Indirect Procurement: A Comprehensive Guide

Ever thought about the behind-the-scenes gears that keep your business running smoothly?  That’s the role indirect procurement plays for modern businesses. 

By definition, indirect procurement involves purchases of goods and services needed for day-to-day operations but not directly linked to what you offer. This can include things like office equipment, rent, IT products, and services such as maintenance, marketing or consulting.

Every company that makes purchases and works with vendors relies on indirect procurement. Unfortunately, many companies tend to put all their attention on direct procurement, overlooking the management of indirect procurement. 

That's a mistake because indirect procurement contributes to 27% of its total earnings. With such a significant impact on both revenue and profits, it's a part of the budget that needs to be intelligently managed.

This comprehensive guide is here to walk you through the ins and outs of indirect procurement, why it matters, break down the difference between direct and indirect procurement, and more.

What Is Indirect Procurement: Understanding the Basics

Indirect procurement, often referred to as indirect spending and overhead expenses, involves purchases of supplies and services that support business operations but are not directly related to manufacturing a product or delivering a service.

There are four types of indirect procurement strategies:

1. Vendor Rationalization: Used to combine relationships with vendors and decrease costs.
2. Category Management: Manages relationships with vendors to save costs and work with more efficiency.
3. Strategic Sourcing: Involves checking spending categories and negotiating with vendors for the best value.
4. Demand Management: Aims to decrease the total spending on specific goods.

According to 360 Research Reports, the types of indirect procurement outsourcing that held the largest market share in 2023 are: 

• Marketing services (advertising, digital marketing, website design, promotional products, event management agencies)    
• IT-related services (computers, hardware. software subscriptions, business technology consulting services)
• HR-related services (recruitment, onboarding, and training)
• Facilities management & office services (rent, utility expenses like electricity and gas, equipment leases, building cleaning & maintenance).

Other examples of indirect procurement include:

• Business services (accounting, finance, legal counsel, consulting fees)
• Telecommunications (services related to internet, mobile, landline connectivity)
• Training and development (expenses related to courses, certifications, workshops, and other types of employee training)
• Capital expenditures ( purchases of land, property, equipment, furniture, etc.)
• Uniforms and PPE (personal protective equipment) for businesses that require safety gear or uniforms for their workers
• Fleet management (expenses related to purchase, maintenance, and insurance of company vehicles)
• Corporate services (corporate gifts, catering, subscriptions, memberships).
• Office supplies and miscellaneous (kitchen supplies, coffee, snacks, cleaning items, stationery, printing paper)
• Travel and entertainment (employee meals, corporate credit card expenses, rental cars, airfare, hotels, taxis, parking).

What Is the Difference Between Direct and Indirect Procurement?

Just like indirect procurement, direct procurement involves the acquisition of goods and services. However, there are specific differences between how these two types of procurement work.

First of all, direct procurement is the process of acquiring raw materials and services that go into the final product a business offers. In contrast, the main goal of indirect procurement is to make sure team members have the supplies, resources, and equipment necessary to do their jobs well.

Direct procurement has a direct impact on the company's performance, profits, and competitive advantage. Indirect procurement, on the other hand, keeps everyday business operations running smoothly.

Many companies have dedicated teams led by Chief Procurement Officers for their direct procurement. These teams include procurement professionals like category managers, spend analysts, and contract managers. But, when it comes to indirect procurement, they use decentralized and temporary teams.

In direct procurement, keeping track of inventory is crucial because if there's not enough inventory, it can disrupt the whole value chain. In indirect spend, managing inventory isn't as important.

Some examples of direct procurement include:

• Components (electronic components, sensors, and motors used in assembling a product)
• Raw materials (plastic, wood, steel, and other materials used in product manufacturing)
• Services (design, engineering, and maintenance services directly connected to the production process) 
• Packaging materials (boxes, shipping materials, labels).

Indirect Procurement Challenges

Handling service-based purchases is a whole different ball game compared to buying manufacturing materials. That's why indirect procurement teams need their own specific approach. Here are some challenges they might face:

• Multiple Stakeholders and Channels. The indirect procurement process includes various channels and multiple stakeholders, making it tough to manage.
• Frequent Low-Volume Purchases. Indirect procurement involves purchasing goods often but in small amounts, making the process difficult and resource-intensive.
• Poor Visibility. Unlike direct procurement, the indirect process isn't tied to specific lists of materials, making it more difficult to control expenses. 
• Lack of Centralization. While most companies often have a dedicated team for direct procurement, indirect procurement is decentralized, has fragmented supply chains, and lacks meaningful data. 
• Lack of Planning. Usually, indirect procurement is done when there's a need. This means that the indirect procurement process is often unplanned, making it challenging in terms of hidden costs.
• Lack of Research and Negotiation. Because indirect spending is done only when there’s a need, it lacks enough research or negotiation. This leaves room for the vendor to decide the terms of the procurement, leading to missed chances for cost savings. 

