Procurement is an inescapable part of doing business. There are no companies out there that can get by without doing business with at least a few other companies. Managing those relationships is a crucial part of running an organization.
For decades companies have placed a strong emphasis on controlling direct spend in order to lower costs and increase the bottom line. Meanwhile, indirect spend has flown relatively below the radar, with many businesses not fully taking advantage of the huge savings to be found there.
While it’s true that indirect sourcing is more difficult to control, there are indirect procurement strategies that you can implement to save your business tons of money. Understanding the nuances of indirect procurement best practices is the first step toward cutting costs. If you’re ready to overhaul your indirect procurement strategy, keep reading for our cost-cutting strategies.
Indirect procurement is the process of sourcing services and goods that are not directly related to the company’s production process or sales activities. These indirect materials and services support the company’s overall operations but are not part of the final product or service that is delivered to customers.
Some examples of indirect procurement include:
Indirect procurement isn’t the only area of procurement that a company needs to focus on. If indirect procurement is the process of sourcing goods and services that are not directly related to the company’s core product or service offering, direct procurement is the contrast.
Direct procurement entails the purchase of goods and services that are essential to the production of the company’s core product or service. Examples of direct procurement would include raw materials, equipment, and labor. As a result, it’s much easier to see how direct procurement has a straightforward effect on potential profit.
Whether a business spends more on direct or indirect sourcing depends mainly on the industry. For example, service-based businesses rely much more on indirect procurement.
At first glance, indirect and direct procurement might seem very similar. However, the two are very different. They see different styles of inventory management, supplier relationships, and procurement strategies. Because indirect spend can be more challenging to optimize, a cohesive company-wide indirect procurement strategy is essential.
A company’s indirect procurement strategy refers to the process and methods used to source and purchase indirect spend items, which are typically low-value, high-volume items such as office supplies and maintenance services.
Some of the best practices for indirect procurement include centralizing the sourcing function, leveraging technology, conducting spend analysis, and establishing supplier performance standards. By following these best practices, companies can streamline their indirect procurement process and achieve significant cost savings.
Another way to tackle many of the major challenges that indirect spend procurement strategy faces is by outsourcing to a third party. For example, a cost reduction firm like P3 Cost Analysts can handle indirect strategic sourcing for a number of services such as telecom, utilities, uniforms, and more.
Figuring out indirect procurement best practices for your business is a complicated process. Because indirect spend is usually spread out over many departments and a large number of contracts, it’s more difficult to get under control. It requires a lot of planning and monitoring but has proven to be worthwhile in the long run.
Try these five cost-cutting indirect procurement strategies to get started.
A spend analysis is an essential tool for indirect procurement. It involves identifying all of your company’s indirect expenses and then categorizing them by supplier, department, category, and so on. This information can then be used to negotiate better terms with suppliers and optimize spending. In order to effectively manage indirect spend, it is first necessary to establish a clear baseline. This will allow you to set spending targets and track progress over time.
A key issue when it comes to indirect procurement strategies is visibility. Departments are typically in charge of their own indirect procurement strategies and often aren’t looking at the big picture. They’re given the freedom to purchase materials on an as-needed basis, but this is often not the most cost-effective method. Tracking indirect spend across all departments will help you better analyze where money is being spent and where to cut costs efficiently.
Once you have a solid idea of where the majority of costs are coming from, you can start getting indirect spending under control. Here there are many indirect procurement best practices to implement, but it’s not a one-time process. Start by creating competition among suppliers to secure more competitive rates and contract conditions. During this stage, see if you can implement the bundling of services to lower costs as well. Once you’re satisfied with your renegotiated contracts, be sure to monitor invoices continuously to check for errors and overcharges.
Implementing the right technology and software can simplify setting a baseline, tracking spending, and controlling costs across the company. Automation software provides more transparency and allows users to see data analytics that helps identify opportunities for cost savings and improves category management. In addition, with software that controls the contract management process, vendor onboarding, and supplier relationships, companies can minimize manual processes.
Another major challenge that affects indirect procurement strategies is that the decision-makers in charge of significant procurement choices are not experts in the matter. Outsourcing indirect procurement strategies to a third party can place these decision-making processes in the hands of industry experts who have the market knowledge to make smarter decisions. For example, P3 Cost Analysts are hired by businesses during the procurement process to provide their expert knowledge. As a result, companies like P3 can help other enterprises to save money by ensuring services are appropriately procured and at the right price.
Recognizing that you need to overhaul your indirect spend procurement strategy is the first step, but deciding what to do next is more complicated than that. For a majority of businesses, the most cost-effective solution is working with a third party like P3 Cost Analysts.
There is so much room for savings in indirect procurement, but you have to know where to look. Many organizations don’t have an entire team dedicated to these areas, but P3 has experts in many of the main areas where businesses can find huge savings.
To start cutting costs through better indirect sourcing, schedule a free call with P3 Cost Analysts and talk with one of our cost reduction experts today.