Just as “no man is an island,” no business can survive without forging strong relationships with other goods and service providers. To take charge of the procurement process and bring about optimal growth, companies must work to develop smart strategies that keep business operations running smoothly without negatively impacting profit goals.
Although often overlooked as many companies focus primarily on direct procurement activity, making the most of indirect procurement can help businesses of all kinds better realize their long-term goals.
What Is Indirect Procurement?
To reap the full benefits of indirect procurement, you’ll need to first understand what exactly it involves. Let’s begin by contrasting direct and indirect procurement:
- Direct procurement involves a business going directly to a source for raw supplies. For example, an apparel manufacturer may contract directly with a cotton or silk supplier to obtain the required fabrics. Without the needed material, of course, the apparel company won’t be able to make its product or generate revenue.
- Indirect procurement refers to the process of purchasing services or supplies that keep a business running but are not directly linked to revenue generation. Indirect procurements may include office equipment, fixtures, janitorial services, IT services, travel, and so on. All of these allow the company to function efficiently and effectively, but don’t directly impact the bottom line.
Whether it’s a bakery buying sugar to make the cupcakes promised for a client’s corporate picnic, or an on-site, outsourced reprographics company contracting for copier repairs, all B2Bs rely on indirect procurement to keep things moving. Buyers typically make procurement decisions based on company requirements in relation to cost, quality, and reliability.
Tips for Successful Indirect Procurement
Managing indirect procurement is a complex process, requiring careful planning and monitoring. After all, there are many categories to address, relationships with suppliers change regularly, and contracts are negotiated on an ongoing basis. Establishing a coherent indirect procurement strategy can allow for significant time and cost savings. But how to get started? The seven tips outlined below can help.
1. Be Strategic
Enhance indirect procurement efficiency by bringing all supply chain parties together to better identify opportunities for savings in operations, maintenance, repair, and other areas. Recognizing that the procurement process is more complicated than a single transaction, examine potential efficiencies in:
- Identifying potential suppliers
- Distilling company requirements into explicit supplier specifications
- Conducting market research
- Assessing quotations to award contracts
- Developing and managing supplier relationships
As Greg Hamel, director of Business Strategy & Indirect Purchasing at Ford said, “Supplier relationships are important now, more than ever.” Hamel emphasizes the importance of recognizing the full potential of a company’s purchasing team, which serves as much more than a “transactional group.” To develop smart indirect procurement strategies and get the best value on purchases, logistics and procurement teams must work together, he said, with the procurement side bringing knowledge of supplier relationships and sustainability and the logistics side offering insight into “the art of logistics and optimization.”
2. Stay Informed
Use analytics and market research to gauge the best ways to approach suppliers in order to meet your internal consumers’ needs. Do research first to ensure you fully understand the area for which you are procuring and what specific needs must be met. And before even approaching the supply market, take the time to determine how much products should cost or what services should be included.
3. Build Relationships Internally
Many indirect categories have their own stakeholders within a business. Individuals accustomed to making their own procurement decisions may chafe at efforts to streamline the process, or may resist changes that they have not approved directly. Take the time to build relationships with these people and get their input on indirect procurement activity; they may have insight into certain areas that you don’t, and getting feedback from various departments will allow you to better predict future shifts and needs.
4. Track Spending
All too often, indirect procurement spending is not monitored with the same hawk-eye attention paid to the direct supplies needed for production. Consider office supplies as an example. At many companies, employees are given leeway to order new supplies as needed, without any oversight into whether a $30 stapler is really necessary when a $15 one would likely work just as well. Keep tabs on employee spending, and seek out areas for improvement across all departments.
5. Embrace New Technology
Uncovering opportunities for savings is a top priority in the procurement world. By seeking out new technologies and taking advantage of today’s smart analytics and data solutions, businesses can expect:
- Heightened spend transparency
- Better category management
- More effective supplier relationship management
- Greater awareness of market trends
6. Look to Suppliers for Insight
A good supplier relationship involves vendors acting as a resource for continuous improvement. They are not only looking to sell you products or services but are also working to serve as a trusted partner. The more you focus on facilitating communication and mutually beneficial collaboration with suppliers, the more likely you are to see real value.
7. Ask for Help
For some businesses, it makes sense to invest in indirect procurement management assistance. This might mean hiring procurement specialists to increase overall efficiencies and reduce your hands-on interaction with vendors or investing in sophisticated software solutions to streamline vendor onboarding, provide greater category transparency, and reduce costs associated with indirect procurement.
How to Implement Smart Indirect Procurement Practices
Indirect procurement activities play an important role in any type of business or industry. To ensure streamlined, efficient operations and a healthy, resilient supply chain, companies must ensure indirect spend procurement is not neglected or overlooked.
And with today’s wealth of technology and information, there are more opportunities than ever for both time and cost savings. Keeping abreast of new trends and following the seven tips outlined above will help put your company on the path to continued success.