While businesses follow well-defined procedures for direct procurement, indirect procurement management is frequently overlooked. However, it is one of the processes that provide real benefits, particularly in terms of cost savings. What challenges are involved? What methods and tools can help optimize it? Read on to find out.
I. What is indirect procurement?
Indirect procurement refers to all the goods and services that are not directly related to a company’s offering but are necessary for its operations. They fall into two categories.
- Class B procurement relates to the company’s core business activity, covering, for example, computer hardware and software, business travel, marketing, etc.
- Class C procurement includes non-recurring or non-strategic procurement, such as office furniture and supplies, sanitary supplies, and other overhead expenses.
II. The difference between direct and indirect procurement
Direct procurement, also known as production procurement, is an integral part of the production process. The company’s commercial offering revolves around direct procurement. Indirect procurement, or non-production procurement, refers to goods and services that are necessary for the company’s operations.
This distinction results in genuinely different management styles. Direct procurement, which is more strategic, involves clear procurement processes and strict controls. However, up to 79% of companies admit to not having a comprehensive view of their indirect procurement!1
III. The influence of indirect procurement and the impact of unfocused management
The influence of non-production procurement
The Pareto principle, also known as the 80/20 principle, establishes its average financial impact within companies.
- Class B procurement represents 15% of an organization’s expenditure and 30% of its total procurement volume.
- Class C procurement accounts for just 5% of its expenditure but 50% of its procurement volume.2
Orders not controlled by Procurement departments
Because indirect costs are low, they are considered non-critical. This is supported by the fact that all of a company’s departments are typically authorized to incur these costs. This quickly causes them to go unnoticed by Procurement departments.
Lack of supervision can lead to the following consequences:
- procurement carried out without a contract;
- unplanned procurement carried out at the last minute;
- a large number of suppliers contacted and orders processed;
- payment methods that may lack adequate control (such as credit card payments);
- potential order errors and returns.
A matter of profitability, productivity, and supplier risks
Rates that are not negotiated upstream, unnecessary procurement, and excessive quality are among the obvious economic losses caused by a lack of procedures—but they are not the only ones.
This high volume of orders and invoices drives up the company’s operating costs and increases the TCO (Total Cost of Ownership) of the procured goods. The Procurement and Accounting departments’ productivity also suffers.
In addition, this unfocused management of suppliers makes it impossible to evaluate their performance. How do you know if they are reliable or compatible with your company’s strategy? You need to be able to fulfill your duty of care while also achieving your CSR objectives. The supplier risk is real, from both an economic and a regulatory standpoint.
IV. Managing indirect procurement in 7 steps
To avoid the negative impact of uncontrolled indirect procurement, it is vital to implement—and follow—a number of management rules.
- Audit and analyze your spending and supplier base by category.
- Define a procurement strategy based on these categories. This might include creating an Indirect Procurement department, outsourcing indirect procurement management, streamlining the supplier base, or implementing an e-procurement tool.
- Streamline and then reduce your supplier base and the products sold to your internal customers. The goal is to reduce both your procurement costs and your order processing costs.
- Negotiate procurement prices and consider incorporating them into framework agreements.
- Define a standardized procurement policy and processes… and make sure you share them with everyone internally!
- Create a catalog of the products available to internal buyers and distribute it to them. This can also by accomplished using a custom marketplace or text-based forms.
- Centralize your indirect procurement with software solutions. An e-procurement solution will give you control over non-production procurement processes, while an SRM platform will help you manage your supplier base.
What are the advantages of e-procurement tools?
These digital solutions centralize all indirect procurement and include features designed to make things easier for your teams. For example, they automate procurement requests by implementing a product catalog or a Punch-Out (an integrated catalog linked to the supplier’s website which displays pre-negotiated rates). Workflows exist for validating these requests, as well as for the automated reconciliation of purchase orders and supplier invoices.
E-procurement solutions offer the following advantages:
- real time savings for internal customers and accounting teams;
- increased efficiency for procurement teams;
- improved visibility of indirect procurement expenses;
- reduced ordering and processing costs;
- better compliance with payment deadlines due to faster reconciliation of orders and invoices.
Optimizing your indirect procurement allows you to better control your expenses. Your teams will also see tangible improvements in time and efficiency. As a bonus, reduced procurement processing times lower the risk of late payments. Achieving this optimization, however, requires implementing the right strategies, centralizing procurement, and automating processes through the implementation of an e-procurement solution.
1 : Definition of indirect procurement and its challenges, décision-achats.fr
2 : About Class C procurement, Manutan