Indirect Procurement – “The Hidden Spend”

Published: 31 July 2013

In the current economy people will be surprised to hear that companies are ignoring or missing opportunities that could save them millions of pounds!!

As organisations are being pressured more and more to combat rising commodity prices and reduce costs in slow or stagnant growth, it is surprising that not all companies have taken control of their indirect spend. It would be hard to say that these companies have not seen what good procurement looks like as they will quite often have tight control over their direct materials and supply chain and will already be seeing the benefits there. So why is it that indirect procurement is often the forgotten, or should I say, neglected spend when it can have such an impact on the bottom line of a business?

From speaking to the procurement and finance community a number of issues have been raised as to why companies don’t manage their indirect spend quite as well as they could. The most worrying fact is that some organisations are completely unaware of just how much they spend in this area. When you look at how a company’s indirect spend is made up, it can quite often consist of a huge range of relatively low level costs that are spread out across an even wider range of stakeholders. Combined, these low level spends can soon amount to a considerable cost to a company that can quite easily go under the radar.

Another issue is around the nature of indirect spend and the nature of the stakeholders that it relates too. With the spend being highly fragmented with numerous end users who all have very different requirements, the approach needed to tackle it is very different to that used in managing the direct procurement spend. For this reason an indirect procurement strategy has to be far more proactive in engaging the broader business and stakeholder communities to truly be able to influence the spend, as unlike other areas the spend wont automatically identify itself and come to you.

The final area that can make the difference between success and failure is the value that the Board adds to indirect procurement and where it is positioned within their list of priorities. There seems to be direct correlation between the visibility of indirect procurement and its ability to influence buying behaviours and as such its success and the support it receives from the Board. This is particularly true when it comes to the relationship with procurement and finance and how aligned they are when it comes to strategy. As with any type of procurement activity, the procurement function needs to be involved at the beginning to truly be able to influence a process. Without the mandate or even support from the Board, procurement will never be able to influence to its true potential.

There is nothing new about dedicated indirect procurement and some organisations have really seized the opportunity and have hugely benefited from the results. It is however surprising how many organisations have yet to realise the true potential and benefits of having and supporting a truly strategic and integrated indirect procurement function. So why is this the case? It could be quite easy to point the finger of blame to either the lack of support from the Board or procurement’s lack of ability to gain influence with their stakeholders. The truth of the matter is that both areas need to be in tune with each other following a clear and visible strategy that allows and values good commercial procurement activity. Ultimately it is the business unit managers who are the final decision makers with this spend so rather than procurement being seen as a function trying to take over the complete activity they need to be seen as supportive and trusted procurement advisors.

Richard Grayling is a Consultant in the Supply Chain & Procurement Practice at Berwick Partners

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