Specialization

project on

“IMPACT OF OPTIMIZING INDIRECT SPEND IN

PROCUREMENT”

Submitted in partial fulfilment for the award of the degree of

Master of Management Studies (MMS)

(Under University of Mumbai)

Submitted by

SALONI SANJAY VADWALKAR

(ROLL NO: 179)

Under The Guidance of

PROF. SANDESH AKRE

2020-22
MET Institute of Management

i
 Specialization
project on

“IMPACT OF OPTIMIZING INDIRECT SPEND IN

PROCUREMENT”

Submitted in Partial fulfilment for the award of the degree of Master of

Management Studies (MMS) University of Mumbai

Submitted by
SALONI SANJAY VADWALKAR
Roll no. 179
MMS Operations (2020-2022)

Under the guidance of

Prof. Sandesh Akre

MET Institute of Management

Bandra West, Mumbai 400050

ii
 CERTIFICATE

This is to certify that project titled “IMPACT OF OPTIMIZING INDIRECT SPEND IN

PROCUREMENT” is successfully completed by Mr. / Ms. during the IV Semester, in partial

fulfilment of the Master’s Degree in Management Studies recognized by the University of

Mumbai for the academic year 2020 through 2022. This project work was original and not

submitted earlier for the award of any degree / diploma or associateship of any other

University/ Institution.

Name:
Date: (Signature of Guide)

iii
 MUMBAI EDUCATIONAL TRUST, INSTITUTE OF MANAGEMENT
University of Mumbai

DECLARATION

I hereby declare that this report submitted in partial fulfilment of the requirement of the award for
the marks of Master’s in management studies (MMS) to MET Institute of Management is my
original work and not submitted for award of any degree or diploma, fellowship or for similar
titles or prizes.

I further certify that I have no objection and grant the rights to MET Institute of Management to
publish any chapter / project if they deem fit the journals/Magazine and newspapers etc. without
my permission.

Signature:
Name: Saloni Sanjay Vadwalkar
Course: Master’s in management studies (MMS)
Roll no: 179
Place: Mumbai

Date:

iv
 ACKNOWLEDGEMENT

I wish to take this opportunity to express of deep appreciation to Prof Sandesh Akre for
providing his valuable guidance, training, giving insights, comments & suggestions, and
overall support towards the completion of this project successfully.

I wish to take this opportunity to express my deep gratitude to Dr Swati Lodha, Director,
MET IOM and Dr Nitin Kulkarni, Course Coordinator, MMS who have helped,
encouraged, inspired and enlightened me with their constructive ideas and overall support
towards the completion of this project successfully. I want to thank Mumbai Educational
Trust Institute of Management, Mumbai for giving me this opportunity and to gain
theoretical and practical knowledge through this work. Last but not the least, I would thank all
my friends who have directly or indirectly helped me to complete the paper.

Name of Student: Saloni Sanjay Vadwalkar

Signature:

Date:

v
 SYNOPSIS

Name of the Student : Saloni Sanjay Vadwalkar

Course and Year : MMS – 2020-22

Period of Project Research : Semester IV

Area of Project Research : Specialization Project

Name of the Guide : Prof. Sandesh Akre

Title of the Project : Impact of Optimizing Indirect Spend in Procurement.

Project Details
[A] Objective of Study : To study the impact of optimizing Indirect Spend in
Procurement.

[B] Research Methodology : Secondary data.

[C] Expected results of the study : How optimizing indirect spends can help
organizations make a significant improvement in
their profitability and productivity.

