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Why Ignoring Indirect Spend is Bad for Business

Apr 28, 2017

Indirect procurement is a key part of category management, but is often overshadowed by direct procurement. Items such as raw materials or inventory are indeed essential, but an organization cannot operate without the many things that fall under indirect spend. These include everything from office furniture to computers to office supplies, as well as travel expenses, packaging, and many other items. They are just as important as the products or services that a company sells, but are typically not well monitored and managed.

There are many reasons that indirect procurement is neglected. Here are some of the challenges involved in the process.

Number of suppliers: Because there are so many different types of indirect spend, procurement often ends up working with a very large number of suppliers. This means many different contracts and relationships to manage, and it can be difficult to give each company and purchase enough attention.

Number and size of purchases: As a result of the high number of suppliers, there tend to be many small purchases made, rather than a few large ones. This makes it difficult to take advantage of volume discounts, meaning that there are many individual purchases to track. A considerable amount of time and effort is required to manage the high volume of transactions.

Untracked spending: Purchases come from many different sources, and are not always tracked correctly. For example, sometimes employees use personal funds to purchase supplies and then receive reimbursement, and procurement does not have proper documents for or control over that spending. This means that procurement often has an inaccurate view of total indirect spend, making it difficult to identify waste or opportunities to consolidate purchases.

Decentralized spending: Every department of a company has indirect spend, which results in many separate purchases. This means lost opportunities for bulk purchases that could save the company money. It also means needing to communicate with many different people within the organization in order to budget and gain an accurate understanding of overall spending. An added challenge is that procurement often does not have control over the spending decisions made by various stakeholders.

What are the best ways to improve indirect spend?

There are several ways to mitigate these challenges and improve efficiency around this aspect of category management. Procurement software, for example, can improve performance in many areas. It makes it significantly easier to track and analyze spending, allowing you to consolidate data from multiple vendors and multiple departments within the company. It also becomes simpler to identify inefficiencies and ways to take advantage of volume discounts and other offers. This allows for greater insight during category planning.

Another way to manage indirect spend is to simply create and enforce rules around it. Sometimes, employees order supplies and quantities that they do not necessarily need, simply because there are few guidelines or checks in place. If they know that purchases are being monitored, they are less likely to be wasteful. Also, if specific processes are put in place in terms of permissions and documentation, it becomes easier to track and evaluate spending.

While it may be impossible to develop expertise and close relationships with every single vendor, these things should not be neglected altogether. Identifying the largest spending categories and focusing on relationships with a few key vendors will benefit the company without requiring procurement to gain in-depth knowledge of every single partner.

With so many people and organizations involved on both sides of the purchase process, indirect sourcing may feel impossible to master. However, it is not necessary to master everything in order to improve processes and start saving money. By making use of procurement tools and putting solid processes in place, it is possible to significantly improve both efficiency and spending.

To know how SpendEdge can help you in indirect procurement

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