Indirect procurement often accounts for more than 20% of the total business spend. Since it comprises unconsolidated, low-cost purchases, it’s easy to overlook indirect spending when looking for ways to lower operating costs. To ensure sustainable growth, organizations should optimize their indirect procurement by adopting smart strategies that eliminate wastage.
1. Start Tracking your Indirect Procurement
When you don’t know all the details about the purchases in your business, it’s likely your spending will get out of control. Typically, expenses for essential items like office supplies and professional services can be hectic to track. It’s worth the effort when you want to eliminate overspending and avoid understating the overall impact of these items on your business.
You can leverage technology tools to simplify the process. Ideally, you can introduce an internal coding system to identify and track indirect purchases. When each item has a line-item level detail, it becomes easier to use the ERP system to track and report on indirect procurement. This strategy also improves visibility and allows your procurement department to gain more control over indirect procurement.
2. Determine Performance of Indirect Procurement
Some indirect procurement control strategies don’t start from scratch, especially when your business has good visibility on indirect spending and streamlined procurement operations. Regardless, it’s crucial to evaluate the processes to ensure optimum efficiency. Ideally, your direct and indirect procurement items suppliers should be evaluated regularly.
You can use a scoring system to determine supplier performance and look for opportunities for changing your sources. Try to figure out whether a specific supplier meets pricing expectations, delivers on time, and maintains outstanding services. If you discover that a supplier isn’t striving to improve their services, you should raise the issue or look for alternative supply options.
If you fail to evaluate your indirect procurement regularly, you are likely to lose all the benefits of streamlined procurement.
3. Consolidate your Suppliers to Negotiate Pricing
In most cases, indirect procurement often involves low-dollar items purchased frequently. Despite their recurrence, most businesses tend to ignore these transactions. While most businesses look for ways to save money, very few consider indirect spending. Because the transactions are constantly overlooked, poor governance paves the way for supplier proliferation and pricing inefficiencies.
The chronic lack of governance also leads to significant overlaps in items procured in an organization, especially in large organizations with multiple locations that enjoy procurement autonomy. For instance, different branches of the same company can order the same item from multiple suppliers. The organization should identify the overlapping items and consolidate the procurement into one supplier to streamline indirect procurement.
Consolidating overlapping products makes it possible to source the supply in a single volume instead of small consignments. This strategy also facilitates contract negotiation to secure inventory and take advantage of lower prices.
Indirect procurement plays a significant role in modern businesses. While indirect procurement is often ignored, it offers numerous opportunities to eliminate wastages without deploying unnecessary resources. However, you can implement smart strategies and best practices to streamline your procurement processes.