How Indirect Spend is Hurting Your Business and Cutting into Your Profits

Written by: Sarah Landrum, Founder, Punched Clocks

Indirect spend — the cost of goods and services not directly involved with a product’s manufacturing — plays a pivotal role in determining the profitability of a business. Examples of indirect spend include office supplies, janitorial services, furniture, safety equipment and computers.

A business might be fantastic at managing the direct costs that impact their manufactured goods, but the inefficient handling of indirect spend can result in lost profits and missing opportunities. Here’s what you should know.

The Challenges of Indirect Spend Management

Direct expenditures certainly require careful analysis and handling, but indirect spend management is a different beast. For one, indirect spend tends to impact companies that rely on a large number of suppliers or partners. Building quality relationships, with a handful of suppliers, is easier than doing so with dozens.

Indirect spend management also entails a larger number of smaller purchases, made more frequently compared to direct expenditures. Managing a large quantity of smaller transactions can prove to be a challenge. Additionally, although these transactions may be smaller, they often require more diverse expertise. Paying for electricity may require insight from someone with electrical experience to achieve the optimal price. Even buying supplies like paper clips in bulk may require someone with experience dealing with wholesalers.

Quality measurement is also difficult for indirect spend. Direct expenditures and manufacturing are usually subject to inspection, though indirect goods and services tend to not incorporate well with a company’s ERP system or industry-specific inspection. As such, evaluation of indirect goods can require more resources.

The bottom line is that optimizing indirect spend can result in savings of more than 25 percent.

Tips to Curb and Optimize Direct Spend

Once you’re aware of the various aspects of indirect spend that make it more daunting than managing direct expenditures, it’s worthwhile to consider key strategies for curbing indirect spend.

For one, it’s useful to establish relationships with key executives so you can gain better insight into their purchase processes. It may be unrealistic to cozy up to everyone, though being on good and transparent terms with suppliers can help optimize a large number of smaller purchases that indirect spend tends to encompass. Streamlining supplier management is essential. Without streamlining, companies can lose 20 percent of their possible savings.

Also, strive to prioritize preferred suppliers. Negotiate contracts with suppliers in top expenditure areas where the relationship’s mutually beneficial outcome is clear and supported by data. Ideally, you can pool smaller spends into a fund with a handful of suppliers instead of the daunting approach of dealing with so many vendors that it’s difficult to keep track.

Another useful strategy to help curb indirect spend is to embrace automation and collaboration tools — specifically, tools that provide an easy way to connect and incorporate with back office systems. These tools can also provide a closed loop procure-to-pay standard that helps reduce manual processes while also providing useful analytics on indirect spend. Specifically, e-procurement accommodates competition and keeps overhead low by minimizing brick-and-mortar investment.

Automation for reordering and supplier payment can help free up time for tasks that require more manual attention. Automation with payments can help avoid late fees and save thousands, while automating general operations can provide a paper trail that provides insight on where the budget is going.

You should also incorporate KPIs such as customer satisfaction and cost competitiveness to help measure and score indirect suppliers. KPIs can help you identify which vendors are easily replaceable and which vendors you may consider involving more in your operations.

Indirect Sourcing Categories to Highlight

There is a wide variety of indirect spend categories, with several of them ideal for looking at right away. For office supplies, including files and paper, consider negotiating with key suppliers for wholesale pricing. Also, embrace digital storage so you’re not forced to pay for physical document storage.

IT services can also be cut down by contracting the services to on-call personnel who only arrive when necessary. Depending on the niche, a full-time IT person may be wasteful if technological aid is not significant. Similarly, you can minimize janitorial costs by having an on-call provider. Providing them with your own janitorial supplies can also help cut down on costs.

Certain software can aid with HR and communications systems by automating certain tasks like benefits and claims management. With communications, a PBX system can provide an automated menu and call forwarding, essentially acting as a virtual secretary.

Travel is another area of indirect spend that can be costly. When possible, use virtual meetings to reduce paying for transportation. Company cars spend 95 percent of their time parked, making them wasteful budget items.

A business should optimize their indirect spend to get the most out of their resources and overall spending — plus boost profits and productivity at the same time.