Procurement’s importance as a key business process has increased significantly in recent years with the growing use of vendors, but do you sometimes neglect indirect procurement by focusing too much and on direct procurement?
Procurement is a complex business function, and often the source of woes for many companies. Revenue, cost and production are all direct results from the success (or failures) of your procurement strategy.
Your procurement department is responsible for the seamless running of both your internal and external operations, and without the sourcing and purchasing of goods you wouldn’t even have a business.
Unfortunately, however, many businesses are spending far too much of their time focusing on direct procurement that they are forgetting the importance of indirect procurement. This results in significant overspending and a lack of cost control.
What is indirect procurement?
In its simplest definition, indirect procurement is the act of purchasing the services, supplies, materials and goods required to support the ongoing existence of your organization. These supplies are what your business requires for its day-to-day operations, but they don’t add to your company's bottom line.
Indirect procurement examples could include:
- Travel expenses
- Maintenance fees
- Computers and office hardware
- Employee management and development
- Consultant and non-employee costs (contractors, freelancers, advisers, consultants etc.)
- Computer software
- Workplace management
Direct procurement vs. indirect procurement - what’s the difference?
Direct procurement differs from indirect procurement as it’s the process of purchasing materials, resources, goods and services that become part of what your organization sells to its customers.
Examples of direct procurement could include products for resale, ingredients for food products if your company is in the food industry, machinery or the materials needed to manufacture the product your business sells.
Direct procurement is the spending on services and materials that drive profit, while indirect procurement is expenditure on services and goods that are required for the successful day-to-day operations of your business.
What are the challenges of indirect procurement?
Due to the differences between indirect and direct procurement, there are some key variations in the way you manage them. This becomes more important when you consider some of the challenges that come with indirect procurement.
Indirect procurement is a broad category that involves hundreds of spend categories and thousands of suppliers. A high turnover in suppliers and a large amount of transactions leads to many organizations believing that managing indirect expenditure is impractical.
The result? A lack of visibility and control over indirect spend. If you have no processes in place that show you exactly how much your business is spending, there’s no way of knowing how much money you are wasting on inefficient and ineffective indirect procurement.
The importance of effective contingent workforce management when it comes to indirect procurement
The largest cost component of your indirect procurement will be people, and your organization’s non-employee workforce will make up a large portion of that expenditure. Implementing an effective contingent workforce management strategy can completely transform your indirect procurement program.
Non-employee workers are often hired on a departmental or project level, meaning there’s no company-wide approach on how much they should be paid and what vendors should be used to minimize costs. This results in poor hiring processes, a lack of visibility and control over costs, inefficient processes, compliance issues and many other invisible challenges that lead to hidden costs.
Implementing a contingent workforce management strategy or managed services provider (MSP) program and using a vendor management system (VMS) will give you a centralized approach to non-employee workforce management and much-improved visibility.
In turn, you will realize benefits such as significant cost savings for your indirect procurement, access to the top talent in your industry, better insight into which vendors meet your needs and much more.
Want to find out more information about how an effective contingent workforce management strategy will revolutionize your indirect procurement program? Contact HCMWorks today. Our team of workforce management experts would love to help.