What is Indirect Procurement & Why should your company care?

This article looks at what indirect procurement is, why it's important, and the whys and hows of effective indirect procurement implementation

What exactly, is Indirect Procurement?

Indirect procurement is the process of purchasing goods and services that are critical to the day-to-day operations of a business but not directly linked to the production of goods or delivery of services.

Indirect procurement enables a company to function effectively, is driven by employee demand, and indirectly affects a company’s profitability.

Examples of Indirect Procurement

  • Commercial space: Companies need factories, offices, and business properties to function smoothly.
  • Utilities: Commercial properties require water and electricity for equipment to work and the business to function.
  • Professional services: Companies require legal, accounting, and consulting services to function effectively.
  • Maintenance, repair and operations (MRO): Companies require MRO supplies to maintain their equipment and facilities.
  • Travel: Companies require travel services to send their employees to different locations for business purposes.
  • IT services: Companies require IT services to maintain their computer systems and networks.
  • Advertising and marketing spend: Companies require advertising and marketing services to promote their products and services.

Why should your company focus on indirect procurement?

Indirect procurement is a critical aspect of any business.

Since it encompasses the purchase of goods and services not directly related to the production process - but is still essential for the smooth functioning of the organisation - many businesses tend to overlook indirect procurement, which can - and usually does - have a significant impact on the company's bottom line and overall success.

Cost savings

One of the primary reasons why businesses may want to improve their indirect procurement processes is cost savings.

Indirect procurement accounts for a significant portion of a company's expenses, and streamlining the procurement process can help identify opportunities for cost reduction.

By consolidating suppliers and negotiating better terms, businesses can save a significant amount of money and improve their bottom line.

Increased efficiency

Another reason why businesses may want to improve their indirect procurement processes is to increase efficiency.

Indirect procurement can be a time-consuming and complex process, involving multiple stakeholders and departments.

By implementing an efficient procurement process, businesses can reduce the time and resources required for procurement, freeing up employees to focus on more critical tasks.

Ensuring compliance and risk mitigation

In addition to cost savings and efficiency, improving indirect procurement processes can also help businesses ensure compliance with regulations and mitigate risk.

The procurement process can be subject to various regulations, and non-compliance can result in fines and reputational damage.

By implementing a standardised procurement process and monitoring suppliers, businesses can ensure compliance and mitigate risks.

Improved supplier relationships 

Furthermore, improving indirect procurement processes can also lead to better supplier relationships. A well-managed procurement process can foster collaboration and transparency between suppliers and businesses, leading to better communication, improved quality, and ultimately better results.

How to efficiently implement and improve indirect procurement processes

So improving indirect procurement processes can have a significant impact on a business's bottom line as well as its overall success.

By focusing on cost savings, efficiency, compliance, risk mitigation and supplier relationships, businesses can streamline their procurement process and reap the benefits of a well-managed procurement function.

But how exactly can your business implement and improve its indirect procurement processes?

Identify the right suppliers

Indirect procurement professionals are keen to promote innovation, and they consider their suppliers to be among the main drivers of innovation.

The suppliers also rely heavily on the involvement of their internal teams to come up with innovative ideas or solutions, thereby creating more value.

Bring all supply chain parties together

Enhance indirect procurement efficiency by bringing all supply chain parties together to better identify opportunities for savings in operations, maintenance, repair and other areas.

Recognising that the procurement process is more complicated than a single transaction, examine potential efficiencies in identifying potential suppliers.

Set clear goals

A program to transform indirect procurement begins with setting clear goals and focusing on categories and subcategories.

Your organisation can then analyse the potential value of these categories and subcategories by using benchmarks and spend visibility tools.

Rethink outsourcing

Indirect procurement is a critical business function for any company and can unlock significant value while providing competitive advantages.

While outsourcing a portion of indirect procurement can offer considerable short-term benefits, such as access to category expertise and market intelligence, long-term value erosion is a serious risk.

A new vision of Indirect Procurement

According to McKinsey, indirect procurement is a critical business function for any company and can unlock significant value while providing competitive advantages.

Since 2011, indirect spend has been growing by an estimated 7 percent per year globally. Even so, many organisations fail to give indirect categories the attention they deserve and common challenges are apparent across industries.

McKinsey says that companies need a new vision for indirect procurement that combines cutting-edge tools and practices, as well as traditional approaches to category management, to address fundamental issues relating to processes, capabilities, and data.

Using this coordinated, technology-enabled approach, global companies are already achieving marked improvements that are driving significant value.

In other words, to truly implement effective indirect procurement, a wider view of how the parts of your company's operations and processes relate to the whole, is absolutely necessary.

A program to transform indirect procurement begins with setting clear goals and focusing on categories and subcategories, as above - or in layman's terms: Draw up a budget on your spend - and be specific and accurate with your classifications.

Procurement professionals are keen to promote innovation, and they consider their suppliers to be among the main drivers of this innovation - so look to your suppliers, and adapt your operations accordingly. 

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