How to Use Procurement Goals to Reduce Indirect Spend
Last updated: March 23, 2023
In today's business landscape, companies constantly seek ways to optimize their spending and maximize their bottom line. One area where significant savings can be realized is indirect spend. These expenses can quickly add to a considerable portion of a company's budget. That's why setting procurement goals can effectively manage indirect spending and achieve savings without compromising quality or service.
A procurement goal is a specific objective a company or organization sets for its procurement process to receive the best value from its sources and support its overall business objectives. But what are the functions of procurement?
The procurement process involves acquiring goods, services or works from external sources, such as suppliers or vendors, to support business operations. Procurement is crucial for businesses of all sizes and across all industries. It's a vital role-player in ensuring the organization has the necessary resources to operate efficiently and effectively.
Effective procurement practices help organizations achieve various essential business outcomes. Organizations can better align their procurement strategies with their overall business objectives and track progress toward achieving them by setting procurement goals.
Each organization's procurement goals can differ depending on its industry and business objectives. However, based on industry best practices and trends, these are the four goals of purchasing:
Reducing procurement costs is a common goal for organizations because it can significantly impact their financial performance. This spending can domino into other areas, such as improving profitability and gaining a competitive advantage. So how do organizations go about reducing procurement costs? Here are some strategies:
- Negotiate better prices: One of the most common ways to reduce procurement costs is to negotiate better prices with suppliers. This strategy may involve negotiating volume discounts, reducing minimum order quantities or asking for better payment terms.
- Consolidate purchasing: Another strategy is consolidating purchasing volumes across the organization. This approach can help the organization achieve economies of scale and negotiate better prices with suppliers.
- Implement procurement technology: Procurement technology such as e-procurement systems or automated purchasing tools can streamline procurement processes and reduce the time and resources required to manage procurement.
Building strong supplier relationships is critical for ensuring a reliable and high-quality supply chain. Effective supplier relationship management can help the organization improve product quality, reduce lead times and increase supply chain resilience.
This goal involves identifying and engaging with critical suppliers, establishing mutually beneficial partnerships and enhancing communication and collaboration throughout the procurement process. Here are some other strategies to enhance and maintain supplier relationships:
- Communication: Effective communication is key to building and maintaining strong supplier relationships. Organizations should be transparent about their needs and expectations and communicate regularly with their suppliers to ensure they meet those needs.
- Collaboration: Organizations should also work collaboratively with their suppliers to identify opportunities for improvement or innovation. This collaboration may involve joint product development, shared inventory management or other initiatives.
- Performance monitoring: Regularly monitor supplier performance to ensure they meet organizational needs and expectations. Track quality, lead times and on-time delivery metrics.
Procurement plays a critical role in managing risks associated with external suppliers, such as supplier bankruptcy, product quality issues or supply chain disruptions. Effective risk mitigation can help the organization avoid costly disruptions to its supply chain and ensure business continuity. This goal involves the following strategies to mitigate risks during procurement:
- Risk assessment: Organizations should conduct a thorough risk assessment to identify potential risks in their supply chain. Look at factors such as supplier stability, political instability or natural disasters.
- Risk mitigation planning: Once potential risks have been identified, organizations should develop a plan to mitigate those risks. This task may involve developing alternative sourcing strategies, implementing backup inventory management plans or taking other steps to minimize the impact of potential disruptions.
Many organizations are increasing focus on sustainability, reducing their environmental impact and promoting social responsibility. Effective sustainability initiatives can help an organization improve its reputation, reduce costs associated with waste disposal and attract environmentally conscious customers. Here are some steps organizations can take to implement sustainability practices during procurement:
- Identify sustainability goals: The first step in implementing sustainable procurement practices is to identify the sustainability goals that the organization wants to achieve. These goals should be specific, measurable, achievable, relevant and time-bound (SMART).
- Conduct supplier assessments: The next step is to assess suppliers to ensure they meet the organization's sustainability criteria. This measure can involve evaluating supplier policies, conducting audits and verifying supplier certifications.
- Integrate sustainability into procurement processes: Organizations can integrate sustainability into their procurement processes by including sustainability criteria in supplier selection, setting sustainability requirements in contracts, and monitoring supplier performance against sustainability goals.
Procurement is essential to the continuous operation of numerous organizations and industries. And in recent years, many organizations have begun implementing goals to meet basic principles of procurement, like getting the best value for their money. We've outlined some potential benefits of successful procurement management through procurement goals for those considering internal development in terms of cost-benefit analysis.
Procurement goals help focus the efforts of procurement teams on achieving key objectives, which can lead to increased efficiency and productivity. When everyone on the team is working toward the same goals, it's easier to prioritize tasks, allocate resources effectively and avoid wasted effort. Clear goals help the procurement department stay motivated and engaged, boosting efficiency.
Setting procurement goals can help identify cost-saving opportunities. For example, if one of the goals is to reduce costs, the procurement team can negotiate better prices with suppliers, reduce the number of suppliers or optimize the procurement process. Having goals related to cost savings can also create a culture of cost-consciousness within the procurement team and the organization as a whole.
