During periods of economic downturn, the profile of procurement is often raised within many organisations. Direct procurement often takes the limelight but why should you invest the time and resource on your indirect procurement strategy and do you really need professional procurement resource . . . . .?
Indirect Spend, Goods Not for Resale (GNFR), Non-Production, different industries have different names for spend that is not the direct goods or materials which are subsequently sold to the end client. ‘Indirects’, the term we most commonly use, are integral to the operation of any business and will typically account for a significant portion of a company’s cost base, covering IT, Facilities, HR, Marketing, Professional Services and so on.
Indirect procurement plays a vitally important role and implemented properly it can ensure streamlined, efficient operations and a healthy, resilient supply chain, so indirect procurement should not be neglected or overlooked.
Whilst it can be argued indirect procurement can be deemed less significant than direct, when looking at the performance of the business, the procurement savings will directly impact the bottom-line profit. A focused and successful indirect procurement strategy can be a highly successful method of driving up a company’s profitability – extremely important during times of economic hardship.
Business Unit vs Procurement Professional
Effective Indirect Procurement is often not fully embedded in an organisation with non-procurement staff responsible for significant buying decisions. There are a whole raft of benefits and added value that can be achieved through the correct use of solid procurement practices which can be delivered through procurement professionals but also through the provision of tools and skill transfer to existing non-procurement staff.
Indirect procurement can include hundreds of different goods and services, many can require significant expertise to be effectively managed. To have the expertise and skill sets in-house for all areas would be enormously expensive for all but some of the largest organisation’s, and in the most part completely unnecessary.
You may hear some procurement professionals that take the view only the procurement function can deal with indirect suppliers effectively and deliver the best results. This is obviously not true; procurement relies heavily on the knowledge and experience of stakeholders to enable them to do their job effectively. An embedded procurement function will work for many organisation’s but in those that it does not, a clear indirect procurement strategy backed up by policy and procedures can provide stakeholders with the support required to generate greater results.
A highly effective and successful indirect procurement function aims to deliver results with suppliers, but will also look internally at the behaviour’s of the people within the business, where is the demand, what are the policies and procedures and take on board the organisation’s risk appetite.
The Challenges . . .
There are a range of challenges for businesses to consider when implementing a procurement strategy for indirect spend which will also influence whether professional procurement support is required. The following points cover some of the high-level issues that business’ can encounter, however, each business will find different challenges based on their industry, level of existing procurement resource, stakeholder buy in and more.
Lack of Procurement Knowledge and/or Resource
It may be the case that an organisation simply does not have a procurement function – which is very common. While often deemed a necessary evil, procurement can also be ignored completely. Many non-procurement personnel will be perfectly capable of making significant buying decisions – but is it the optimal decision? Could the support and knowledge of a procurement professional have improved the eventual outcome? Where a procurement team is in place it can also be the case that they fall into a tactical way of working rather than working as a strategic business partner, thus failing to maximise the potential benefits of having a procurement function.
Lack of Mandate
Responsibility for most indirect spend often lies with the business unit and for some goods and services, it may not be clear as to who actually owns them at all. Even with policy and procedures in place, lack of clarity can lead to ineffective management of the spend. It can also be very challenging for a new or existing procurement function to gain some control over the process and policies when trying to manage this spend.
Lack of Influence
While a business may already see some benefits of Indirect Procurement and have a procurement team, they often find they lack influence within the business to implement their procurement processes and strategies. Typically, this will be due to a lack of buy-in from the business and/or a lack of support from the board. If a stakeholder doesn’t buy into the benefits of allowing procurement into their budget area and they are not ‘told’ to do it . . . . in many cases they won’t.
Range of Goods and Services
Spend is often spread over a wide verity of areas. Knowledge of all areas is likely impossible without a large team. Having expertise across all the indirect spend areas is generally unrealistic. This can result in stakeholders disapproving of procurement involvement and deem their own knowledge, as subject matter experts, enough. There can also be hundreds if not thousands of individual suppliers providing goods and services to an organisation.
Lack of Attention and Low Importance
It is often the case that business’ feel that greater importance should be given to their direct procurement with little to no attention paid to Indirect areas. This is most likely to occur in industries such as manufacturing and retail where direct materials and goods far outweigh the volume of indirect spend.
Fragmentation of Spend – De-Centralised
Spend can be fragmented and spread across a range of locations and business units. Sporadic buying patterns, lack of preferred suppliers, embedded relationships with stakeholders and a lack of data can make it very difficult to develop a buying strategy for certain goods and services.
So, why is Indirect Procurement Important?
Every company is different, and the impact successful indirect procurement has can vary. However, this is a high-level overview of the typical benefits of implementing and utilising procurement for your indirect goods and services.
Price Reduction or Total Cost of Ownership
The most obvious and often the primary objective (rightly or wrongly) placed on procurement by the business. The reduction of the price or the total cost of ownership of goods and service to generate cost savings. Implementing a suitable strategy, the use of rigorous procurement processes and negotiation.
Supplier Service Improvements or Greater Value
The benefits go much further than cost reduction alone. While negotiating a better price will drive savings, securing additional products or services at no added cost, improved efficiency, sharing of resources, collaborative working, or reduced time to supply are all potential added benefits.
Reliance on a third party is inevitable for most organisations, whether it be reliance on your IT provider to provide secure and stable IT systems, to your marketing agency managing the correct message and protecting the business’ image.
Simple procurement practices can ensure risk is mitigated from having supplier contracts, periodic reviews, supplier management, ensuring the business requirements are understood and understood by the supplier.
By optimising your indirect procurement strategy, you can generate a significant benefit to your bottom line. Indirect Procurement should not be neglected. Having an established, structured, and standardised procurement process you can make significant gains, even if it’s not possible to employ a dedicated procurement team.
If you would like any advice on indirect procurement within your business or if you would like to discuss how we can support your requirements, contact us at firstname.lastname@example.org and one of the Oculus Procurement directors will be in touch to discuss.
ABOUT THE Author:
Having graduated in Procurement and Supply Chain Management from Liverpool John Moore’s University in 2012, Luke commenced his career as a Graduate Procurement Manager at one of the UK’s largest third-party logistics organisations, before moving into financial services and then founding Oculus in 2017. Luke’s roles have all been within centre-led procurement functions leading significant, business-wide procurement transformations, gaining significant experience of the design and implementation of procurement policy.
As one of the founders of Oculus, Luke has worked with clients from a variety of industry sectors such as manufacturing, insurance, financial & professional services, and retail. With experience across a wide array of spend categories, primarily focusing on HR, facilities, and professional services.
Luke’s key specialism is in spend data analytics and cost modelling. Offering the ability to unravel vast quantities of data to build simple yet effective reports providing the insight required to support a drive for change. Through effective Power BI dashboards, Luke is able to offer a level of insight, previously unavailable, to support the identification of areas of focus within an organisations spend profile.