Four Steps to Cut Indirect Spend in Procurement

by: Loraine Lawson

As any accountant will tell you, the little expenses add up. That’s true even in procurement, where indirect spend — those acquisitions not directly incorporated into the manufacturing of your product — can add up to big money.

By not controlling indirect spend, companies could be leaving $30 million on the table for every $1 billion of indirect spend — and that’s a conservative estimate, estimates David Rae, editor of Procurement Leader.

Rae’s calculations are based on a recent finding that just 44 percent of global organizations claim to have more than 70 percent of their indirect spend managed by procurement.

Part of the challenge may be that indirect spend not only describes a wide range of products and services — from computers to janitorial services — but it also cuts across departments.

To tame indirect spend, procurement leaders need to address both aspects of the challenge.

Walt Sindewald, owner and principal consultant for Competitive Edge Procuremento, specialized in indirect spend during his years at Sony Corporation and  now consults on the topic. Here are his suggestions for how procurement leaders can manage indirect spend, as summarized in an E-Sourcing Forum post:

1. Partner with business owners to better understand their needs and relationships with indirect suppliers.
2. Integrate indirect spend data and information. To tackle indirect spend, you’ll need to know all that you can about indirect suppliers, which will require integrating systems or data to access and analyze that information. Be sure to integrate with ERP systems and other applications, if indirect spend data is housed there.
3. Look for opportunities to save everywhere, whether it’s aggregating spend across departments or re-negotiating existing contracts. Look over every detail of service specifications, fees — anything that will give you leverage or help you reduce costs.
4. Use a sourcing tool to better manage indirect categories. This piece appears on E-Sourcing, so e-sourcing tools are discussed as one option for reducing costs by using resources such as reverse options, but traditional B2B solutions can also be used to help manage payments and contracts with indirect spend suppliers.