A direct focus on indirect spend

If your organisation is not managing your indirect spend, then you are missing out on a significant source of cost savings.

At most companies, the focus is on reviewing and managing the direct spend—the goods and services that go into the products a company makes — and rightly so. It is a large chunk of the company's annual expenditure, and cost saving initiatives can produce notable results.

But companies can only cut so much. Those searching for different ways to save should look to manage another portion of the spend, the goods and services they buy to operate their facilities and operations, also known as indirect spend.

Although indirect spend represents a smaller percentage than direct spend, it holds a lot of potential for savings. When there is a procurement focus, companies "often achieve documented cost savings in excess of 25 percent from previous agreements," writes Robert A. Rudzki, retired CPO at the pharmaceuticals giant Bayer*. A statistic that 7 Step Solutions has witnessed and delivered.

To deliver this type of value the business needs to have the skill and expertise to source facilities solutions, information technology, travel, human resources, marketing, and other categories. The business needs to know how to gather and analyse spend data and have an understanding of suppliers and the market. They should also have tools that can help optimise processes, such as spend analytics and procure-to-pay software.

Focusing effort on these indirect categories can take several different forms. It can consist of taking complete ownership for sourcing the category, leading cross functional teams that negotiate agreements and manage supplier relationships, or consulting with business and functional leaders on procurement decisions.

Yet many companies—even those with CPOs who understand the value of involving procurement in indirect spend—are not seeing the savings. The A.T. Kearney Indirect Procurement Study of CPOs at leading multinational companies finds few are managing indirect procurement with the level of attention needed to reap the full benefits. They have great intentions, but they are not making full use of tools that can help, such as automating and outsourcing transactional processes, using data to forecast spending, and tracking savings generated by business units.

Indeed, managing the indirect spend can be a challenge. It involves many categories / subcategories and suppliers — of products and services for which there can be a multiple of relatively low cost transactions. Sometimes other functions buy the goods and services from their “preferred” suppliers and have done so for years. When these arrangements are challenged, and somebody else tries to step in, they may feel threatened.

7 Step Solutions has had full exposure to these business challenges and can offer a range of solutions to help businesses meet some of the head winds of indirect spend and brings out of the box thinking to traditional ways of indirect procurement delivery.

* Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap