Why You Must Focus on Indirect Spend Management

Procurement teams often tend to overlook indirect spend.
Indirect spend constitutes a major share of the total expenses.
Done right, indirect spend management can provide visibility into costs and help achieve strategic business objectives.

November 28, 2022 | Procurement Strategy Blogs

Indirect spend management is often overlooked because it’s not as exciting as negotiating new contracts or placing orders.

However, these expenses can make up a large percentage of a company’s total expenses.

Therefore, indirect spend management is an important aspect of running a business, and one that must be paid close attention.

What is Indirect Spend Management?

Indirect spend management (also known as procurement management or procurement operations) is the process of monitoring and controlling purchases that are not directly related to creating a company’s final product. These types of expenses are known as indirect expenses because they are not direct costs related to the production of final goods. Rather, they are indirect costs that have a secondary impact on producing final products.

For example, the wages paid to a logistics manager are an indirect cost because they are not related to producing the final product. This is because that person’s salary isn’t used to purchase materials directly related to the making of the product.

Indirect spend management includes activities such as cost accounting, inventory control, and detailed tracking of different types of expenses that aren’t directly related to production. It is also known as ‘behind-the-scenes’ purchasing because it involves managing relationships with vendors and suppliers in order to get the right materials at the right price.

The goal of indirect spend management is to ensure that a company has control over the purchase of all its indirect materials, including office supplies and utilities.

Challenges Faced in Indirect Spend Management

When it comes to indirect spend management, there are a few challenges that organizations need to overcome in order to ensure long-term success. They are:

Lack of visibility into indirect expenses - One of the biggest challenges that organizations face with indirect spend management is a lack of visibility into these costs. If purchasing staff fail to record all indirect expenses, it becomes incredibly difficult to forecast future budgets.
Poorly managed relationships with vendors – Managing vendor relationships is another challenge of indirect spend management. If your purchasing team doesn’t have the authority to negotiate lower prices, they will pay more than they need to for the items they purchase.
Lack of consistency across departments – Another key challenge of indirect spend management is a lack of consistency across departments. If purchasing staff don’t use the same terms and vendor selection criteria, it becomes difficult to compare expenses between departments.

Steps Involved in Indirect Spend Management

There are many steps involved in indirect spend management. These are:

Clearly define buying process for indirect items - Before you can manage your indirect expenses, you need to create a buying process that allows you to select appropriate vendors and negotiate the best deal possible. This buying process should be consistent across all departments so that everyone is working with the same vendors and receiving the same terms.
Create a purchasing policy - Once you have a consistent buying process in place, you can create a purchasing policy that lays out your expectations for purchasing costs. Be sure to include information on how vendors are selected, payment terms, purchase limits, and other relevant details.
Monitor and track expenses - Once you have a consistent purchasing process and a purchasing policy in place, you can begin to monitor your expenses. This tracking can occur on a manual or automated basis.

Different Ways to Improve Your Indirect Spend Management

There are many ways you can improve your indirect spend management. Some of them are:

Conduct regular audits - Before you can improve your indirect spend management, you need to understand where you currently stand. To do this, conduct regular audits that evaluate vendor relationships, purchase orders, and inventory levels.
Train purchasing staff - Improving your indirect spend management involves training your purchasing staff on the best ways to reduce expenses. This can include showing them how to negotiate better terms with vendors or tracking supplier ratings to avoid unreliable vendors.
Automate purchasing processes - In addition to training your purchasing staff, you can also automate as many processes as possible to improve efficiency. This may include automating purchase orders, creating a purchasing system, or setting up an approval process.

Conclusion

While procurement teams spend a lot of time on direct spend management, they must not neglect indirect spend. This has become critical, given the growing uncertainty in the business environment.