Indirect Procurement

Indirect Procurement represents an often-neglected opportunity for companies to reduce costs. In our experience, many of our clients narrow their focus in Procurement activities targeting their direct portfolios – and oversee that the sourcing of services and goods not for resale contains potential to generate savings in the double-digit percentage range and often higher than in most direct categories. This qualifies Indirect Procurement as a major cost reduction driver with the right for management attention.

However, to advance Indirect Procurement to a best-in-class performance, some tricky challenges need to be tackled.

Firstly, Indirect Procurement is not sexy at all. Categories like utilities, cafeteria supplies, office supplies – let’s be honest, being responsible for the sourcing and managing of those goods and services is not everyone’s dream job. This is one reason why many of our clients struggle to attract top talent for management positions in Indirect Procurement.

The second challenge that Indirect Procurement faces is a very low level of spend transparency.

Reasons for that are decentralized spend pools, e.g. in companies with production plants, offices and other entities across a country, continent or globally. Structures like this make it difficult to gather, evaluate and analyze data about total spend per location and category in one place, in one department.

One of our clients faced this situation in nearly all of its indirect categories, with many units scattered across the continent. The first step of our initiative was to gather all Procurement data from every unit., which turned out to be a major challenge: All spend categories in unit A were stored and managed by the team in unit A, all spend categories in unit B were stored and managed by the team in unit B and so on and so forth. Like in many other organizations, there was no centralized Procurement department, nor a team managing categories nationwide.

What might make sense in the first place (Why would unit A need to know about the utilities spend of unit B?) lets the company loose savings opportunities on a large scale due to neglected scale effects and missed chances to roll out best practices to all units.

The problem of a decentralized spend mandate is not limited to geographical aspects. Companies struggle to control their indirect spend also because the responsibility for spend categories is widely distributed across the organization: The technology department controls the majority of IT spend, the marketing department makes sourcing decisions on advertising spend. Procurement professionals are not involved, often because the supposedly ‘specialists’ in each department believe Procurement experts do not have the required knowledge to meet the department’s needs.

As an important effect, centralizing expert knowledge, enables the Procurement team to strengthen the company’s stakeholder management. Knowing the specific demand and challenges of each business unit is the basis for strategic stakeholder communication and handling. This includes deep dives into portfolio streamlining, even in portfolio with very insufficient item specifications – a very common situation for Indirects categories.

We consider it as one of our main duties to break open historically grown knowledge silos and cooperation barriers. Advancing Indirect Procurement to world class level includes close cooperation between business units to make the Procurement team aware of specific needs of each department.

Only when expert knowledge is bundled in the Procurement department, (indirect) sourcing can be centralized, the advantage of scale effects can be applied and as a result, cost reductions can be achieved.

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