Indirect spend costs companies far more than they realize
For many organizations, cost optimization measures focus mainly on squeezing out savings in strategic procurement (negotiating down costs of raw materials sourced) or tightly managing labor and staff costs. As these two categories account for the bulk of operating expenditure for most companies, aggressive cost negotiation makes sense. However, these two categories are also the least amenable to sustained cost control due to their susceptibility to market forces: With all competitors trying to gain the same competitive edge in direct sourcing costs, sustaining a long-term advantage requires a degree of negotiating leverage that few firms have.
Meanwhile, often overlooked, is the saving potential in indirect or non-strategic procurement. Indirect procurement accounts on average about 10% of revenue, and while this is dwarfed by direct procurement, the savings potential is not insignificant.
Khareed’s analysis of the procurement spending of more than a hundred large manufacturers and assemblers indicates potential to reduce indirect procurement costs by 15% on average through improved sourcing and better demand management. A further 5% of procurement spend can be saved simply by improving processes and minimizing dependence on a fleet of purchase agents. This can translate into net savings equal to a hefty 2% of revenue, a not-insignificant cost reduction for the many commodity-oriented businesses that comprise Pakistan’s large scale manufacturing sector.
There are 4 areas we recommend tackling in order to minimize indirect procurement spend:
- Price management: The cost of soliciting competitive bids for each and every item being procured is prohibitively expensive for most procurement organizations. As a result, only the largest ticket items are competitively tendered. However, in volume terms, even the low ticket items can add up to sizeable costs
- Transparency management: Even in competitively tendered situations in the best run of procurement organizations, there is always a degree of price intransparency and leakage, simply due to the numerous interfaces between the end user and the seller.
- Demand management: Maverick or unplanned purchases often drive up costs simply because of short lead times, which limit the ability of procurement organizations to solicit the best offers. Better management of demand and improved planning can dramatically curtail costs by allowing sufficient lead time to source optimally.
- Specification management: In many organizations, the procurement organization does not work sufficiently closely with the end user to correctly determine the specifications of the item being procured. Where the balance of power rests with procurement, ill-judged cost saving efforts can result in low cost but also low quality equipment being procured, which increases the total cost of ownership. Conversely, technical end users can over-spec their requirements, requesting materials and equipment that exceed their minimum necessary requirements. Finding a suitable balance between the procurement function and the end user can shave off costs without hurting operations.
Khareed’s Prism™ e-Procurement module is designed to enable companies to manage each of these 5 areas of their procurement operations to minimize their costs, increase their visibility on their spend, and make procurement easier and more efficient. More than a hundred large corporate enterprises across Pakistan are currently using our procurement solution to run their day to day procurement and save time and money at the same time.
If your organization could benefit from using a procurement transparency solution that is tailored for the needs of the Pakistan market, please get in touch with us and we will schedule a meeting to see how we can help you.