Does indirect spend get the attention it deserves? We don’t believe so, especially given the pressure organisations are under to reduce costs in the current economic downturn. Why should companies that are traditionally focused on reducing direct spend shift their attention towards indirect purchasing, the less centralised and more difficult type of spend to manage? The answer is simple: because indirect spend is a mine of untapped savings opportunities; it is the backyard for low hanging fruit in your annual budget.
Indirect spend can account for up to 50% of the total spend for manufacturing companies and can range up to 90% in some non-manufacturing sectors, a statistic that some readers may find surprising. When addressed, this normally untapped spend has the potential to improve operating margins by 1% – 2%: conveying a material savings potential. Nonetheless, companies are slow in reacting to this and are therefore missing out on substantial savings, with SMEs being generally slower and less prone to take action than larger organisations. This is due to the fact that of direct and indirect spend, the latter is generally more complex and challenging. Indirect spend analysis requires a broader range of materials and services, and specialised skills to be managed effectively. When compared against direct spend, indirect spend typically has a wider supplier base, more random buying patterns, a higher number of buyers, and is generally more decentralised across the organisation.
At first glance, tapping indirect purchasing might seem like a labour intensive, low reward task, but a closer look will reveal valuable savings and benefits and thus bottom line improvement. The key to achieving these, and the foundation to indirect spend management, is gaining enhanced visibility into indirect spend data, which is attained through indirect spend data collection, consolidation, cleaning and analysis. Indirect spend data visibility will answer questions like: What was purchased? Who was responsible for the expenditure? Where was it purchased? When was it purchased? Why was it purchased? This will facilitate the next steps to managing and reducing indirect spend.
Whilst indirect spend management has gained popularity in the past decade, becoming the object of significant management focus and service offerings, the area is still young and there is vast scope for improvement. This is especially for small and medium size enterprises that have been considerably lagging behind their larger peers in terms of managing this type of spend. The current economic climate pressures everyone to revise their costs and budgets, but particularly SMEs which are typically more sensitive to economic downturns than larger organisations. Therefore, at a time when cutting spend is a priority in most organisations, indirect spend management is a must that can no longer be ignored – particularly by SMEs.