There’s a secret way to cut operating costs that distributors can take advantage of if they simply became more aware of it. The secret: getting on top of what is typically referred to as “indirect spend.”
Manufacturers specifically are aware of what “direct spend” is all about. Direct spend refers to expenditures on things like motors, pumps, circuit boards, packaging materials and similar components purchased from outside vendors that must be installed in equipment or other products. In most cases, manufacturers keep very close tabs on how many of these items are purchased and their costs because they can be very costly and are directly related to production.
However, indirect spend applies to a variety of goods and services that manufacturers, as well as distributors, purchase that typically are not tabulated or monitored. Essentially, the get in and paid for under the radar. However, according to various reports, indirect spend items can total anywhere from 20 percent as much as 50 percent of a company’s purchases.
These percentages are so high that they indicate indirect spend costs are simply something that distributors may not be able to ignore. It’s likely why Barbara Lauer, director of services procurement for the Contingent Workforce Solutions team of KellyOCG, reports that 70 percent of procurement executives in a variety of different industries now cite indirect spend as a top focus for controlling and reducing cost.1
So what expenditures come under the heading of indirect spend? Among them are the following:
- All types of office supplies such as staplers, paper, folders, paper clips and in some cases, tablets and electronics along with services that keep a distributorship up and running
- Costs associated with solid waste disposal, recycling and environmental fees
- Travel expenses for company personnel (especially fees for reservation changes and upgrades)
- Maintenance and repair items as well as consumables such as grease and oil for repair centers
- Utilities (fuel, water, electricity)
- Professional services such as hiring consultants
- IT related services (hardware, software, installations, repairs, etc.)
As you can see, some of these are viewed as smaller, less costly items, or one-off purchases, which are reasons they often escape under the radar of operational costs. Further, these kinds of expenditures often involve a number of different suppliers, and a wide range of product categories and specialty services. Some are typically not considered worthy of monitoring, and others fluctuate greatly, making them difficult to measure and monitor systematically. Nonetheless, as discussed earlier, the cost of these relatively low-dollar and incidental purchases can soon mount and become quite significant over time.
Getting on Top of Indirect Spend
The first thing distributors must do to get on top of indirect spend is to see if they have any type of monitoring system in place for these purchases and, if so, look into how effective it is and what items it covers. Because there are likely many organizations that do not have a system in place, let’s start at the beginning on how to get one up and going so we can start to reel in some indirect spend cost savings.
Some of the key steps include the following:
- Get “buy-in” from every staffer that makes purchasing decisions. They need to be aware that the organization wants to rein in indirect spending and help monitor these costs.
- Next, these purchasers need to record all indirect procurement purchases and their costs, from pencils to computers to travel.
- Purchases must also be organized into categories; this will help monitor inventories throughout the organization. In larger distributorships or with large wholesalers, very often another division of the company has indirect spend items they do not use or need; these can be moved to where they are needed, eliminating the need to make a purchase.
- The data must be centrally monitored so that it lists the most costly items first; these more costly items are where the greatest savings are likely to be found.
- Now that we are better aware of what is being purchased and the costs of these items, notify all vendors that the company is beginning to measure and monitor indirect spend items; doing so gets everyone on board with the program.
- Begin vetting suppliers to see if certain items can be purchased at a reduced cost; however, it is also necessary to consider which vendors provide exceptional service and deliver add-on value, such as helping administrators select more cost effective products.
- Related to this, eliminate “as needed” purchasing; purchase indirect spend items in large quantities for possible volume discounts.
We should note that getting on top of indirect spend and reducing these costs is a top-down management decision. Very often purchasers in various departments of an organization may think the amount charged to the company for office supplies, for instance, is so moderate that they question why it must be tabulated. A top-down management decision helps clarify its importance and helps everyone realize the big picture, that indirect spend can have a direct impact on the company’s bottom line.
Michael Wilson is vice president of Marketing for AFFLINK, a provider of supply chain optimization. He can be reached thru his company website at www.AFFLINK.com
1KellyOCG, an outsourcing and consulting organization.