Procurement teams of all sizes understand the need to control both direct and indirect expenditure in order to keep costs low, generate value, and support their businesses’ profitability and competitiveness.
Indirect spend includes all expenditure on items that are not directly related to the end product or service but are necessary to keep the firm running on a day-to-day basis. For example, indirect spend includes utilities (gas, electricity, water), office supplies, marketing expenditures, human resources, software costs, and travel charges.
Controlling the indirect spend related to operating business expenses has its own set of opportunities, if your team has a procurement software and the necessary tools, expertise, and approaches to manage it and its implications if it gets neglected.
According to Mckinsey, effective indirect procurement management can contribute up to 12% of cost savings. Similarly, if the indirect spend is not managed effectively, it can cost the company a considerable amount of loss.
Here are five top tips to improve your indirect spend management and streamline your indirect procurement in your company.
1. Leverage the Power of Spend Analytics
Spend analytics is the process of collecting, consolidating, cleansing, classifying and analyzing procurement expenditure. It adds value by fetching data from different sources – such as money spent on procuring certain products or paying fines on late payments – and makes it simple for businesses to combine all spend data.
Through spend analysis, you can gain complete visibility into this gathered data, resulting in actionable insights that give higher value in the form of more focused process improvements and lower costs.
This transparency can be especially beneficial in addressing indirect procurement issues like working with multiple suppliers for a single product. This helps in identifying excessive maverick spend and exploring savings opportunities.
With comprehensive spend visibility, you can see places where your employees deviate from approved indirect spend rules to buy products and services, either as a one-time occurrence or, in more severe circumstances, to evade regulation or conduct fraud purposefully.
Analysing spend data also identifies risk possibilities by revealing your company’s dependency on a few suppliers. Moreover, it can also highlight cash leakages in your indirect spend contracts by providing you with an overview of actual contract cost compared to realized contract cost.
Similarly, having eyes on the full procure-to-pay (P2P) process from beginning to end provides you with a wealth of performance and compliance data to examine and use to make better decisions. You can determine which suppliers are beneficial and which ones are simply unreliable.
2. Consolidate Categories of Indirect Spend
Indirect expenditure is known for being dispersed across the business and acting beyond the scope of procurement. By having complete insight into the company’s spend, procurement teams can consolidate indirect spend categories and save costs by having complete insight into the company’s spend.
This entails grouping all indirect spend into categories and vendors. For example, suppliers provide discounts on bulk or repeated purchases to retain companies as their clients.
Suppose the finance department procures travel services from Company A and the HR department procures travel services from Company B. In that case, none of these companies will provide you discounted rates as you are not a frequent buyer in their data repository.
By consolidating the demands of all departments into fewer orders with favored suppliers, indirect procurement can execute company-wide contracts that provide benefits such as volume discounts, better contract conditions, and more flexible suppliers.
Simplifying the categories can help improve spend management with an efficient supply chain without cutting down on necessary expenditures.
3. Educate and Seek Support
A significant part of managing it arises from the lack of knowledge on indirect spend when it comes to indirect spend. These additional requirements aren’t often openly mentioned, and some employees may be unaware of the importance of supplies that comes under indirect procurement. This is why providing education can help you enhance your indirect spend control.
You can organize training sessions on the types of indirect spend and how important it is for the company to manage it. This training should be comprehensive and offer tangible KPIs that your procurement team can grasp.
Performance requirements, contract compliance, cost-effectiveness, and other factors can all be determined using these measures. Simply outlining your needs and why they are essential might assist employees in making better judgments about indirect spend.
It’s also critical that procurement experts recognize the significance of indirect spend. Unfortunately, controlling indirect spend is frequently delegated to the most junior procurement personnel. This is because its importance is highly neglected and is administered with as little effort as possible. Procurement teams can only hope to optimize their indirect expenditure procedures by incorporating top management.
Moreover, you can also seek support from experts on the subject matter who can provide training to employees as well as give you insights and best procedures on how to manage indirect spend using the latest tools and technologies available in the market. Such investment can help you save a lot of money in the future.
4. Analyse and Measure
Along with education, ensure that your team establishes clear standards and methods for controlling and optimizing direct and indirect spend. To achieve this purpose, you can set KPIs to assess their performance.
For example, you can set a goal to reduce 5% of indirect spend in your office cleaning supplies category through bulk purchases in a period of one year. Then, after a year, you can analyze and measure if your procurement team were able to achieve that goal.
Establishing clear goals and KPIs will help you keep a strict check and balance between the estimated and actual spend. This can help reduce the risk of spending too much on indirect purchases and limit maverick spending.
Continuous improvement is only possible if you clearly understand how your policies and practices affect costs, earnings, and risk management over time. Make sure that you communicate the newly set rules and expectations with your team to meet their KPIs.
5. Leverage Technology and Adopt Digital Transformation
Technology has become an inevitable part of any business process nowadays, and to manage procurement-related processes, it is critical to digitally transform them. By leveraging technology, financial health, competitive strength, and business continuity may all be improved.
Pulling indirect procurement out of the shadows and into the light for analysis and improvement may be more difficult for some companies than others, depending on the availability of technology and toolsets. However, adding crucial digital technology will help you improve indirect spend management regardless of the business.
For example, automated procure-to-pay optimization is based on strategic spending and category management principles, ensuring complete spend visibility and responsibility while lowering the risk of fraud, maverick spending, and theft.
Because of its connection with contract management and supplier management software data, P2P software also guarantees that all purchases are made at the best available price and terms.
Indirect procurement teams are brought in from the cold and given access to the same supplier and category management tools and techniques as direct procurement.
This also supports long-term supply chain resilience and business continuity through contingency-based sourcing and data-driven supplier management for indirect spend categories.
Automation is the most potent and immediate advantage when it comes to improving indirect procurement and the whole procure-to-pay process. Software robots don’t require breaks and they operate at speeds that human employees can’t match.
They need little to no human intervention, reduce or help eliminate human error, and enable you to integrate rules and regulations established by your finance and procurement teams to automatically aid category management and metrics-based sourcing choices while staying within financial constraints.
Automation also improves cash flow by capturing early payment discounts, leveraging economies of scale, or conserving money as needed, thanks to complete spend transparency provided by the software.
Advanced analytics and centralized data management integrated with your existing software environment, such as enterprise resource planning (ERP) system, customer resource management (CRM) platform, and so on, can result in improvements across the entire company.
Managing indirect spend is as important as managing your direct spend. Traditionally, indirect spend mainly focuses on procuring low-cost products and services while neglecting essential aspects of procurement such as supplier relationship and risk management.
For example, suppose you are selling fragile items that need good packaging material to safely deliver them to your customers. But while procuring the packaging, you looked only for low-cost packaging and ignored its quality.
Because of this heedlessness, the product might get damaged and make your customer extremely dissatisfied. Similarly, if the supplier is not reliable, you may not procure enough packaging materials at the right time, which can disrupt your entire supply chain.
In a nutshell, even though indirect spend is not linked to your end product directly but it can significantly affect your bottom line. By implementing these tips into your procurement function, you can improve the management of your indirect spending and increase cost savings.