Realizing Savings in Indirect Spend: A Guide for Procurement Teams
Are you often taken aback looking at the total value of your indirect spend at the end of the quarter or financial year? This is not uncommon – most procurement professionals find that their indirect spend tends to go out of there hand. The reason for this is the lack of spend visibility. Especially in industries where the business and procurement teams are concentrating 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 spend, and a top performing team can expect cost savings between 20% and 40%. The opportunity for savings in your indirect spend category is huge and can affect your bottom line directly.1
Third and probably the most important part is how do you go about making those savings? With the lack of visibility, it is not easy to envision how you would go about making those savings as most categories might look essential. The secret lies in not actually cutting down your requirement but in managing them. There is no one major activity that will give you the answer, you will need to employ multiple processes, tools and shift your view on team management to realize the savings.
What does indirect spend look like:
Indirect spend comprises of several different categories like marketing, rent, capital expenditure, private-label packaging, facilities, outsourced services and others. The total potential for savings for an average performing team is usually 15%. Considering the magnitude of the spend, this number can be quite high. 3
Top Performing Teams
By just simple changes to their outlook to indirect spend, many top procurement teams can realise heavy 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:
Managing Maverick Spend: Maverick spend is one of the trickiest parts of indirect to manage as there is a lack of definition and allocation of funds is murky. Quick and unplanned requirements are part of running a business, but it is not something that cannot be anticipated. An allocated budget set aside for ad hoc spends can really help in budgeting and finding savings. A useful resource for this is to have an experienced team member who has been with the company and 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 other indirect spend that you know will come again in the future or may be used by different teams can help get heavy discounts from known suppliers.
Centralised Sourcing: Centralised sourcing & procurement team can make aggregating and forecasting demand easier. This in turn also can unearth savings opportunities. Centralised sourcing is essential to make aggregating demand a reality.
Supplier Risk: This is in the “not-so-obvious” category because apart from doing the basic 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 closely to 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 manual process is astonishing, 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 analyse savings opportunities or even present data for a procurement manager to deduce insights. Without proper spend visibility, it will not be possible to realise the full potential of 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 are fully equipped to mine cost savings from big data analysis and have the emotional quotient to deal with the multiple stakeholders involved in making a procurement team that is saving cost leakages from all sides and essentially making money that would otherwise be lost.
Procurement teams in must take the extra effort to find these savings. Cost savings is slippery and sometimes almost frustrating. Procurement managers can work diligently trying to cover all leakages and yet not reach 100% savings at the end. The aim should be to cover as much as you can, 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.