Why indirect procurement matters
In a tight and volatile market where margins are fine and challenges are exacting, every competitive advantage needs to be explored. Despite that, few organisations examine their indirect spend with any real intent – which is surprising given that it grows an average of 7% year-on-year and accounts for roughly 20% of an organisation’s procurement spend. At best, such practices are negligent. Even in favourable market conditions, very few organisations can afford to leak that amount of cash and value from their business.
Optimising indirect spend is not hard. Value is maximised in a different way to direct procurement. It’s achieved through leveraging data, SRM and through supply chain optimisation that enable the company to identify and pursue value-oriented opportunities. To that end, getting control of your spend data is vital for improving strategy. By knowing where you are currently you can accurately plan, track and review your activity moving forward.
Why visibility matters
Achieving visibility and control over your indirect procurement spend is critical to effectively creating value and costs savings for your company. It’s also useful for freeing time and improving operational processes.
When you have visibility over spend through a good platform, you’re able to present data and information to execs that demonstrates how spending patterns affect the business. This goes beyond cost, and extends to supplier performance, flexibility and innovation – things that add value to the supply chain and to the organisation.
This data is empowering. It not only helps execs in their decision-making process but also helps them to understand indirect procurement from a strategic perspective. This transforms their role from one that is essentially administrative i.e. a buying clerk, to one that is active in helping to deliver overall business strategy.
Insight into how and where money is spent on indirect goods moves the organisation away from traditional metrics too. As noted above, a lot of emphasis is placed on the overall cost of goods – which is still relevant – but not the only measure of successful buying. Such metrics fail to take into account the overall relationship with a supplier, for example. Are they delivering on time? Do they have capacity to meet our demand? Are there opportunities for innovation?
How control over IP improves process
A better understanding of your indirect procurement also leads to improved process – which in turn generates value through cost saving and operational efficiencies. By identifying spend patterns, delivery patterns and bottlenecks, for example, you’re able to pinpoint where the pinch points in your process are. Moreover, you’re able to place spend under contract, consolidate suppliers and evaluate their performance better – which gives you to leverage to negotiate a favourable partnership with them that is mutually beneficial.
Arguably the biggest benefit however is the use of automation to handle tedious, repetitive and time-consuming tasks. Increasingly, organisations and procurement departments are turning to automation to handle the basics such as POs, invoicing and repeat deliveries. This not only significantly reduces the administrative burden and human hours spent processing, but significantly reduces the error rate in processing. When you extrapolate that across an organisation’s entire supply chain, the value it brings is both huge and obvious.
The benefits don’t end there either. Far from being the death knell for traditional procurement roles, automation is empowering procurement professionals and individuals responsible for buying. By relieving them of a major administrative burden, they are free to pursue more strategic and engaging work.
This trend is fostering a new kind of dynamism among executives who are becoming increasingly astute and technically savvy. They back that up with the soft skills to engage with stakeholders and negotiate with suppliers, which overall leads to a far more strategic approach to procurement. It’s a win-win for the organisation and for the employer.
If you’re in procurement you will know how crucial indirect spend is to your business and understand the impact it has on your company’s operations. You’ll also know that getting a handle on it can be tricky for a number of reasons, and for a lot of organisations, it’s a problem area.
Taking control of indirect procurement can prove daunting, but it is possible to make significant improvements quite quickly. It all starts with gaining visibility over what you are spending, how often and with whom.
From that vantage point, it’s possible to see what an untapped source of potential indirect procurement is – and what a driver for change it can be in the organisation.
From cost saving and efficiency through to innovation and empowerment and partnerships, it is an enabler not only of business excellence, but also of sustainability, long-term viability and lasting success.