Wrangling the Complexity of Indirect Procurement
It’s no mystery why indirect spend is often ignored. By its sheer nature, optimization has proven to be incredibly challenging. Unlike direct materials which are often highly engineered, associated with a specific set of approved suppliers, and controlled precisely through ERP and MRP technologies, indirect spend is comprised of a highly fragmented group of suppliers that vary by business unit (BU) and plant. These suppliers represent 1000s of sub-categories of goods and services and are often easier to substitute than their direct counterparts. From a manufacturing viewpoint, this can mean anything from machinery spares to consumables, from repair services to facilities maintenance, and from IT to basic office supplies. Compared to direct materials, the number of suppliers is both huge and decentralized, with major inconsistencies in size—from small mom-and-pop shops with limited technology know-how, to large, multi-national suppliers with significant selling power. And there is little to no standardization on which to base indirect procurement methods whether through catalogs, P-Cards, paper-based POs, phone, fax – you name it.
Not only does the sheer number of suppliers create complexity, but the lack of control in the way organizations purchase these materials and services compounds the problem. Repair services, office supplies, and specialty MRO materials are all part of the spend profile of a manufacturer, but they are infrequently controlled in the same way direct materials and services are controlled. So it’s not uncommon to go to the head of corporate purchasing for a large multi-plant company and find they have no idea how much is spent in the area of indirect and MRO. And if they do have a high-level estimate, none of them can provide a granular view of that spend by BU, plant, geography, supplier, or commodity. The result? Little if any indirect spend is optimized.
Many companies have left control of indirect and MRO to their plant managers and GMs; and on occasion national contracts in obvious categories such as office suppliers, travel, industrial gases and technology. And it’s no wonder. Clunky ERP systems were designed to manage direct, not indirect spend, so they’ve been largely incapable of addressing the indirect supply chain in the right way. So legions of plant controllers, buyers and administrative staff walk around with spreadsheets tracking spend, have huge paper catalogs sitting on their desk from the local distributor, or even worse, have ceded control of their indirect to third party consolidators and distributors who promise savings and control—but surely at some cost and without transparency.
Another challenge is that many executives have treated indirect spend as non-strategic. Why? Because they have been rewarded for focusing on the largest chunk of spend—namely direct materials and services. Plus, indirect is just plain tough or thought to be too small in volume. But with the direct side under reasonable control, executives and progressive managers are turning their heads to the largely unaddressed indirect, which represents between 8% and 20% of a manufacturer’s revenue. And since there’s no aggregate visibility into that amount of spend, many CFOs and CPOs are left wondering what to do about that 8 to 20 cents of every dollar. Let’s put it in different terms, if a $1B manufacturer with 20% gross margins can reduce their indirect cost by 10% then that’s $10M to the bottom line which is the equivalent of having to increase revenue by $50M to generate the same amount of profit. Which is easier 5% growth or 10% cost take out on a neglected segment of the business?
It is time to tackle indirect spend head-on by activating intelligent e-procurement software that moves beyond automation; that facilitates smarter, real-time change; and that drives an immediate and significant impact to the bottom line by effectively addressing the complex challenges of indirect spend.