(Internal Guide)

vi
 TABLE OF CONTENTS

ABSTRACT................................................................................................................................1

1 INTRODUCTION...............................................................................................................2

1.1 STATEMENT OF THE PROBLEM...........................................................................3

1.2 SIGNIFICANCE OF THE STUDY.............................................................................4

2 OBJECTIVE OF THE PROJECT.......................................................................................5

3 RESEARCH METHODOLOGY........................................................................................6

3.1 LITERATURE REVIEW.............................................................................................6

3.2 RESEARCH GAP........................................................................................................8

4 INDIRECT SPEND.............................................................................................................9

4.1 WHAT IS INDIRECT SPEND?................................................................................11

4.2 CATEGORIES OF INDIRECT SPEND....................................................................15

4.3 CHALLENGES TO MANAGE INDIRECT SPEND...............................................17

4.4 WAYS TO OPTIMIZE INDIRECT SPEND.............................................................22

4.5 IMPACT OF OPTIMIZING INDIRECT SPEND.....................................................27

5 CASES TO STUDY THE IMPACT OF OPTIMIZING INDIRECT SPEND.................29

5.1 CASE 1.......................................................................................................................29

5.2 CASE 2.......................................................................................................................32

CONCLUSION.........................................................................................................................34

REFERENCES.........................................................................................................................35

vii
 ABSTRACT

In the area of supply chain management, indirect procurement or indirect spend is critical in
cost reduction, increasing operational efficiency, and thereby adding value to the firm.
Indirect spend addresses the portion of an organization's procurement that is not directly tied
to the production/acquisition of completed or semi-finished items. In fact, indirect spending
assists an organisation in carrying out its primary functions. Due consideration must be given
to optimising the use of intellectual property to get the advantage as a tool for enhancing the
organization's cost effectiveness, which affects both financial and operational efficiency.
Indirect spending helps to the creation of value for the business, serves as a competitive
advantage, and aids in the improvement of the firm's systems. Lack of visibility, un-
negotiated expenditure, maverick (off-contract buying), diverse character, and broad
categories of logistics may provide obstacles for the organization's efficient implementation
of robust indirect spend. Furthermore, using relevant procurement key performance
indicators, trying to capitalize on demand and supply-driven opportunities, utilising
economies of scale, involving stakeholder involvement and collaboration, shifting the vision
and mission of indirect spend, utilising the procure to pay (P2P) cycle, improving real-time
visibility of indirect spend, and employing appropriate process flow will undoubtedly assist
organisations in reducing costs and increasing profits. In today's corporate world, indirect
expenditure is stressed in terms of both cost savings and increasing the organization's
profitability. However, successful implementation of a strong indirect spend policy will help
to increase the organization's economic stability.

This project defines indirect spend, discusses the various reasons and challenges associated
with managing indirect spend, and discusses approaches to optimise indirect spend.

1
1 INTRODUCTION

You will very certainly hear the terms "indirect spend" and "direct spend" in any
procurement-related context. You may also come across terms like "indirect materials,"
"GNFR," "indirect procurement," "overhead," and "variable and fixed indirect costs."

These terms may surprise you, but their origins date back to 1760, during the Industrial
Revolution, when cost accounting was first used to measure the cost of a product in order to
compute the price based on the desired profit. The difficulties of running a large-scale
business prompted the development of cost accounting.

Due to constantly developing technology environment and challenging market competition,

companies have actively started to pay attention to their operation’s cost structure and spend
management. In the earlier decades, the research and development have emphasized
managing the company’s revenue generating supply base – direct spend. In the past two
decades, the cost reduction and savings capturing have become crucial and the interest has
shifted to examine the costs of necessary operating expenses which are called indirect spend.

While the strategic sourcing process can provide cost savings on its own, striving to improve
your outcomes necessitates considering the phases in the process and determining the best
approach to modify those processes for your firm. Creating cost-cutting measures, conducting
market research, and negotiating with internal stakeholders and external suppliers all
necessitate a highly creative approach—not it's all about data. Applying strategic sourcing
strategies to indirect expenditure categories can be a difficult task; yet, for businesses trying to
decrease costs or increase profitability, these spend categories can provide a wealth of
undiscovered savings opportunities.

2
1.1 STATEMENT OF THE PROBLEM

Most procurement organisations devote a significant amount of effort to goods and services
that are directly relevant to the business and not to indirect sourcing. Unfortunately, a few
indirect activities, such as IT, facilities, maintenance (MRO), human resources, marketing,
and so on, do not always receive adequate attention. These indirect expenses, which vary
depending on the type of organisation, account for approximately 35-45 percent of a
company's total spend.