Procurement goals can establish a clear understanding of supplier expectations. By setting goals related to supplier performance, the procurement team can communicate expectations to suppliers and track performance over time. This tracking can help identify areas where suppliers are falling short and provide an opportunity to work collaboratively to address any issues. Setting goals for supplier diversity and sustainability can promote responsible procurement practices and strengthen supplier relationships.
Procurement goals help identify potential risks, such as supply chain disruptions, and create mitigation strategies. By setting goals related to risk management, the procurement team can proactively identify and address potential issues, which can help prevent costly disruptions down the line. Additionally, having clear goals related to risk management can help build resilience in the procurement process and the organization as a whole.
Procurement goals can establish clear expectations and metrics for procurement performance, leading to increased transparency and accountability. By setting goals related to key performance indicators (KPIs) such as cost savings, supplier performance and risk management, the procurement team can communicate its priorities to stakeholders and track progress over time. This transparency can help build trust with internal and external stakeholders and demonstrate procurement's value to the organization.
Setting procurement goals helps align procurement activities with organizational objectives, leading to better outcomes and increased corporate value. By focusing on efficiency, cost savings, supplier management, risk management and transparency, procurement teams can help drive success for their organizations.
Now that you better understand procurement goals and how they can benefit your organization, here are 10 steps procurement managers can follow to set up procurement goals:
The first step is to understand the overall objectives of the organization. Procurement goals should align with these objectives to support the organization's vision and mission. For example, if the organization's goal is to reduce costs, the procurement goal could be to negotiate better prices with suppliers.
It's also important to understand these objectives. Consult or create a mission statement, strategic plan and other essential documents that provide insight into the organization's priorities.
The next step is to analyze spending data to identify areas where the organization spends significant money. This analysis will help procurement managers understand where they can have the most significant impact and identify opportunities for cost savings or process improvements.
Once the spending data has been collected and analyzed, the procurement manager and team should identify KPIs based on the organization's overall goals to help measure the progress and success toward the procurement goals.
Examples of procurement KPIs include cost savings, supplier performance, on-time delivery and inventory levels. Other examples may include cost savings, supplier diversity, sustainability or other vital areas.
Procurement managers should gather input from stakeholders across the organization, including finance, legal and operations teams. That input will help ensure that procurement goals are aligned with the needs of the entire organization.
Using the KPIs identified in the previous step, the procurement team should set specific, measurable, achievable, relevant and time-bound goals. For example, a SMART goal for cost savings could be to reduce overall procurement spend by 10% over the next year.
Each procurement goal should be assigned to a specific individual or team within the procurement department to ensure accountability for achieving the goal.
Procurement goals should have specific timelines for achievement. This will help ensure that progress is being made and that there is a sense of urgency around achieving the goals.
Procurement managers should allocate the necessary resources, including staff, technology and budget, to achieve the procurement goals.
Managers should communicate the procurement goals to the organization, including key suppliers and stakeholders. This communication will help ensure everyone is aware of and working toward the goals.
Procurement managers should regularly monitor progress toward the procurement goals and adjust the objectives or strategies as needed.
Indirect spending is the procurement of goods and services not directly related to the production of an organization’s core products or services. Examples of indirect categories include office supplies, travel expenses and IT services. Here are some indirect procurement strategies that managers can use to reduce indirect costs and improve indirect spend management:
The first step in reducing indirect spending is identifying the categories under this umbrella. Procurement managers can work with various departments across the organization to identify these categories and understand the business needs and requirements of each one.
Once the indirect spending categories have been identified, procurement managers can set specific indirect procurement goals for each one. These goals should be aligned with the overall objectives of the organization, as well as the specific business needs for each category.
Procurement managers can use spend data to identify opportunities to reduce indirect spending. They can look for areas where the organization is overspending, such as purchasing from non-preferred suppliers or paying too much for a product or service.
Procurement managers can use their procurement goals to develop a sourcing strategy for each indirect spend category. They can consolidate suppliers, negotiate better contracts or implement e-procurement systems.
Procurement managers should communicate with organizational stakeholders to ensure everyone is aligned with the procurement goals and sourcing strategies. This connection helps build buy-in and support for initiatives to reduce indirect spending.
Here are some general tips that procurement managers can follow to reduce indirect spending:
- Encourage departments to consolidate their purchases to reduce the number of suppliers used.
- Establish preferred supplier relationships to ensure the organization gets the best value for its money.
- Implement a spend management system to track spending and identify areas for improvement.
- Implement an e-procurement system to automate purchasing processes and increase visibility into spending.
- Negotiate with suppliers for better pricing and terms.
- Regularly review contracts and purchasing agreements to ensure they still deliver value to the organization.
Implementing procurement goals can be a powerful strategy for reducing indirect spending in any organization. With procurement best practices and commitment to continuous improvement, companies can reduce their indirect spend and drive greater value across their entire procurement function.
Many firms need help identifying and categorizing expenditures, but keeping track of spending is critical for cost control. While many businesses rely on software to perform spend analysis, they need more than that to achieve a complete solution.
The Dryden Group has over 15 years of experience and competence in spend analysis. Learn how the Dryden Group's spend analysis assessment can help your organization. Contact us online today for additional information.