CSCMP's Supply Chain Quarterly
May 22, 2019
Procurement Priorities

Indirect spending worthy of direct attention

If your procurement organization isn't managing your indirect spend, then you're missing out on a significant source of cost savings.

At many companies, procurement mostly focuses on managing the direct spend—the goods and services that go into the products a company makes—and rightly so. It's a big chunk of the company's annual spend, and cost-saving initiatives can produce impressive results.

But companies can only cut so much. Those searching for new ways to save should look to procurement to manage another chunk of the spend, the goods and services they buy to operate their facilities, also known as indirect spend.

Although indirect spend represents a smaller percentage than direct spend, it does hold a lot of potential for savings. When procurement is involved, companies "often achieve documented cost savings in excess of 25 percent from previous agreements," writes Robert A. Rudzki, retired chief procurement officer at the pharmaceuticals giant Bayer, and Lehigh University Professor Robert J. Trent in their book Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap. That's because procurement has the skill and expertise to source information technology, travel, human resources, marketing, and other categories. Buyers know how to gather and analyze spend data and have an understanding of suppliers and the market. They manage relationships. They also have tools that can help simplify processes, such as spend analysis and procure-to-pay software.

Involving procurement in these nonproduct or indirect categories can take several different forms. It can consist of buyers taking complete responsibility for sourcing the category, buyers leading cross-functional teams that negotiate agreements and manage supplier relationships, or buyers consulting with business-unit leaders on purchasing decisions.

Yet many companies—even those with chief procurement officers who understand the value of involving procurement in indirect spend—are not seeing the savings. The A.T. Kearney Indirect Procurement Study of CPOs at leading multinational companies finds few are managing indirect procurement with the level of attention needed to reap the benefits. They have good intentions, but they are not making full use of tools that can help, such as outsourcing transactional processes, using data to forecast spending, and tracking savings generated by business units.

Indeed, managing the indirect spend can be challenging. It involves many categories and subcategories—and suppliers—of products and services for which there can be a multitude of relatively low-dollar transactions. Sometimes other departments buy the goods and services from favorite suppliers and have done so for years. When procurement tries to step in, they may feel threatened.

In their book, Rudzki and Trent offer suggestions to help procurement meet some of the challenges of indirect spend, including enlisting support of top management, clearly defining and communicating procurement's role, and recruiting internal business leaders for input. One company where procurement is involved with good results is Mondelez International, the global maker of such brand-name goods as Oreo cookies, Toblerlone chocolate, and Cadbury candy. Andrea Sordi, global procurement director—business services, and his team strategically source the company's indirect categories, which represent 10 percent of an annual $20 billion spend. The categories are IT, travel, legal, and human resources services.

Keeping in mind Mondelez's corporate goals of driving high margins, increasing productivity, and generating cash to reinvest in the business, Sordi and his team use zero-based budgeting, a tool that reviews every dollar spent each year, to reduce costs by 30-70 percent, depending on the category. In recognition of their success, Mondelez presented the team with a company award, and the team spoke about its best practices at a Consumer Analyst Group conference.

Other companies can replicate Mondelez's results. Involving procurement in the indirect spend is a good place to start.

Susan Avery is a business journalist with 30 years of experience covering the procurement profession.

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