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Breaking Down Indirect Spend Optimization Barriers

Breaking Down Indirect Spend Optimization Barriers

Indirect spend can represent anywhere from 20-40% of a company’s revenue, making it a huge factor to the bottom line and profitability for any organization. And while there are not many completely new challenges to managing it, there are always new ways to address the optimization and investigation of the expense.

Indirect Spend Optimization

Procurement optimization measures must be taken on every level of operations, but it is especially true in an area where there tends to be so many spending leaks. Most companies start with individual departments and attempt to find ways to optimize indirect spend within those areas, relying on the information provided by team members and managers.

In attempting to optimize indirect spend within an organization, there are a number of barriers that procurement specialists will likely run into. Identifying these barriers and finding ways to overcome them is crucial to achieving the end goal.

Barriers to Indirect Procurement Optimization

1. Upper management does not consider the indirect procurement department to be a top priority

In some companies, indirect procurement teams are deemed less important because their work is not directly related to revenue. When management is looking to cut costs, they often direct their attention to this area first. This leaves an already-struggling department with an even smaller budget, making their job that much harder.

2. The indirect procurement department often has lean teams with few resources

Since indirect procurement personnel are viewed as less valuable, they have to function with fewer employees and resources. In many cases, they have a significant lack of resources, including IT support. And even when management cuts indirect procurement staff, the department is expected to perform just as well.

3. The indirect procurement department deals with a very complex spend area

Indirect spend is extremely complex in terms of number of suppliers, diversity of spend categories, transaction volume of low-dollar purchases, and number of purchases made outside of the procurement department. To optimize indirect spend, those in this area need to manage all internal processes with minimal resources, as well as monitor supplier performance. Since there are so many suppliers and influencers involved in indirect spend, this is an extremely difficult task.

Addressing the Barriers to Indirect Spend Optimization

Due to new technology and methods honed by professionals over the years, addressing these barriers has become easier and more effective than ever before.

Gain an understanding of the importance of the position

First and foremost, management needs to understand the value of the indirect procurement department and its effect on the company as a whole.

If this department is given the attention it deserves, the company can accrue significant savings direct to the bottom line, as well as additional revenue. By managing indirect spend in a more organized and efficient manner, it can mean the difference between having to sell $1,000,000 more to come out on top or simply saving $40,000 from GNFR waste.

Gain a strategic advantage by investing in indirect spend automation

Software has been developed that makes tracking indirect spend much easier and more accurate than the manual data-entry methods that have been used to this point. By investing in this software for the indirect procurement department, companies can look forward to fewer profit leaks, as the area will have a better process in place for ordering, purchasing, shipping, and receiving GNFR.

Value Gained from Indirect Spend Optimization

Companies can obtain tremendous value from indirect spend optimization. By implementing best practices and taking the steps toward overcoming barriers, they can better manage consumption, help boost supplier performance, improve price negotiations, and more.

More importantly, putting the effort into indirect spend optimization now can yield a significant ROI in the next 12-24 months, increasing revenue and decreasing costs.

Conclusion

The effect of indirect spend can be much more far-reaching than simply saving a few dollars on a product purchased from a supplier. A particular product may save both time and money in production, cutting costs but also not adding to the cost of rent or other overhead included in the cost of manufacturing. The thorough evaluation and analysis of every piece of data can likely uncover much more hidden revenue than was previously expected.


About Lumatrak

Lumatrak provides a full range of real-time On-Time Delivery visibility tools to help better manage supplier and delivery performance from order to the final mile of your indirect goods supply chain. Provided in the cloud through its Software-as-a-Service (SaaS) offering and already connected to vast numbers of manufacturers and contractors, Lumatrak’s solution can be quickly implemented to complement and enhance any ERP, Strategic Sourcing and Procure-to-Pay systems.

To learn more about how a better GNFR-delivery management solution could save your company both time and money, contact the team at Lumatrak today.

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