Many companies are failing to realize that significant cost savings are in sectors NOT directly related to sales and services. Indirect spend is commonly overlooked and that is where companies are missing opportunities to improve earnings.
The Difference Between Direct and Indirect Spend
Before diving into the facts, let’s clarify the difference between Direct Spend and Indirect Spend. Indirect spend is related to the cost spent on essentials (services and goods) that go into running an organization, while direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured or its services.
Some common examples of goods purchased through indirect spend are office supplies, safety glasses, computers and event caterings. Examples of direct spend include raw materials, subcontracted manufacturing services, components and hardware.
Why is indirect spend so important?
It’s not hard to overlook indirect spend; who would think that the toner used to print out that presentation or copy your annual report could effect a company’s finances? Add in the other indirect spend items and now you’re looking at a much bigger percentage of income going into companies purchases. It’s hard to believe that companies could spend up to 50% of their total revenue on non-product or “indirect” expenditures.
It’s easy to neglect indirect spend; there are few companies who approach this area of spend with the same drive that they approach their goods for resale. With so much attention applied to direct materials procurement, indirect procurement has come to be placed on the ‘back burner’, with its principal focus on placing purchase orders. Even companies with keen procurement for indirect spend have trouble separating operational purchasing from strategic procurement. It may seem intimidating when looking at indirect spend and how it spreads across a broad spectrum of commodities – thereby increasing the supplier base and the supply chain management complexities – but it’s this attitude towards indirect spend that could cost a company more money in the long run.
Procurement practices were analyzed in a study that focused on the purchasing habits of 16 major multinational corporations. The research found, on average, in 81% of companies over 20% of the indirect spend was bought without consulting the procurement department. In another study produced by A.T. Kearney, that reached executives from 94 multinational companies, it found that corporations are not using advanced data analytic techniques, such as predictive modeling, to deliver useful future insights. Many indirect procurement groups are simply analyzing data to track historical trends, which causes procurement organizations to have little control over where the savings go, so the savings are often used in unintended ways.
Reviewing the chart below will give you a better understanding of the indirect spend cost areas.
Where can the savings happen?
- Facility supply savings can become double digits across multiple categories
- It’s common to save 8% to 15% and up on industrial, safety, lab supplies and others.
- Office Supplies make a significant amount of savings
- Savings on items such as paper and toner range between 12% and 20%
- Savings from indirect material and services improve as transformation and ramp-up efforts are completed
- Overall, improvements typically add up to a first-year net savings of 10-15%
- In the long run, targeted cost savings can be in the 25-30% range
Now that you know a bit more about indirect spend and you are ready to start saving, how about considering a group purchasing organization (GPO)? A GPO can assist your procurement department in handling any challenges that may arise while tackling these indirect spend categories. Joining a GPO will cancel the risk of unsuccessfully sourcing a specific indirect spend category and your GPO will measure the performance of each indirect spend suppliers, making sure you get the best-in-class savings.
Click here for a list of CoVest’s indirect spend catergories!
Study done by Inverto
Click this image to download an infographic on indirect spend