Mid-size companies that excel at direct spend may be missing out on a key area ripe for savings and process efficiencies: indirect procurement.
As business becomes ever more competitive, finance leaders are challenged with managing cash flow and working capital with greater accuracy; which means gaining control over both direct and indirect spend. This issue can be challenging for mid-size companies, especially those who have developed efficient and productive processes for their direct procurement. Then why have these same companies not exerted similar disciplines for the purchases of things like office and maintenance supplies and HVAC services as they have for the products, materials, and services related to their competency? What are the reasons why managing indirect spend has become such a challenge?
4 obstacles to managing indirect spend:
- Silos – Indirect spend is often managed independently within specific functional areas or business units of a company. The procurement professionals who play such a pivotal role in the product or manufacturing groups find they lack the visibility and ability to control indirect spend throughout the organization.
- Too many suppliers – Procurement managers may have excelled at building quality relationships with a relatively small number of suppliers of core needs, but have not or cannot create the same kind of relationships required by the significantly larger number of indirect spend suppliers, representing a dizzying number of commodities. It’s almost impossible to have category coverage and current market knowledge across all these areas.
- Too many transactions – While the actual amount of each purchase may be lower – think a shipment of paper clips vs. heavy duty truck axles – the number of procurement transactions and their frequency is certainly higher. When these transactions are processed manually, a disproportionate amount of time and resources is devoted throughout the P2P process.
- Lack of detailed spend analysis – A holistic detailed spend analysis is usually not available for indirect spend, partially because it’s undertaken manually, hidden through the various forms of payment (i.e. credit card, non-PO, etc.), and kept within the functional silo. This may be the reason companies don’t realize the true value of managing their indirect spend: they don’t know which opportunities are being missed out on because they don’t know opportunities are there. If companies became fully aware of the volume of indirect spend that’s generated – some say it can account for up to half of a company’s purchases – they may stop calling these purchases “non-strategic.”
Working with a third party may provide the solution.
Companies, especially SME’s that have neither the resources or the technology to manage their indirect spend, are increasingly looking to third-party providers for an end-to-end, procure-to-pay solution. The best solutions can do much more than simply standardize purchasing processes; they also provide supplier management and price negotiation, e-invoicing and payment, and strategic sourcing and spend management capabilities. They also allow companies to install the right KPIs, such as days payable outstanding (DPO), vendor satisfaction, and invoices processed.
See how AmeriQuest can help you get control of your indirect spend.