How Indirect Procurement Management Drives Cost Savings

Indirect procurement management is one of the most important aspects of budgetary control. Learn how to save money and streamline the purchasing process.
Written by:  Bridey Joyce
Published:  July 10, 2024
procurement manager reviewing indirect procurement

Evidence of effective procurement practices can be found throughout a company's day-to-day operations. Consider a team member reaching for a supply and finding what they need. That's strong procurement. And if Finance closes month-end having verified that indirect spending is under budget? That's strong procurement as well.

The procurement category that accounts for purchasing goods and services tied to business operations rather than production is indirect procurement. Though it tends to get overlooked, it is an important component of preserving a company’s financial health since it can be equal to as much as 40 percent of revenue. Managing this type of spending effectively requires good purchasing practices and well-maintained budgetary control. 

Regulating indirect spend might mean the difference between preserving profit margins or potentially struggling with cash flow. Poor visibility, maverick spend, and other challenges can make indirect purchasing a costly threat to the bottom line. 

This article shares the information you need to know about indirect procurement, along with the methods and techniques that help Finance better manage indirect spend.

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What is indirect procurement?

Indirect procurement is the process of purchasing goods and services that are not directly related to the company's products or services. Unlike direct spend management, which focuses on raw materials and components needed for manufacturing and project development, indirect spend deals with all the behind-the-scenes supplies and services required to run the company's daily operations.

Although indirect goods and services don’t contribute directly to a company's output, they’re vital for maintaining an efficient, productive, and smooth-running business environment. Since these purchases typically represent a significant portion of spending, indirect category management is also a priority for the business function.

What kinds of goods are considered indirect procurement?

Offices require many items to function efficiently, meaning indirect procurement comprises a wide range of supplies, including everyday goods like pens and paper, to specialty items for your company’s industry or vertical (like retail procurement, hotel purchasing, etc.). 

The following common items can each play a role in keeping companies running smoothly, contributing indirectly to the productivity and success of organizations: 

  • Office supplies, such as paper, stationary, toner, and ink
  • Equipment and tools 
  • Maintenance, repair, and operations (MRO) services
  • Consulting and professional services, such as legal, marketing, and financial advisory
  • Information technology (IT) equipment
  • Software licenses
  • Travel and expenses
  • Catering services 
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The Complete Guide to Procurement Management KPIs

Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!

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7 Common challenges of indirect procurement

Indirect procurement budgets frequently spiral out of control due to challenges in administering them. Without a centralized purchasing system, the chaos of uncoordinated buying practices across departments makes tracking and managing overspending especially difficult. As a result, procurement costs quickly accumulate, sapping working capital and cash optimization. 

Here are some of the most common obstacles to good procurement management for indirect spend:

  1. Lack of visibility and control: Indirect procurement often involves numerous lower-dollar transactions, making it difficult to maintain oversight and manage expenditures effectively.
  1. Fragmented procurement processes: Different departments within a company may handle indirect procurement using varying procedures, leading to inefficiencies and inconsistencies
  1. Inadequate data and analytics: Without robust tracking and analysis of spending patterns, companies may struggle to identify cost-saving opportunities or negotiate better terms with suppliers.
  1. Complex supplier landscape: The wide range of goods and services involved in indirect procurement can result in a sprawling supplier base that is challenging to manage.
  1. Compliance issues: The less-centralized nature of indirect procurement can make it more difficult to ensure purchases adhere to company policies and external regulations.
  1. Limited strategic focus: Indirect procurement is not often seen as being as strategically important as direct procurement. This results in less attention from senior management and decreased resource allocation for process optimization.
  1. Difficulty in measuring ROI: Since indirect goods and services do not directly contribute to product output, quantifying their return on investment is complicated, making it harder to justify expenditures.

Indirect procurement best practices

Despite the difficulties of keeping indirect costs in check, there are many methods to make the process more manageable. Incorporating the following best practices into the procurement program can remove roadblocks to transparent and efficient procurement:

Consolidate suppliers to reduce the number of invoices. This can lead to more frequent volume discounts, improved negotiation leverage, and more consistent quality of products and services.

Implement a preferred supplier program for more strategic sourcing. This can unlock new discounts, ensure ongoing product quality, and facilitate quicker ordering processes. Procurement teams focused on growth and stability work to create strong supplier relationships and supply chain management to drive better outcomes.

Establish clear procurement policies to ensure clear communication. Document and communicate the procurement process so all stakeholders know their roles, responsibilities, and compliance requirements. This increases transparency and accountability.

