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Can indirects sourcing be more than just a cost center?

Indirect sourcing is part of the procurement process in an organization. The sourcing managers chart strategies for the respective categories and liaise with suppliers for material and service needs of their organizations.

In product-based companies, indirect sourcing has the potential to bring in cost savings and improve process as well as efficiency. Personnel in charge of indirect categories need to assess and leverage internal and external solutions for improving the delivery time and driving a supportive sourcing model.

Sourcing indirects can be a strategic function based on the spend allocation and scale of operations in companies. However, the onus is on sourcing managers to persuade key decision makers such as CPOs and CFOs by detailing the value addition that indirects can bring.

Key challenges in indirect sourcing

While sourcing personnel do the negotiations and bring in efficiencies and cost advantages, they are also tied up at times in terms of organizational red tape, lack of support and communication. Some of the key challenges are:

  • Lack of business priorities which hamper the sourcing process
  • Inefficient sourcing strategies
  • Budgetary constraints or delay in payment processing
  • Lack of category awareness
  • Lack of end-user engagement
  • Impression of indirects being a cost center

The perception of indirects being a cost center makes it all the more challenging for sourcing managers to persist in those organizations. The spend data related to multiple categories are often inadequate and it requires great skill and patience to convince the decision makers about the relevance of indirects spend on a particular category.  Also the bar becomes high for indirect sourcing with business units spread globally. The management needs to focus on value creation through the adoption of newer technologies and redesign their indirect sourcing goals.

Best practices for deriving the sourcing benefits

By having a shared model for both the directs and indirects sourcing, companies can derive benefits through enhanced negotiation power and vendor rationalization. Supplier performance should be based on key performance indicators which include employee productivity and working conditions.

Indirect sourcing practices must be centered on cost and risk compliance. They should facilitate access to material and personnel instead of being a roadblock. Sourcing experts suggest that a strategic approach helps in reducing the risk of partnership with new vendors and lag in on-boarding processes.

Engagement with external agents also brings in considerable savings and let the managers focus on strategic activities. The external agents have the advantage of understanding the buyers’ needs and identifying right-fit suppliers based on their market exposure and experience. Given their acquaintance with multiple suppliers and buyers, they have better bargaining power. They can therefore make the involved parties reach a contract on favorable terms. Sourcing managers may have to negotiate on commission percentage with the agents which maybe in the range of 9-10 percent.

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