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Managing Indirect Spend

What makes a buyer different from a purchaser and different again from a procurement manager, and why is it important? Peter Duffy, a procurement and supply chain professional for 30 years, is an expert in indirect spend, which includes anything from stationery supplies to recruitment and everything in between not directly related to production line costs.

Peter estimates that indirect spend can account for up to 50 per cent of a company’s purchases and that manufacturers especially can spend 20 per cent or more of their total revenue on indirect expenditures. The opportunities for considerable savings are potentially huge, he says.

"Indirect spend management has always been of interest to me due to the scope of the spend, yet is very often overlooked," he tells Rullion. This is because it is simply not considered as strategic, because it is the "nuts and bolts" that goes on behind the scene "and so therefore quite often senior management don't look at that and don't see it as a priority".

"Who really worries about the stationery, or the cost of recruitment or travel? Is all of this always done with a cost management focus? Quite often not," he says.

The place to start, according to Peter is to understand that there is an issue. He always begins with a full spend analysis preferably looking at two to three financial years.

"Having got the data you rule out all those with contracts already in place and rule out all of those that are single-source or direct spend," he says. "What you then need to do is determine a low cut off point because there is a certain amount of spend that would just not be worth the effort for the savings you could possibly obtain. Just draw a line and say anything below that you're not going to look at."

Next comes the strategy; ask, what can be combined? "You might have more than one agency you use in recruitment so what you could do? My strategy is to put it out to tender and look at forming a strategic partnership with a single source for recruitment. The chief objective is to get that indirect spend under control but it's not something that happens overnight," Peter says.

He continues to say that due to restructuring in a company Peter previously worked for, 57 per cent of their HR staff left. The company then needed a supplier who would handle all of the business recruitment. "As a team we defined the scope of the need and the process we wanted to follow."

He then compiled a tender document and went to the market to a number of potential recruitment agencies, whittling them down to a short list, before inviting them to presentations ahead of selection.

Peter says he then formulated a key performance indicator (KPI) with clear turnaround times with the use of technology "both theirs and ours". And not only did the process bring in around 6 per cent in savings on recruitment alone but the company also built a strategic partnership.

It all depends on the size of the organisation however. Peter believes that big multinationals could very well look at doing it all in-house because they would probably have the financial resources. But typically in a manufacturing environment that is not necessarily a huge global operation it would be worth it "because it takes an awful lot of time to look at social media and to vet candidates".

"I would want the agency to earn their money by going to the market conducting the first round of interviews and produce a short list of candidates that they would put their name to as being suitable, and that means they have to put my company first and they need to understand the market place and where they can tap into the correct resources," he says.

"Now that can be done in-house quite effectively, but what you tend to lose is the depth and spread that an agency can provide." Applying the same data analysis across all indirect spends Peter said procurement managers need to ask "who cleans the toilet, the offices? Who gets rid of the waste? All of that can be rolled into one contract and it's about understanding first what is spent on all of those activities," he says.

"I think there is one fundamental problem why procurement is not seen as value adding and that is that every person as an individual feels they can buy." But buyers, purchasers and procurement managers are not the same thing. Peter says anyone can buy. "You buy when you do your weekly shopping. You make the decision to buy that special offer," he says, but that's not the end of the story.

When someone is buying a car, he asks, how many look into the details around the cost to operate, the total cost associated with ownership. "Is it the good looks, the performance, the miles per gallon? Is it about diesel or petrol, the best financing options? When you start taking all that into consideration you are moving from a buying to a purchasing concept which is about understanding the full cost of that purchase."

Procurement takes it a step further. It's about the 'even-bigger picture'. The procurement manager will look at current best practices, impact on the environment and sustainability, and also whether the seller is the type of organisation he would want do business with.

Peter concedes that the entire process of analysing indirect spend across an entire organisation could be outsourced to consultants to determine where savings could be made but it may not always be the best approach.

"Along with data analysis and financial spend analysis you need to understand the culture of the organisation, what is the business strategy and how are you in fact going to impact the bottom line of the organisation," he asks.

"That means without a shadow of doubt you need to talk to key stakeholders and understand their drivers and their requirements, be it for resources, maintenance, or travel. It's that understanding of what the company's drivers are and that will tailor the strategy that you need to adopt."

An in-house professional procurement team means there is someone onsite who can work with stakeholders and has the company's culture and values at heart.

"You have the risks of that maverick spend that could impact you twice because in my experience outsourcing companies may not always have your core values to heart," Peter says.

Also analysing and coming up with a procurement strategy is not the end of the story. "Yes we are often policemen," he adds, "but at the same time we can save millions of pounds worth of spend through adhering to a process."

Policing indirect spend comes once the strategy and contracts are in place and it is then about making sure this is enforced by communicating with stakeholders and those creating the spend, requiring them to either go thorough procurement or use the appointed agreed preferred supplier "because that is how you control it."

Maverick spend is one of Peter's bug bears. It's when an individual within organisation goes makes a purchase without going through typical procurement process. A prime example from Peter's personal experience was when an employee needed an emergency bearing so he calls a mate who supplies them, nips to collect them, writes his name on the order and when it land at accounts "it's got Joe Bloggs as the name".

"Even though Joe Bloggs might be an employee, Joe Bloggs has no authority to make that purchase because we could have possibly got it under a contract at a cheaper price where we could even have had a rebate for the volume of spend over a period of time. So the maverick is Joe Bloggs going out and wasting, in essence, company money even if it was with the best intention in the world."

The difficulty is the more maverick spend an organisation has the more the focus of the company is not on procurement and the added benefits it brings, Peter says.

KPIs, Peter adds, are key to delivering continuous improvement. Some of the biggest issues with KPIs is the monitoring. They need time and regular review meetings with suppliers to check whether they are delivering or not. KPIs, Peter states are specific and measurable.

Added to that, a procure-to-pay P2P system, he says gives full visibility of the true spend thus allowing accurate reporting, quality checks, accurate receipting, electronic invoicing, through to final invoice payment and data analysis of spend "so you've got to have an effective P2P process in place".

"When you look at that you can make sure you are getting the right quality at the right time or 'OTIF' On Time In Full. So if you order 50 bearings they need to actually be the correct make, quality, standards and specs as per the order and they need to be there on time because if you don't it is a failure of a KPI, which could affect production," he continues.

Technology also has a key role. Peter says there are stand-alone programmes to cover procurement solutions, purchases, tendering, contract management, supply evaluation, all the way through to full P2P solutions. "There are various ways of using technology. It's about knowing what’s available,” he adds. If an organisation does not have the money to do that, he says there are powerful tools such as Excel where analysis can be done by the right people with the right skills.

"It's a holistic circle. You have to consider data analysis, KPI, P2P, policing, maverick spend... all of these have to be incorporated into the focus and strategy for direct as well as indirect spend. Often, indirect spend is considered to be non-strategic and of low value to the point where organisations don't focus on it but that is where they lose out on savings," Peter concludes.