In business, certain expenditures are unavoidable. The cost of raw materials and other direct costs are easily identifiable and often make up a significant chunk of a company’s expenses. However, another category of spending is just as important but often more difficult to track: indirect costs. Indirect spend includes everything from office supplies to marketing and advertising expenses. While identifying and tracking these costs may not always be easy, they can significantly impact a company’s bottom line. Therefore, mastering indirect spend can be crucial to your company’s success. In this blog post, we’ll explore some tips for getting started.
1.Categorize the expenditure
When it comes to indirect expenditure, categorization is key. With so many items and internal customers, it can be overwhelming to keep track of everything. That’s where category managers come in. They help segment and prioritize the expenditure, making it more manageable. Unfortunately, these materials are unclassified, random, and very difficult to track in many cases. An expenditure analysis tool is a necessity in these cases, as it can help provide more accurate categorization and comprehension of where money is being spent. With this tool in place, organizations can save time and money while better understanding their overall spend.
2. Understanding the importance of indirect procurement
When management is looking to cut costs, it’s up to the category managers and other procurement professionals. Unfortunately, this leaves an already-struggling department with an even smaller budget, making it difficult to continue providing the same level of service. However, a robust indirect procurement team can help the company avoid pitfalls such as supplier disruptions or costly contract breaches. Category managers can help ensure that by switching to smart AI-infused flexible procurement technologies.
3. Improving transparency to maintain credibility
Indirect spend can quickly spiral out of control if left unchecked. This is why developing and implementing a spend management plan supported by key performance indicators is essential. KPIs can help you track and evaluate the effectiveness of your indirect spend management strategy. It is also crucial for the organization to have a proper savings plan before launching an indirect procurement initiative. When savings are not realized or are allocated in a way that the stakeholders disagree with, it can damage relationships and make it harder to get buy-in on future initiatives.
4.Enabling beyond the tools
Stakeholders may fear that procurement could impact personal relationships developed with suppliers. They don’t want to use well-defined competitive bidding or auction processes. It is very convenient for them if their current supplier has been around long enough, so they can rely more heavily on what he knows than start over from scratch! However, by outlining the process and timelines and understanding the stakeholder’s business needs, objections can be quickly diminished. Moreover, to successfully deploy a new digital and analytics-based approach to procurement, it’s essential to create the right culture and instill the necessary mindsets and behaviors. This requires strong support from top management and building the hard and soft capabilities needed for the organization to reach and sustain its full potential.
5. Effective governance structure to ensure success
A well-oiled machine needs all of its cogs working in tandem to function correctly – the same can be said of a successful procurement initiative. Companies that adopt indirect procurement initiatives without implementing an effective governance structure are doomed to fail. Top management must step forward in setting direction and priorities while also providing the necessary resources. But they can’t do it alone; they require the support of stakeholders at all levels of the organization and beyond. Only then can indirect procurement live up to its full potential.
6. Breaking the silos- a step towards agility
In traditional organizations, each indirect spend category is managed by a separate group or individual. This can lead to silos within the organization, with each group focused on its own area and competing for resources. In an agile organization, managers are replaced by a group that can negotiate for different categories. The working group comprises multidisciplinary professionals from all over the company and is known to include engineers and marketers in its membership. This allows for more collaboration, flexibility, and a greater focus on the organization’s overall objectives. The agile operating model includes defined processes with clear ownership, involvement of internal and external stakeholders, and standard but flexible activities. Cross-functional collaboration is essential for controlling costs and ensuring that projects stay on track.
Managing indirect spend is critical to organizational success. However, inefficient processes and lack of visibility can lead to significant waste and missed cost savings and value improvement opportunities. The easiest way to cut down on your spending is by investing in eProcurement and Spend Analytics solutions. It’s a cost-effective and efficient solution that will help you make better decisions about how money flows through the company, leading it right back to where they belong: into revenue streams! With the right tools and approach, you can optimize costs, focus on value improvement, and improve your bottom line. In addition, proactive governance will help you keep indirect spending in check while improving overall performance through effective relationships with suppliers and stakeholders! So, are you ready to make the move?