Unlocking the Mysteries of Indirect Procurement
A Deep Dive into its Complexity and Business Impact
In the world of procurement, there has always been a great divide between direct and indirect procurement. While direct procurement often takes center stage as the "noble" part of the purchasing process, indirect procurement has been relegated to the sidelines, seen as a collection of mundane, repetitive tasks with little impact on a company's core business. But is this assessment really accurate?
What is indirect procurement and what type of purchases does it cover?
At CW1, we believe in providing clear and concise definitions to facilitate a deeper understanding of complex concepts. To begin, let's define indirect spend as the expenditures associated with services, materials, or maintenance activities that are essential for managing and operating the core business. In contrast, direct spend encompasses the costs of goods, materials (raw or otherwise), and services directly linked to the production of finished products or services that a business offers to its clients. By delineating these two types of expenditures, we can better comprehend their distinct roles and significance within an organization's procurement strategy.
To illustrate this to our internal stakeholders, we use the analogy that indirect procurement encompasses items and services that may go unnoticed until their absence is felt. For instance, office supplies such as toilet paper might not be top of mind for many, but their unavailability can cause significant inconvenience. This underscores the necessity of managing indirect procurement efficiently and effectively to ensure a seamless operation.
What makes it a complex job in healthcare?
In the context of healthcare, indirect procurement can encompass various aspects such as IT, construction, staff augmentation, and consulting. Specific examples might include office supplies, laptops, landscaping, or architectural design services. However, it is crucial to note that these categories can vary significantly based on the industry and the company in question.In many organizations, direct spend is managed by a centralized department, typically referred to as a supply chain. This centralized structure leads to more mature processes, well-defined stakeholders, and established technology systems. One reason for this maturity is the extensive tradition and experience of Supply Chain departments in managing the cost of goods sold (COGS) on a balance sheet, a concept familiar to many.In contrast, indirect procurement remains fragmented across multiple departments and stakeholders.
The processes and technology designed for direct spend may not always be suitable for indirect categories, leading to discrepancies in how they are managed. This fragmentation is evident in ERP products on the market, which are more configurable for direct spend around goods than for services, which predominantly fall under indirect spend. Consequently, departments such as IT, HR, and Finance often handle their own sourcing and procurement, rather than relying on a centralized function. Indirect spend categories typically involve more service agreements and fewer goods, resulting in one-off scopes of work that require negotiation. Service agreements tend to be those one-off scopes of work that need to be negotiated. Whereas goods agreement, you can contain many SKUs. Sometimes thousands of SKUs can be on a goods agreement from the same supplier. So this would then tend to lead to more contracts, more volume because everything tends to be a one-off scope of work.
Embracing the Excitement:
A Perspective on Procuring Consulting Services
Indirect procurement is like a rollercoaster ride with its ever-changing landscape, making each day a unique experience. Interacting with a bunch of stakeholders, from IT, Finance, to HR, keeps things interesting, as every conversation is different.Some challenges in indirect procurement include:
Managing contract volumes
Crafting statements of work
Sure, these tasks aren't for everyone, but they add excitement and appeal to the field. Indirect procurement is full of variability and complexity, creating an environment that encourages professional growth. If you love challenges, this can be a super rewarding career path!With decentralized indirect spend happening across departments, it's crucial to build strong relationships with internal stakeholders. By centralizing or aggregating spend by category, organizations can get a better grip on their opportunities and challenges.It's essential to remember that internal stakeholders, like IT, HR, and Finance professionals, might find indirect procurement processes time-consuming. They have their own primary responsibilities and might not be experts in procurement. So, they could miss some important details during the procurement process. Indirect spend often involves service agreements, which can take longer to finalize because of their unique scopes of work.Misaligned priorities can pop up when sourcing pros handle both direct and indirect procurement. Organizations usually prioritize direct spend because of their focus on the cost of goods sold (COGS). So, indirect spend might not get the same attention or due diligence, leading to inefficiencies.The secret sauce to success in indirect procurement is building fantastic relationships with internal stakeholders. These connections help sourcing professionals tackle the complexities of indirect spend and ensure smooth operations. It's also super important for indirect sourcing pros to see their internal stakeholders as customers. By treating IT, HR, and Finance teams like valued clients, procurement specialists can better understand and address their needs, boosting overall organizational success.
Furthermore, within an organization, if your objective as a leader is to enhance maturity and gain control over indirect spend by centralizing it within the supply chain, you may encounter resistance stemming from the fear of change. This apprehension may arise from concerns that the supply chain or sourcing team is encroaching upon established areas of responsibility or attempting to wrest control from stakeholders.This highlights the importance of cultivating strong relationships with stakeholders across the organization. It is crucial to remember that one aspect setting indirect procurement apart is the need to develop relationships across various divisions and departments, as indirect spend often remains fragmented. By building these connections, you can effectively navigate the complexities of indirect procurement and foster an environment of collaboration and success.
Indirect spending profiles
Certainly, technical expertise is a crucial component in the indirect procurement space. For instance, when sourcing IT services, it is ideal to have someone with an IT background or experience in IT sourcing who understands the industry's language. The same principle applies to Finance and HR staffing.
However, the indirect procurement domain places significant emphasis on soft skills and behaviors. Two essential qualities that contribute to success in this field are flexibility and humility. Flexibility is vital due to the nature of the indirect space, where processes, technology, and staffing levels for the sourcing team and internal stakeholders may not always be ideal.
Humility is particularly important because indirect procurement is often less mature than direct spend in many organizations. This can manifest in interactions with internal stakeholders and within the supply chain department, where the perception of the indirect sourcing team's importance may be diminished since it is not directly tied to the cost of goods sold. Emphasizing these soft skills, in addition to technical expertise, is key to achieving success in the indirect procurement field.
In today's post-pandemic world, attracting talent in supply chain, including indirect procurement, is indeed challenging. The strain on the global supply chain has increased pressure to maintain product flow and control costs. Factors such as inflation further complicate the landscape. Nevertheless, retaining talent is a different matter, and it hinges on leadership and the work environment. To achieve high retention rates, it is essential to:
Value the work of supply chain professionals
Adapt to remote or hybrid work environments
Create a sense of belonging and value
Show genuine care for employees as individuals
For those considering a career in indirect procurement, it is crucial to remain flexible and humble. When facing challenges in your first job or position, examine the surrounding environment, including technology, processes, and culture. Often, the issue may not be about you but rather the structure and fragmentation of indirect spend.Additionally, explore various niche areas within the indirect category. Options are vast, ranging from IT, construction, consulting, and staff augmentation to office supplies, furniture, software, and more. Embrace the challenges and, most importantly, have fun in your career journey.Key takeaways for a successful career in indirect procurement:
Find a mentor and ensure your company aligns with your personal values and goals
Remain flexible and humble, adapting to the environment and potential obstacles
Discover a niche within the indirect category that suits your interests and strengths
Embrace challenges and enjoy the journey
Direct and indirect spend are two complementary aspects of the same overarching procurement process, and both are essential for maximizing opportunities and delivering value to an organization. Each requires its unique set of skills and experience, and their significance cannot be underestimated.Currently, with unprecedented challenges such as global supply chain strain, rising inflation, political disruptions, and extreme weather events, supply chain professionals are more crucial than ever. The role they play in controlling costs and ensuring product flow is paramount to the success and stability of businesses in these uncertain times.