Whether by choice or benign neglect, indirect procurement has traditionally taken a back seat to direct procurement. Yet, properly optimized, both direct and indirect procurement have the potential to provide demonstrable value to the organizations they support. Achieving such optimization, however, often requires a substantial shift in how companies perceive indirect procurement, the technology and tools used to manage their overall procurement processes, and the often scattered nature of unmanaged or poorly managed spend.
In order to address these issues, organizations need to update their indirect procurement processes. By combining a traditional approach (seeking cost savings opportunities) with change management and advanced technologies, procurement professionals can integrate process optimization, strategic spend management, and better supply chain management into their workflows and harness the value hidden in indirect procurement.
Indirect Procurement Processes Must Evolve
The modern economy is complex, data-driven, and heavily competitive. It is also threatened by unprecedented disruptors such as natural disasters, international sociopolitical conflict, and health crises like the COVID-19 novel coronavirus pandemic.
To protect business continuity—let alone secure and maintain competitive advantage— in this intense environment, companies need to leverage every possible technological tool at their disposal to build value, achieve cost savings, and strengthen their bottom line. They also need to develop and implement practices supported by these technologies, and adopt company policies that drive the change necessary to secure support from internal stakeholders at all levels.
Indirect procurement merits special consideration in this regard because companies have so often prioritized direct procurement in the procurement function, seeking to maximize efficiency, cost savings, and value when sourcing raw materials and essential services.
In addition, despite the growing importance of digital transformation to competitive strength, many companies continue to rely on manual workflows and paper-based processes in procurement.
As a result, companies lose value in numerous ways due to:
- Opaque spending. Without full spend transparency and process-driven accountability, companies increase their risk exposure through higher rates of maverick spend, invoice fraud, and even theft.
- Inefficiency and human error. Manual workflows are tedious, repetitive, and susceptible to human error, which then adds additional costs by requiring time-consuming investigation and correction. They also increase overhead cost and reduce efficiency, since procurement and accounts payable professionals have to spend time and energy on relatively low-value tasks rather than supporting strategically valuable initiatives.
- Unoptimized sourcing and poor supplier relationships. Too often, only direct materials vendors receive the time and attention required to build strong and strategic supplier relationships. Indirect procurement teams, meanwhile, are instructed to focus solely on quick cost savings opportunities, and therefore miss out on greater value in strategically sourcing indirect goods and professional services.
- No clear plan for digital transformation. Organizations mired in the paper-and-pencil past and traditional approaches that prioritize direct procurement alone may struggle to secure interest, let alone approval, in making the digital leap. Such organizations need not only new tools, but a proactive plan for effecting cultural change to make modernization and digitization possible—and ensure everyone from the C-suite down is engaged, educated, and working toward the same goals.
In relegating indirect procurement to the back burner while continuing to rely on outdated paradigms, companies are limiting their own growth, functionality, and bottom line.
“Using indirect spend data, the Internet of Things (IoT), and automatic replenishment tools, today’s procurement teams can rely on software helpers to automatically track inventory and automatically move inventory to fill needs or place orders for new items as needed—complete with context-aware contingencies that route requests falling outside the budget to a human approver for review.”
The Future of Indirect Procurement: Blending Basics with Next-Gen Tech
Indirect procurement is about much more than office supplies, janitorial services, or maintenance, repairs, and operations (MRO). It represents an average of 10% of a company’s revenue (up to 18% for some industries), and yet still receives minimal time and attention in most organizations. Which is both unfortunate and costly, as research from McKinsey and Company found indirect procurement optimization can reduce organizational costs by 15 to 17 percentage points.
Today, effective indirect procurement management is increasingly focused on three core concepts:
- Applied procurement fundamentals, which include:
- Procure-to-Pay (P2P) optimization to boost efficiency, accuracy, and cash flow management.
- Effective category management to secure optimal pricing and terms while building strong supplier relationships.
- Strategic use of metrics to track, measure, and improve both performance and compliance in all areas of procurement.
- Applied digital technologies, including:
- Robotic process automation (RPA).
- Advanced data analytics paired with centralized data management.
- Artificial intelligence (AI), including machine learning.
- Updated procurement strategies, including:
- Proactive and ongoing change management strategies, with a focus on securing buy-in and compliance with updated workflows and policies as well as developing the necessary skills to reap the full benefits of new technologies and practices.
- Zero-based budgeting.
- Prioritizing agility via integration of procurement data and processes with other business units, especially finance, to center both direct and indirect procurement as drivers of strategic value and process improvements as well as cost savings.
These three concepts are interdependent and represent a powerful paradigm shift for not only indirect procurement, but the role of procurement itself within an organization.
Let’s take a closer look at these concepts and how each supports more efficient and effective indirect procurement processes.
Applied Procurement Fundamentals
Paper-based or digital, procurement is made up of a large number of interconnected processes centered around obtaining and (with accounts payable) paying for goods and services. Following best practices for these processes has a strong positive impact on an organization’s financial health, competitive strength, and business continuity.
Procure-to-Pay Optimization that includes indirect spend management on an equal footing with its direct spend counterpart and is executed using digital tools:
- Provides guided buying, informed by strategic spending and category management policies, to ensure full spend visibility and accountability while reducing the risk of fraud, maverick spend, and theft. It also ensures all purchases are made at the best possible pricing and terms thanks to integration with contract management and supplier relationship management data.
