You are probably doing a good job keeping on top of your spend when it comes to the things that are central to running your business. You have negotiated contracts that cover not only pricing but also terms, delivery and overall compliance. You review those contracts on a regular basis and from time-to-time you even consolidate your supplier base to take advantage of better pricing or terms.
However, when it comes to things in your business that you use but that are not considered central to its profitability — printers, ink, paper, cleaning supplies, etc. — you may not be so diligent. Often with indirect spend items, you use multiple suppliers to purchase similar items, thus losing buying power. And because the invoices for these items may be smaller, monitoring those accounts can be burdensome.
But you may not realize that indirect spend accounts for 40% of total spend at most businesses and that by controlling that spend you can reap savings of up to 25% annually. These facts may surprise you because it is very likely that you don’t have a clear picture of just what your indirect spend is. Consequently, you may be allowing purchasing in that area to go along unmanaged and not optimized.
If you really want to reap the benefits of gaining control over your indirect spend, there are two relatively simple steps you can take.
- Consolidate your supply base: If you are operating out of multiple locations, chances are your purchasing for indirect spend items is decentralized. And even if you operate out of a single location, when it comes to indirect spend, there probably are not a lot of checks and balances in place which means multiple people within the organization are making purchases from a wide array of suppliers. In some cases, you can be talking about hundreds of suppliers and thousands of invoices!
If this sounds like your operation, chances are you are overpaying for the everyday items you use in your business. It is important to devote time to sift through all of this information in order to consolidate the supply base down to a reasonable number. This will give you more leverage with each supplier as they will be getting a bigger portion of your spend. Once you’ve accomplished this exercise, you can begin to develop relationships with your suppliers, which could result in things like better terms, delivery, etc.
- Test the market: Consolidating the supply base is not the end of the process, however. You need to be on guard that you don’t become complacent with this smaller supplier list. You need to review your suppliers’ performance, pricing, services, etc., on a regular basis to look for areas of improvement. From time to time, test both pricing and services against other suppliers.
These steps will help you gain control over your indirect spend but it requires that you first make sure you have visibility into transaction details. One way to gain that visibility is through an e-procurement system. But however you decide to gain visibility into your spend, make sure you understand where your money is being spent and who is spending it. After that, take the steps you need to give indirect spend the same attention you give direct expenditures.