Indirect purchasing: don’t make the same mistake as the Titanic !

Drawing of Titanic to illustrate the mistake to don't make with indirect purchases
October 28th, 2016
Share :
{{totalComments}} comments

Indirect purchases represent 20% of a company's total spend but account for 80% of its administrative costs. Costs which are often hidden in labour and overheads, such as the time spent selecting products, receiving deliveries, dealing with invoices and managing suppliers.

The mistake often made with this type of transaction is to focus the majority of effort on pricing at the expense of a thorough review of the related processes.
In other words, the company, like the Titanic, only sees the tip of the iceberg without realising that the real danger comes from what lies beneath !

A huge... nominal saving!

Working on the purchase price always sounds like a winning idea. Several companies now ask for quotes whenever an order exceeds a certain value and it’s not rare for the internal purchasing process to require three quotations, negotiations and approval for an order worth 350 euros (or even less).

This practice undoubtedly enables the company to make a huge… nominal saving.

Take the example of our 350-euro order. Quotations and negotiations may bring down the price by 20%, i.e. 70 euros, but you still need to subtract the time spent searching, sending quotations, negotiating, approving the order and, in certain cases, creating a supplier account and collecting the product. Lastly, you need to allow for the cost of invoice management. The amount associated with these operations varies, but based on the average hourly cost of a purchasing manager or accountant, you can easily end up with something between 70 and 100 euros, and that doesn’t include the time that could have been spent on higher value-added tasks!


Time to optimise the whole process once and for all !

The main focus of an effective indirect purchasing policy must be to streamline the entire process, from placing orders all the way through to managing invoices. This can be done in five steps:

  • Create a list of approved suppliers
    It’s good practice to select a few specialist suppliers for products that the company orders regularly and a generalist supplier for everything else.
    It’s better to choose suppliers who can deliver directly to the place of work. Given the quality of e-commerce sites and electronic solutions in 2016, it’s increasingly bizarre to have to go to a trade counter or into a store to purchase goods.
  • Negotiate a global discount with those suppliers
    The discount may be global and/or associated with net prices for certain flagship products.
  • Implement an electronic order management solution, covering order-placing through to electronic invoice management. These solutions manage the entire approval process.
  • Promote the agreement internally and support the operations staff to ensure that everyone uses the chosen solution.
  • Manage supplier agreements and the annual progress plan to identify other areas where money can be saved (replacement products, rationalised ranges, etc.).


Digital technologies and customer relationships: the winning combination !

Let's go back to the example with the initial order. Although the annual discount agreed with the supplier may be lower than the 20% negotiated for each order, the total cost will ultimately be much less.

Taking a negotiated discount of 10% and bearing in mind that the steps seen earlier can give a 60% reduction in administrative costs, the total saving will be somewhere between 77 and 95 euros. This is well above the 70 euros saved through negotiation alone, obviously without counting the time saved, which could be reassigned to negotiating orders where the value justifies additional work (orders> 1,000 euros, projects, etc.).

Implementing a cost-reduction policy like this involves establishing partnerships with suppliers who are proficient in using the digital systems required to streamline costs and who are also capable of delivering site level support to guarantee successful deployment.