer be ignored when cost reduction is acute. This study indicated that significant improvement can be made in the indirect spend portfolio by consolidating, standardizing and outsourcing indirect items of spend to reduce costs and lift the service levels!!