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HCMWorks Insights

What Is Indirect Procurement and How Is It Affecting Your Business?

Posted by HCM Works on 15 Oct 2015

You probably put a great amount of resources, personnel and money into direct procurement—those goods and services that are bought for the external customers or client, such as the raw materials or components used in the products that you sell or your subcontracted manufacturing services. You likely place a greater amount of importance on this type of procurement because it is directly related to your profit margin and customer satisfaction rate. The less you spend to make your products, the lower your costs, which means you get higher profits from your sales. And the higher in quality your products are, the happier your customers will be.

However, you might not realize just how vital your indirect procurement is to your overall business, too. This type of procurement involves purchasing the goods and services that enable your day-to-day business activities. Indirect spend can include office supplies, travel, IT services, packaging materials, equipment, janitorial services, fixtures, office furniture, and so on. These are the goods and services that are necessary for you to run your business.

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Indirect Procurement Challenges

Procurement teams do not typically focus on reducing their indirect spend. Often, this is due to the complexities of dealing with a broad spectrum of commodities in multiple categories. There could be hundreds of indirect spend categories and tens of thousands of suppliers to manage. There is also often a high turnover in indirect suppliers and a large number of low-monetary transactions. For this reason, many business owners believe that managing indirect expenditures is too impractical or costly to be worth it.

Additionally, a lack of visibility in indirect spend brings forth a significant challenge—you cannot control what you can’t see, and you might not have the processes in place to see just how significant an amount of money you are spending on indirect procurement.

Managing indirect expenditures also takes a big variety of skillsets for total effectiveness, such as a broad range of category expertise, change management, contract management, negotiation and supplier management, data analysis, and technological know-how. Some companies simply don’t have the skills, tools, or resources required to do so.

Managing Indirect Spend Can Significantly Reduce Costs

It’s understandably a huge undertaking to prioritize and effectively manage indirect procurement, but it should be a priority if you’re looking to save on costs. In this increasingly competitive market, it’s vital for companies to cut costs wherever possible in order to increase their profits and grow into the future. The fact is indirect spend has a monumental effect on your business, and you need to be able to manage it effectively to get the best value for your dollar.

How to Manage Indirect Procurement

Taking a strategic approach to your company’s indirect procurement processes can help you reduce its negative effect on your profits. In order to deal with the challenges mentioned above, you could benefit from requesting assistance from procurement specialists and investing in customized software to help you manage the entire procurement cycle.

Investing in these indirect procurement management solutions can allow for in-depth analyses, provide real-time data for better decision making, reduce your risk of working with new vendors, quicken the onboarding process, allow for easier and safer payment processing, reduce cycle times, allow for greater visibility into your category spend, and increase overall efficiencies so you can reduce the costs associated with the function. It can provide insights into opportunities, identify potential areas for savings, and alert you to liabilities that you should be controlling before they hurt your business.

Optimizing your indirect expenditures can have a significant effect on your bottom line. You cannot neglect this function any longer. Having an established, structured and standardized procurement process is essential—and procurement specialists and software can help.

The fact is indirect procurement is just as valuable as direct procurement and should be managed in the same strategic way.

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Tags: Procurement

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