Indirect procurement: Chasing down hidden costs

Part 2: Product selection and consumption
Indirect procurement
February 11th, 2020
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Management of indirect procurement, in particular class C purchases, is poorly coordinated, right from the point at which needs are identified. Yet formalising expectations makes it possible to optimise product selection and consumption, which ultimately means spending less money.

Being aware of indirect procurement needs is a guarantee of better purchases

Employees working within companies rarely have access to documents—such as specifications—that should ideally be used as a basis for carrying out indirect and class C purchases. Instead, they adopt the same approach as they do in their private life, simply selecting products based on their own consumer habits, preferences and/or beliefs etc.

In the majority of cases, this means that high-end and high-quality products are purchased at high prices. Purchasing high-end products makes sense in certain scenarios, since they often come with a warranty, long service life, extended service period etc.

Yet in other scenarios, products from different price bands (entry level, mid-range or retailer's brand), costing between 10% and 20% less on average, might fit the bill even better. This is particularly true for indirect and class C purchases.

The root cause of this tendency to opt for high-end products is excessive quality — a phenomenon that is as inconspicuous as it is expensive.

The solution: A partner supplier for indirect procurement

Luckily there is a way of putting a stop to excessive quality and the costs associated with this problem, which is sadly encountered all too often within companies. It involves optimising product selection and consumption with the help of a partner supplier.

A partner supplier can use its product expertise and extremely broad range in the field of indirect procurement to:

  • Recommend the products that are best suited to employees' needs based on the intended use of the products.
  • Implement action plans to help employees make appropriate choices, particularly through marketing campaigns, automatic suggestions for alternative products etc.
  • Provide information on actual and potential savings to raise awareness among the various stakeholders and highlight the project's added value.

By cmbining the leadership of the Procurement Department with the expertise of the partner supplier, a strategy of this kind allows employees to consume better and spend less. This is all the more true since the savings are directly reflected in the company's profit-and-loss accounts, and can be reallocated to high added-value development projects.

Finally, this strategy paves the way for the holistic optimisation of indirect procurement through the adoption of a TCO approach[1] aimed at streamlining not only the direct costs of these non-strategic purchases, but also, and most importantly, their indirect costs.

[1] Total Cost of Ownership