What is Indirect Procurement and How Does it Create Cost Saving Opportunities?
Running a business is a challenging, complex, and expensive process that requires significant investments of time, labor, strategy, and capital. Indirect procurement is an essential part of this process and includes the purchasing and sourcing of essential materials, services, products, and goods required for daily operations and functioning. Although this form of procurement does not contribute to the bottom line of a company, it can provide various cost saving opportunities, and help companies mitigate unnecessary expenses in multiple ways. As companies expand, CPOs and managers are becoming increasingly aware of the rising costs, challenges, and risks impacting businesses, and inefficient, wasteful, or expensive procurement is a major contributor to these obstacles. By identifying, evaluating, and leveraging various cost saving opportunities within the indirect procurement process, companies can reduce overall spend while still maintaining performance, meeting business requirements, and overcoming monetary challenges or risks.
What Cost Saving Opportunities Arise from Indirect Procurement?
Aggregate Demand: In a large organization, various departments most commonly have differing demands, needs, and preferences. However, when it comes to indirect procurement, general needs are often similar, if not entirely alike. Identifying and categorizing similar needs, such as office supplies, store requirements, and marketing needs can significantly minimize the number of purchase orders, vendors, and payments required to meet all department needs. Leveraging this cost saving opportunity can help companies increase efficiency and accuracy, minimize unnecessary expenses, and improve tracking of purchases made and required within the company.
Minimized Supplier Risk: Identifying viable and effective cost saving opportunities is highly challenging, and companies can often overlook significant contributors when it comes to indirect procurement. The supplier selection process for direct procurement is time-consuming, complex, and competitive, and companies must utilize the same data-driven approach for indirect procurement suppliers. Companies can significantly reduce costs, increase savings, and avoid losses by identifying, evaluating, and developing effective strategies, choosing the right vendors, or changing terms of contract when entering partnerships. In doing so, professionals can ensure a sustainable, transparent, and reliable partnership, based on mutual awareness and data.
Automation: The rise of digitization, automation, IIoT, and artificial intelligence has transformed industries and given rise to a plethora of cost saving opportunities, including higher efficiency, reduced labor, and improved supply chain systems. Automation also helps accurately track spend, oversee performance and identify overlooked needs, and minimize human error in the ordering, tracking, and analyzing processes. Additionally, with automated systems in place, companies can invest in skilled labor and focus more on strategic growth, overall development, and sustainable strategies that enable reduced costs, higher savings, or increased profitability. Taking this step also provides companies with the opportunity to explore new technologies and solutions, and stay ahead of the market.
Reduced Maverick Spend: One of the most significant challenges across industries is identifying, evaluating, and minimizing maverick spend, particularly in rapidly growing industries. When companies expand, daily requirements and indirect procurement needs significantly increase, consequently increasing the number of orders, purchases, and payments made from various departments. Maverick spend can often rise from the lack of clarity, communication, or tracking of expenses between departments, and reducing it is one of the most crucial cost saving opportunities for companies to leverage. Reducing maverick spend can increase efficiency, minimize costs, lead to improved inter-departmental communication, and encourage better partnerships with vendors.
Centralized Sourcing: Every company needs a singular, accurate, data-driven and centralized system to track, analyze, improve and change internal company processes. Centralized sourcing can help companies easily identify potential shortcomings, fraudulent activities, supply chain complexities, and internal risks impacting the system. Indirect procurement is a crucial tenet of everyday activity and centralizing the related data can significantly support and enable these changes. When companies make crucial decisions regarding costs, prices, profitability, and savings, real-time and accurate data from this system can help improve the decision-making process, provide increased transparency, and minimize error.
Success Story – SpendEdge Advantage
The growing retail industry has been majorly influenced by digitization, the rising demand for convenience, and an increasing need for accessibility in developing countries. Emerging markets have led to major expansions within companies, and subsequently, businesses are in search of effective, sustainable, and reliable cost saving opportunities. A rapidly expanding retailer based in Northern Europe sought to reduce costs, increase savings, and develop cost-reduction strategies. To do so, the company chose to partner with SpendEdge and leverage our expertise in developing, implementing, and improving cost-reduction strategies and efforts. Our experts assessed the company’s processes, supply chains, and operations, and identified various cost saving opportunities within the indirect procurement process. To improve the retailer’s performance, enable higher savings, and minimize risks, the experts provided the company with actionable recommendations and helped them make necessary strategic changes.