Profit hides in Indirect Spend. When it comes to finding and protecting that profit, there are two challenges. The first is recovering profit from under-managed spend. The second: creating a competitive advantage from the strategic management of spend.
Why does Indirect Spend matter?
A. Cost: Up to 40% of a company’s expenses might be Indirect Spend.
B. Savings: Optimizing procurement can save up to 25% on Indirect Spend line items.
C. Profit: Improving procurement strategies can deliver double-digit return to your bottom line.
Management of Indirect Spend is a big, challenging job, but the transformative effect on the business justifies the effort. Lower costs are one benefit. Rigorous specification, supplier qualification and strategic procurement processes can improve the products and services used by the company in ways that significantly improve the business.
Getting a strategic procurement effort on track requires persistence and a success-focused action plan. These concepts and tips will help you get started managing compliance, controls, and costs.
What is Indirect Spend?
Indirect spend items are purchases of goods and services not directly incorporated into the final product or service offering of a company.
Indirect Spend categories include Accounting, advertising, marketing, consulting, travel, IT, telecommunications, HR-Facilities, Utilities, MRO (maintenance repair and operations), capital goods, office supplies, furniture, food services and commodity packaging supplies. Indirect Spend in many of these categories can be critical to the company’s success.
Purchases justify a procurement group that can lower costs in the short-term and understands how supplier relationships can generate value for the company.
Gain Control & Harvest Savings
To reap savings from Indirect Spend, companies must strategically manage the processes and people involved. This management requires many collaborative efforts within a company and between suppliers, internal buyers, and your procurement team. Indirect Spend includes everyday items but also complex services. As your Indirect Spend management improves, your evaluation of suppliers becomes longer-term and more strategic.
To do a good job managing indirect spend, a business must commit to:
- Executive sponsorship
- Processes that identify, categorize and aggregate items
- Systems that streamline and improve procurement
- Support to select qualified suppliers and negotiate sound contracts
- Collaboration between procurement professionals and departmental buyers
- Monitoring for pricing, risk assessment, and changing market conditions
- Measurements and visibility
You can see from this list how efforts to contain and control Indirect Spend are comprehensive and companywide.
Implement New Processes to Track Spend Better
Historically, companies put more focus on direct spend, which are the costs that go into finished products. Indirect spend categories can be more fragmented, numerous and diverse. Purchasing authority for Indirect Spend items is traditionally assigned to remote locations, business units, departments or internal stakeholders in a group, such as maintenance, operations, legal, HR or marketing. For these managers, relationships, proximity or speed counts more than cost savings.
Additional Tactics to Improve Indirect Spend:
- Invest in Automation & Technology.
- Partner, Hire or Train Procurement Professionals.
- Involve departments in creating processes.
- Get an optimal supplier portfolio.
- Move toward long-term savings and value creation.
Get outside consulting if you need help to select technology, develop strategy, implement new procurement processes, pick qualified suppliers, or negotiate better, longer-term contracts. Transportation Insight offers free information and discussion about how to analyze your spend, put together a plan, assess the current situation, establish cost-saving processes, conduct strategic sourcing and save money.
Identify Items and Create Categories
A complex task is identifying Indirect Spend in your company in terms of items and costs. Reviewing payables (Accounts Payable) can offer the clearest listing of suppliers, items and costs. This review requires looking into spending by locations and departments to find the total for each item and the current supplier.
These steps can start bringing indirect expenditures under control:
- Identify items and suppliers via Accounts Payable (AP).
- Assign items to categories.
- Review specifications and newer technologies, materials, or offerings.
- Aggregate Indirect Spend item quantities into fewer, larger orders with preferred suppliers.
- Implement company-wide contracts that reap volume discounts, favorable terms, and responsive suppliers.
Once you identify all the items, you can achieve success by aggregating similar items into categories that create larger bid packages for higher discounts. Also, there are opportunities for more substantial discounts, higher-volume deals open opportunities for supplier-managed inventories and multi-location ordering, replenishment, or delivery. Transportation Insight’s savings calculator offers a glimpse into the prospective cost reductions that can be realized when leveraging a partner using best procurement practices.
When items are aggregated and categorized, you may find opportunities to keep smaller quantities in stock, reduce the total number of items purchased, or reduce the number of supply closets.
Tasks, Goals & Metrics For Long-Term, Incremental Improvement
In the beginning, better control of Indirect Spend is different from the end game. After processes and suppliers are in place, the company needs to measure success and compliance. These measurement tasks need the right KPIs for suppliers and internal processes. Tasks, such as periodic budget reviews and training, are necessary. The company must build on success to reach higher towards the greater rewards from Strategic Sourcing and partner-like supplier relationships that offer an exceptional level of higher value.
- Measure Cost Savings & Supplier Performance: Technology can provide real-time visibility into purchase transactions to the line-item level, which helps to stay on track with ongoing spend management.
- Set KPIs for Suppliers: KPIs can be used across suppliers, measuring contract compliance, customer satisfaction, cost competitiveness, service, support, and continuous improvement.
- Review Budgets Regularly: Periodically review for savings opportunities under the revised procurement process. Ongoing cost review is part of a continual improvement effort. Also, look for ways to improve your new procurement process.
- Create Lasting Value & Competitive Advantage: Ultimately, your procurement strategy should shift from the initial cost reduction phase to a value creation phase for the company.
- Strategic Total Sourcing: Strategic Sourcing identifies the lowest total cost, not just the lowest purchase price. It embraces the procurement lifecycle, from specification to payment. Strategic sourcing is a procurement process that offers continual improvement of the purchasing activities of a company. Strategic sourcing often creates a close, partner-like relationship with a supplier to meet that customer’s needs better.
- Educate Staff on Indirect Spend: Your procurement group (purchasing group) and budget owners from each department should become acquainted with the goals of your Indirect Spend cost-saving initiative.
Looking through these tasks, we recognize the importance of Indirect Spend management to the long-term profitability and competitiveness of the company. The efforts and organization-wide collaboration needed to attain results are apparent. Excellence in supplier management through Strategic Sourcing changes the basis of competition for a company and requires a continuing commitment to improvement in supplier evaluation, supplier relations and contracting.
Optimizing Indirect Spend Transforms Companies
By combining tactical procurement processes and strategic sourcing, companies realize savings in Indirect Spend that goes to the bottom line. As companies improve buying processes and view supplier relationships over the longer-term, the value of these relationships goes up along with the benefit to the company.
Businesses know that changes in technology, regulation, and markets alter the playing field for the company and that its ability to adapt to lower-cost and better-performing solutions is critical to success. For more information on reducing expenses by improving the management of Indirect Spend, watch our webinar, “Uncover Indirect Spend and Reclaim Lost Profit.”