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Businesses should adopt robust processes and develop good relationships with products and service providers to stay ahead in the current competitive market. Using innovative procurement procedures ensures that companies manage their costs, fosters growth, and profitability. Unfortunately, most businesses focus on direct procurement.

Indirect procurement, also called tail spend, is often overlooked by business managers and procurement departments. Interestingly, indirect procurement makes up 80% of organizational expenditure and contributes to 27% of the total revenue. The impact of indirect spending is also poised to grow by 7% annually.

While indirect procurement involves low-value purchases, these transactions occur frequently, and the costs can quickly add up. Outlined below are the challenges of indirect procurement and how businesses can manage these expenditures.

Challenges of Indirect Procurement

Lack of spending policies

Unfortunately, most businesses don’t have indirect spending policies and procedures that curb unauthorized expenditures. As businesses grow, procurement teams and managers may not prioritize the development of indirect spend policies over other business tasks. However, without a clear framework to protect the business’ finances, uncontrolled indirect spending can hinder business growth as expenses will undercut profits.

Working with multiple suppliers

Indirect procurement accounts for more than 80% of a business’s total purchases. This is because it involves several categories, ranging from office supplies, marketing activities, IT services, maintenance services, utilities (water, electricity, and gas), HR activities, and more. To complete these purchases, businesses should work with multiple suppliers simultaneously.

Lack of spend data

Indirect procurement mostly involves several employees and suppliers. If you have many employees, contracts and procurement agreements might be buried in different employee inboxes, making the collection of spend data overwhelming. However, this doesn’t have to be a challenge in the current era of digitization.

Businesses should take advantage of spend management software, which allows different employees (spenders) to upload their contracts, invoices, receipts, and terms on the platform. The software stores, analyzes, and creates reports of spending data.

Poor visibility

Most companies don’t consider indirect procurement as important as direct procurement. As a result, they focus on building close relationships with direct expenditure suppliers and overlook their indirect spending counterparts. Additionally, indirect procurement involves several products and services, making it impossible to focus on one supplier. This makes it impossible to identify cost-saving opportunities for indirect spending.

Tips to Improve Indirect Spending

Managing indirect procurement is tedious and complicated. It involves multiple product categories, suppliers, contracts to engage, and building relationships. However, the following tips can help businesses establish proactive indirect procurement procedures that save time and cost while enhancing productivity and employee experience.

Take control of direct and indirect procurement

Businesses should manage their direct and indirect procurement processes holistically. Supply management platforms, such as strategic sourcing tools, monitoring supplier performance, enforcing strong negotiations, and comprehensive contract management should be applied to all procurement processes.

Proactive supplier management is crucial for both direct and indirect procurement. Procurement teams are fiduciary responsible for spending the company’s finances responsibly and ethically. Allowing every other employee to engage in procurement activities leads to uncontrolled expenditure and exposes the company to legal issues, as some crucial contracts and agreements may be invalidated.

Integrate the right technology

While most businesses can’t save on indirect expenditures for several reasons, lacking the right technology is among the primary reasons. Most procurement teams rely on ERP systems solely to manage indirect procurements. While ERP solutions are excellent supplemental tools when used with indirect procurement solutions, they don’t provide the much-needed agility to manage:

  •  Supplier approval and onboarding
  • Buying patterns and spending analytics
  • Employee, department, and supplier based expenditure
  • Centralized indirect procurement data

While integrating an indirect procurement solution platform is the first line of optimizing your indirect business expenditure, you should adopt modern options, which offer digital procure-to-pay solutions with centralized records, automated notifications, and workflows. These technologies give you control over all indirect procurement life cycles and approvals.

Encourage responsible spending

Most indirect procurements are done by non-procurement personnel who purchase day-to-day products and services on behalf of the business. This often leads to low compliance rates, wasteful spending, high costs, and increased fraud risks. Businesses can avoid this by educating all employees on the importance of following procurement procedures and frameworks that guide purchase decisions.

Endnote

Managing your business’ indirect procurement might prove challenging. However, even though not all procurement decisions have the same implications on a business, all expenditures should be carefully evaluated. Managing your indirect expenditures effectively saves company costs and improves the business bottom line.