Standardize procurement processes to ensure compliance with purchasing policies. Unifying purchasing processes across the organization increases efficiency, reduces processing times, and improves compliance with policies and regulations.

Conduct regular spend analysis to identify cost-saving opportunities. This could involve negotiating better terms with suppliers and eliminating unnecessary purchases.

Monitor supplier relationships to ensure competitive pricing and high-quality service. Identify agreed-upon procurement KPIs around delivery times, product quality, and service responsiveness. Use this information to make informed decisions about continuing or adjusting vendor relationships.

By integrating these best practices into your indirect procurement strategy, your organization can achieve significant cost savings while enhancing the efficiency of its purchasing operations.

ROI-boosting benefits of strong procurement management

Good systems can boost the ROI of your procurement function. A strong process — ideally one that implements a procurement management solution like Order.co — delivers improvements in performance that result in better ROI for your organizational spend.

Companies that improve their indirect procurement processes see these growth-building benefits: 

Cost savings: Procurement management helps you keep an eye on every indirect purchase to identify cost savings opportunities and reduce waste and redundancy.

Process efficiency gains: Developing a strong purchasing process means orders take less time to fulfill and track. Software can expedite and consolidate payment for even more efficiency.

Supplier performance improvement: Visibility and data from upgraded procurement systems make it possible to use vendor performance auditing to ensure your suppliers remain competitive.

Risk mitigation: Strong procurement reduces the likelihood of purchasing-related risks like supply chain disruptions or non-compliance issues.

Spend visibility: Data transparency creates an environment for analyzing spending and quantifying how purchasing changes influence strategic decision-making and cost management.

Employee productivity: With streamlined procurement processes, employees can use less research and footwork to get orders in the door, boosting productivity and satisfaction within the purchasing department.

Outlining the quantitative and qualitative benefits, such as reduced purchasing cycle times, lower transaction costs, and improved contract terms, helps articulate the value generated from indirect procurement initiatives.

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Ebook

The Complete Guide to Procurement Management KPIs

Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!

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Top metrics to track ROI in the procurement process

Want to know how your process improvements are paying off? Keep an eye on the performance of your procurement activities using these metrics:

  • Cost avoidance: Track savings that prevent potential cost increases and purchase price variance, even though they don't immediately reflect cost reductions.
  • Spend under management: Calculate the percentage of total spending actively managed within the procurement function.
  • Supplier performance scorecards: Assess supplier performance based on delivery time, quality, and contract compliance criteria.
  • Contract compliance rate: Determine the percentage of purchases that adhere to contracted prices and terms.
  • Purchase order cycle time: Measure the average time from issuing an open purchase order to receiving goods or services.

5 Strategies to streamline indirect procurement

Strong procurement processes are the backbone of efficient and cost-effective business operations. They are streamlined, repeatable, and designed to reduce errors and delays. To further enhance efficiency, consider using the following methods:

  1. Reduce manual record keeping: Implement digital solutions to automate record keeping, thereby minimizing human error and freeing up valuable time for more strategic tasks.
  1. Simplify line items to reduce redundancy: Review and consolidate purchase orders to eliminate unnecessary or duplicate items, ensuring lean and cost-effective procurement. 
  1. Create a streamlined purchase requisition process: Develop a simplified process for submitting, reviewing, and approving purchase requisitions to reduce cycle times.
  1. Implement electronic payments: Shift toward electronic payment methods to decrease transaction time, reduce processing costs, and increase purchasing transparency.
  1. Leverage technology: Implement procurement software to automate the indirect procurement process, enhance data visibility, and improve accuracy. This can speed up the cycle and reduce manual errors. Using a procurement platform like Order.co offers automated purchasing and approval workflows, smart checkout features, centralized order management, and consolidated payments.

Control indirect procurement spend with Order.co

The power of indirect spend to influence a company’s financial health makes managing it a top priority. Order.co offers a streamlined way to address the challenges of controlling indirect procurement. The platform gives companies the power to ensure every purchase is compliant, visible, and well-managed. 

Order.co offers users a suite of features to control indirect spend, including: 

  • Curated catalogs for easy, compliant ordering
  • Approval workflows for budgetary control
  • Permission-based buying by budget, role, department, or location 
  • Automatic, line-level GL coding
  • Automated matching to ensure accuracy
  • Consolidated payments for faster processing 

These features make it easy to get the supplies you need, verify compliance, and pay for orders in a timely manner. 

To learn more about managing indirect procurement with Order.co, request a demo today

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