In procurement, goods and services can be acquired in different ways. Aside from the technology-driven evolution of procurement, eProcurement 2.0, or mobile procurement, there’s also the more enduring difference in procurement between direct and indirect spend. While you may be more accustomed to direct spend partnerships in procurement, understand that collaborating with your suppliers can also help you to improve your indirect spend.
In procurement, direct spend is the purchasing of goods and services that are to be directly incorporated into the product your organization produces. Indirect spend, on the other hand, is the purchasing of goods and services that are not directly incorporated into the product you produce. For example, a contractor may procure wood and nails to be used in a project. This is direct spend. The contractor may also procure a hammer and safety goggles for that same project. That’s indirect spend.
Other indirect spend items may include:
- Office supplies
- Janitorial items
- Office furniture
- Marketing-related services
- Travel management
In enterprise procurement, “indirect spend has come a long way,” says Jason Busch of Spend Matters. “Indeed, it is not just what we originally thought about putting through Ariba 15 years ago – i.e., paperclips and pencils.”
As opposed to direct spend in procurement, indirect spend may contain several areas that are ripe for being cut out of your expenses. We aren’t advising that you slack on the purchasing of safety equipment or bathroom supplies, just that you understand how your company’s own behavior can impact your selling, general, and administrative (SG&A) expenses.
As Busch advises his own clients, when looking into your indirect spend purchasing, “change your habits – don’t try to change the industry (or supply market). You won’t succeed in the latter.”
Just like in all facets on procurement, view your indirect spend strategy as the familiar hunt for value. However, understand that you aren’t always in control of the market.
“One of the toughest challenges for procurement organizations tasked with managing indirect spend is that they don’t do it – their suppliers and stakeholders do,” says Busch. “Consider the sometimes limited visibility procurement has into demand, pricing, contracts and related areas for indirect spend, especially those that are managed and/or negotiated at a decentralized level in the business.”
Quantifying the total cost of indirect spend can be difficult, but negotiating these items as a means for improving your own margins is a situation that can get really messy. Instead, focus on supplier collaboration as the means for reaching a compromise.
“Suppliers are truly key to the bigger picture,” says Busch. “Address their needs at the same time as internal stakeholders and users and you’ll win.”
Looking to launch a new collaboration? First, check out our piece, Before Partnering with a New Supplier, Ask These Questions >>>