8 Ways To Achieve Indirect Spend Management
By Hugo Britt | September 15, 2020
We’re all familiar with the “low-hanging fruit” expression when it comes to business and strategy, right? It refers to the projects that are completed quickly and the goals that are easily met. The quick wins are nice, but what about everything else that requires a little more effort?
In procurement, direct suppliers typically represent both the biggest prizes and the “lowest-hanging fruit.” This means it can be tempting to optimize direct spend while ignoring the value that could be harvested from your organization’s (admittedly harder-to-manage) indirect spend.
Neglecting indirect spend is disruptive to your organization, resulting in overspending, reduced visibility, and a lack of control over the supply chain.
Part one of this article explains the difference between direct and indirect spend. It also explored some of the challenges involved in getting indirect spend under control.
In this article, we examine how procurement professionals can better manage their organization’s indirect spend.
8 ways to achieve indirect spend management
1. Develop a strategic sourcing plan
An organization looking to improve its indirect procurement processes must focus on developing a strategic sourcing plan for both direct and indirect spending.
To start, look at the whole picture to identify savings opportunities within your supply chain. Examine areas where you might develop more meaningful and collaborative vendor relationships.
Next, perform in-depth analysis on all indirect spend. This will help create a plan that includes organizational goals, market research, a detailed SRM strategy, and indirect supplier performance criteria.
How do you propose to meet your existing indirect spend management challenges? This might include an alternative approach to contract management and purchase and invoice processing. It may also involve a new procurement policy for buyers within your organization, or the implementation of a preferred supplier program for indirect procurement.
Need additional help forming a comprehensive plan?
Download our free playbook to learn how to analyze your current procurement function and ways to implement a sourcing strategy that works for you.
2. Clean up your data
Procurement professionals have an enormous amount of data at their fingertips yet most struggle to make sense of it all. Good data management paves the way for additional opportunities to mitigate supply chain risks, evaluate supplier performance, and enable innovation and collaboration with suppliers via increased supply-chain transparency.
But you won’t be able to do any of it if your data is a mess. Sarah Scudder, President of Real Sourcing Network, recommends cleaning up your data sooner rather than later, as this helps you understand how to prioritize your time and resources. Another reason to get your data in order, according to Susan Walsh, is to make sure it’s compatible with expensive new technology you’re about to invest in.
3. Invest in appropriate technology
It’s worth investing in software tools such as a cloud-based procurement solution to support more accurate and efficient buying.
Along with good data, the automation of processes will enable your procurement team to effectively implement your new strategies. It will also provide real-time visibility into all indirect spending within your organization.
For example, automation can help procurement teams monitor, limit, and reduce excess purchasing from buyers across the organization. Meanwhile, the best eProcurement solutions are capable of analyzing and classifying every transaction.
According to a 2019 report from KPMG, just 45% of businesses feel established in their use of technology and automation in procurement.
Procurify’s CEO Aman Mann believes that “You can have mastery, autonomy, and purpose inside your organization. You have to spend money inside companies; specifically indirect spend. This is the reality, you have to. But if you’re able to use appropriate technology that gives the autonomy to the end-user, they can make decisions. What I find on the other side of that is ad hoc processes; you’re just putting in a significant amount of policies inside your organization. This constrains the actual company from making smart quick decisions.”
4. Improve transparency and visibility
Indirect spend is renowned for being fragmented throughout the organization, operating way outside of procurement’s purview. This often extends to large contracts such as company catering, staff travel, or IT services.
Procurement must gain total visibility of their organization’s spending. This means consolidating all indirect spend into categories and suppliers. The resulting list of critical, preferred suppliers will help you drive supply-chain efficiency and enable more favorable supplier contract terms such as volume discounts.
5. Change company mindset
One of the key challenges with indirect spend management in procurement is that a large proportion of indirect spend is carried out by non-procurement professionals. If procurement policies are not clearly communicated, compliance will be low. This can lead to maverick spending and higher costs for the organization.
Educate the whole organization on the importance of following procurement procedures. Also set key performance metrics to monitor and measure contract compliance.
It’s equally crucial that procurement professionals themselves acknowledge the importance of indirect spend. Too often, the task of overseeing indirect spend is assigned to the most junior procurement professionals. This diminishes its significance and the sophistication with which it is managed. Only by involving senior management in indirect spend can procurement teams hope to effectively optimize their processes.
6. Take control
No doubt the purchase of your most crucial consumer product components (direct spend) comes hand-in-hand with a comprehensive strategic sourcing process. It also involves in-depth contract negotiations, regular buyer-supplier communications, and ongoing contract management and supplier performance monitoring. The same care and caution should be applied to indirect spend to guarantee that your organization is spending money responsibly, ethically, and sustainably.
Identify and take control of all contracts across your organization, which also means taking the time to analyze, amend, and consolidate as necessary.
“By removing policies and putting a system in place for indirect spend,” Mann says, “that allows you to get real-time tangible information, end-users can quickly achieve their goals. At the same time, the organization as an aggregate is managed, then you’ve got the best of both worlds.”
7. Partner with a Group Purchasing Organization
Entering into a procurement partnership with a Group Purchasing Organization (GPO) is an additional strategy for addressing the challenges associated with indirect spending. A GPO helps balance your indirect spend and reduce supplier risk while saving you time, money, and effort.
At Una, we harness billions in buying power to unlock savings for indirect categories including travel, office supplies, shipping, or MRO. If you don’t have the time or resources to put towards indirect spend management, a GPO partner is another solution to achieve results.
8. Build trust and rapport with business stakeholders
Procurement professionals may be able to accomplish the things above but you’ll run into issues getting the new policies and procedures to stick without the support of your organization’s stakeholders.
Nick Gunn, Founder and CEO of The NiVACK Group, thinks this is a crucial step. “Building a great partnership with the business stakeholders will not only help manage the indirect spend, but it will help to ensure value creation that is important to them.”
Jessica Hankins, an expert Category Manager, agrees. “Building trust and rapport with business stakeholders is key. They will be very necessary in ensuring that business units stick to the sourcing strategies. I like to do this by making development of the sourcing strategy a collaboration with my internal business partners – best way to get buy-in is when people feel ownership.”
In the end, Amanda Prochaska, an experienced procurement practitioner, has possibly the most important thing to remember. “People come first. Truly be curious about the people around you and what they need to achieve. This should include your team, your stakeholders, and our suppliers. Through a people-first approach, you will build stronger strategies, deliver more value, and achieve a secure and agile supply base.”
We couldn’t agree more.
For more indirect spend resources, check out our Indirect Procurement Quick Reference Guide.