It has become a classic procurement practice: focus your time, resources and strategic attention on the big-spend categories and suppliers.
The Aberdeen Group recently reported that 70 percent of procurement executives cite the indirect spend as a top focus for controlling and reducing cost. Procurement executives know that indirect category management now presents a significant opportunity for cost management, gross profit and margin growth.
Companies recognize that they need to advance their management of the indirect spend categories. Clear visibility and insightful data analytics present a significant opportunity for procurement to take a more strategic approach. We know this because:
In 2012, HCMWorks conducted a survey of C-suite executives in enterprises with revenues of more than $1 billion. They report that "for every dollar/pound/euro that is placed under management of the procurement department, the average enterprise sees a benefit (cost savings) of between 6 and 12 percent."
Proactis reports that for the average company, "a 5 percent savings on tail spend can be the equivalent of a 10 percent increase in net profit."
Yet, why do most companies continue to struggle with harnessing their indirect spend? In my view, it's because they don't approach the indirect spend as a whole, so they don't have the clear visibility essential to financial and strategic excellence.
In the HCMWorks survey, nearly 75 percent of the respondents reported that "they had little to no visibility or insight into their firms' indirect expenditure."
Companies need real-time information about their indirect spending to drive true value.
Additionally, enterprises must determine how to establish efficient indirect procurement processes without taking on unnecessary risk, increasing cost or sacrificing market presence or impact. Just as important as risk and cost management, is the ability to assure operational managers that they can easily access and retain access to quality resources, especially talent.
If you're ready to reign in indirect spend and make it more visible in your organization, I suggest you take these three actions:
Optimize processes. Establish standard processes for Statement of Work development and lifecycle management, supplier on-boarding, contracting, invoicing, and payment to attain better oversight of tactical and niche spend that is often highly administrative and overlooked.
Optimize value. Through the visibility gained from process optimization, drive reporting and analytics that can drive cost savings methodologies that include improved talent supply chain strategies, competitive bid strategies, detailed cost & rate validation, change management control, and consumption management strategies.
Optimize the supply base. Engage suppliers that can and are ready to deliver at the right price when you need them. Measure supplier performance to optimize supply base that ensures quality of delivery, on time and at the right cost.
To succeed in managing the indirect spend, every company needs a consistent approach - aligned with the business strategy. They need robust back office support processes to ensure what is being purchased and from whom is aligned with the overall procurement and business strategies. A visible indirect spend multiplies the company's capacity to comply, meet internal standards, mitigate risk, ensure supplier quality and move with speed.
If you're ready to take the dare and elevate indirect spend to the next level of strategic management, find out how here.