Not Much Bargaining Power. Because there are not many big orders in indirect procurement, the company doesn't have a strong position to negotiate lower prices with vendors.

Implementing Effective Strategies

Handling indirect procurement properly requires specific strategies. The good news is that if you implement the right strategies, you can reduce your overall spending by up to 17%. Here are some best practices to take into consideration:

Strategize your vendor choices 

Even though direct procurement teams usually handle vendor relationship management (VRM) with a more strategic approach, indirect procurement managers shouldn't overlook it. Managing relationships with vendors is important to ensure that they continue to meet your needs. 

This involves keeping an eye on vendor performance, fixing any issues that arise, and evaluating ways to improve the procurement process. It is also important to maintain open communication with vendors to make sure that both parties are satisfied.

Build Internal Relationships

Your company’s indirect procurement involves the coordination of different departments in your company. If the internal communication between these departments isn’t good, you might end up with duplicated efforts, conflicting actions, or too much spending.

Regular meetings, using a centralized procurement dashboard, or having a designated indirect procurement team can make sure everyone is on the same page. By understanding what your departments need and expect, procurement managers can come up with a procurement plan that aligns with the organization's goals.

Track Your Spending

Unlike the organized purchase process you see in direct procurement, indirect procurement is less structured. Very often, purchases occur without being recorded or approved, leading to oversights and waste of money. That’s why it’s important to have a system that keeps track of all the spending on indirect procurements in every department. 

You can do this by analyzing what's bought, who the main vendors are, and how much is spent. This will help your procurement managers identify areas where things aren't working efficiently, discourage unnecessary spending, and find ways to save money, like negotiating for better prices. 

Leverage Tech Tools

In today’s digital day and age, tools and software are available for nearly every operation, including procurement. Here are some tech solutions you can take advantage of: 

• Digital procurement software to follow up on vendor performance and understand how your business spends. According to BCI's Supply Chain Resilience Report, 56% of procurement teams already use this technology. 
• Contract management software for centralized management of agreements with indirect vendors, ensuring compliance with pricing.
• Market research tools to help identify trends, giving your company a competitive advantage.
• E-procurement tools and p-cards to improve the procurement process efficiency.

Technology is key to making procurement more efficient and controlled. By gaining insights into your spending patterns, you are able to make data-driven decisions that help your organization save money.

Measure Performance

Establishing key performance indicators (KPIs) is vital for effective indirect procurement. If companies don't keep an eye on these metrics, there's a higher risk of excessive spending or missing chances to save money. Some important KPIs to help you measure your performance include: 

• Cost per invoice
• Cost reductions and cost savings
• Spend under management
• Cycle time
• Life cycle costing (LCC)
• Cost avoidance
• Procurement return on investment (ROI)
• Vendor lead time
• Compliance rate
• Vendor-related metrics, such as how much you spend with each vendor, vendor lead time, compliance rate, and variations in price. 

By keeping tabs on these KPIs, you can see where your indirect procurement is doing well and where it needs improvement.

Indirect Procurement Benefits

Effectively handling indirect procurement can bring a number of advantages to your company. Here are some of the most important indirect procurement benefits:

1. Saves money: A smart procurement process decreases costs by combining purchases from a small number of vendors. Having fewer vendors usually means buying more from each, which often leads to discounts. Having an effective indirect procurement strategy helps build closer relationships with vendors, resulting in lower prices and better payment terms in the long run.
2. Prevents unplanned spending: Unplanned spending, also known as maverick spending and rogue spending, occurs when employees make unauthorized purchases against company rules. Using strategic indirect procurement processes helps make things more visible, allowing the finance team to keep an eye on expenses. Having a list of approved products and vendors makes procurement faster while at the same time avoiding unnecessary expenses. 
3. Helps build strong vendor relationships: Doing strategic sourcing with a few chosen vendors ensures good quality, makes sure everyone follows the rules and guarantees better prices. In addition, businesses that build partnerships with their vendors get more flexibility in their contracts and more help when there are issues or problems.
4. Enhances productivity: A well-developed indirect procurement process uses workflows and automation, making things more efficient. With these tools, there is less need for manual work in finding and completing orders. They save procurement teams tons of time spent on repetitive tasks. These saved hours can be used for more important things, leading to faster processes and better productivity.
5. Provides a competitive edge: Companies that manage to master indirect procurement are able to get ahead of the competition. Being able to keep good relationships with vendors, improve productivity, and manage costs puts them at the top in their industries.

Conclusion

Indirect procurement is crucial for a business to run properly, and how it is managed has a big impact on productivity and profitability. That's why it's important for modern businesses to focus on creating effective indirect procurement strategies that prioritize the use of advanced tech tools, strong vendor relationships, and controlled spending. 

If businesses manage to master indirect procurement, they can expect a significant improvement in pretty much every aspect of their operations, leading to an increased saving and improved bottom line.

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