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Understanding Indirect Spend Impact Upon Profitability

Understanding Indirect Spend Impact upon Profitability

The majority of businesses tend to place a much greater emphasis on growing their top line rather than on reducing their costs. In terms of buying, there is that much greater emphasis on how many widgets can be sold at a high margin compared to how locations may be updated to promote maximum sales at minimum costs.

It’s extremely important for retailers to create desirable shopping experiences, but not only do these retailers generate revenue, they also must pay for their construction costs as well as any fixtures used to help sell their widgets.

It is arguably more important to reduce costs than to generate additional revenue. Increasing direct spend should increase revenue, but if indirect spend can be decreased, there will be a much larger impact on the bottom line.

What Is Indirect Spend?

Indirect spend, or the amount spent on indirect costs, is spend that does not directly generate revenue. Indirect costs include such items as marketing, sales, accounting, administration, IT, facilities, realty, supplies, depreciation, maintenance, and all goods and services purchased not associated with the cost of the finished product.

One of the largest costs and most important on the indirect side is realty. Focusing on a retail business, the realty is the physical storefront. Companies must create their own unique shopping experience that continues to draw in their customer base. They must continue to keep their stores fresh to build their customer base and not lose them to competitors. These costs can quickly pile up, and they are completely unrelated to actually selling the product.

How Much of a Company’s Spending Is Indirect Spend?

If there is money to be made on the indirect procurement end of a business, how is it done?

To answer that question, we need to first examine how much of a company’s purchasing is found in indirect spend. This question becomes more difficult when you compare the different industries. Major retailers have huge costs, especially if they have a large store count. Their manufacturers also have large indirect costs associated with keeping their plants modern and cost-efficient to manufacture their goods. Other manufacturing industries, including cars and airplanes, have huge manufacturing plants. Boeing’s manufacturing plant outside of Seattle, for example, is the largest building in the world by volume.

Even though indirect spend is vastly different by industry or even company within an industry, it is always a large part of the P & L statements. For such a large portion of the purchasing, there definitely needs to be a lot of attention paid to what is being spent.

Identifying Indirect Spend Leaks

Identifying indirect spend leaks can be a daunting task in organizations where this spend has been loosely examined in the past. Initially, management will need to ensure that there are proper procedures in place for evaluating these costs, such as new inventory methods and accounting systems. Some companies choose to hire procurement professionals or consulting services in order to streamline their processes and maximize their potential for savings.

A large piece of the puzzle for finding indirect spend leaks could lie with excessive labor costs or unreported billing errors. Having professionals in place to closely examine these types of expenses is crucial to discovering hidden extraneous costs, even if these are professionals utilized from within and assigned additional tasks.

Conclusion

Indirect spend is where most companies lose track of spending, simply because of inefficient or complete lack of tracking methods. This can be the key to making sure an organization grows its bottom line. Learning where the various spending leaks are coming from and how to stop them could mean the difference for a manufacturer’s sustainability in both the near and distant future.

 


About Lumatrak

Lumatrak provides a full range of real-time OTIF visibility tools to help you 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 number 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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