- Brings indirect procurement teams “in from the cold” and lets them use, and benefit from, the same supplier and category management tools and strategies as direct procurement.
- Supports long-term supply chain resilience and business continuity through contingency-based sourcing and data-driven supplier management for indirect spend categories using key performance indicators (KPIs) and analytics.
- Improves cash flow through full spend transparency and more strategic and robust supplier relationships; AP can capture more early payment discounts, leverage economies of scale, or preserve capital as needed.
Effective category management is as important to indirect spend management as it is direct. Expertise and stronger engagement with suppliers, combined with granular indirect spend data, allows teams to secure optimal pricing and terms, streamline the supply chain, and develop contingencies as needed. Detailed category management data can also provide valuable analytical insights senior management can use to adjust forecasts, identify opportunities to further improve workflows, or decide whether to outsource essential support services such as information technology (IT) or maintain them within the organization.
Strategic use of metrics is as old as procurement itself. Measuring performance and compliance is crucial to improving both, and when procurement teams can track and evaluate KPIs with clear and complete data, it’s much easier to streamline your supply chain by removing or rehabilitating underperforming suppliers while pursuing more ambitious relationships with your best suppliers. This is particularly important in indirect procurement, where services such as IT, software as a service (SaaS) hosting, and human resources (HR)/talent recruiting can represent a significant portion of total spend.
Applied Digital Technologies
Companies who implement a centralized procurement solution such as PLANERGY can make automation, analytics and artificial intelligence part of their workflows to support optimization of basic procurement processes as well as integration of the new procurement strategies necessary to digitize and modernize indirect spend.
Automation provides the most powerful and immediate benefit in optimizing indirect procurement and the entire procure-to-pay process. Software robots never need a break or a day off, and work at rates that can’t be matched by human staff. They require minimal human oversight, reduce or eliminate human error, and integrate rules and policies set by your finance and procurement teams to automatically leverage category management, metrics-based sourcing options while ensuring spend remains within budgetary parameters.
Advanced analytics and centralized data management, combined with integrating procurement with your existing software environment (including your existing accounting software, enterprise resource planning (ERP) system, customer resource management (CRM) platform, etc.) provides across-the-board improvements such as:
- Elimination of data silos and file format conflicts.
- Fully transparent connections between budget planning and actual spend.
- Automatic integration of data from various sources, including category management, to improve human decision making and provide context and guidance to software robots executing automated processes.
- Provide support for advanced analytics tools that can project demand, suggest supply chain consolidations, and provide insights that allow procurement team members to seize unique opportunities such as cross-category purchasing initiatives.
AI is essential to digitization and can be trained, over time, to evaluate its own efficiency and efficacy, integrating continuous improvement into all your workflows. AI can be as basic as the RPA processing three-way matches on incoming invoices or as advanced as machine-learning-based natural language processing in user interfaces for ordering goods and services using everyday speech or text.
More advanced AI also drives analytics and advanced purchasing processes. Using indirect spend data, the Internet of Things (IoT), and automatic replenishment tools, today’s procurement teams can rely on software helpers to automatically track inventory and automatically move inventory to fill needs or place orders for new items as needed—complete with context-aware contingencies that route requests falling outside the budget to a human approver for review.
Updated Procurement Strategies
Even the most advanced tools won’t help if your organization doesn’t have the interest or ability to use them. To seize the hidden value of indirect procurement, companies need to invest time, talent, and resources in making sure everyone’s on board with procurement’s new role, the new tools and practices involved, and their own roles in building value for the organization.
Change Management might be the first and most important step in modernizing your indirect procurement. Demonstrating the value of digital tools and updated spend management practices to the C-suite is essential, as they’ll provide guidance and leadership and set the standard for the rest of your organization to follow. A change management plan—including ongoing cultural change as well as more concrete changes such as software implementation planning—will help you secure the buy-in you need to leave outdated processes and inefficiencies behind.
Zero-Based Budgeting requires justification of every dollar spent. It works best when budgets are set using rich data streams provided by a centralized software environment, the expertise of indirect spend category managers, and a shared commitment to supporting both specific project/departmental goals and the overall financial goals of the organization. Indirect procurement benefits from ZBB since teams can use data-driven insights to leverage economies of scale for the best possible pricing and terms for high-volume and frequent purchases.
Prioritizing agility and resilience can also be a powerful tool in modernizing your indirect procurement (and procurement in general). Agility uses cross-functional collaboration to bring together skilled experts from multiple business units, disciplines, and backgrounds. These teams apply their expertise and skills to manage categories proactively and flexibly, based on insights gleaned from data analytics, performance metrics, and financial strategies. This allows them to manage indirect spend from a much broader perspective in real time so they can take advantage of cost savings opportunities or secure value by lowering total cost of ownership through strategic partnerships for indirect goods used across multiple departments and budgets.
Recover the Value Hidden In Your Indirect Procurement Processes
A host of new eProcurement technologies can help organizations of all sizes optimize, digitize, and modernize their indirect spend. By combining them with a strategic approach to procurement fundamentals and a clear vision that includes a change management strategy, procurement teams can eliminate inefficiencies, meet the needs and expectations of internal stakeholders, and help position the procurement function as a source of both significant cost reductions and steadily increasing value for the companies they serve.
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