Indirect spend has found itself on the back burner of many industries savings opportunities. However, there is plenty of savings to be had if you know how to manage it.
Indirect Spend: A Brief Overview
Historically, direct spend has taken the limelight in the business world with corporations focusing their time and energy to manage it. This is because direct spend has a higher dollar value attached to it and because it represents a much larger percentage of purchases than indirect spend (by value). However, if a company has 50 different offices who are buying 20 different types of toner for 10 different brands of printers AND receiving contingent labor through several suppliers – with no controls, no policies, and no negotiated rates – there could be a substantial impact on cost and internal resources.
Indirect spend contributes to a significant portion of a company’s purchases 10%-25% by value. These expenses are those attributed to materials and services that are not used in the finished products like office supplies, industrial supplies, office equipment and temporary labor. Improvements can be made by consolidating, standardizing, and outsourcing indirect items. This can reduce cost and raise service levels within the indirect category.
Fortunately, more and more businesses are becoming aware of the importance of managing indirect spend. Many procurement executives now recognize that indirect category management presents a significant opportunity for cost management and profit. With 70% of procurement executives acknowledging indirect spend as a top focus for controlling and reducing cost, there can be a significant change in how companies handle their indirect spend. Luckily, they have several options to choose from.
The most straightforward option to managing indirect spends is by handling it internally. This option gives the company the most control over how the spend is managed from beginning to end. However, it is difficult to manage indirect spend in-house because many companies lack the resources, time and expertise. Indirect spend comes with the challenge of having expansive industry knowledge on the many commodities, which may include transportation, office supplies, IT, MRO, consultants and travel. Not only is it hard to find talent with a large enough skill set to handle the indirect category, but finding a budget for this talent can be just as trying.
Companies may also lack leverage in negotiations with their suppliers. Many times having low volumes give corporations little opportunity for discounts. Low volume can lead to non-contractual spending (maverick spend) in certain product categories making indirect management that much more difficult.
There are alternatives to manage indirect spend outside of the company. Outsourcing the indirect spend can be handled through a group purchasing organization, a procurement sourcing group or other similar services. There are several reasons to consider outsourcing, if not to make the company workload lighter.
Outsourcing can mitigate many of the challenges associated with change management. Procurement outsourcers are specialist in approaches that enable ongoing process efficiencies which can result in shorter cycle times and reduced resource requirements.
Outsourcing service providers can offer extensive knowledge on commodities because of their ongoing experience across a multitude of companies. You will have access to their real-time supply market insight, which a single buying organization may not have.
Outsourcing services providers are measured based on their ability to continually maintain impeccable service levels. This means that your company will have consistently rapid and reliable results.
The GPO Option:
There are many reasons to manage your indirect spend both internally and externally. However, there is only one option that will give you the advantages of both. Joining a group purchasing organization will give your company the control that is seen with managing internally, but will also handle the majority of the work leaving your procurement team to focus on more crucial projects.
With a GPO you will not be handing your indirect spend completely over to an outside organization. Your corporation will still have contact with suppliers, maintaining your supplier relationship in the same manner as if you had sourced it yourself. Most importantly, GPOs are experts in finding the best savings from the initial purchase and throughout the total cost of ownership. Therefore, you will not only have the best service, but the best savings as well.