Indirect? What's Indirect Procurement?

"The future of procurement belongs to those who can master the art of both the direct and the indirect. Embrace the challenge,?and build a robust,?holistic procurement strategy that drives value across your entire organization." -?Vroozi

The Unsung Hero: Unveiling the Power of Indirect Procurement

Procurement is categorized into two main areas: direct and indirect. Direct procurement involves acquiring goods and services integral to the product's production, typically listed in Bills of Materials (BOMs) and contributing to the cost of goods sold (COGS). While there may be some gray area, these items are generally associated with the core manufacturing process.

On the other hand, indirect procurement focuses on obtaining products and services that support business operations but are not part of the final product. This category includes a wide range of goods and services such as office supplies, IT services, HR services, utilities, maintenance, travel, and more. Indirect procurement drives operating expenses (OPEX) and is crucial for the smooth functioning of the overall business operations.

The fundamental difference lies in whether goods or services are directly involved in the production process (direct procurement) or play a supportive role without becoming part of the final product (indirect procurement). Both are vital for a company's success and share common strategic elements in procurement. Despite this, many companies tend to overlook the importance of indirect procurement and, as a result, miss out on significant value.

"Indirect procurement is no longer the 'forgotten child' of business.?It's a sleeping giant,?and with the right approach,?it can unlock significant savings and value." -?Una Consulting

Mastering the Indirect: A Strategic Approach

Let's briefly explore indirect procurement, focusing on three key strategic areas: Source-to-Contract (S2C), Procure-to-Pay (P2P), and Supplier Management.

• The Source-to-Contract (S2C) process encompasses category strategy, sourcing strategy (including market intelligence and cadence), sourcing methodology, intake processes, and contracting. This highly strategic area demands market intelligence and effective partnerships with stakeholders.

"Technology is the key to unlocking the secrets of indirect procurement.?Automation,?data analytics,?and e-sourcing tools can bring visibility,?control,?and efficiency to this hidden corner of your business." -?Basware

• Moving to Procure-to-Pay (P2P), the emphasis is on spend under management, guided buying, tail spend management, catalog strategy, self-service, and automation. This area is more transactional, where leveraging technology (e.g., automation, data analytics, and e-sourcing tools) is crucial for efficiency, control, and compliance.

"The cost of poor supplier risk management is not just financial; it’s the erosion of trust, reputation, and customer confidence." - Unknown

• Finally, Supplier Management involves category segmentation, Key Process Indicators (KPIs), Service Level Agreements (SLAs), business review cadence, risk analysis and management, as well as joint improvement initiatives. Establishing crucial partnerships with key suppliers and emphasizing risk management are pivotal components in this area.

Untapped Potential: The Power of Indirect Savings

To conclude, let's delve into indirect savings, which, unlike direct procurement, may not be immediately evident. This often leads companies to overlook potential savings opportunities, leaving money on the table. Broadly, there are three categories of savings management: supply management, demand management, and compliance and controls.

"Don't underestimate the power of small change.?Optimizing paperclip purchases might seem insignificant,?but multiplied across thousands of indirect categories,?the savings can be staggering." -?John Reynolds

• In supply management, savings opportunities revolve around traditional procurement methods, such as reducing contract costs through renegotiation, resourcing, redesigning, and increasing spend under management maximizing benefits from existing contracts and volume discounts.

"Taming the wild beast of indirect spend requires collaboration,?not control.?Partner with stakeholders, empower them to make informed choices,?and build a culture of cost consciousness." -?LogicSource

• For demand management, the focus is on reducing demand, including strategies like stop doing certain activities, doing less, handling tasks in-house, and rationalizing specifications by refraining from purchasing unnecessary functions and features.

"Think of indirect spend like a leaky faucet.?Every drip may seem small,?but over time,?it can drain your resources.?Plug the leaks and watch your bottom line improve." -?Approve.com

• Lastly, the compliance and control category aims at increasing internal compliance by ensuring accurate procurement of contracted items at negotiated prices. It also involves reducing processing costs through the use of approved catalogs, automation, and self-service. Achieving both compliance and control can be facilitated through a Procure-to-Pay (P2P) platform mentioned earlier.

In summary, as I mentioned earlier, indirect procurement spans a vast array of categories and is inherently complex. In my attempt to highlight key areas from both procurement management and savings perspectives, I acknowledge the intricate nature of the subject. It's possible that I may have overlooked certain aspects, or you may have a different point of view; nonetheless, my aim is to provide fundamental insights for those unfamiliar with indirect procurement. I hope this discussion proves valuable in offering a foundational understanding of the topic.

"Indirect procurement isn't your typical purchase order.?It's a web of complex categories,?fragmented data,?and hidden maverick spend.?But within this complexity lies immense opportunity." -?McKinsey & Company