Why Indirect Procurement
Many organisations put their futures at risk by failing to control external expenditure on indirect goods and services.
According to the Chartered Institute of Purchasing and Supply CIPS organisations will typically spend between 30 and 80% (percent) of total turnover, depending on their sector, on the procurement of goods and services. Therefore effective Procurement of these is a prime target for cost reduction.
This simple example illustrates the point. Assuming a company with revenues of £10 million and a net profit of 5% i.e. (£500,000) has an external procurement spend of £5 million. A saving of just 5% on this would equate to £250,000 and would increase the company's profit by 50%. Improvements on indirect purchasing will have a direct impact on the bottom line and on service and reputation.
Often senior management in organisations don't know much they spend on indirect procurement or which suppliers they use or how effectively they are managing indirect spend. In a 2007 survey carried out by Nelson Hall NelsonHall fifty-six percent (56%) felt they were failing to secure cost-effective indirect products and services, while fifty-four percent (54%) thought they struggled to manage the volume of suppliers they have for indirect procurement. Importantly, more than half of the procurement departments were under pressure to cut indirect budgets and lacked the in-house resource to manage indirect spend. This highlights the immediate need for experienced indirect interim procurement manager that come in and "hit the ground running" providing real time value.
It is often the case that indirect procurement goes unmanaged, with the buying being carried out locally by the stakeholder or other support functions, with no strategies, processes, management or direction. Indirects are often targeted for "quick-wins" and whilst these may yield small savings of 5% - 10% significantly better savings of 15-25% or greater can be achieved with a managed strategic function.
It is also common place for significant indirect goods and services to be procured under no formal process or due diligence, no measurements put in place, no stretch targets and no contractual agreement. The latter coupled with Supplier Relationship Management can yield year on year savings. Experience has shown, requirements for £million of pounds merely given to suppliers, 8 to 12 year contractual commitments signed, evergreen clauses that lock you into complex and substantial cancellation processes and many more horror stories
Without effective procurement strategies to co-ordinate the indirect procurement of goods and services, organisations can lose their way, costs spiral out of control, customers are let down and the reputation of the organisation is damaged. Procurement should not be seen as a backroom, peripheral function but as a key business process.
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