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Realizing Savings in Indirect Spend: A Guide for Procurement Teams

By Shabad Singh
In Spend Analysis
Apr 1st, 2020
0 Comments
2546 Views

Are you often taken aback looking at the total value of your indirect spend at the end of the quarter or financial year? It is not uncommon – most procurement professionals find that their indirect spend tends to go out of their hands.

The reason for this is the lack of spend visibility.

Especially in industries where the business and procurement teams concentrate on savings from direct spend, indirect spend is overlooked and tends to pile up.

Your second thought would be “I could have saved on a lot!”, and that is correct!

Studies have shown that at an average, indirect spend consists of 45% of an organization’s total spending, and a top-performing team can expect cost savings between 20% and 40%. The opportunity for savings in your indirect spend category is enormous and can affect your bottom line directly.1

Third and probably the most crucial part is how do you go about making those savings? With the lack of visibility, it is not easy to envision how you would make those savings as most categories might look essential.

The secret lies in not cutting down your requirement but in managing them. There is no one significant activity that will give you the answer. You will need to employ multiple processes and tools and shift your view on team management to realize the savings.

What does indirect spend look like:

Indirect spending comprises several different categories, such as marketing, rent, capital expenditure, private-label packaging, facilities, outsourced services, and others. Hence, the total potential for savings for an average performing team is usually 15%. Considering the magnitude of the spending, this number can be quite high. 3

Top Performing Teams

By just simple changes to their outlook on indirect spending, many top procurement teams can realize substantial savings: Delta airlines was able to save $11 million on hotel bookings in one quarter by just employing a software solution that revealed financial issues.

World-famous motorcycle brand Harley-Davidson saved $4 million by outsourcing all indirect spend to just 3 suppliers. Cadence design systems reported $6 million in savings by investing in a technology that provided insights and cost-saving opportunities. 2

Let’s get into it, how can you save –

The obvious:

Managing Maverick Spend

  • Maverick spend is one of the trickiest parts of indirect to manage as there is a lack of definition, and the allocation of funds is murky. Quick and unplanned requirements are part of running a business, but it is not something that someone cannot anticipate.
  • An allocated budget set aside for ad hoc spends can help in budgeting and finding savings. A useful resource for this is to have an experienced team member who has been with the company. The support can, to some extent, plan for maverick spends to the closest approximation.

Aggregate Demand

  • Probably one of the fattest savings whale in procurement, aggregating demands for office supplies, marketing needs, multiple store requirements, and another indirect spend that you know will come again in the future. Also, different teams may use it can help get massive discounts from known suppliers.

Centralized Sourcing

  • Centralized sourcing & procurement team can make aggregating and forecasting demand easier. This, in turn, also can unearth savings opportunities. Hence, centralized sourcing is essential to make aggregating demand a reality.

The Not-so-obvious:

Supplier Risk

  • This is in the “not-so-obvious” category. Apart from doing the necessary check of supplier contracts, adding a few extra checks of new supplier’s history and financial status can go a long way in avoiding unnecessary losses.
  • Working with your legal team to closely ensure an industry-specific look at contract clauses to consider unforeseen but plausible contingencies is essential for a wholistic savings mindset of a top-performing procurement team.

Automation

  • The number of procurement teams still using the manual process is astonishing. In addition, A recent study by Deloitte shows that just 18% have a digital procurement strategy supported by a complete business case.
  • A procurement team’s budget should account for a best-of-breed procurement solution. An ERP solution is just not intelligent enough to analyze savings opportunities or even present data for a procurement manager to deduce insights.
  • Without proper spend visibility, it will not be possible to realize the full potential of the savings opportunity. If you don’t know what, where and how much you are spending, savings is not possible.. 4

Team Management

  • Top-performing procurement teams use several training methods to ensure their teams equip themselves to mine cost savings from big data analysis.
  • They also ensure that the teams have the emotional quotient to deal with the multiple stakeholders involved in making a procurement team that saves cost leakages from all sides and essentially makes money that would otherwise be lost. Hence, procurement teams must take the extra effort to find these savings. Also, cost savings are slippery and sometimes almost frustrating.
  • Hence, procurement managers can work diligently to cover all leakages and yet not reach 100% savings. Therefore, the aim should be to cover as much as you can. To conclude, the art of cost saving is in the chase.

If you have any other strategies for saving in indirect spend, do let me know in the comment section below.

Sources:

  1. https://www.beroeinc.com/whitepaper/indirect-spend-management/
  2. https://drydengroup.com/top-10-efficient-companies-indirect-spend-management/
  3. https://www.mckinsey.com/industries/retail/our-insights/beyond-procurement-transforming-indirect-spending-in-retail
  4. https://scoutbee.com/digital-procurement-2019/

 

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