Top 10 Most Efficient Companies at Indirect Spend Management

Summary

Managing company finances effectively is a challenge all businesses face. When considering costs a modern-day business must account for, it can be easy to overlook the less notable — yet equally vital — purchases, from office supplies to executive travel.

These two types of purchases fall under indirect spend, which is defined as goods or services that are not directly used for the manufacturing of products. Forms of indirect spend management also include the following common categories: janitorial services, cleaning products, facility maintenances, technology and more.

Not surprisingly, these costs add up quickly. Many companies allocate a larger portion of their annual expenditures toward indirect, vs. direct, spending. Without proper oversight and management of its allocation, direct spend can pull necessary funds from direct spend, such as manufacturing costs.

To keep a business alive and functioning daily, indirect procurement is an important consideration. Although many forms of indirect spend are predictable and recurring, some unexpected circumstances can quickly drain a business of its funds available for indirect spend. This can include the replacement of malfunctioning equipment, acquisition of a new branch or employees or necessary software updates.

We’ve researched companies that are effective at managing indirect spend, giving them a strong head start on both expected and unforeseen sources of indirect spend. But first, what are the signs of a company that excels at indirect spend management?

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Signs of a Company that Manages Indirect Spend Effectively

There are some key similarities among companies that effectively manage indirect spend. Here are a few notable indicators of a company with an exemplary grasp on indirect spend management:

Time Spent Managing Indirect Spend

Ideally, a company plans a strategy for upcoming indirect costs and procurement, as well as accounting for any source of additional costs that vary year over year. Adequate planning is imperative for both peace of mind and time savings: the less financial planning involved in advance, the more issues and uncertainty will arise down the road with budget distribution.

Number of Vendors and Suppliers

While quality, in most cases, surpasses quantity in the business environment, the number of unique vendors a company works with can occasionally reflect room for improvement regarding indirect spend costs.

When a company consolidates vendor relationships, new opportunities arise for discounts, refinements and lower purchasing price. Additionally, fewer suppliers means simplified process automation: an important metric for both business time and costs.

Collaboration Across Business Units

Businesses are more efficient when all parts of the company act as a cohesive unit: enabling shared practices and an understanding all components of a business are moving toward a shared goal.

Without collaboration, certain units of a business can drain financial resources, while others suffer from a lack of them. Collaboration also means a company can share insights across departments, and all decision-makers can use them to improve different areas of company spending.

A Company Can Share Insights Across Departments And All Decision Makers Can Use Them To Improve Different Areas Of Company Spending

For business owners who look to benchmark progress with indirect spend allocation, checking in on these factors can provide insight into how they manage indirect spend. More importantly, measuring indirect spend over time cites areas for improvement, and with improvement comes a higher budget for initiatives that will push a company forward, such as research and development.

Ranking Top Companies by Indirect Spend Management

Companies that manage indirect spend successfully deserve recognition for finding an effective balance of direct and indirect expenditures. These companies should act as a guide for newer, or financially mismanaged, businesses that can benefit from an example of appropriate spend allocation.

Additionally, mirroring effective models of indirect procurement management can quickly take hold across similar businesses within their respective industries, providing growth and sustainability for many companies, employers and workers.

Therefore, we compiled a list of 10 companies that have a strong track record of allocating indirect spending appropriately and effectively.

We chose the 10 leading companies below based on factors including innovation and financial distribution, growth as a result of indirect spend savings and overall profits after expenses.

1. Delta Airlines

Delta Airlines established its Atlanta-based headquarters in 1929. Since its inception, Delta has grown into one of the world’s largest airlines, carrying more than 160 million passengers to their destination every year.

Delta deserves a spot on our list for using technology and data analysis to leverage discounts. At one time, Delta hubs acted as individual business units, and each unit within the company held the responsibility to maintain, and purchase, services and supplies. This practice led to inconsistencies, in addition to rising indirect spend-related costs, across multiple hubs within Delta.

Eventually, Delta used a software package to reveal financial issues across the business, and with this information, the company consolidates resources and spending to maximize profit. The improvement to indirect spend included savings of millions, with a savings of $11 million on hotel rooms in one three-month period alone.

