Indirect Procurement

The revolution in indirect procurement

Indirect procurement is often considered the "poor cousin" of the procurement function. It is thought to be less important and less strategic and so is less well-catered for in terms of human resources and skills. However, for some years, this function has been undergoing a real transformation, in respect of both the Procurement area and the savings levers to be activated.

Context

Indirect procurement contributes to the operation of different company departments by procuring products and services that are not directly integrated into the production of the final product/service.

Indirect procurement is often referred to as "general costs", "unclassified expenditure", or "non-market procurement" and covers a very wide range of product lines and services, which are distributed diffusely in organizations. These include communication, intellectual services, equipment and supplies, travel and transport, IT, HR, facilities and utilities, transport and logistics, etc.

At present, indirect procurement holds huge potential for savings, with a direct impact on the accounts of companies that are seeking to permanently reduce their operating costs. Volumes of indirect procurement continue to be high year-on-year until they become "strategic" (IT, communication, etc.) and are often left in the hands of decision-makers, who do not have adequate awareness of cost issues, and are not procurement method professionals.

Challenges

Depending on the business sector, indirect procurement can account for 20 - 30% of the company’s procurement expenditure. It therefore offers very high potential for savings, which can directly affect Profit and Loss (P&L) within a very short period of time: saving 10% on indirect procurement could allow the company to generate 1-2 EBIT points in just a few months.

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A study carried out in 2013 among procurement managers revealed that they were not yet in charge (or extensively in charge) of expenditure falling within the category of indirect procurement: insurance, legal, marketing and communication, etc.

The study showed that certain operational domains are still controlled by the departments concerned and that the procurement function needed to continue its efforts to convince them of the value of its contribution.

The study found that the involvement and motivation of decision-makers are a determining factor in that respect, which is a conclusion Argon Consulting had also reached in its procurement projects.

The challenges linked to indirect procurement are hard to grasp due to the multiplicity and disparity of categories: the action to be taken must be suited to each situation, which further complicates any projects concerning them.

Additionally, suppliers related to these categories of procurement sometimes evolve in changing environments, which are often affected by technological revolutions or deep-seated changes in consumption methods (e.g. the emergence of the Cloud, low-cost business transport, etc.).

Indirect procurement is often cross-functional (due to the high number of stakeholders/decision-makers and the "universal" nature of the expenditure). This makes it hard to coordinate action but should encourage collaboration between Procurement, decision-makers and users.

Companies are rarely equipped to address these opportunities effectively or to control the related expenses. Indeed, traditional optimization levers do not respond to the complexity and diversity of indirect procurement, which is still not under control, despite the emergence of new applications that facilitate budget control.

Beyond procurement itself, the challenge related to these categories is the implementation of a reliable cost control system:

  • Facilitating the processing of financial data and the management of expenses
  • Guaranteeing compliance and adherence to negotiated contracts
  • Ensuring a level of delegation that is consistent with the procurement strategy
  • Employing new applications based on the "digitalization" of procurement, to facilitate the control and organization of this activity

How can Argon Consulting help you?

  • Providing expertise on indirect procurement categories
  • Introducing global savings programs for indirect procurement
  • Supporting the structuring of the indirect procurement function

Case Studies

Operational due diligence in the acquisition of a specialized retailer by an investment fund
Yes, it is still possible to save 30% on indirect procurement!
Defining a makeorbuy and sourcing strategy for all clinical development processes
Finding procurement synergies in a decentralized group
Various levers can still be activated to optimize costs and control the margin
Organizing procurement and managing new products introduction