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Optimize Your Indirect Procurement Strategy to Generate Value

Picture of Michael Cadieux Michael Cadieux : 8/29/22 8:00 AM

Everyone seems to be talking about indirect procurement these days. For procurement practitioners looking for more information on indirect procurement, we’ll explore everything you need to know about indirect procurement, including how developing an optimized indirect procurement strategy can help you generate value for your company as you face today’s current global procurement issues.

What Is Direct Procurement and Indirect Procurement?

First off, let’s start by getting a clear definition of what exactly indirect procurement is and point out what differentiates it from direct procurement. I like the explanation of the indirect procurement process that approve.com provides, which defines the term as “optimizing the purchasing of any items used to maintain day to day operations.”

This typically includes goods and services not directly related to manufacturing a business’s products. Just for your reference, examples of this could include such things as office supplies, hardware, equipment, travel expenses, marketing campaigns, rent for facilities, utilities, maintenance, repairs, outsourced services (IT, accounting), other professional services (advisors, consultants), and much more.

So, how does that differ from direct procurement? Good question. With direct procurement, you are more focused on purchasing the raw materials needed to manufacture the product(s) sold by the company. Examples of direct procurement items would include things like vegetables, meats, and other ingredients (for a restaurant), hard drives, screens, keyboards, and similar items (for a computer manufacturing company), and fabrics like cotton, silk, linen, and more (for a business selling clothing or textiles). Depending on what the company is manufacturing or producing, the direct procurement purchases will vary accordingly, but this gives you an idea of the differences.

Now that we have the definitions of the two defined, let’s dive into how to pinpoint some of the key differentiating factors between direct and indirect procurement spend:

When dealing with direct procurement, the purchasing process is usually handled by a centralized management team and must adhere to a strict and pre-determined budget for total spend. In contrast, indirect purchases are typically decentralized, where the focus is placed more on the smaller parts of the business with different needs and approvers. It is vital to have a formal plan in place for handling this spend, as it is the only way to stay on top of and curtail the common pitfalls of inefficient or rogue spending that tend to come with this territory.
How the company goes about keeping an eye on inventory differs between direct and indirect procurement as well. With direct procurement, thanks to supply chain management and demand forecasting, the purchasing process is straightforward. You just make a calculated and informed guess on how much you need to order and order just enough to prevent coming up short while also avoiding a surplus. With indirect procurement, however, it’s a bit trickier to plan—or forecast needs—in advance, which explains why these types of purchases are most often made on-demand.
The length of supplier relationships also varies between direct and indirect procurement. Direct procurement tends to see more long-term supplier relationships due to direct purchases of standing orders with the same suppliers to keep steady manufacturing of their product pumping out even-keel. On the other hand, indirect procurement tends to see shorter-term relationships, where your pick of suppliers can vary often based on the best prices available each time you order whatever you need at the moment.

Why Is Procurement Strategy More Important Than Ever?

Procurement strategy is a developed long-term plan to enable your organization to cost-effectively acquire the necessary supplies from a list of efficient vendors who will deliver quality goods on time, abiding by the purchasing terms. It’s the most sought-after concept within the procurement community—and for good reason. At the core of procurement strategy’s dependence are a few key factors, which include considerations like purchase timeline, available budget, total cost of ownership, possible risks, and more.

And with the “risks” today being so high—amid a constantly changing world where the variables are shifting at a breakneck and unprecedented pace—the constant flux we find ourselves in today calls for a clear, actionable, and agile procurement strategy to match. It is a matter of grave importance. There is no other way to word it.

And the importance of having a clear and concise strategy with indirect procurement in particular, which according to the experts at McKinsey & Company, has seen an increased spend of roughly 7% annually since 2011, can’t be underestimated. After all, that is a considerable chunk of change we are playing with there, and far too many organizations today fail to give indirect procurement the consideration it merits.

So, what do I mean by giving it attention and proper consideration? And what is being done today to develop better indirect procurement strategies?

What Has Changed with Indirect Procurement Strategy?

Organizations across the globe are pivoting to address constant change—and challenges—they face daily by adopting new approaches and visions for indirect procurement. These visions are based heavily on the reliance and incorporation of new technologies to optimize success and achieve the ultimate cost savings and process efficiencies.

These common challenges include spending spread across multiple locations, business units, and categories, among others. All these things are addressed by upping the ante by enlisting the latest technology and talent required to meet these challenges. So, what does this look like exactly? Listed below are the key elements focused on today:

Intelligent spend engines are digital tools that use automated engines to classify and categorize spending, which can lead to significant bottom-line savings. For your reference, an intelligent spend engine can save big during mergers, for example, by identifying similar maintenance parts used by both companies and pinging your organization to consolidate vendors. Making such a move can save you upwards of 10%-12%, which is nothing to sneeze at.
Advanced analytics solutions are used in tandem with target-setting tools to alert your company to cost-saving and process-optimization opportunities. A few examples of such target-setting tools that are popular right now include:

Category-specific tools – automated solutions that identify, apply, and monitor standard and advanced levers unique to a category
Smart workflows – platforms that review the forecast spending per category to provide an actionable strategy for best practices for selected categories
Functional advanced analytics tools – used to aid category functionality and include things like automated, real-time KPI dashboards and executive scorecards, parametric clean-sheets, and more.

How To Optimize Your Indirect Procurement Strategy

Now that you see the extreme importance of having a solid indirect procurement strategy, here are some specific areas you can focus on—and simple, proactive steps you can take—to up your indirect procurement strategy game: