Indirect purchasing is often underestimated
Indirect purchasing, also known as indirect procurement, is still often neglected by many companies. As a rule, it accounts for between 15% and 30% of total procurement costs, so its influence on a company’s financial performance is of considerable importance.
Indirect purchasing includes all goods and services that are not included in the direct production process of the products and do not form part of the merchandise (such as packaging material). Instead, they’re necessary for the administration, operation or support of the main business area. These include:
- Operating and office materials
- Machines and tools
- Consumables, such as cleaning agents or office supplies
- Transport and logistics services
- Consulting and training services
- Marketing services
- IT technology, comprising hardware and software as well as IT services
- Other services, such as maintenance, cleaning and repair work
- Travel expenses
Challenges in indirect purchasing
In indirect purchasing, it’s just as important as in direct purchasing to procure materials and services efficiently, on time and in a cost effective way. However, there are some unique features that make indirect procurement a particular challenge. Indirect purchasing usually results in a high number of order processes involving many different goods, each with a relatively low order value. It is usually organised in a decentralised manner, which means that the order process involves several employees. So-called “maverick spending” is rife: many specialist departments buy independently, without consulting purchasing experts. As a result, the entire ordering process is much less transparent than direct purchasing and often results in unnecessarily high costs, as no framework agreements are used and conditions are not optimally negotiated. Particularly where the typical products and services of indirect purchasing are concerned, there are usually several suppliers competing for customers.
How to save costs in indirect purchasing
You might be satisfied to negotiate a discount of a few percent in direct purchasing. But, in many cases, you have a much better chance of obtaining even higher discounts in indirect purchasing. For example, the price ranges of marketing agencies or facility management for comparable offers are generally high. Often, simply enquiring about a price reduction in the double-digit percentage range is enough to obtain it. In IT procurement, you can save a lot of money by consistently transitioning to cloud technology. Tenders and professional negotiations for service desk solutions and hardware often result in significantly lower costs.
Most companies are now aware of the issue of energy costs, but even in this area you can often save thousands of pounds by switching providers. For example, there are energy purchasing groups which aggregate demand from industry, trades and other companies in order to negotiate favourable bulk prices. In general, purchasing managers should keep an eye on price developments in the electricity market. Companies can then react to price fluctuations or changes in the energy market at an early stage and minimise their procurement risk. In indirect purchasing in particular, it is not just the purchase prices that are significant - it’s the overall package that makes the difference. For example: are maintenance services already included? How high is the energy consumption of the devices?
In general, companies should take advantage of the increased availability of data resulting from advances in digitalisation and popular automation technologies, to unlock hidden potential in indirect purchasing. So far, standardisation and digitalisation of this area has been comparatively low. Among other things, this means that the process costs per order are significantly higher than necessary.