Indirect Spend: Harvest Savings, Improve Competitive Advantage

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.

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.”

Parcel Audit Services Power Network Optimization

Without deploying parcel audit services that empower performance optimization, small package shippers face a storm of potential risks. These can span the spectrum, from non-compliance and failed service to multiple payments of the same invoice and fraudulent usage of your account number. In each case, a lack of awareness into shipping activities creates risk that not only jeopardizes profitability. It also threatens to negatively impact customer experience.

It takes a team of parcel logistics experts – and 360-degree visibility across your transportation operations – to calm the storm and mitigate these risks.

Best practices for optimizing your parcel operations requires a “diagnose first, prescribe later” approach to designing best-in-class parcel programs that maximize service levels with minimum disruption.

Diagnosing Problem Points with Parcel Audit Services

E-commerce continues to radically change the way Business-to-Consumer (B2C) and Business-to-Business (B2B) organizations serve their customers. UPS Estimates global e-commerce sales will reach $3.3 trillion in 2019 and more than double to $6.7 trillion in 2025. Further, it cites analyst predictions that global e-commerce sales, projected to account for 13 percent of retail purchases in 2019 will grow to 20 percent in 2025. In terms of parcel volume in the United States, FedEx expects the U.S. parcel market to double in size to more than 100 million packages per day by 2026, with e-commerce a significant driver of accelerating volumes.

With increased parcel volumes comes increased complexity. Not only will this spur increased challenges associated with invoice, payment, and claims management. This evolving marketplace requires that parcel service providers closely monitor service practices to maintain their own profitability. Be mindful of carriers’ efforts to shift pricing practices and strategies around surcharges and accessorials to financially support associated service needs.

Now more than ever, small package shipping optimization powered by audit technology and parcel expertise is integral to helping shippers validate their practices and uncover opportunities to optimize performance.

Three steps are involved in the optimization process

  1. Solutions Assessment: Review your current state and clearly identify your financial goals, your customer service needs and your logistics requirements.
  2. Program Analysis and Design: Leverage industry knowledge and proprietary technology to carefully analyze all aspects of your parcel program.
  3. Implementation: Once design is complete, manage RFPs and optimize your platform to best meet customers’ needs.

Best practices for auditing your parcel operations requires visibility into your supply chain, diligent data collection and smart analysis. Market-leading service providers collect more than 200 data points from parcel and freight bills to uncover duplicate invoices, bill of lading errors, missing items, damaged cargo and more. Less rigorous companies check far fewer data points, missing discrepancies that, when resolved, lead to cost savings.

Audit Services Recover Lost Profit, Drive Improvement

Rigorous parcel audit compliance services will assess to the penny against client contracts to match program costs with services rendered. Auditing every invoice takes a tremendous amount of administrative effort; not auditing invoices mean you leave money on the table. Auditing with SOC I Type II compliance means complex invoices are inspected and unraveled for national and regional carriers.

Using collected data, you can model what-if scenarios to enhance programs for current strategies and future goals. These scenarios can address mode optimization, split shipment assessment, routing analysis, DC alignment and site selection analysis, mergers and acquisitions analysis, fulfillment models and regional carrier analysis. The result is a parcel program closely aligned with business goals based on fact-based analytics, robust audits and industry expertise.

Leveraging a partner with an Enterprise Logistics solution and an engineered parcel program supports growth of your business. Transportation Insight’s audit analysis offers deeper insight into parcel audit services to help you keep customers happy, streamline business operations and achieve competitive edge.