Ashwani Singh 25th Sep 2014

Indirect Procurement

What is Indirect Procurement

Indirect procurement is the sourcing of all goods and services for a business that enable its activity

The indirect procurement is a slow, technology intensive process requiring change management across the organization boundaries

Direct Vs Indirect procurement

Direct IndirectDefinition Cost of doing business Cost of being in Business

Consumer Customer/Client Internal stakeholder

Supply Disruption Business stops Business stops

# of supplier Low High

# of categories Low High

Value High Medium

Spend High Medium

Indirect Procurement

Globally common Indirect Procurement categories include

MRO

• Consumables• Electrical

supplies• Industrial

supplies• Capital

Equipment • Machine

Parts• Uniforms• Safety

equipment

TRAVEL

• Air Travel• Hotels• Rental Cars• Travel card• Meetings• Car fleet

IT & TELECOM

• Hardware• Software• Services• Voice & Data• Wireless

• Property Management

• Facilities Services

• Capital Projects

• Utilities• Office

Supplies• Furniture• Repair and

maintenance

PROPERTIES PROFESSIONAL SERVICES

• Consultancy• Financial

advisory• Engineering

services• Legal

services• Advertising• Promotions• Trade shows

& events• Marketing

• Ocean freight• Rail /

Intermodal• Airfreight /

Expedited• Courier &

messenger• Small

package• Storage /

warehousing

TRANSPORTATION

Challenges – Indirect Procurement Require significantly more and varied suppliers.

Have a medium average spend.

Require larger numbers of smaller purchases, more frequently.

Consist of more “maverick” (first time) spend.

Be driven by more internal stakeholders.

Require diverse experience.

Be difficult to evaluate.

Be considered less strategic.

Struggle with delivering indirect procurement internally

Indirect Procurement - Opportunities

Perceived Opportunity

PurchaseCost

Quality Costs

SpecificationsInventory Practices

Warranty TermsDisposal/Salvage Practices

Demand Drivers

Environmental Issues

FreightStandardization

Procurement Practices

Warehousing CostsOperational Practices

Actual Opportunity

Maintenance Expenses

Total Cost Approach

Best Practices – Indirect Procurement Total System Cost

Buyer Cost

Interaction Cost

Profit

Supplier Cost

Total System Cost Savings

Traditional Focus (price only)

Buyer Cost

Interaction Cost

Profit

Supplier Cost

Strategic Focus

StrategicTraditional

Initiative Process - Indirect Procurement

1. Define category

2. Initial data/ information gathering

3. Segment and prioritize

6. Develop Commodity profilesCustomer needs/expectations

• Current sales • Suppliers

7. Develop indirect sourcing approach

8. Supplier discussions and alternative review

9. Agreement Execution

10. Implement and maintain compliance

4a. “What is neededand how buy?”

(key users)

4b. “How establishedcurrent agreement?”

(key buyer)

5a. “What data isavailable?”

(auto/manual)

5b. “How is data stored

and retrieved?”(auto/manual)

Concept to reality - Indirect Procurement

Immediate plays/best deal leverage1

Price/cost restructuring (Volume leveraging and supply pattern shifts - less

complex)

Short term buy plans (Volume leveraging, innovation, and supply pattern shifts

- more complex)

Sourcing effectiveness teams (SETs) (Supplier integration, productivity, standardization,

performance base improvements

2

3

4

Shareholder equityeconomic profit

User educationand training

Process/policyEnforcement

Measurementand budgetrestrictions

$

Segm

ent a

nd p

rioriti

zeProfessionalservices

Informationtechnology

Temporaryservices

MRO

Facilities

Travel

Utilities

Key Strategies – Indirect procurement

Choose Preferred Suppliers

Focus on and influence key executives

Manage with Automation and Measurement

Set KPIs

Role of Indirect Procurement

Stronger internal controls

Better visibility into the entire process

Better communication across stakeholders to optimize decisions and strategies

Data analysis (turning raw data into business insights and intelligence)

Reduce procurement process costs

Best Practices – Indirect Procurement Indirect procurement Spend increasing in the categories of IT, marketing and advertising, facilities management, MRO, Logistics and professional services.

Indirect spending accounts for

60 percent - Third-party spend in non-manufacturing companies. 90 percent - Financial services industry. 50 percent of spend in manufacturing organizations.

COE - Center-led model of procurement, where a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing.

Central-led organization with collaboration across business units. Users of this model achieved savings greater than 10 percent over the last two years in 47 percent of categories.

Indirect Procurement

Summary To expect different results, we may need updated roadmap.

No two companies operate the same way – But all have guiding principles for success.

Best Practices are a benchmark and guide for Procurement Effectiveness and Improvement.

Company leadership expects Procurement Organizations to be more Transformational vs. Tactically focused.

Good News: Company leadership is expecting more from our Supply Chain Management profession.

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“A creative person is motivated by the desire to achieve, not by the desire to beat others”