Procurement priorities may come and go in response to changing customer demands, evolving technology, an increased focus on CSR, or unpredictable supply chain disruptions. But cost reduction is a critical concern under any circumstances, and the chaotic events of 2020 have only served to increase the pressure on procurement to reduce their organisations’ spend.
While procurement teams have historically focussed their efforts on the optimisation of direct spend, recent years have seen most organisations adopt a more strategic approach to managing their indirect spend. Could the impact of COVID-19 set this progress back?
Why are organisations cutting indirect spend in the wake of COVID-19?
Ongoing economic instability, uncertainty about the future, and increased spending in certain indirect spend categories (including PPE) has seen organisations panic slashing spend in other “non-essential” indirect categories. This includes everything from marketing and technology to research, training, and office supplies.
Despite this exceptionally challenging period, it would be remiss to slip back to a time when indirect spend was a little considered afterthought, so often managed by those with minimal procurement experience.
Because indirect suppliers are working hard to stay afloat by maintaining their existing customers and securing new ones, procurement professionals have a unique opportunity to gain an advantage at the negotiating table.
Here are four ways for procurement teams to optimise their indirect spend.
1. Look for opportunities to re-negotiate contracts
Now is the perfect time to re-evaluate and renegotiate your supplier contracts.
Given the sudden shift to remote working, it’s probable that a significant proportion of your transportation, utilities, and service contracts have become redundant in the past year. But there may be opportunities for renegotiation. Landlords may consider changing your rental agreements, un-used service contracts could be extended, you might be able to claim refunds for unused travel expenses, and some insurance companies have offered rebates in a bid to retain their customers.
Other important considerations include deciding whether to change the terms of evergreen contracts and assessing warranty terms. In these volatile times, automatic contract renewals might not be the most sensible option for your organisation.
2. Consolidate indirect spend categories
Indirect spend categories are too often characterised by needless complexity, a lack of transparency, and a surplus of tail-end suppliers. Given that indirect spend can account for 20-40% of an organisation’s overall spending, it’s well worth consolidating your supply base.
Supplier consolidation starts with completing a thorough spend analysis to identify savings opportunities and develop a list of both preferred suppliers and those who are underperforming.
Highlighting preferred suppliers will it easier to manage this spend. Procurement professionals will be able to secure more favourable contract terms, bolster supplier relationships, leverage economies of scale and volume discounts, and ultimately drive cost savings.
3. Educate employees on the importance of procurement processes
Failing to properly educate your workforce on the importance of robust procurement processes will lead to maverick spending. As a result, buyers are more likely to spend with unauthorised suppliers, which exposes the organisation to more risk, impacts the accuracy of data collection, and increases procurement’s overall spend.
Investing the time and funding to properly train your employees on procurement processes, contract management best practices, and your preferred supplier programmes will pay off in the long term.
4. Invest in technology
Real-time visibility of spending across your entire organisation is a luxury that the right kind of technology can provide.
Investing in a decent eProcurement solution could help to address many of the challenges associated with indirect spend management such as supply chain visibility, maverick spend, compliance, and data management. Make sure to do your research to find a solution that best meets your organisation’s needs.
Join PASA Connect Today
On 4th March, the PASA Connect team is hosting a virtual roundtable, “Indirect spend analysis – essential cost reductions for every business.”
To find out more visit the PASA Connect website or contact Jonathan Dutton via Jonathan Dutton at jonathan@pasa.net.au m +61 (0)404 452 861.
