Managing “indirect spend” can boost your bottom line

Guest column by Joe Payne, Director of Strategic Sourcing for Source One Management Services LLC. Source One is a Willow Grove, Pa., procurement cost-reduction consulting firm, and Payne is co-author of “Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing,” which is available on Amazon.

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As the economic downturn moves into its fifth straight year, companies continue to do everything they can to remain profitable.  On the cost side, the biggest single line expense in most organizations is payroll and health benefits, so restructuring and layoffs are usually the primary focus.  After that, the next biggest nugget is raw material costs, which means that negotiating with primary vendors in an effort to reduce unit prices and extend payment terms becomes standard operating procedure.

One area of cost that is typically overlooked or examined as a last resort is indirect spend.  Indirect spend, which includes everything a company buys that is not capital or a component of the product being made, tends to be the smallest piece of the spend pie and therefore not given much attention.  But taking a closer look at indirect spend can result in substantial bottom line improvement – even more so than payroll or raw material costs.  The reason is simple: in many organizations, indirect spend represents the “low hanging fruit.”  The costs are typically perceived as administrative or tactical, often viewed as a series of one-off purchases with no real consistency, and are not reviewed on a regular basis.  

Furthermore, indirect spend categories are more often than not managed by administrative staff, marketing, IT – whoever deals most with the supplier of the product or service.  These people are by and large not trained in purchasing and negotiations, and their primary responsibility is not to make sure they are getting the best price – it’s to make sure the company has office supplies available, that shipments go out on time, or that email servers are working.  Cost is not a focus, and only a secondary concern.

For these reasons, indirect spend can be an untapped opportunity for savings, as long as you have a process in place to capture them.  The important thing is knowing where to start.  Here are a few ways organizations can get hard dollar, bottom line cost savings from their indirect spend:

Create a Roadmap – Take a look your GL – who are the top suppliers?  What “buckets” do they fall in?  Is it IT or administrative expenses?  Is it marketing, or facilities services?  Categorize the data and then prioritize project areas based on the amount of spend, the ability to consolidate (if multiple vendors provide similar services) and the opportunity for cost savings (has the category been looked at recently in a formal way?).

Make it Strategic – Put together project teams including finance, purchasing, and the stakeholders/end users that work with the suppliers on a day-to-day basis.  Set an expectation for collaboration and a goal of substantial cost savings, and let them get to work.  Make sure Purchasing or someone that is an expert in sourcing and negotiations takes the lead.

Make it Sustainable – Given that almost two thirds of identified savings are never implemented, it is important that the project lead has the authority to make decisions and implement changes.  Make realized cost savings part of the team’s yearly objectives, and let them know that their success in the initiative will be evaluated as part of an annual review.  Reward them for their success, and change will come easy.

Strategic sourcing is a useful tool to identify cost savings opportunities, but for indirect spend, change management is just as critical.  If you make cost savings a priority, you will find a wealth of opportunity to improve your bottom line.  

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