Keeping procurement projects on track and maintaining cash flow efficiency is crucial for sustaining profit margins. However, not all spending can be directly linked to specific projects or activities. This is where indirect spend comes into play, significantly affecting a business's bottom line.
According to McKinsey, indirect spending has been growing by approximately 7% annually worldwide since 2011. Despite this, direct procurement often receives more attention, while indirect spend remains less visible.
In this guide, we'll delve into the intricacies of indirect procurement — defining what it is, explaining its role, and contrasting it with direct purchasing. We'll also address common challenges and provide strategies to make the most out of every dollar.
What Is Indirect Procurement?
Indirect procurement involves the acquisition of goods and services that are not directly used in the production of a company's final products yet are essential for supporting its day-to-day operations.
In the grand scheme of the procurement process, indirect procurement ensures that your company’s non-core needs are met, so your key processes can run without a hitch. It involves multiple departments and requires a strategic approach to align with business objectives and budget constraints.
Indirect vs Direct Purchasing
To better understand the role of indirect procurement, it's important to differentiate it from direct buying:
Direct procurement involves acquiring raw materials or components that are integral to the production and sales of finished goods. For example, a car manufacturer purchasing steel and rubber for vehicle assembly engages in direct procurement. These materials directly impact the quality and cost of the end product.
Indirect procurement, on the other hand, involves buying items and services that support business operations but do not contribute directly to the final product. Examples include office equipment, software licenses, and maintenance services. These purchases are essential for running your business but do not directly influence the end product.
Understanding the difference is key for purchasing managers to make smart decisions aligned with organizational goals. While direct procurement focuses on managing risks in the supply chain and material costs, indirect procurement mainly emphasizes cost-effectiveness.
Indirect Procurement Categories
Indirect procurement covers a wide range of categories, each catering to different aspects of business:
- Office Supplies: This includes stationery, printers, desks, and other items essential for administrative tasks.
- IT Services: Software, hardware, and IT support services that maintain and enhance the company’s technological infrastructure.
- Maintenance Services: Services that ensure the upkeep of facilities and equipment, such as HVAC maintenance, janitorial, and repair services.
- Professional Services: External expertise like consulting, legal advice, and marketing that support strategic and operational functions.
- Travel Expenses: Costs related to business travel, including transportation, accommodation, and meals.
This list can include more expenditure items, as each organization has its unique set of needs to keep their business on track.
The Importance of Managing Indirect Purchasing
Managing indirect procurement is far from a routine task; it affects a company's overall financial health and long-term sustainability. Here’s why keeping track of indirect procurement is essential:
Broad Scope of Indirect Spend
As mentioned above, indirect procurement spans various categories, each contributing to overall company spending. Effective category management ensures adequate acquisition of necessary resources, preventing waste and inefficiencies across the board.
Impact on Operational Efficiency
Ensuring that necessary resources are procured and readily available helps companies avoid delays and disruptions. This, in turn, contributes to high productivity levels and smooth business operations.
Impact on Company’s Viability
Sound management of indirect transactions helps maintain financial stability by managing costs and sticking to budgets. This financial discipline leads to better profit margins and positions the company for sustainable growth.
Additionally, efficient procurement strategies give the company a competitive advantage. By handling purchasing processes well and keeping costs in check, businesses can offer more attractive prices or reinvest savings into other strategic areas.
Challenges in Indirect Procurement
Indirect buying involves low-dollar transactions that, when combined, can make up a significant portion of a company's total spending.
Despite their seemingly small size, these purchases may present major challenges when it comes to establishing a strong spending strategy. These obstacles can result in unexpected results on financial reports, causing budgetary headaches for procurement professionals.
Frequent Purchases
Indirect procurement often involves buying small quantities of items frequently. This makes indirect transactions resource-intensive and time-consuming.
Lack of Centralization
Unlike direct procurement, which is usually handled by a dedicated team, indirect procurement usually lacks centralization. Various internal stakeholders make their indirect purchases, leading to a fragmented process. Such decentralization makes it hard to gather meaningful data, analyze spending patterns, and maintain cohesive supply chains.
Lack of Visibility
Indirect purchases are spread across different departments, with transactions often happening without proper planning. This spread creates challenges in maintaining a clear view of where and how money is being spent. Without clear insight into these expenditures, controlling costs and ensuring they align with budgets becomes difficult.
Maverick Spend
Maverick spending, or purchases made outside of established procurement processes, is a common issue in the indirect procurement process. Since it is usually reactive and based on immediate needs, most purchases are made bypassing approvals. This lack of oversight may lead to budget overruns and undermine negotiated supplier agreements.
Complexity of Supplier Relationship Management
The decentralized nature of indirect procurement and the increasing supplier base add complexity to supplier management. Maintaining relationships with numerous vendors is challenging when purchases are made last minute and without thorough research or negotiation. This may result in suboptimal pricing, inconsistent service quality, and potential delivery disruptions.
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Indirect Procurement Strategies
Managing indirect procurement effectively requires a structured approach. Here are some strategies to help streamline the process and maximize cost savings.
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Establish a Structured Process
Unlike direct procurement, which often has established protocols, indirect procurement can be more ad hoc. Set clear guidelines, procedures, and approval workflows to standardize purchasing behavior across all departments.
Educate and Empower Employees
Many instances of unauthorized spending occur due to a lack of awareness about procurement policies. By providing training sessions and resources, organizations can ensure that all staff members understand the importance of following proper channels.
Automate Procurement Tasks
Implement procurement software that automates routine tasks such as order processing, approvals, and invoice matching. Automation reduces manual errors, speeds up the procurement cycle, and frees up time for your team to focus on strategic activities.
Integrate & Plan Procurement Activities
Integrating procurement activities across departments ensures a more coordinated approach to indirect buying. Use centralized procurement systems, that allow different departments to collaborate and share information.
Plan your indirect procurement initiatives, such as consolidating orders to benefit from volume discounts, to gain cost savings.
Monitor and Analyze Indirect Spending
Use procurement tools with real-time analytics to compile, categorize, and analyze spending patterns. Regularly review this data to identify areas to work on and improve decision-making related to indirect spending.
Continuously Refine and Improve
The procurement landscape is constantly evolving, and so should your strategies. Access your indirect purchasing regularly and make necessary adjustments. This might include updating internal policies, exploring new suppliers, and staying informed about market trends. Seek feedback from stakeholders and conduct periodic audits to make the most of your strategy.
Spend Smarter & Save with Team Procure
Managing indirect procurement effectively requires more than just strategies and best practices — it demands the right tools. Team Team Procure is a comprehensive software solution designed to streamline and optimize your indirect procurement processes.
Separate Projects
Team Procure allows you to create separate projects for procurement categories, making it easier to manage and track expenses. This feature ensures that all indirect purchases are organized and aligned with your budgetary goals.
Budgeting
With Team Procure, you are able to create and allocate separate budgets for indirect purchasing. This helps in setting clear financial targets and monitoring expenditures precisely. You can assign budgets to particular users, teams, and departments for better accountability. To combat maverick spending, lock negative budgets so they stay within an approved limit.
Real-Time Analysis
Team Procure's real-time analysis and tracking capabilities provide deep insights into your indirect spending. Monitor used vs remaining amounts and track each purchase order made within the budget.
Conclusion
Though each indirect purchase might appear minor, together they significantly influence your company's profitability. By formalizing procurement processes, educating staff, automating routine tasks, and integrating procurement activities, businesses create a cost-effective approach that aligns with their organizational goals.
Ready to transform your indirect procurement approach? Schedule a personalized demo with us to see how our procurement platform can help achieve better financial control.
