For many organizations, Indirect spend is a challenge to understand, as much as manage. The spend is often substantial and easier left alone. On top of that, you may not have the resources to dive in and get the many categories under control. If you are beginning to dig into into your Indirect categories, or you have been with dismal results, here a 5 issues that may be beneficial to correct first.
1. Your Procurement Managers do not KNOW the categories they manage.
It is important to at least have a working knowledge of the categories you are working within. If you do not know the ins and outs, that is fine, but being able to speak the language is necessary. Not understanding a category opens you up to tougher negotiations, worse contract terms, unnecessary spending, and a negative view of Procurement from stakeholders. It is important for Procurement to be involved in any negotiation early, however, coworkers and suppliers will not demand your involvement if you slow them down.
If you are thrown into a category, be upfront and honest with stakeholders who can show you the ropes internally. This way you are taught with the bias of your company in mind. If the supplier is your source of information, you may be taught dishonestly in some, but rare, cases. For example, if once monthly HVAC maintenance is acceptable, a supplier could instruct you that twice monthly service is necessary to get double the business. With stronger category knowledge, you could avoid doubling the required maintenance expense. The same situation could apply to contract negotiations. If a supplier is aware of your lack of knowledge, you could end up with terms that do not benefit your company’s goals. Most importantly, the respect from suppliers and stakeholders to require you be present in negotiations is paramount. As the Procurement representative, you may not be a category expert, but you more than likely are a negotiating and contracting process expert. This is where you will shine, so garnering the respect to be present is extremely important.
How much trust can you put in your internal reporting? How well do you know what this data represents?
Procurement Managers often believe the exact story that their reports are telling them. They choose a category, run a report, and take the total of the spend column as the exact amount of spend in that category for a time frame. However, this is often not the case. Understanding the data allows you to understand the category much better. If your company has a large amount of spend without corresponding purchase orders, be sure to understand whether you are seeing this data or not. Know whether you are looking at spend that has been received against a purchase order or matched and paid against a purchase order. If you do not know exactly what the data you are seeing is telling you, your ability to find cost saving opportunities is greatly diminished. You also risk working within a category that has little addressable spend.
3. You have too many old contracts with too many suppliers.
Contracts are one of the most relevant pieces of information for the Procurement department’s success. Many companies rely on contracts to lock in pricing, payment terms, and other legally binding agreements between the company and supplier. However, contract management is often forgot about as business goes on as usual. The clear line of communication between the supplier and company is lost as the contract renews over and over for years. The benefits the company was getting when the contract was signed are now outdated. Procurement could potentially negotiate a much stronger contract, but no longer knows the contract exists.
This is common among conglomerates and large companies with decentralized purchasing, especially when standards for contract management are not a documented company procedure. Once Procurement begins to analyze the category, it is extremely difficult to get a hold of all the contracts with all the suppliers. The easiest way to avoid this is to consolidate contracts and suppliers. This can be a great opportunity for cost savings, as well! The consolidated spend will make your contract negotiation much stronger as you drive spend to less suppliers. Finally, be careful about evergreen clauses that automatically renew contracts. Once communication breaks down between Procurement and the suppliers, the contracts become a nuisance that will not go away. If necessary, use short term evergreen clauses that renew for a year or two at the most.
4. You are concentrating on the wrong categories that are too difficult, or have too little addressable spend.
For multiple reasons, Procurement managers can have their focus on the completely wrong categories to drive cost savings. If you solely consider spend, it can mean focusing on a category with a small amount of addressable spend. Be sure the large numbers are in fact addressable. For example, freight is a high spend category for certain companies. However, the cost is often high no matter what carrier you use. A better situation could potentially be negotiated, but there is a ceiling to the savings.
Procurement should also be considering when the last time the category was taken to market. If your resources are limited, addressing a category that has not been analyzed for years may be the better decision. Finally, reflecting on whether you are addressing a category because it is one you know well may be another opportunity for improvement. I have seen this multiple times. A Procurement manager is comfortable with stakeholders in one category of spend and continues to look for savings to work with the same department. This often leads to unproductive analysis from the manager that is continued down the chain to the analyst level.
5. You are overdoing due-diligence and not “getting in and getting out”.
Perhaps the most unproductive way to handle Procurement is to overdo due diligence without making any decisions. What I mean by this is looking into spend, analyzing, meeting with suppliers, running RFP’s (Request For Proposal) or RFQ’s (Request For Quote), negotiating contracts, and then doing it over and over without making any changes. At some point, a change will need to be made to actually render savings. If you are not making any decisions, you are not affecting the organization in a positive way. Be careful not to sit in the supplier sourcing function of Procurement for too long. This can cause Procurement managers to be viewed as wasting stakeholders’ and suppliers’ time. Not everything needs multiple meetings, and everyone on the organizations’ and suppliers’ end does not have to be present to have a quick conversation.
Finally, remember what the function of Procurement is. We are here for sourcing, contract management and negotiation, and supplier management. Good Procurement is simply getting as much of your organization’s spend under control. We are not Finance, we are not Accounts Payable, and we are not IT. This is what I mean by get in and get out. Too many times, Procurement gets stuck with processes that handcuff the department from doing what it is there to do. To be effective, take on as few non-Procurement functions as possible. Since we are so hands-on in the beginning stages of a supplier relationship, we often are the ones used as a fall back for tasks other departments do not want to handle. So, when possible, get in and get out, and find the next category to get under control!