In most organizations, one of the common tasks of the procurement team is to establish methods of controlling indirect spend.
So, first things first, what is this Indirect spend I hear you ask.
If direct spend is the procurement of products and/or services that are built into the finished product (i.e. a wheel on a car) then indirect spend is everything else. Examples of indirect spend include stationery, IT systems, services like office cleaning, recruitment.
When it comes to managing spend – direct spend often, rightly, gets significant focus. I’ve lost count of the companies that I’ve worked with where the priority is focused on reducing the costs of direct expenditure (helping to build competitiveness and profitability of product) and reducing lead time while often indirect spend appears to be some form of poor relation. As procurement specialists, we know that for every $100 you give us to manage we’ll save you x% – indirect spend is no different.
While many procurement specialists might say that spend is spend whatever the category, in reality, indirect procurement is a different beast. It contains issues, which simply don’t exist in its direct counterpart. Given this, the approach to managing this type of spend needs to be both smartly tuned and appropriate.
In large companies, indirect spend is usually monitored and managed by its own team, including dedicated commodity managers and buyers. I’ve found in my experience that SME’s, however, often have different processes and types of controls with often a greater focus on direct spend. Manning levels are also different and often they are not geared up to take the opportunities that are reachable.
Whatever the size of the business you shouldn’t loose sight of the fact that there is often considerable value to be had in optimizing your indirect spend. But if you’re looking to get to grips with Indirect spend what actions should you take? For those businesses that might be constrained by resource (SME’s for example) then usually, I’ll suggest 4 action points
1/ Standardize how you buy (your procurement process)
2/ Monitor spend data, understand what you buy & why
3/ Categorize your spend to help you look for, and find, value
4/ Optimise your suppliers
While these might seem obvious, the first action is often the hardest. There are usually various places in a company where spend can be “leaked” (points of purchase) and embedding a standard process which works whilst not restricting working practices can be a fine balance.
Clearly, utilizing standardized contracting processes also helps. Using repeatable artifacts like statements of work, contracts etc can rapidly speed up “onboarding” new suppliers/arrangements and make the process as pain-free as possible. Setting out, in advance, what you’re trying to achieve and making the process as smooth as possible really pays dividends.
Above we identified the 4 critical features of managing indirect spend but if you have more time (and resources) then I’d also suggest the following:
5/ Look to implement appropriate “enabling” contracts that automatically encourage compliance whilst making the buying process ‘easy’ for the end user.
6/ Look at the total procurement process and don’t forget payment – this can help deliver substantial back office savings.
7/ Measure compliance / Monitor maverick spend and use it as a learning tool, not just a stick to beat users with
8/ Remember that indirect suppliers are not excused from performance management
9/ Don’t be surprised by change, learn from it and adapt processes to suit.
How does your business manage indirect spend? Any tips/lessons learned? Let us know in the comments section below.
One of the fundamentals of procurement is to control spend, companies do this in a variety of ways (with varying wit and complexity) from implementing category management through to simply controlling who is allowed to add a new vendor to the MRP system.
Over at CIPS there’s a statement which reads “over 80 percent maverick spend is not uncommon”. Shocking eh? Perhaps not. Maverick spend can become truly rampant without the right controls and systems. Maverick spend matters because at the heart of the problem is a potential waste of spend, money that could be used for better things. But what’s the first step in getting to grips with this issue?
Get yourself a KPI of course.
At first glance, implementing a maverick spend KPI doesn’t sound too hard, does it? After all, you just have to place percentage spend on one axis and controlled vs uncontrolled on the other.
That’s where it gets tricky – how do you define maverick spend?
For example is your spend maverick in the following circumstances?
* Your buyer buys appropriate goods from an approved vendor for that category of spend
* Your buyer buys inappropriate goods from an approved vendor i.e. they buy a computer system from your stationery supplier.
* A buyer buys goods from an unapproved vendor but they are cheaper than you’d get from the approved vendor
* A buyer buys goods from an approved vendor which is approved for procurement within another spend category
* A buyer buys goods from an appropriate supplier within that category but buys product that is not approved (i.e. executive rooms from a hotel chain rather than standard
The truth is there’s a variation on a theme and organizations might have subtle interpretations on what maverick spend is for them.
Given these intricacies, one of the biggest problems in producing a maverick spend KPI is the level and interpretation of data. Sure you might be awash with data but as we can see from the examples above sometimes that data will need cleansing/refining in some form to be able to get reliable reporting.
Once you have the data and can produce your KPI it’s important to understand what behavior you want to drive from the results.
Of course taking control of maverick spend can bring about real monetary procurement savings, however, many procurement initiatives to control spend have an inbuilt weakness to ensure supplier contracts are used and one of the big problems here is in building up appropriate supply chain data.
It’s easy to report on spend by category but to get granularity on the coupling of spend, products, and suppliers require a level of granularity that many organizations simply don’t have.
Developing a Maverick spend KPI can deliver real benefit. However, it should be recognized that companies that fail to address the difficulties around data & supplier relationships can expect a blunt instrument in terms of fine detail.