A company’s profitability depends on both its direct and indirect procurement processes.
While direct procurement gets much of the focus because of its close relation to the manufacturing of products and delivery of services, indirect procurement also contributes to the cost-effectiveness of an organization.
With the right management, indirect procurement can help your business become more competitive and productive, with long-standing benefits that go beyond the bottom line.
What is indirect procurement?
Indirect procurement, or indirect spend, is the process of purchasing materials and services that support a business’s daily operations.
This might include the purchase of:
- Office furniture desks and chairs
- Office supplies like pens, printer ink, and paper clips
- Rent and utilities for the office building
- Software systems
- Consulting services
- Professional development
This is in contrast to direct procurement, which deals with the purchase of inputs or raw materials that are used in the production of goods or services.
Unlike direct procurement, indirect procurement doesn’t follow a regular cadence or pattern and is something you’ll engage in as it’s needed.
For example, you probably don’t have regular shipments of office chairs scheduled like you might for the rubber, plastic, or metal used to manufacture the products you sell.
When your team recognizes the need for new office chairs, you can begin the process of researching your options and selecting a supplier for a one-time order.
The importance of indirect procurement
Even though indirect spend does not explicitly impact a company’s profitability like direct procurement, it still plays an important role in supporting overall operations.
In fact, McKinsey & Company notes that since 2011, indirect spend has grown by about 7% each year for companies around the globe.
A common instinct is to see indirect procurement solely as an area for cost reduction–which it can be.
For instance, if the business is struggling to hit profitability targets in a certain quarter, it may hold off on sending the sales team to a national conference or upgrading staff computers until there is more cash on hand.
However, effective management of indirect procurement can also have a significant impact on a business’s efficiency and overall strategy.
Indirect procurement practices ensure employees have the proper tools and resources to be productive, creating a more sustainable work environment that helps the business meet its high-level objectives.
A company that makes and sells home decor can still manufacture goods even if they don’t have the most up-to-date customer relationship management (CRM) tool. However, having an advanced platform could help the sales and marketing team run more effective campaigns, resulting in higher sales.
Thus, indirect spend is not just a potential area for cost savings but plays an integral role in a business’s growth and competitiveness.
Common challenges with indirect procurement
Some businesses may be more reliant on indirect procurement, such as service-based companies, while others engage in more direct procurement activities, like manufacturers.
Either way, all businesses must find the right balance with their indirect procurement processes, ensuring they meet budget and profitability targets while also supporting innovation and efficiency.
Specifically, small and medium-sized businesses face some unique challenges with indirect procurement, including:
Limited procurement expertise
One frequent challenge for smaller organizations is that they may not have a dedicated procurement department in place.
Whether they lack the resources to build out a dedicated procurement team or they don’t have anyone on staff with relevant experience, it can be difficult to optimize this process without any knowledge or expertise to fall back on.
In reality, full-time procurement staff may not be entirely necessary for small companies with modest purchasing needs.
However, it can be beneficial to have someone on the team who is familiar with the process for better contract negotiations, managing vendor relationships, and building effective procurement strategies and policies.
Lack of sufficient policies and controls
Indirect procurement processes can be less frequent and of lower value than direct procurement.
However, the costs can quickly add up and impact the bottom line if you are not paying attention to the purchases the team is making.
You don’t want to feel like you’re micromanaging employees and looking over their shoulders each time they use the company card. But, you should be diligent about what the company funds are being spent on, and ensure it aligns with the business’s overall objectives.
If you don’t have specific policies or controls in place, you may start to notice frivolous spending that can strain profitability, such as extravagant office amenities, gourmet snacks, and lavish team-building retreats.
These purchases might be justified in the name of boosting employee morale and building culture, though they should also produce tangible value to ensure the company is making strategic financial decisions.
Scalability issues
If you have limited resources, it can be challenging to responsibly scale up purchasing activities as business grows.
When you’re just starting, it might be manageable to take care of all procurement matters on your own or designate these responsibilities to someone on the team.
However, these needs can become more complex as you expand into new markets, add new products or services, and devote more resources to strategic growth initiatives.
The risk is that indirect procurement management falls to the back burner, leading you to spend more than necessary, purchase items that don’t align with your strategy, or forget to order important supplies and services that support your operations.
Best practices to improve indirect procurement processes
Despite the challenges, small and medium-sized businesses can optimize indirect procurement to reduce costs, improve efficiency, and support innovation.
Here are some of the best practices to help you better manage indirect spend:
Create thorough policies
To guide strategic purchasing decisions, it can be helpful to establish indirect procurement policies–if you haven’t already done so.
These policies should be uniquely tailored to each business and the type of indirect spend they engage in.
Some of the general policies that can apply to most businesses include:
- Defining specific spending limits for each employee or department
- Guidance around how and when to submit a purchase request
- Outlining which staff members have the authority to approve spending
- The dollar limit when procurement contracts are required
- Guidelines for employee expense reporting and reimbursement policies
Implement request and approval workflows
You can improve indirect spend efficiency by implementing a workflow for employees to submit purchase requests and receive approvals.
This way, management can have more visibility and control over what the company is purchasing, while still enabling employees to express their needs for new equipment, supplies, services, or technology.
Whether through a shared spreadsheet or an expense management system, find the best solution for your business to help you eliminate unnecessary purchases.
It will allow you to place some extra scrutiny on the process to ensure you’re getting the best value for your money and meeting your procurement policies.
Establish an approved vendor list
Creating an approved vendor list (AVL) helps your team streamline procurement activities.
It provides a go-to list of vendors and suppliers who you’ve already vetted and meet your requirements.
When employees need to purchase a certain item or service, they can consult the list first to see if they already have a relationship with someone who sells it.
Chances are, the vendors and suppliers you have long-standing relationships with on your AVL will offer more favorable prices and delivery terms, which can be more profitable and efficient than finding a random supplier based on a quick search.
Perform regular audits
Once you have the proper policies and systems in place to manage indirect spend, conduct regular audits to ensure all practices remain in line with your strategy.
You’re not only looking for areas of non-compliance but also opportunities to reduce expenses and prevent unnecessary spending.
Make sure your suppliers are meeting your expectations on price, delivery speed, and quality, and see if there is further negotiating room for future purchases.
Adopt technology solutions
With the right technology systems, you can enjoy a more efficient and streamlined procurement process.
Certain solutions will offer automated approval workflows and expense tracking, reducing the amount of hands-on time your team spends on these administrative tasks.
Many will also include advanced analytics and data visualization, making it easier to monitor spending trends in real time and quickly gauge if you’re on track with your budget.
All in all, this technology can help you make better indirect spending decisions and identify cost-saving opportunities, even if you have a limited headcount to dedicate to these tasks.
Streamline indirect procurement payments with BILL
Indirect procurement may not be as impactful on the bottom line as direct spend, though it can still create significant value for the organization when managed correctly.
Optimizing indirect procurement processes helps you reduce costs and improve operational efficiency, providing your team with systems and policies to make strategic purchase decisions.
Aside from creating detailed policies and workflows for indirect procurement, having the right technology systems (like BILL’s automated accounts payable solution) helps your team be more efficient with its resources, reducing the amount of manual work required to manage purchases.
BILL simplifies the process y by automating the approvals workflow, verifying vendor invoices for legitimacy, and scheduling on-time payments.
Streamline your indirect procurement process today with BILL’s automated supplier payments tool.
