Indirect Spend Management Best Practices

Posted by Negotiatus on October 24, 2018 at 5:06 PM

Conventional wisdom has been that group purchasing organizations (GPOs) can benefit companies by streamlining indirect spend management and saving significant amounts of money. GPO advocates cite recent research that shows a majority of companies are still not using or considering GPOs, and assert that this is "leaving money on the table."

GPOs, however, are quickly becoming an outmoded concept. Developments in technology have introduced capable and easy-to-use indirect spend management software systems that can provide all the benefits of a GPO, but more efficiently and without taking away a company's flexibility in managing procurement.


From GPO to indirect spend management software

A GPO pools the buying power of its members so they obtain volume discounts and terms from suppliers. This is especially useful for purchases, such as office supplies or MRO services, that are relatively small for most businesses. With the low volume of these purchases, individual businesses usually can't negotiate for better pricing. And indirect spend management is still management, requiring both manpower and time. Before the advent of indirect spend management technology, GPOs provided reasonable solutions to both of these issues.

Indirect spend management systems, however, have rendered GPOs suboptimal. By deploying the right system for your business and following these best practices, you can maximize your indirect spend management and realize greater benefits than a GPO can offer.


Talk to your stakeholders

Centralizing procurement is considered a general best practice because it reduces the risks of unmanaged or wasteful spending and out-of-process buying behavior. It only works, however, when the stakeholders throughout your business can count on getting what they need to do their jobs, and buy into the new way of doing things.

Here's a simple example: Your shipping and receiving department needs a part to fix one of its two forklifts. It's a simple fix, but until that part arrives, the department's productivity is cut in half, with potentially dire consequences for the rest of your operations. The department manager could have the necessary part in hand within the day simply by picking up the phone, and will be tempted to do that, even if the part will cost three times as much, if the alternative is having his forklift out of action for a week while a purchase works its way through a multi-layered process.

Taking care of your internal customers helps to establish the parameters needed in an indirect spend management system, ensuring that it will provide the cost savings and efficiency gains you need.


Set quality standards and guidelines

One of the major drawbacks of GPOs is that procurement through a GPO removes some of the direct ability of the individual businesses to monitor product quality standards. Using an indirect spend management program doesn't require that compromise, but standards need to be clearly established within your organization to provide purchasing guidelines.

A good way to do this is to analyze previous buying patterns, demand patterns and purchasing requirements to help your sourcing experts assess offers from suppliers. This is one area where having a flexible spend management program with good analytics tools is a must.


Develop smart partner relationships

Finding mutually beneficial ways to cooperate, even with direct competitors, can improve indirect spend management by giving you access to different resources, and maximizing the use of your own. What sort of partner arrangement would work for your business depends on your particular circumstances. It could be a comprehensive cross-shareholding arrangement, or something on a more limited level. Some categories of indirect spend management lend themselves well to cooperative agreements, such as MRO spending or third-party shipping.


Use pricing templates for cost components

Breaking down costs into their component parts is one aspect of indirect spend management that companies sometimes overlook. This means that the indirect costs of indirect spending categories are missed. Identifying component costs of indirect spending items, including their indirect cost contributions, allows you to develop templates for pricing. These templates in turn help to prevent waste by identifying potential problem areas, and help as guides in setting up required quality standards and cost limits.


Choose a good centralized supply management tool

Having the right spend management program is a must for any business, and eliminates the need to transfer any indirect spending into a GPO. An effective centralized supply management tool will provide your business with its own "mini GPO" by centralizing vendor access and product lists.

This puts current and past procurement and payment data in one place as well, enabling the spending management program to provide rich analytics. Ordering and purchasing patterns can be identified and corrected, or repeated as necessary. Budget parameters can also be established, and set according to whatever control is most useful, such as purchaser, vendor, product or budget amount. With robust, real-time analytics, managing budget targets and limits is faster and more effective because problem areas can be quickly identified before they become serious issues.

A good spend management solution will also facilitate strategic sourcing, which is often cited as one of the key benefits of GPOs. With its data analytic capabilities, the indirect spend management software can put together options for procuring supplies and materials at the most advantageous price and terms.

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Topics: spend management, indirect spend