Author: Michael Wydra

In part two of this short series of guest posts from REL Consultancy, manager Michael Wydra takes a closer look at how, once an indirect spend analysis is complete the insights gained can be turned to procurement’s advantage. After analysing indirect spend on an aggregated level (see part one), the next step is to go into detail by gaining insight into the specific spend categories. Subcategories should be defined to reasonably group category spend. It can also make sense to capture certain supplier characteristics, such as region, spend contracted and contract expiration date. Even where there is a valid contract, the business may not be actually buying according to the negotiated conditions. A catalogue with negotiated items and prices may be available but not used. Maverick spend, or purchases executed outside the boundaries of a contract, can be a reason for high purchasing costs as well as increased transaction costs. Ideally, an organisation should evaluate the percentage of targeted or negotiated cost savings lost because contracted rates from preferred suppliers were not used during the purchasing process. This is particularly a problem in indirect spending categories, where, on average, 12 percent is lost. Other opportunities include investigating lower-cost markets rather than sourcing locally. Measuring compliance is not easy but necessary to point out process weaknesses.

Today we are please to publish the first in a short series from Michael Wydra of REL, part of the Hackett Group Cutting costs is a recurring and sometimes even a permanent imperative in most companies. But when firms need to slim down, their efforts usually focus on reducing direct expenditures, even though indirect spend areas provide higher improvement potential that is often easier to realise. “Indirect” spend covers goods and services that are not used in the manufacturing of an end product or development service. This area is often referred to as “nonstrategic” spend, since it has low strategic relevance. Indirect categories include office products, travel, car hire, waste management, energy, facility management, security services, insurances, telecommunications, IT, packaging, and maintenance, repair and operations (MRO) items. Because these areas are not always covered by central procurement, they may not be managed in a professional manner, resulting in a lack of visibility and control. However, these expenditures can add up to large amounts, making indirect spend worth a closer look.