Four strategies to adopt while managing indirect spend
Indirect procurement is ingrained in all companies, whether product based or service based, and is a vital cost of doing business. Yet, many companies struggle to manage indirect procurement effectively. Often, this happens because indirect spend is scattered across various categories among multiple departments and teams. Most businesses don’t have the right tools to manage and organise procurements across all their divisions and improve their financial health.
Direct versus indirect spend
Indirect spend differs from direct spend in that it doesn’t relate specifically to the company’s production line. Indirect spend involves the purchase of goods and services that are not directly incorporated into the company’s manufacturing processes but are crucial for the functionality of its bottom line. Office equipment - such as personal computers and laptops, janitorial services, travel management services, utilities, office supplies and furniture, maintenance repairs, and so on - are all examples of indirect spend. Because direct and indirect spend are distinctive, each requires a different procurement strategy. To make informed spending decisions and execute the right strategies, companies must first understand how the two spends differ.
- Direct spend is mission driven and often demands rigid supply timelines and regular inventory management for continuity of production. On the contrary, indirect procurement is demand driven; purchases are made as and when required.
- Direct spends are overseen by a centralised procurement management department, with internal teams focusing on specific areas of expenditure. On the other hand, indirect spend is typically decentralised with various internal, non-procurement teams making purchases in silos with independent budgets.
- Direct procurement is a planned expenditure as it directly affects a company’s production line and any interruptions in the procurement of materials can halt the entire manufacturing process. Indirect procurement is done rather spontaneously and doesn’t require rigorous planning.
The need for indirect spend management
Indirect procurement places great emphasis on spend management. Without effective procurement management strategies, indirect spending can quickly spiral out of control and diminish your organisation’s efficiency. It can result in unregulated budgets, over (or under) stocking, and a significant loss of funds. Indirect spend directly impacts your company’s profits. With proper indirect procurement management, you can optimise the quality of your production line while controlling the associated costs.
Strategies for effective indirect spend management
Though seemingly tricky, one can curb and manage indirect spend effectively with some planning and strategising. Companies can manage indirect procurement better by:
Conducting an indirect spend analysis:The first step toward effective indirect procurement management is analysing the existing spend patterns. Companies must identify their key vendors to determine potential savings opportunities. Furthermore, categorising direct and indirect spend can help make your supply chain more efficient and improve your organisation’s bottom line.
Developing supply relationships:Supply relationship management is as important for indirect procurement as it is for direct spend. Improved relationships with your suppliers mean better procurement solutions with easier identification of potential problems and gaps in the production line.
Investing in the right tools and automating procurement:A comprehensive indirect spend procurement strategy involves enterprise-grade technology and tools to efficiently track, identify, and categorise purchases and inventory. Companies must invest in the right software to manage indirect spend. By automating the procurement processes, companies can identify purchase requirements for each department and avoid excessive spending on unnecessary goods.
Educating the employees:Indirect spends can be disorganised if the employees are not adequately educated on spend management. Such ancillary needs are rarely discussed and because of a lack of financial knowledge, employees may end up overspending, resulting in inconsistent and unoptimised spend patterns. Organisations must educate their employees on procurement strategies and spend analysis with accurate metrics to make more informed decisions on indirect procurement.
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How can Infosys BPM help?
Our spend analysis services incorporate tools such as enterprise-grade AI, spend classification, and opportunity identification to offer actionable insights into your company’s indirect spending for enhanced procurement management. Know more about our spend management framework that includes solutions such as:
- Data ingestion, cleansing, and de-duplication
- Spend classification
- Actionable insights and opportunity identification
- KPI scorecard, root-cause analysis, and mix-and-trend dashboards