Leaving Indirect Spend Unmanaged Means Dollars Left on the Table

Posted: 06/12/2019 - 01:35

For organizations looking to identify cost savings, increase profitability and get a leg up on the competition, indirect spend management is an ideal place to look. Often considered the backend of procurement – involving expenses like IT services and equipment, professional services, office supplies and HR services – indirect spend actually accounts for a significant portion of overall spend. When left unmanaged, organizations can’t possibly have a real understanding of spend or cash flow, which can lead to overspending given the overall lack of visibility and control for this category. The challenge is that few companies have the resources to properly manage indirect spend. 

Taking this into account, we recently analyzed indirect procurement data from our repository of over 125 million transactions and $140 billion in spend, with the goal of providing industry-specific reports that track how KPIs (Key Performance Indicators) and benchmarks shift over time. The first two procurement benchmark reports – Consumer Packaged Goods (CPG) and Manufacturing – provide interesting details around KPIs like supplier counts, spend as a percentage of revenue, indirect spend per employee, purchase order coverage, payment days and more. 

Perhaps one of the most notable findings was that indirect spend represents 26 percent of all costs for both manufacturers and CPG companies – a huge number when left unmanaged – signaling the importance of leveraging indirect spend insights to drive value and competitive advantage. 

Another notable finding gave us some real-life insight into what could happen to indirect spend when the number of an organization’s suppliers grows in a short period. From 2015 to 2017, we found facilities spend per headcount in the manufacturing industry increased by nearly 35 percent. But at the same time, the facilities supplier headcount increased by eight percent, with disproportionately more suppliers than the size of the category implies. Consolidation of suppliers is a crucial strategy for procurement organizations when looking for long-term savings. Not only will this usually lead to lower prices as you leverage your volume with fewer suppliers, but it also will allow you to spend more time focusing on other areas of the business. 

Surprisingly, however, the growth of suppliers didn’t negatively affect the payment terms in the facilities category, which instead became more favorable over the last few years. Longer payment days give organizations more flexibility with your working capital – a vital part of a more efficient organization. 

On the flip side, we saw a significant drop in spend within the marketing branch, especially in the consumer goods industry between 2015 and 2017. This data suggests that organizations have lowered their spend on media buying, playing a big role in the decrease in marketing spend overall. Instead, CPG organizations are creating better-targeted ads, leveraging newer marketing channels and overall, doing more with less money as customer expectations mount.

So, what do the insights provided by these benchmark reports really mean? For CPG and manufacturing organizations, spending dynamics and supplier relationships will continue to shift and margins will continue to tighten, leaving little room for error. While most of procurement’s resources are typically dedicated to managing direct spend, the indirect side of the business presents an immediate opportunity to reduce costs and drive efficiencies.

While this type of analysis certainly offers manufacturers and consumer goods organizations with valuable insights around current spending trends, it’s only a moment-in-time picture. The real value of benchmarking comes from the ability to compare your own data against your peers, category-by-category, updated every month to help drive informed decisions about your business.  And now with machine learning and AI-enabled tools more readily available, organizations have a wealth of new data at their fingertips and are able to clean, analyze and act on it like never before. Benchmarking can unveil insights and opportunities driven from data that previously might not have been considered at all. 

As organizations continue to look for savings opportunities that truly deliver value to the bottom line, procurement organizations would be wise to not overlook their indirect spend. Managing both direct and indirect spend by leveraging AI and data-driven procurement benchmarking is what will ensure that businesses thrive in the coming years.


About The Author

Johan-Peter Teppala's picture

Johan-Peter Teppala is a seasoned procurement leader and the CEO of Sievo, a procurement analytics company that helps the world’s leading businesses better leverage spend data.