Despite keeping costs under control, many companies fail to achieve their desired level of profitability. This can happen because procurement departments are unaware of just how important indirect procurement is for running a profitable business.
Understanding indirect procurement
Indirect procurement, also known as indirect spend, represents the purchasing of goods – usually services and supplies – that help keep the day-to-day operations at a company alive. With direct procurement, the entire cost goes toward production, which is why companies are usually more aware of it. Indirect spend is somewhat invisible compared to direct spend because it helps keep everything running behind the scenes.
For example, if you’re running a manufacturing business, you need raw materials and goods to create your final product and will need to buy them from, likely, multiple suppliers. And because it’s all going toward the manufacturing process, this is your company’s direct spend or procurement.
On the other hand, there are many things you need to keep production going. You need facilities, utilities, maintenance services, HR, and office supplies – to name a few. None of these has a direct impact on your product, which is why they all account for your indirect procurement.
The main indirect procurement challenges
Much of indirect procurement costs can qualify as tail spend which makes up about 20 percent of your company’s total expenses. That number alone can give you an idea of the role it plays in your day-to-day business.
Despite the percentage of your budget that indirect can comprise of, finding ways to efficiently manage it can be quite challenging. In most cases, this happens for one or more of the following reasons:
1. Working with multiple suppliers at once
Assuming that much of indirect spend also qualifies as tail spend it could account for up to 80% of your company’s total purchases or suppliers. To carry out all these purchases, you will need to work with many suppliers at once, which together can provide the services you need to keep your company running.
Even working with a handful of suppliers at the same time can be challenging, let alone a dozen or more. Plus, with more suppliers it’s more difficult to track and analyze their performance.
2. Lack of diverse purchasing experience
Things would be a lot easier if you could form a small team and put them in charge of your company’s indirect spend. But to do this they would need to have a very diverse knowledge base in procurement to be successful.
After all, they’ll be in charge of a wide variety of tasks – from purchasing toilet paper and light bulbs to procuring janitorial and maintenance services. They have to be experts in all those products and services to ensure they’re securing the best possible value for your company.
3. Lower visibility
As we have already explained, indirect spend tends to be much less visible than direct spend. Many procurement leaders also consider it lower priority because it doesn’t have an immediate effect on products or services sold.
It doesn’t help that a large portion of your company’s indirect spend comes from one-off purchases that aren’t always covered by negotiated contracts. This makes them hard to evaluate and thus easy to overlook in spend analyses.
The final word
Managing your company’s indirect procurement can be difficult, but fortunately there are platforms that can help you automate, track and analyze it to make the process easier and more efficient. In doing this you can achieve a greater number of RFQs which will result in more competitive and transparent prices.