How to Reduce Indirect Spend

By Hugo Britt | May 10, 2022

You’ve been trying to ignore it for months but it’s always there – sometimes hidden, sometimes in plain sight. You’ve attempted to lock it in the “too hard basket,” but somehow it keeps getting bigger. You’re running out of excuses and realize, with a sigh, that the time has come to deal with it. 

That’s right – we’re talking about indirect spend.

What is indirect spend?

Indirect spend refers to the purchase of the many goods and services that do not become part of an organization’s final product or service. In other words, it’s non-production procurement. 

For example, if you work for a book printing business:

  • Direct spend would be items like paper, ink, binding glue and everything that goes into making a book.
  • Indirect spend would consist of utilities, warehousing, office supplies, machinery, delivery drivers, and more.

Every business has indirect spend, yet procurement has historically dedicated most of its time and resources to finding cost savings in direct categories. This is a mistake, since indirect spend can account for a whopping 15% to 30% of an organization’s total expenses.

But it’s not easy. Some of the challenges involved in managing indirect spend include: 

  • Lack of transparency
  • Lack of spend data
  • Lack of spend analytics
  • Maverick spend
  • Sporadic purchasing
  • Manual processes

6 Ways to reduce indirect spend

Luckily, there are several ways to reduce indirect spend within your organization, including joining a group purchasing organization.

1. Gain visibility and analyze indirect spend data

It all starts with visibility. If indirect spend data is hidden in email attachments and spreadsheets (or not recorded at all), there is little hope of identifying savings opportunities. All spend should go through an e-procurement or spend management platform to create a “single source of truth.”

This central database can then be analyzed to identify potential cost savings. Some will be instantly recognizable, such as duplicate spend and supplier consolidation opportunities, or unnecessary spend such as software subscriptions no-one is using.

2. Establish policies

Indirect purchases are typically made by non-procurement people. They have their own jobs to worry about, so you can’t expect them to be across the ins and outs of your procurement policy.

Use your spend management platform to make it easy for people to conform with the policy. For example, if your policy is to use only locally-based suppliers for office catering, a user search should filter out any non-local suppliers.

Another cost saving policy may be to require stakeholders to source three quotes before making any purchase (above a certain threshold). They can then choose the best-value option rather than simply picking the first supplier they find.

3. Establish spend thresholds

Spend thresholds are the limit up to which someone can spend without the procurement team’s intervention. To take the printing business as an example, a stakeholder could order a low-cost replacement part for a printing machine, so long as they follow the policy and use the correct platform.

But major purchases should go through the central procurement team who will launch a formal sourcing process (supplier discovery, RFPs, negotiation, contracting etc) to find the best-possible value.

Spend thresholds can be controlled either through the e-procurement platform or by establishing credit card limits.

4. Reduce maverick spend

Maverick spend has the potential to undermine all your cost-reduction efforts in indirect categories. Tame your mavericks with smarter procurement systems, user education, or requiring sign-off on purchases (although this creates an administrative burden). One of the keys to reducing maverick spend lies in understanding why it is happening. Perhaps, for example, your procurement policies are confusing or the purchasing platform is difficult to use.

5. Establish a cost-conscious culture

What sort of spend culture exists in your organization? How do employees behave in terms of spending company money? Employees should understand that maverick spend and failing to find the best value-for-money will have a negative impact on the company’s bottom line. The aim of a cost-conscious culture is for employees to treat every dollar of company money as if it is their own.

6. Partner with a group purchasing organization

Group purchasing organizations such as Una harness billions of dollars in buying power to unlock savings across high-volume indirect categories such as travel, office supplies, shipping, and MRO.

GPOs are also a great way to save time and resources that you may not have available for managing indirect spend.

Una members have access to a robust supplier portfolio offering pre-negotiated contracts across several key spend taxonomies. This means we’ll be able to find savings and spend management solutions in several spend categories.

Ready to reduce indirect spend? Contact the Una team to learn more.

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Do you have questions about group purchasing? Wondering how a group purchasing organization works to save you money, time, and effort? 

Una’s team of Sourcing Advisors is here to help. Contact us to learn more.

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