Economic and financial uncertainty during the COVID-19 pandemic will have a significant impact on a company’s indirect spend. The primary focus will be to cut it — but that’s not the right approach.
As manufacturing reopens and ramps up, some essential indirect spend categories may see strong activity, with increased spend on PPE, employee health screening, continuous surface and common area cleaning, changes to office and factory layouts and other related COVID-19 safety costs.
But firms are cutting back in other indirect spend categories, often slashing discretionary and non-essential spend in a panic. Any increases in technology spend supporting a remote workforce and factory automation efforts are offset by budget decreases in travel, advertising and marketing, research and development, employee training, office supplies and equipment, facilities management and other indirect spend categories.
Instead, most buyers are focusing efforts on catching up with customer orders, identifying and overcoming material shortages, managing inventories, realigning supply chains and determining the optimum workforce levels to meet demand.
Due to procurement staff cutbacks, we may be returning to the days where indirect spend was an afterthought, managed primarily by end users with hardly any procurement, sourcing or negotiation experience. And that would be a mistake.
Why? Indirect suppliers are feeling the heat to maintain and increase their business, making it a buyer’s market and an opportunity to gain negotiation leverage.
This is the time to take advantage of procurement’s expertise to help guide the next stages in our reopening and take greater control of this critical spend category. Savings will be imperative to fund other company issues.
Here are indirect spend areas for immediate consideration.
All insurance categories are under pressure. Reductions in the workforce have led to fewer people covered by health, life, travel and accident compensation plans. How might this impact coverage, premiums, renewals and the length of the current contract? Some insurance companies are already offering rebates. Others may need to be asked.
The crash in oil prices and the increase in renewable energy options offer an opportune time to review utility bills and power agreements. Expenditures on energy are already lower, but work to keep them under control once demand increases by locking in lower rates or migrating to new technologies.
Review agreements with agencies and airlines on discounts. Pay attention to cancellation and rebooking charges. Many airlines are holding onto future booked ticket revenue. Getting these funds back would be valuable.
4. Real estate
Landlords may be willing to renegotiate rental agreements. Construction projects may be on hold or reduced in scale and scope as companies decide to allow more work from home or reduce their factory footprint. Consider facility management costs, security, janitorial services and changes to factory and office layouts.
5. Service contracts
Imagine all of those copier and printer service contracts piling up monthly charges while the equipment sits hibernating in empty offices. At the minimum, those service contracts should be extended to reflect the time office were shut down and renegotiated to reflect less usage. The same goes for service contracts on equipment on the factory floor and in laboratories. Avoid evergreen contracts, those agreements that renew automatically. Review warranty agreements as well.
6. Transportation and logistics
This an area where performance outweighs cost savings. While fuel costs are down, many trucking and transportation companies have had significant layoffs or shut down entirely. Less air travel has also led to constraints in air cargo capacity going forward, this is a major area of supply chain risk. While buyers may find cost savings, they should focus on service and long-term continuity of supply.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.