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
5. Establish a cost-conscious culture
6. Partner with a group purchasing organization
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.
Get in Touch
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.