Indirect procurement is generally seen as a cost centre at most of the organizations. However, when managed systematically, it can add up to the company’s bottom line. Indirect procurement is essential for the business upkeep as it involves office supplies, maintenance services and equipment.
Managing indirect procurement costs require an array of skillsets which include category expertise, negotiation and contract management. However, many organizations due to lack of such skills lose out on managing the indirect expenses.
Also, procurement teams usually do not focus on controlling their indirect spend given the complex nature of materials or products falling under multiple categories. As organizations vary in sizes, the level of difficulty also varies in managing different categories and multiple suppliers. Change of suppliers and managing large volumes of low-value transactions are some of the challenges that procurement managers have to tackle.
Optimizing the indirect procurement spend
Indirect procurement spend provides both savings and cost avoidance opportunities. Although indirect category is different from that of direct procurement, it requires special focus to bring it under control with the help of technology and some expertise.
Compliance: This is one of the key areas where indirect spend spins out of control. Examples include invoice accuracy and duplicate billings. Procurement managers should concentrate on these areas to arrest the irregularities. They should set up a centralized system to register and approve purchases.
Demand management: Regular scrutiny of material orders brings in accuracy in order placement and dissuades users from placing orders randomly. For instance, accounting the use of stationery items for each employee can bring in disciplined usage. It also becomes easier to streamline the items based on demand. This helps in renegotiating with suppliers based on change in the number of orders.
Pricing pressure: The prices of commodities are generally susceptible to market pressures. However, for those under indirect spend categories, there is usually enough margin cushion to absorb these price oscillations. It is important for procurement managers to leverage on volumes and remember price benchmarks for negotiating better deals with suppliers.
Streamlining the indirect spend
Procurement managers should prioritize the indirect procurement spend area if they have to save on costs, improve processes and procedures. Since indirect spend has a considerable impact on the business, a strategic approach can help in reducing the adverse impact on the bottom line.
Availing procurement advisory services or investing in customized software for indirect procurement expenditure can help in eradicating the problem areas. With these solutions at hand, the managers can change their procurement strategies, identify key risk areas and new suppliers. They can also achieve transparencies in orders and transactions, simplify payment processing and improve the overall efficiency of the procurement process.
Solutions to manage indirect procurement
The advisory or technology solutions can provide insights on new opportunities and identify areas for cost savings. Procurement managers can then revisit their contracts for major spend areas and bring changes to reduce maverick spend. Technology tools such as EDI can be used to manage the orders and bring in transparency. Procurement teams should also set up KPIs for their suppliers in terms of contract compliance, competitiveness in costs, and user satisfaction.
For effective results, procurement managers may need to prepare short and long term implementation plans by clearly incorporating their goals and responsibilities. They should seek support from the finance department and involve the key stakeholders so that budgetary issues are effectively handled.