Delta took indirect spend management one step further, and made the decision to become their own suppliers by purchasing a refinery. Costs for a refinery had proved to be Delta’s largest expense, and by moving that in-house, they improved profits for the company significantly.

2. Harley-Davidson

As a leading manufacturer of motorcycles, Harley-Davidson owns factories across the United States and markets its products worldwide. Establishing a strong global presence certainly has additional logistical, and manufacturing, considerations that can quickly drive up a company’s indirect spend.

Newer fans of the iconic brand may not know Harley-Davidson suffered a significant financial crisis in 2009. Following this crisis, Harley-Davidson implemented fundamental changes to its approach to managing indirect spending costs. One of these changes involved outsourcing all indirect purchases to only three suppliers: a move that saved Harley-Davidson $4 million in the first year of its implementation.

3. Cadence Design Systems

Cadence Design Systems, a multinational electronic design automation and software and engineering services company, opened its doors in 1988. Based in San Jose, Calif., this Fortune 900 company owns sales offices, research facilities and design centers throughout the world.

Cadence gained quite a reputation when it made the choice to use advanced technology in an effort to improve indirect procurement mangement. Cadence invested in technology that provided thorough insights on where to find savings opportunities, particularly when it came to vendor relationships. After rebuilding and reorganizing its approach to indirect spend management, Cadence Design Systems reported $6 million in savings.

4. The Bayer Corporation

Based in Pittsburgh, PA., the Bayer Corporation currently owns 40 consolidated subsidiary companies located in 19 different states. Bayer sells products in the following categories: prescription medications, over-the-counter drugs, nutritional supplement, diagnostic products, animal health products and more.

Bayer works with multiple vendors and suppliers across the world, so it’s no surprise indirect spend is an important consideration for this company. In fact, Bayer procured goods from 110,900 suppliers, spanning 152 countries, in 2016 alone.

Bayer Procured Goods From 110,900 Suplliers Spanning 152 Countries in 2016

As Bayer is actively involved in establishing successful global vendor relationships, this company aims to lead the way in optimizing indirect spend. Bayer’s procurement practices, which include leveraging network and supplier relationships, adhering to ethical and social principles and facilitating advancement in procurement activities, landed them on our list for the best-managed companies for indirect spend.

5. Starbucks

Starbucks delivers more than coffee to its customers — it delivers a well-run supply chain and innovative indirect spend practices. Founded in 1971 in Seattle, Washington, this coffee shop faces a competitive landscape and multiple challenges when it comes to planning, distribution and logistics.

Therefore, Starbucks invests a significant amount of time and resources into planning, recently focusing on improvements that could be make to its global logistics solutions. Due to the necessity of building and maintaining relationships with suppliers around the world, Starbucks racks up quite a large indirect spend bill — which has, understandably, led to an emphasis on cutting costs wherever possible.

Starbucks is one of the world’s most admired companies for indirect procurement management due to its innovative practices, like eventually creating a unified global logistics system to better manage its supply chain. In fact, this movement to a vastly improved supply chain likely contributed greatly to more than $500 million in savings over two years following its creation.

6. Amazon Business

Amazon is an American cloud computing and e-commerce giant, and also the owner of one of the most advanced supply chains in the world. Founded 23 years ago in 1994, Amazon today owns several successful subsidiaries and divisions.

Amazon leads the way in many segments, from supply chain management to technology innovation. At the same time, Amazon isn’t necessarily the most traditional example of an approach to indirect spend management, with its real-time marketplace. However, moving from traditional approaches proves to be a benefit to Amazon Business.

Today, they are on our list due to their state-of-the-art practices and corresponding metrics: showing improvements in reducing off-contract spend and fraud, simplifying both shopping and vendor experiences and optimizing indirect spend by assisting purchasing teams.

7. Hewlett-Packard Company

Based in Palo Alto, Calif., Hewlett-Packard, or HP, is an American multinational information technology company. HP develops and sells a large variety of hardware components and computer software in the B2B and B2C segments.

HP allocates a significant amount of money to research and development — including a recent $3.6 billion investment — thus requiring a significant amount of consideration for extra costs, and keeping a close eye on indirect spend.

