Top Tips: Indirect Procurement/Sourcing as a Spend Management Core Component Strategy (Part 2)

- June 27, 2011 12:06 PM
Categories: Spend Management | Tags:

In the first post in this series, I discussed the importance of considering both the high-level nuances of indirect spend relative to direct as well as laying out the basic argument for putting more resources on the indirect area today. To summarize my suggestions on this last point, direct spend cost components are increasing, not decreasing, and for many companies today, indirect spend (inclusive of services) is really the only opportunity for material cost reduction. Moreover, in the direct spend area, it’s become so important these days to focus not only on containing commodity price risk, but supply chain (and supplier) risk management as a top priority, starting with such fundamentals as assuring continuity of supply and having suppliers honor contracted terms and agreements. No doubt cost still matters in direct spend, but when rising, capacity constrained markets rule the day, the emphasis in this area must switch from one of savings orientation to maintaining supply continuity at reasonable cost.

Indirect spend, in contrast, presents a whole host of savings and cost avoidance opportunities — even in today’s market conditions. Even though each indirect category is different and the nuances can be very significant, requiring special expertise and technology to tackle individually, there are generally a number of vanilla levers to pull when it comes to getting indirect spend under control. These include:

  1. Indirect demand management — demand management is not just about managing demand, it’s about reducing it. If employees know that a category they buy is being scrutinized by procurement, they’re less likely to purchase items or services they might not need to. Moreover, with indirect, it’s often much easier to quickly rationalize specifications for a given item or service across a company than it is for direct, where engineering-related changes might be required. This in turn can lead to greater volume leverage with fewer suppliers.
  2. Indirect compliance — One of the greatest areas of spend leakage is in indirect procurement compliance. When it comes to invoice accuracy (SKUs, price, terms, etc.), double-billings, double-payments, credits, etc., it feels to me that indirect spend is a much, much greater challenge for most companies than it is for direct. Part of the common problem here is that suppliers often have greater insight into their customer’s buying data than the procurement organization doing the purchasing actually does. But for those companies that begin to target both indirect generic compliance challenges as well as category-specific indirect compliance hurdles, the outcomes can quickly become well-worth the efforts. In many cases, companies can identify immediate credits and savings recovery opportunities — not cost reduction, an important distinction — in a matter of weeks.
  3. Indirect sourcing — In today’s market environment, it’s hard even in indirect categories to fully escape upward commodity price pressure impacting the finished cost of a particular item (services, fortunately, are different). Yet in indirect spend categories, there’s often enough margin in other areas to more than compensate for commodity price increases in underlying base material (e.g., rising oil costs driving resin increases and transportation surcharges leading to rising unit costs for office products). The key on the indirect sourcing front is to always remember three key things when it comes to working with suppliers to identify savings: volume leverage (i.e., bring more volume to the table), volume commitments (or at minimum, showing detailed spending patterns in the past) and price awareness/benchmarking (i.e., knowing what the leading market price is based on your particular basket of spend).

Stay tuned as we turn our attention to the areas procurement must consider when it comes to indirect spend relative to direct.

Jason Busch

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