Almost all companies are able to optimize their direct spend and have a very good control over them. The grey area lies in the ‘indirect spend’ of the company which is decentralized and is under the control of the several operating units of the business.
What does ‘Indirect Spend’ include?
‘Indirect spend’ includes expenses required for the operation of each business unit. Each unit works with varied vendors and incurs costs ranging from consumables like pens and pencils to daily utilities to airplane travel, IT and other professional services. Each of the costs may seem like small amounts as against the costs incurred for production, however, when the costs of all the operating units are totaled, they sum up to huge amounts.
What are the Challenges?
There are several challenges that businesses need to face while managing their ‘indirect spend’. The reasons why ‘indirect spend’ becomes difficult to manage for Procurement lies in the basic nature of these expenses which are listed below:
Involves dealing with more and diverse suppliers : The number of suppliers dealt with by the several functional units is large and varied. Building in-depth relationships with each of them is a challenge.
Average spends are smaller : The purchases under this category include varied items procured from different suppliers. As the volume is small, negotiating for better terms in the contract becomes difficult.
Smaller purchases at frequent intervals : The volume of purchases at a single time is small but they have to be incurred at frequent intervals. If the control over this is maintained manually then it will need more resources.
More internal stakeholders involved : Procurement finds it easy to manage ‘direct spend’ as there is interaction with a few stakeholders in the manufacturing unit. Whereas in ‘indirect spend’ the number of purchasing stakeholders is larger and Procurement has no power and the mandate for control over them.
Needs expertise in diverse areas : Indirect spend includes purchases as diverse as paper clips to light bills to catering and so on. Such a varied spread of purchases requires Procurement to be experts in diverse areas for their effective functioning.
Not easy to evaluate : There are no laid down metrics and criteria for evaluating the indirect suppliers unlike the direct suppliers to whom they can be applied. Sometimes, the ERP system of the company is not able to capture the items that go under the indirect spend.
Not given the priority : Control over the ‘direct spend’ often becomes the first priority of the management while that of ‘indirect spend’ is not given much importance. This is largely because of lack of volume visibility which in turn will come only if this area is given due priority by the management.
The indirect spend items constitute 20% of the total company’s expenditure but involves about 80% of the company’s suppliers. With the introduction of automated financial solutions; control over these 80% of suppliers may become a feasible option and in turn managing ‘indirect spend’ will become easier.