Why indirect spend is the next frontier for supply chain cost savings
Direct stakeholder involvement is a hurdle in managing complex supplier relationships
While supply managers were extracting the last pennies from their latest negotiation with their steel supplier, the human resources manager was signing off on a travel software contract with very favorable terms.
Favorable for the supplier, that is.
Indirect spend comes of age
Indirect spend, long considered the backwater of supply management, are the products and services that a company needs to function. Examples are HR services like benefit administration and recruiting, IT services such as network management, travel management programs and even food service.
“Internal and external relationships play a significant role in supplier selection and contract management.”
“Indirect spend categories can be more complex and challenging because the spend is traditionally managed directly by the business or internal stakeholders such as legal, human resources, and marketing,” said Ray Mazzoleni, a veteran of indirect procurement that includes large multinational firms in the software, pharmaceutical, and document management industries. “As a result, internal and external relationships play a significant role in supplier selection and contract management.”
Getting some professional guidance
Non-manufacturing companies, like those in software, consulting, legal services, and medicine, would often assign supplier and contract management to the administrative and staff. Human resources would handle the administrative side like employee benefits and travel. Marketing would contract for advertising. Facilities managed all of the building maintenance functions and so on.
The process was fractured by function, with untold money misspent without regard for established supply management protocols such as contract management or even competitive bidding.
As the importance and sophistication of these agreements grew, and stakeholder complaints increased, management began to see the need for a professional approach.
Performance and relationship issues
The importance for indirect spend has been recognized in most organizations, with the traditional needs of customer service, cost management, process improvement, and supplier relationships coming to the forefront.
Mazzoleni noted that for the longest time companies considered indirect spend as necessary overhead spending and did not pay the same focus to it as direct spend.
“Spend and data analytics are the best tools for procurement to approach indirect spend strategically.”
“Indirect spend actually comprises the bulk of third party spend in most organizations,” said Mazzoleni. IT, professional services, HR and marketing tend to be the most common areas.”
While the performance of direct materials suppliers can be captured in standard enterprise metrics applications, many of the performance criteria of indirect suppliers are subjective or self-reported by the supplier or stakeholder. Even best travel software package will not mollify a traveler who doesn’t want to change planes in Chicago.
"There are usually more suppliers in indirect spend categories because there are more users,” said Mazzoleni. “Indirect spend with suppliers may encompass multiple categories, making it difficult to determine amount of spend transparency and the depth of supplier relationships.”
Active supplier management is critical
“Spend and data analytics are the best tools for procurement to approach indirect spend strategically,” said Mazzoleni. “In this respect, I like to provide the business unit with information and a perspective that they maybe weren’t aware of or hadn’t considered, in order to make an informed sourcing or business decision.”
His approach, along with collaborating to support and meet business objectives, always yields initial gains. “These benefits may include reductions in SKUs or offerings, revised specifications, reductions in the supply base, more favorable pricing and contract terms and demand management savings,” said Mazzoleni.
Mazzoleni said these gains can quickly disappear, if the spend is not actively managed. “Spend should be analyzed annually at a minimum and key suppliers should be reviewed quarterly,” he said. “While some indirect spend may be cyclical, like office supplies, other commodity areas such as marketing may change based on new products or campaigns.”
A practitioner turned educator, Rich Weissman has more than 25 years of experience in all facets of supply chain management. He is past president of the Institute for Supply Management –Greater Boston, and the recipient of the Harry J. Graham Memorial Award, the highest honor bestowed by the Association.