Hewlett-Packard is on our list for its commitment to also diverting resources to its global procurement program, an effort that provides improvement to indirect spend approach. Run by HP’s technology and operations division, the HP global procurement organization is responsible for managing HP’s indirect spend.

Hewlett-Packard is also a co-founding company of the COPS Indirect Procurement Standard, a system developed to oversee and manage indirect procurement operations.

8. Cisco

Cisco is another example of a company that has successfully faced, and adapted to, significant growth. Following global expansion since its inception in 1984, Cisco needed to quickly implement best practices for its procurement policies.

Why is Cisco making an appearance on our list? Cisco successful responded to rapid growth by identifying key areas of improvement to both direct, and indirect, spend. These key areas included supplier development, contract management, supplier performance management, procurement operations and efficient and effective buying services, among many more.

Cisco Responded To Rapid Growth By Improving Direct And Indirect Spend

Cisco also features several valuable resources for current and prospective suppliers on its website, ensuring all suppliers implement and enforce standards on a global scale.

9. General Motors

Founded in 1908, General Motors currently manufacturers cars in 35 countries. GM also manages notable, successful divisions such as Buick, Cadillac, Chevrolet and GMC.

GM is a strong advocate for both consumer and vendor partnerships, and emphasizes transparency and building solutions in its supply chain mission statement.

In addition to its role as an advocate for advancement in indirect spend optimization and best practices, General Motors is on our list for being another co-founder of the COPC Indirect Procurement Standard. Today, General Motors continues to be a global sales leader in the automotive industry. It’s also a company that continuously works to improve indirect spend costs, as well as supplier relationships.

10. Rolls-Royce

Rolls-Royce sparked lots of conversation in the world of indirect spend management when it unveiled its 2009 initiative: Project Thor. The creativity, and insightfulness, surrounding Project Thor is what landed them on our list of companies that lead the way in managing indirect spend.

Project Thor features four distinct areas of improvement: rapid repricing, category deep drives, sector sourcing and improving staff. The executive team at Rolls-Royce communicated the project as an effort to change culture, ambition, worker capability and engagement. As we’ve learned, all four of these areas can play a significant role in optimizing indirect spend, and there are many takeaways from the Project Thor approach to indirect spend management.

How Your Company Can Improve at Managing Indirect Spend

Whether your company is listed in the top 10, or you feel you have a long way to go, there are steps your company can take to improve your financial outlook, including the management and distribution of indirect spend. After all, indirect spend is one of the more controllable figures within a company’s budget, and changes you make today can impact your ROI tomorrow.

Conduct a Current Spend Analysis

Perhaps the most important part of financial planning and restructuring is having a confident grasp on your company’s current spending. Understanding where a business’ funds are allocated can help analysts pinpoint expenses that greatly impact cash flow, therefore enabling executives to promote change and facilitate improvement.

Segmenting Overall Spend By Departments And Process Groups. Identify Spend Against Similar Business Models

The process of conducting a spend analysis includes segmenting overall company spend by departments and process groups. Once that data is collected, compare the numbers against “ideal” or “average” costs within the industry. The goal is to identify, and benchmark, spend against similar business models. Although it will never be a direct comparison, it can serve as opportunity to pinpoint strong outliers compared to industry standards.

Once you’ve identified the outliers, you can focus on improving the budget you allocated to them, and identify means to move them closer to industry averages.

Evaluate Existing Vendor Relationships

As many of the companies on our list reveal, choosing the right vendors and suppliers is an essential step in containing indirect spend. One tip is to work with a smaller number of trusted suppliers for a variety of different needs to help you gain a valuable leverage on pricing.

It doesn’t hurt to always keep an eye open for new prospective vendors, as pricing is an always-changing variable. While cheaper doesn’t always mean better, it does present a significant opportunity for companies that are looking to cut costs.

Invest in Automation and Technology

As technology and automation become even further integrated into society, they’ll become more entrenched in business practices, as well. While they can’t replace the thought process of an analyst or employee who has worked with a company or industry, for a long time, automation and technology can serve as a quick option for data collection and interpretation.

Automation frees up employees and executives to focus on the actionable items that will drive growth and improvement. It certainly doesn’t hurt to try to adapt to more modern practices, and we anticipate technology will continue to play a prominent role in procurement for businesses around the world.

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