Indirect procurement spend is the sourcing of goods and services not directly related to the manufacturing of products. Indirect spend refers to the goods and services that support, maintain, and develop business operations.
However, managing indirect procurement is complex: more suppliers to manage, decentralized purchasing, a large number of stakeholders, varying maturity levels, and a higher potential for maverick spend.
Indirect categories often have a greenfield of sourcing opportunities, the potential for consolidation, and untapped cost savings. So don't give up!
In this blog, we'll share 6 tips on how to improve your indirect spend management.
Indirect spend visibility
Know your spend categories
Know your stakeholders
Indirect sourcing plan
Key performance indicators (KPIs)
Indirect spend forecasting
Want more category management tips? Read here!
Examples of indirect spend
Indirect spend categories depend on your industry and the nature of your business. It may account for between 25% -40% of your company’s total spend.
Indirect categories are those goods and services that are required to support day-to-day operations. Indirect products and services enable business operations and production processes but cannot be allocated to a specific product.
Indirect categories include:
- Human Resources
- Office supplies
- Travel expenses
- Professional services (insurance, legal, and consulting)
Challenges in indirect spend management
Managing indirect spend can be challenging, and requires different skills and tools than direct. Indirect spend often receives less attention from CPOs because of its complexity.
The main difficulties with indirect spend are:
- Weak adoption of spending policies.
- Lack of spend visibility and data accuracy.
- Incorrect spend classification that does not reflect the business categories.
- A large number of suppliers and stakeholders.
- Scattered budgets and purchase decision-makers.
- Change resistance that can be seen as lacking stakeholder buy-in and compliance.
- Maverick spending can lead to lost saving opportunities, contract leakage, and conflicts.
- Disorganized procurement team that does not support and guide internal stakeholders.
- Interpersonal relationships and organizational fit between the teams can make or break a supplier relationship.
Read here more examples of why spend analysis projects fail.
6 tips to improve indirect spend management
So, here's our advice for managing indirect spend.
1. Gain indirect spend visibility
The first step in managing indirect spend is spend visibility. You need to be able to see the big picture as well as slice and dice the data to the smallest level of detail.
Gather and combine multiple datasets and sources. AI and machine learning can help in tracking, analyzing, and automating the various steps in the classification and categorization of indirect spend.
2. Know your categories
Get to know your supply markets and available suppliers. Business stakeholders may provide you with in-depth market knowledge.
Know who the key suppliers are in each sub-category or commodity group to achieve better contract terms and develop solid supplier partnerships.
Ensure your spend taxonomy reflects your business categories. When your taxonomy is relevant, it is easier to untap consolidation opportunities and benefit from economies of scale.
3. Know your stakeholders
Procurement often comes in with a cost savings, compliance, and risk mitigation agenda. What if you started the discussion with how you can help your stakeholders succeed and achieve their business goals?
Prove the value of your contribution with hyper-relevant data and timely insights. Build trust and share your knowledge.
Analytics tools help you find actionable insights from your data on a sub-category, function, and location level. Spend insights help find patterns on which to base sourcing decisions and supplier selection. Share your spend analysis with relevant stakeholders and welcome their input.
The process of getting stakeholders engaged should look something like this:
- Start early--engagement is key to sourcing and contracting success.
- Understand their business goals and terminology.
- Invest time in building relationships and understanding their challenges.
- Know your spend data in preparation for discussions.
- Share success stories with the business.
4. Create an indirect sourcing plan
Document spend analysis findings and insights in a strategic sourcing plan. Define your category goals and the steps you need to take in order to get there. Engage your stakeholders in the planning so you will have their management buy-in.
When everyone understands the big picture and goals, it’s easier to follow pre-agreed rules and processes too.
Some guidelines and policies are needed to manage and optimize indirect spend. Align and agree on purchase policy with the category stakeholders.
Investing in dedicated support and educating a user community ensures support for achieving category goals and delivering more value to the business.
5. Set key performance indicators (KPIs)
Develop KPIs that support your category goals. KPIs are designed to help you reduce risk and maximize value for money.
For example, measure how well a supplier meets their contractual obligations (compliance against specifications, on-time delivery) or how well your categories perform against ESG targets (co2 emissions, share of audited spend).
The goal is to reduce the total cost of ownership (TCO) of all indirect spend and improve the procurement ROI.
6. Employ indirect spend forecasting
Forecasting spend involves combining historical spend information with demand planning and economic and business intelligence data.
Forecasting is used to make strategic spend decisions and ensure future profitability.
Supply chain disruptions, inflation, or a key supplier choosing another client over you can be difficult to predict. Real-time data enables you to reach and adapt to changes.
When you have your spend data in one place, it’s easier to turn insights into action that make an impact.
Read our 6 steps to measure real savings for indirect spend
Photo by Nick Fewings on Unsplash