Indirect Spend Management: How Can it Help Identify Cost Saving Opportunities?
Most companies often focus their efforts on direct spend categories and place a low level of importance on indirect spend. However, indirect spend can make up a high proportion of third-party spend in most companies. Often overlooked, indirect spend management is gaining attention due to its ability to derive more value from their supplier spend and further increase savings. Indirect spend management is not so straightforward and easy. Managing IT, MRO, logistics, utility, and travel requires a different kind of skillset and expertise from the procurement teams. If procurement teams are able to manage and take control over the indirect spend effectively, they can create more savings opportunities. So what are the barriers procurement professionals need to overcome to unlock new savings opportunities?
Controlling maverick spends
Maverick spends are purchases made outside of agreed contracts. Companies make many purchases out of their agreed contracts due to various reasons and circumstances. However, it can be detrimental to the organization as no contract means no legal protection and it can also impact the profit and contract fulfillment. Unmanaged spends can account for billions of dollars of ineffective and inefficient purchases in a large enterprise. Additionally, it also makes the organization vulnerable to procurement frauds. A major problem faced by the procurement professionals is the implementation of control measures to eliminate such maverick spends. Organizations struggle to regulate such spends as employees usually try to be efficient by using a ‘just get things done’ attitude. Also, procurement professionals often bypass the contracting system as it is laborious and time-consuming. At an age where agility is necessary, they cannot afford to waste time in excessive documentation. Additionally, sometimes employees can feel that they can find a better deal elsewhere than in the contract offers. It is essential to review HR policies and educate stakeholders of the detriments of unmanaged spend. A review of the P2P process and a proper spend analysis are also essential to put a stop to such maverick spends.
Lack of centralized control
A common misconception outsiders have about the organization is that it sees the company as a single entity. The truth is far from that, as they function with multiple departments with decentralized control. The problem with such decentralized control is that, when implementing indirect spend management, professionals often lack the knowledge of the scale of diversity within their organization. Each department is provided with their own budgets, and have measures and regulations to spend the budget where they need it. This again gives rise to maverick spends and purchases that are not centralized. Therefore, it becomes problematic to assess who is spending on what. To get on top of the indirect spend management, organizations should centralize their purchasing operations. It will not only help achieve economies of scale but also allow greater scrutiny of suppliers and their contracts. Additionally, it eliminates the practices of offering contracts based on each department’s convenience and ensures qualified suppliers are selected. Apart from its contribution in cost-savings, it also affects the non-price factors such as risk management, CSR initiatives, and supplier diversity.
To tackle the challenges arising out of indirect spend management, companies have turned towards automated procure-to-pay (P2P) processes. Such processes eliminate process errors, increase visibility of payments, and provide better control over indirect spend. Additionally, eProcurement, eInvoicing, AP, order lifecycle management, electronic payments, and supplier management are some tools used by the organization to increase visibility and control over their indirect spend management.
Today, we can see an increasing trend amongst top companies opting for better procurement management to save costs and remain competitive in the marketplace. Procurement is more than just a cost-cutting tool. By reducing waste and optimizing resources, pharma companies can significantly boost their efficiency. The pharma industry has to tackle a lot of modern-day challenges right from generic drugs, personalized medicines, rising research and development cost to expensive clinical trials. Improvement of the procurement process in pharma industry can solve such problems and improve the industry profitability.
Why should the pharma industry opt for better procurement practices?
Innovation in Pharma industry does not concern only towards drug innovation. Innovation in procurement and sourcing processes could lead pharma companies to achieve monumental savings opportunities. For instance, successful pharma companies can create innovative incentive models for suppliers to suggest new ideas on ways to reach new market via new sales channel. By ensuring spend control and collaboration across divisions and functions with their supplier network as well as internal stakeholder’s, companies can create more opportunities for innovation.
Collaboration Across Business Functions
When it comes to conducting a clinical trial, business managers are looking to outsource the process to a capable strategic partner. However, they are quite reluctant to place such decisions in the hand of the procurement team. It has been evident that when procurement function takes over the execution of such activities, they strive to find the best partner and negotiate better terms that will drive the overall performance as well as the output. Additionally, clear procurement roles and responsibilities are a must to ensure smooth flow of operations.
Managing Indirect Spend
A vast majority of spend in a typical pharma company goes to indirect spend categories such as IT, MRO, office supplies, travel, logistics, and marketing. Such spends account for millions of dollars that could be saved because of a better procurement process. By improving the procurement process in the pharma industry with strict policies, proper tools, and providing full spend visibility, companies can improve savings from indirect spends and force regulatory compliance.
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On the very surface, costing may look like a straightforward equation, but it is challenging to figure out where most of the company’s money is going. Managers are always eager to know the figure spent on critical suppliers to make a difference in supply chain negotiations. In the process, they seem to ignore the indirect costs, which can sometimes account for the majority of an organization’s expenses. Since individual business units handle indirect spend, procurement professionals have little visibility on the spend patterns of such units. Indirect spends are estimated to account for about 15% of the organization’s total cost with the possibility of a higher procurement waste.
Digitization of the Procurement Process
A modern solution to take control of indirect spend would be to use digital technologies to monitor the indirect spend. However, merely collecting the information is not sufficient. The managers should be constantly analyzing to explore cost-saving opportunities and check for areas of improvement to optimize the spend. A significant amount of money can be saved by using analytics tools that analyze in-depth spending patterns and service delivery.
Choosing Preferred Suppliers
Today, businesses rely on a vast network of geographically dispersed supplier to fulfill their demands, making the vendor selection process a complicated affair. On top of that, it is essential to maintain a healthy relationship with all key suppliers. One key strategy used to curb the indirect spends would be to minimize maverick spends by renegotiating contracts with key suppliers in each category of top spend areas. Additionally, it is possible to gain leverage on pricing by pooling in smaller spends into a fund with fewer suppliers.
Outsourcing the Procurement Process
Considering the pace at which businesses are growing today, it can be notoriously difficult to contain costs regarding procurement and vendor management. In addition to that, companies also must worry about compliance and governance. A majority of the companies are looking to outsource the procurement process to gain control of their indirect spends. Outsourcing the non-core process of indirect spend not only ensures better performance and value improvement but also enables the organization to free up resource bandwidth and use it towards strategic activities.
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.
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