Which Indirect Categories Your Procurement Team Should Source

By: CovestAdmin
April 1, 2024

Indirect sourcing and procurement are the processes of purchasing goods and services that are critical to a business’s day-to-day operations, but not directly linked to the production of goods (in the bill of materials), or delivery of services.

Indirect procurement enables a company to function effectively and efficiently. It is driven by employee demand (the best savings opportunity is to review the need for the spend in the first place), and affects a company’s profitability. Indirect spend typically accounts for around 15% to 30% of a company’s total revenue. Failure to recognize or take action to minimize risk and costs is a missed opportunity to capture sustainable savings.

 

Managing the various products and services that make up indirect categories is complex for a variety of factors, including:

  • Significant number of suppliers to manage
  • Decentralized purchasing
  • Scattered budgets with limited visibility to meaningful data with a large number of stakeholders and decision-makers
  • Varying maturity levels of an implemented category
  • High potential for maverick spend

It’s all too easy for indirect spend to escape procurement’s control. There is a greater breadth of issues and a depth of expertise needed than direct procurement.

While small and medium sized businesses face their own set of indirect procurement challenges, those obstacles multiply significantly when scaling for a large, global corporation. The needs for an enterprise organization require a larger network and team to cover all essential categories and operations across multiple geographies. You have to strategically select where to focus your sourcing efforts when managing categories on a global scale.

Steps to Source Indirect

Start the process by identifying where your in-house expertise is strong and evaluate the bandwidth it takes to properly manage that category. Next, find the right solution to cover the categories that can ease the overall burden of your procurement team – but which categories should you source and which categories should you outsource for additional support?

After you have identified your procurement team’s sourcing strengths and workloads, you must determine which categories can be offloaded and outsourced. These categories can be leveraged for better pricing, category management and data insights. While it may make up your tail-spend, it can significantly add up, contributing to rogue spend and lost savings when not actively managed. A Group Purchasing Organization (GPO) can aid with these outsourced category management efforts by aggregating the spending power of its members to create leveraged agreements, with benefits and pricing that far outweigh what an individual organization can achieve on its own. In addition to aggressively priced and commonly used products and service categories, a GPO provides far more value to a resource-strained procurement team including:

  • Data collection
  • Spend categorization to define sourceable buckets of spend and category alignment
  • Timely market intelligence
  • Benchmarking and historical trends
  • Business case support and active implementation
  • Active category management and ongoing communication
  • Frequent savings and compliance reporting

Indirect Categories for Outsourced Support

So which type of indirect categories would be best suited to offload to a third party to ease your burden?

  • Categories with a large number of line items or SKUs
  • Frequently used products that can be consolidate and standardized
  • Office products like paper, toner, coffee, office chairs
  • MRO items like safety gloves, cleaners, material handling equipment, packaging, and tools

These consumables makeup significant spend for enterprise organizations, and often is overlooked when considering larger, more strategic sourcing efforts. For these reasons, these indirect categories should be evaluated for outsourced support.

 These types of indirect categories are unique to the business of the organization. Any procurement department will be challenged to source and negotiate these correctly and meet any pending deadlines. Ensure you have a robust sourcing process to select suitable options, considering all stakeholder requirements.

Categories you should be focusing on with your internal teams :

  • Property / Rent / Real Estate
  • IT Services—such as ERPs, HR platforms, any third-party tools (even eProcurement tools that you’ve implemented to obtain improved spend visibility for the future will need sourcing and management), cyber security services, etc.
  • Professional Services, such as Legal, Insurance, Security, Consulting
  • Marketing
  • Events

 

Leverage Your Spend

In summary, there are too many indirect categories to source across the spectrum for a large corporation.  It’s difficult to have sufficient, experience and expertise in them all. Find the ones that are critical to your company and team with specific and clear requirements.  Explore utilizing the industry experts for outsourced partnerships to ensure a strong ROI and active category management.  At CoVest we cover a large range of MRO, Facility, Office Supplies and Services.  These are broad and encompassing categories for manufacturers in particular and often have significant, unmanaged tail spend. Outsourcing this category and utilizing a GPO can leverage your spend with similar profile organizations to provide substantial savings, a streamlined process and deep analytics for ongoing saving opportunities from compliance levels, alternative product identification and much more.

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