Struggling with effectively managing indirect procurement? by Corrado Simontacchi
Targeting areas of not managed indirect spend is a key way procurement leaders can deliver value and maximize savings, and ultimately extend their reach and influence. Traditionally, this ill managed spend has challenged procurement for a number of reasons. Decentralized decision-making and fragmented buying create a lack of visibility into spending, supplier proliferation and limited opportunities to support competitive sourcing.
When you control indirect spend more effectively, you immediately create more opportunities for savings. Even a single-digit reduction in annual indirect spend can lead to significant savings. But how can you effectively manage indirect procurement?
In a research paper, McKinsey reports that “implementing a world-class indirect sourcing process can yield 100-150 basis points of incremental profit within 12 to 24 months. And since indirect spending can account for 15-27% of a company’s total revenues, it is certainly worthy of direct focus.”
Typically, there are five overarching, common challenges facing CPOs and their ability to manage indirect expenditure effectively for their organization, which are:
Lack of capacity - Often, procurement does not have the means to be able to support non-routine and specialist goods and services nor the capacity to cover all categories across the business.
Lack of political weight – Indirect procurement fails to be seen as a value-adding function by senior executives hence, it lacks power within the organization.
Lack of mandate - The primary responsibility for most indirect procurement categories often lies with the business units and for some categories may not even be clear as to who actually owns them.
Lack of awareness and low visibility of indirect procurement - Indirect procurement is often seen as less important than direct procurement in the eyes of senior executives. It is even less important at the business unit level, with many stakeholders viewing an indirect procurement professional’s role as the ‘rubber stamper’ at the end of the process – to ensure contract compliance and potentially negotiate an extra percentage point off the somewhat complete purchase.
Lack of the skills required for effective stakeholder management - The number one challenge here is the ability to work alongside the various business units as a strategic partner and not a tactical function. The second challenge is maintaining a realistic view of category coverage and expertise across all areas of indirect.
Main driver to address
Research into purchasing practices in many industries has demonstrated that a purchasing staff’s capabilities are the factor most closely correlated with higher average sourcing savings. Specifically, building sourcing capabilities drives twice the impact that improving procurement’s integration and alignment with company strategy would and 1.5 times the impact of the implementation of functional tools. The resulting improved performance in turn translates directly into improved EBITDA. High-performing procurement personnel typically have a mix of sourcing-specific skills (such as the ability to reverse-engineer a supplier’s cost structure) and general business capabilities (including the ability to manage negotiations and push for appropriate trade-offs with both suppliers and internal stakeholders).
Interested to enable your organization to get control of indirect spend and tackle ill managed spending? Short of key skills and capabilities to implement a managed indirect spend program?