However, indirect procurement often gets overlooked, and this can harm a company’s profitability. By not understanding or simply ignoring indirect spend, a company may overspend in this area and cut into profit margins. A company can also miss crucial ways to find savings options which can improve overall profitability.
How Important Is Good Indirect Spend Management?
Since indirect purchases such as professional services, travel, IT, marketing services, HR, facilities, utilities, janitorial services, maintenance, repairs, office supplies and other purchases may not be made in bulk and may not be made regularly, it is easy to overlook the impact they may have on a company. But make no mistake, there is a significant impact.
Indirect spending can account for 15-27 percent of total revenues. Manufacturers specifically can spend 20 percent or more on indirect expenses, while across businesses, indirect spending can represent as much as 50 percent of an organization’s total purchases.
Business executives recognize the importance of indirect purchase savings. About 50 percent of Fortune 1000 leaders polled stated that reducing indirect spend costs could improve savings with no interruption of business. Another 70 percent of procurement leaders reported their intentions for reducing indirect spending. Despite this, one study concluded that two-thirds of businesses reviewed do not manage up to 40 percent of their indirect procurements.
What Is Indirect Sourcing?
Indirect materials purchasing refers to the purchasing of those materials which affect the daily operations of a company but do not add to the bottom line. In the example of a clothing manufacturer, the purchase of computer equipment for the office and office supplies is an example of indirect spending. Indirect spending can also include services, such as IT or repair services.