An organization’s indirect spend often accounts for 20% of its overall spend or more, but since that share is comprised of low-dollar, decentralized purchases it often goes ignored when looking for opportunities to reduce costs. Indirect spend includes all purchases within the business that aren’t tied to direct, revenue producing activities. Some common examples would include office supplies and equipment, professional services, and travel, and these indirect expenditures present many “low-hanging” opportunities for an organization to reduce costs.
3 Strategies for Optimizing Your Indirect Spend
1. Start by Tracking Indirect Spend
The old idiom, “what you don’t know won’t hurt you” is wildly false when it comes to spend analysis. In practice, not knowing when, where, how, why and by whom purchases are being made in an organization is a guaranteed way indirect spend runs amok. Spending on items like office supplies and professional services can be tough to track at the line-item level, but it’s worth it to avoid overspending on such items and to avoid understating the impact the indirect spend items have on the overall business.
Use technology to your advantage, too. Assigning internal part numbers to each indirect item, even if that part number is just the manufacturer or supplier part number, and requiring that even P-card purchases have line-item level detail is a great way to use the ERP system to report out on indirect spend items. This added visibility allows the entire organization to get a handle on indirect spend. After all, the ERP system isn’t going to automatically tell you which purchases are indirect spend. The breadcrumbs must be placed internally first.
2. Consolidate Suppliers and Negotiate Pricing
By nature, indirect spend items are low-dollar, frequent transaction items, so despite the transactions taking a lot of time, they’re often ignored in most organizations. Everyone wants to save money, but most don’t look to indirect spend to do so. Since these transactions are regularly overlooked, the lack of governance leads to supplier proliferation and suboptimal pricing.
With that comes significant overlap in the products being ordered by the organization, particularly in large companies with numerous field locations that find themselves with a high level of purchasing autonomy in their operations. For example, it’s not uncommon for multiple locations to order something as simple as paper from two to three different suppliers. Why not find all these overlapping scenarios and consolidate them to one or two suppliers?
Supplier consolidation has significant benefits in terms of streamlining operations, so even if the intent isn’t to reduce or to contain spending, the resulting supply footprint will be far more manageable – a net benefit to the business. But taking that a step further to reducing spend means mapping out the supply base much like one would do for direct spend items. Conducting buyer interviews, reviewing P-card purchase, analyzing existing contracts for professional services, and physically reviewing inventory are great ways to identify overlapping products.
Consolidating these overlapping products into one or two sources allows for the organization to potentially source the indirect parts and services as a single, large, and committed volume; as opposed to many, small purchases at a variety of locations. Consolidation also allows for a contract to be negotiated that can secure inventory and avoid one-off purchases due to stock outs and lower pricing immediately. These are both low-hanging opportunities for cost savings within an organization’s indirect spend.
3. Evaluate the Performance of Indirect Suppliers
Not all indirect spend control efforts begin from scratch. Perhaps your organization already has good visibility into its indirect spend and has consolidated suppliers to streamline operations and capture improved pricing. In this case, it’s important not to sit back and let the system run unchecked; it still requires a great deal of scrutiny to ensure that the gains aren’t lost. Suppliers of indirect items must be evaluated in the same manner suppliers of direct items are.
Scorecards a great way to check supplier performance and recognize opportunities for changing a source of a part or service. What should be included in this evaluation? Asking the following questions will lead to a proper evaluation framework for indirect suppliers:
- Does the supplier’s pricing meet expectations?
- Does the supplier deliver on time? (On-time delivery percentage)
- Does the supplier deliver in the proper quantities? (Fill rate)
- Do the supplier’s services consistently meet expectations?
- Does the supplier frequently stock out of needed supplies?
If the answers to those questions suggest the supplier isn’t continuously improving in order to keep your business, it may be time to apply some pressure or even explore a different supply option. If the indirect supply base isn’t regularly evaluated, the progress gained in spend tracking and supplier consolidation will be allowed to slip back into more unfavorable situations.
Indirect spend is often overlooked, but it presents a myriad of opportunities to tackle waste without committing an unreasonable amount of resources to the problem. For a spend category that can be between 20-40% of overall company spend, it’d be irresponsible for the procurement team not to explore opportunities for improvement in that area because the benefits of evaluating it could make a direct impact on the business.