As the price of goods and services continue to increase, the need to implement solid budget controls becomes even more important. Today we’ll cover indirect procurement—what it is, how to keep a handle on it, and where technology can help. By the end of this article, you’ll have the tools and knowledge needed to get overhead spending under control.
What is indirect procurement
Indirect procurement, also known as indirect spend, involves the purchase of the goods and services, supplies and materials — including computers, hardware, software, maintenance, utilities and travel — that are required for the day-to-day running of a business. Although it is essential for routine operations, this spend category is often overlooked as procurement teams tend to focus on direct procurement.
Direct versus Indirect Procurement
Direct procurement involves acquiring the raw materials, parts, or components that are used to create a product. These are the materials that often end up in the final product for customers. These purchases are generally made in large quantities, acquired from a pool of suppliers at the best possible cost, quality and reliability. These purchases are made frequently and are necessary for key business practices. Examples of direct procurement include:
- Raw materials and components for manufacturing products
- Direct purchasing products for resale or private labeling
- Apps for business units tied to specific manufacturing projects
The Best Practices of Indirect Procurement
Apart from the differences, indirect and direct procurement also share some similarities. Both generate revenue for the company and play a significant role in the quality of the output. An effective indirect procurement strategy will not only make sure that the supplies brought are of good quality but should also be bought at the best price and should also follow the standards established by the company. As such, a good strategy will include the following:
- Spend tracking – oftentimes, indirect procurement spending isn’t tracked the same way as direct procurement. Individuals or departments are often given a budget to work with and can purchase what they want when they need it. However, it’s a good idea to keep an eye on employee spending so finance and accounting teams know exactly what teams are spending money on.
- Strategic sourcing – assess your suppliers and entire supply chain and look for opportunities for savings. Build relationships and collaborate with your vendors to rework your supply base if needed so everyone can get the benefits of the savings.
- Technology – there are many technologies and tools that organizations can use to gain insight and visibility into their procurement process and operations. These technologies include data analytics software, automation technology, and market research tools.
- Relationship building – there are often many departments involved in indirect procurement to some extent, whether it’s purchasing office supplies, setting up advertising budgets, or reconciling invoices. It’s important that everyone is on the same page when it comes to company spending and indirect procurement so you can better predict future needs and shifts.
Indirect Procurement Costs: A Top Priority
Controlling indirect procurement costs should be a top priority. CFOs should consider working with CPOs to install better oversight over indirect spend. With indirect spend, strategy and processes tend to remain less sophisticated; the focus is on achieving cost reductions by obtaining the lowest price possible; and relationships with suppliers often lean toward the transactional. In the course of centralizing indirect spending, CFOs will likely spot opportunities to add value by lowering total cost of ownership. Controlling indirect procurement spend is a challenge, but it’s not impossible. By creating good spending controls and taking advantage of technology, you can significantly improve budget optimization. We can help, Contact us today!