What is Indirect Spend Analysis?
Spend on goods and services that are outside the manufacturing process or your company’s product itself is regarded as indirect. Indirect spend can include expenditures on everything related to internal stakeholders, including professional fees, IT and equipment, and other office supplies. These are fixed costs, compared to direct spending, which relates to the purchased items or services that your company or business sells. In most corporate settings direct spend will tend to receive the most attention, oversight, and focus. However, while your company’s share of indirect spending may be finite, the value of conducting indirect spend analysis and the consequences of doing so can be significant.
Do Not Underestimate Indirect Spend
The consequences of poor indirect spend analysis can cost your business heavily. Do not fall into the trap of doing little to address your poor indirect spend management.
A lack of visibility into your indirect categories suggest you lack a proper understanding of your actual cash spend, cash flow, and working capital. This can affect you later down the track when it comes to spending cash on the business at crucial stages, as the invisible nature of indirect spending can make it seem as though you have more working capital than you actually do. Some estimates suggest that what you are overspending day-to-day without realizing it can be as high as 40 percent of your total spend.
By conducting an indirect spend analysis you must isolate all spend data before consolidating that data into a single database. Once you have consolidated this data you can begin looking for areas where overspending is occurring, but as explained below, it pays to analyze your data from a holistic perspective. In other words, leave no stone unturned while conducting your review.
To this end, spend analysis software such as those provided by ProcurePort can assist you in cleaning up your business expenditure.
Avoid Going to the Most Obvious Areas
German carmakers BMW and Daimler reportedly suffer an indirect spend of over €15 billion per year, which is by no means a trivial number. When it comes to conducting indirect spend analysis, it can be often too easy to focus on the most visible parts of the business without considering the major opportunities that exist in mere “nuisance” segments of your business.
For example, according to Spend Matters’ study “Fix the Tail to Propel Procurement: Attacking the Tail Spend Problem in B2B” procurement professionals spend most of their time focusing on the 80 to 90 percent of suppliers which represent less than 5 to 1 percent of spend and business value.
However, the Pareto Principle states that 20 percent of your customers should be providing 80 percent of your revenue. Very few companies comprehend the risk to their business that bloating their supply chain can have on their business. Likewise, very few companies use their data to cull the number of suppliers, even though there are several apparent benefits in doing so.
By consolidating your supply base, it will be easier to manage, ease the burden on your administrative staff and give you greater control. You can also begin negotiating lower prices with your remaining partners in return for a larger share of the business. At the end of the day, following this strategy will also help you improve the relationships you have with your existing suppliers.
Even once you have consolidated your supply base into one overall list, educated your employees about future decision-making and implemented your new strategy there is an inherent risk that you will become complacent in future as well. Just because your list of suppliers has decreased does not mean it won’t require you to pay the same level of care and attention as you had to prior to the cull.
Be sure to check the suppliers’ performance, prices, services and always look for areas that can be improved upon. The market is constantly changing and evolving, so you will need to adapt with this in mind to maximize the relationships with your remaining suppliers.
Avoid Poor Indirect Spend Analysis with ProcurePort
ProcurePort’s unique, state-of-the-art spend analysis software enables you to make informed decisions about your organizational spend and identify all your saving opportunities. By using a structured spend analysis process to cleanse and analyze your spend data, you can uncover opportunities within your supply chain you never knew existed.