Indirect procurement is often referred to as “general costs”, “unclassified expenditure”, or “non-market procurement” and covers a very wide range of product lines and services, which are distributed diffusely in organizations. These include marketing collaterals, uniforms, consumer giveaways, communication, intellectual services, equipment and supplies, travel and transport, IT, HR, facilities and utilities, transport and logistics, etc.
Indirect procurement is often considered as “Children of A lesser God” compared to the direct procurement function which gets all the attention within the company and from the management. Organizations consider it to be less important and less strategic and so its not well catered for in terms of human resources and skills.
However, it’s changing now and organizations have started focussing on this. Many organizations have taken sincere steps towards identifying the real challenges, recognizing the savings levers and activating them.
The challenge is often decentralising procurement
In indirect procurement, processes are often managed by individual departments rather than being centrally directed by the procurement department. Departments such as marketing, logistics, facility management and IT mostly source their required goods and services independently, detached from the procurement department.
This means that procurement competence often remains untapped, as it is either included in the procurement process too late or not at all. There is a lack of indirect procurement capacity in many companies, especially in terms of developing and introducing new, efficient procurement processes.
Volumes of indirect procurement continue to be high year-on-year until they become “strategic” (IT, communication, etc.) and are often left in the hands of decision-makers, who do not have adequate awareness of cost issues, and are not procurement method professionals.
Love Thy Vendor Problem
No one wants to rock the moving ship. There is a huge tangible and intangible cost of searching a new vendor who can provide the desired quality. The managers involved have a limited knowledge of the vendors available out there. This forces the organizations to stick to the limited set of vendors they know. Mangers also over course of time develop personal relationships with the vendors.
The vendors know this and charge exorbitantly for their services. The irony is that even though there exists a large number of quality vendors in the market at better prices, the organizations end up sticking with the same set of vendors and overpaying.
Careful steps are needed to reduce the procurement costs for the long term and offer efficient models to develop the organisation and achieve better cooperation between procurement and other departments.
Procurement for indirect spend and non-tradable goods or services typically has a high potential for savings. When focusing on reducing costs in your company, indirect purchasing is often neglected. Optimization makes a noticeable difference and often improves profits within a very short timeframe.
Depending on the business sector, indirect procurement can account for 5 – 25% of the company’s procurement expenditure. It therefore offers very high potential for savings, which can directly affect Profit and Loss (P&L) within a very short period of time: saving 10% on indirect procurement could allow the company to generate 1-2 EBIT points in just a few months.