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• An organization’s procurement efforts can be split into two main categories; there are items that go directly into the final product of the company and those that do not.
• The indirect procurement process flow includes activities to purchase goods and services that aren’t traceable in the final product. These items include office supplies, equipment, travel expenses, consultancy services, software, and utilities.
• Indirect procurement makes up a big chunk of a company’s expenses and capital expenditure and therefore it’s important to attain maximum visibility into their procurement.
In most cases, the direct procurement efforts of a company are centralized and overseen by a procurement team. However, in many cases, indirect procurement Is decentralized because departments have unique needs. For better efficiency, organizations need to formalize indirect procurement for better visibility and control.
Whereas companies tend to have proper inventory management policies for direct procurement, it’s not the case with indirect procurement. In many cases, indirect procurement items are ordered on demand. This may result in high ordering costs and inconsistencies in quality, and it could create an opportunity for maverick spending.
Whereas companies get to work with raw materials suppliers for a long period of time, it may not be the case with fragmented indirect procurement. Formalization of the indirect procurement process provides a chance to vet suppliers and develop long-term relationships. This may help the company get better prices, favorable credit terms, and assurances about quality.
Giving More Focus to Indirect Procurement Process Flow
In many manufacturing enterprises, most attention goes to direct procurement. However, better organization of the indirect procurement process will result in a more balanced focus. In fact, it could provide a framework for determining annual budgetary allocations.
The Role of Indirect Procurement
Centralizing and formalizing the indirect procurement process flow is more than finding the lowest prices. It’s a commitment to following internal procurement procedures and building strategic relationships with suppliers. For instance, you could work with a supplier to sign a bulk contract or alter certain item specifications in order to benefit from a better price.
Indirect procurement efforts may also involve the acquisition of the right e-procurement tools for better spending visibility. E-procurement tools will help with category management, whereby related items are grouped together. Through analytical tools, the organization can make better decisions with large enough data sets. They also get to see trends and patterns in indirect procurement spending.
Some Common Challenges in Indirect Procurement Workflow
Indirect procurement processes become a major problem when an organization attempts to manage them manually or using spreadsheets. The sheer volume of suppliers will quickly become overwhelming. It will be impossible to monitor contracts, orders, payments, and so forth. A lack of visibility eventually beats the initial purpose of formalizing and centralizing the procurement in the first place.
An organization that was used to decentralized indirect procurement may face resistance when attempting to centralize the process. People who were used to approving spending before may feel like authority is being taken away. However, the organizational leadership has to bring everyone on board to see the value of well-defined, structured, and monitored spending.
Best Practices in Indirect Procurement Workflow
When attempting to streamline indirect procurement efforts, there are certain practices that organizations should aim to instill as part of their processes.
A lack of visibility is a common procure-to-pay problem. Spend visibility is only possible when all indirect procurement is done through a standardized process and data is collected. The right e-procurement solution can help bring the requisite visibility into an organization’s procurement activities.
Visibility should begin with developing a list of qualified suppliers for all indirect procurement items the organization needs. The purchase requisition, approval, and ordering process should also be done through the software. The invoices should be received and approved electronically.
The organization gets to see what the various departments have procured, the approving parties, the percentage of budget spent, suppliers they’ve worked with, and so forth. This will provide sufficient data for an objective analysis when needed.
The various departments within the organization may have different ways of recording and storing data on their procurement efforts. When streamlining the processes, you must aim to have clean data by standardizing the collection and recording efforts. Data is more useful when it’s consistent across departments and across different periods.
One of the most important things an organization can do to improve procurement is to apply strategic sourcing. This involves thinking through your procurement efforts critically and finding ways to create value. For instance, it may make sense to work with a certain supplier because they are more accommodative of customization requests. Strategic sourcing also ensures that procurement supports the organization’s bigger goals.
Monitoring Vendor Performance
Your organization must develop a way to find, assess, and monitor the performance of its suppliers. Some of the supplier performance indicators include the variance between their price estimates and actual prices, on-time delivery rates, and rate of defects. You may also have to renegotiate some of the existing contracts so that they work better for your organization.
Once you have the new indirect procurement policies in place, you must also ensure that all your staff understands them and their impact on the company’s bottom line.
Getting the Right e-Procurement Software
As seen, the success of indirect procurement optimization in an organization is highly dependent on the ability to automate the workflow. Getting the right software is half the work. It will create a record of transactions and there will be data for visibility.
If your organization is in need of an e-procurement solution, ProcurePort can help optimize a proper solution for you. We are the world’s leading provider of e-procurement solutions.