Why is indirect procurement important?
Keeping a company thriving and growing requires more than a resilient supply chain, operational efficiency, and optimistic business plans. Every company needs to focus and invest in indirect procurement and ensure that daily functioning runs unencumbered and smoothly. Although it does not directly impact the bottom line, it is imperative to maintain efficiency, continuity, and comfort within an organization. Over recent years, experts have become increasingly aware of the role played by indirect procurement within the organization and are encouraging improved facilities and focus in those categories. Due to the lack of significant attention assigned to these processes over the years, various challenges are plaguing indirect procurement leaders while costs rise and the need for investment is propelled. Mitigating inconsistency, lack of awareness, shortcomings, and challenges within this system is imperative to the company’s growth. Indirect procurement can include travel management, equipment maintenance, marketing-related services, or professional services. It aims to procure the materials, services, or care essential to the company and differs in various ways from direct procurement.
What is the difference between direct and indirect procurement?
Supplier Relationship Management: While direct procurement is focused on developing and fostering strong, positive relationships with suppliers, indirect procurement aims to reduce spend, and receive competitive costs. For direct procurement, companies often invest significantly in proper supplier relationship management, negotiate contracts, and build long-term, mutually beneficial partnerships. However, for indirect procurement, supplier relationships hold less value, and concerned departments focus more heavily on tactical relationships that help them manage their spend better, identify the best prices, and procure the required services or products. Recently, experts advise companies to invest in strategic supplier relationships for indirect procurement and contribute to overall organizational efficiency with centralization.
Inventory Management: Direct procurement is heavily reliant on stock and inventory, giving companies reason to focus on tracking, storing, and distributing products with the main aim to promote efficiency and reduce the probability of production delays. Indirect procurement, however, relies on demand to determine required products or services, and stocks are generally maintained at a lower level. This approach helps reduce high costs but can be challenging and lead to shortages or delays in certain cases. Therefore, companies are now incorporating inventory management best practices within the indirect procurement systems to mitigate the possibility of shortages, promote improved organization, and maintain efficiency through their business units.
Technology Usage: The significant upsurge in technology usage has transformed direct procurement into a streamlined and clear process that enables efficiency, communication, collaboration, and inter-departmental growth. Indirect procurement involves the participation of various suppliers and the transfer of large amounts of data. However, this data is not centralized, and although it is user-driven, it fails to account for risks, challenges, market shortages, or other potential complications. Creating an end-to-end system that encourages clear communication, compilation of data, coordination between departments, and higher productivity is becoming more necessary for companies as supply chains and business operations are complicated.
Organizational Structure: Similar to technology usage, direct procurement has become an organizationally centralized, streamlined, and well-managed system within companies. It follows a simple but necessary structure, wherein supply chain teams and category managers adapt to a certain role and ensure completion of their requirements. Indirect procurement is a fragmented and scattered process that involves various internal stakeholders, separate budgets, and different spend management expectations or targets. Companies must adopt a more centralized and structured indirect procurement process to improve efficiency and compliance, increasing the possibility of reduced costs, better communication, and clarity across departments. Exchanges between direct and indirect procurement teams can help both sets of professionals acquire new and necessary skills while jointly promoting growth, efficacy, and structure within the organization.
What are the indirect procurement challenges?
Multiple Suppliers: Since indirect procurement involves the purchasing, stocking, and supplying various products and demands within the organization, there are numerous suppliers, vendors, and partners interacting with the company at any point in time. This challenge requires procurement teams to engage, negotiate, and conduct business with multiple vendors at one time, handle a variety of purchase orders, and increase the probability of error. Having numerous suppliers also deters the team’s ability to track and assess all involved suppliers’ performance or compliance, further inhibiting efficiency and growth. Additionally, this scattered approach can significantly hamper the company’s ability to identify, evaluate and mitigate potential supplier risks, and prepare for inevitable challenges.
Diverse Purchases: Indirect procurement involves purchasing various products and services and requires separate departments to track and supply their internal needs. Assembling a team of professionals to address the organization’s multiple needs would be highly challenging due to these purchases’ diverse nature and require expertise and insights from every department to function successfully. While one professional may be adept with procuring marketing services and other professional consultancies, they may not understand an equipment-driven department’s needs, such as production, and potentially fail to provide the resources required. This lack of in-depth knowledge regarding the various categories of needs can cause major challenges within the company, making it difficult to create a single business unit or department to handle this process’s ever tenet.
Low Visibility: Considering the fragmented, diverse, and challenging nature of functioning in this system, companies find it challenging to create and maintain transparency within indirect procurement and often struggle to provide stakeholders with data-driven insights. As companies grow and the various needs continue to increase, tracking individual transactions with different suppliers for various departments is challenging to track, and companies suffer. Additionally, this lack of transparency also makes it challenging for companies to keep investors, stakeholders, and other involved parties informed of significant changes, upcoming risks, or major market developments. Low visibility can also deter the appropriate tracking and monitoring of savings, spend, and overall company costs.
Fragmented Operations: Due to the lack of awareness and focus on indirect procurement, many companies have failed to develop strong, resilient channels of communicating, tracking, and controlling these processes. This has led to a fragmented approach that causes inefficiency, delays, shortages, and other significant challenges. Additionally, when a company grows, its indirect procurement needs grow exponentially, leading to more fragmentation and challenges. Companies must leverage the guidance of professionals and experts to identify better systems, and streamline their indirect procurement processes, making it possible for them to increase visibility, develop better supplier relationships, understand their needs, and improve overall operations.
Developing an effective indirect procurement strategy is essential to align procurement goals with business objectives. Request a free proposal to gain deep insights on how the solutions offered by the skilled experts at SpendEdge can help you with cost reduction in procurement and ensure best delivery.
SpendEdge offers expert insights, unparalleled guidance, and in-depth knowledge regarding a business’ needs and spend to help improve and overcome the significant challenges plaguing the indirect procurement processes. Recently, a transportation and logistics company witnessed a steady increase in their spend and could not properly track, analyze, or gain visibility on incurred costs. The client sought to mitigate unnecessary expenses and identify the cause for minor unaccounted expenses within their company. By partnering with SpendEdge, the transportation company identified significant problem points in their indirect procurement process and acknowledged the need for streamlined, clear, and communicative functions. With our experts’ recommendations, the company created an efficient tracking, analyzing, and recording system for all indirect procurement transactions and helped departments centralize all purchases, enabling unanimously understood and approved spend and savings. Stakeholders and investors gained improved visibility into the transactions and leveraged our insights to reduce unnecessary spend within the organization.