Many Manufacturing organisaions need to focus more time and energy into Indirect spend areas.
Large organisations typically focus on Direct Material sourcing activities as these are much easier to measure though Purchase or Material Price Variance (PPV or MPV). More mature sourcing organisations need to focus on “indirect” areas to continually drive savings impact.
There are a few obstacles that organisations need to overcome to address their Indirect Spend and a few ways to address them:
1. Unknown Spend- Because Indirect categories are usually not managed centrally, it is challenging for organisations to get their hands on the data. To solve this, they need to reach out to key suppliers for data collection. Most indirect suppliers will have good systems and can readily provide information on who (from an organisation) buys what from them.
2. Resistance to Change- Just because a supplier has been a supplier for a long time does not necessarily mean they are the best supplier in terms of price and other service requirements. Testing the market and potentially forcing a change may be in the best interest of an organisation.
3. Hard to Track Savings- Direct Material Savings are easy to track through PPV or MPV. Indirect savings are usually not as straight-forward to track. In addition to comparing old invoice price to new invoice price, organisations also need to take into consideration other factors such as demand management.
4. Lack of Procurement Influence/Control- Again, because savings are harder to track it may be tough to show Procurement’s value. Relationship building in the indirect area will need to happen gradually over time.