Indirect spend, which is intended to be secondary in nature, has become a huge challenge for
the majority of category managers across all industries. The majority of firms continue to
prioritise cost reduction over process improvement or value development. However, the
question remains: Is it long-term suitable for the business? There is little doubt that optimising
indirect spend could result in large savings; however, determining the right method to use to
do this is more critical.

According to many studies and actual implementations, category optimization for indirect
expenditure can result in considerable cost reductions and savings of 20–30%; for specific
spend categories, this can be as high as 40%. Are these savings, however, long-term? The real
issue arises after a few years, when the tangibility of money fades. As most of the main spend
categories have previously been examined and negotiated numerous times, cost-cutting
prospects begin to dwindle. So, optimally managing indirect spend becomes crucial.

3
1.2 SIGNIFICANCE OF THE STUDY

Organizations all around the world understand the need of delivering bottom-line impact in
addition to striving for top-line growth in order to build shareholder value. Rising commodity
prices and ongoing economic uncertainty have compelled businesses to seek new sources of
cost savings in order to support development and organisational agility. According to Everest
Group estimates, even a 5-10% reduction in non-core or indirect spending can result in a 1-
3% bottom-line impact – a big impact in any economic scenario, let alone the current one.

 A US$8 billion global transportation services firm aggressively pursuing cost-cutting

solutions to fund entrance into new markets and acquisitions saved US$385 million by
transforming how it managed US$1.4 billion in indirect spend.
 A $20 billion worldwide high-tech firm needs to strengthen management and generate
savings quickly in order to fund new product development and expansion into
emerging regions. Within a year, the company hired a partner and implemented a
worldwide source-to-pay solution, allowing them to better manage $2.7 billion in
spend and secure contract savings of more than $90 million.
 A worldwide appliance firm with a market capitalization of $20 billion uses
procurement to fund market expansion. The corporation took advantage of the housing
market collapse to solidify its market leadership by decreasing its cost structure and
boosting marketing initiatives. To create cost savings and support marketing efforts,
the company collaborated with a third party to improve indirect procurement, which
had previously been focused on pricing negotiations and order administration. Today,
indirect procurement is a true business partner, assisting business owners in
consistently optimising their spend, identifying new creative service provider
solutions, and responding quickly to changes in market demand.

These examples demonstrate that the potential impact of streamlining indirect procurement is
significant and noticeable. It is also not surprising given that indirect procurement expense
amounts for almost 40% of total spend in a typical firm. Today, indirect procurement
optimization is about 'how?' rather than 'why?'.

This project studies the various types and challenges that arise while managing indirect spend
and ways to optimize them.

4
5
2 OBJECTIVE OF THE PROJECT

 Understanding the definition and categories of indirect procurement spend

 Recognize the numerous issues that are encountered when managing indirect spend.
 To investigate the various methods and effects of optimising indirect spend in
procurement.
 To comprehend how optimising indirect spending can assist firms in significantly
increasing their profitability and productivity.

6
3 RESEARCH METHODOLOGY

3.1 LITERATURE REVIEW

Companies have actively begun to pay attention to their operation's cost structure and spend
management as a result of the constantly evolving technological environment and severe
market rivalry. Previously, research and development focused on managing the company's
revenue-generating supplier base – direct spend. Over the last two decades, cost reduction and
savings capture have grown critical, and the focus has switched to examining the costs of
necessary running expenses, sometimes known as indirect spend."(Cox, Chicksand, Ireland &
Davies, 2005, pp. 1-5; Kalakota & Robinson, 2000, pp. 237-238)

A"notable change in the corporate environment over the last two decades has been the
introduction of new tools based on new technical solutions. These tools have an impact not
only on personal work but also on organisational activity. Since the retail industry first
appeared on the Internet in 1995, e-commerce solutions have grown significantly in business-
to-customer industries. (May, 2000, pp. 99-100) E-commerce has had a significant impact on
the retail business. Similar alternatives are also available, and the purchasing groups of firms
are increasingly interested in them (Kalakota & Robinson, 2000, p. 237). These solutions
include several e-sourcing and e-procurement platforms. The use of these digital solutions has
been shown to boost the adoption of best practises in the firm while also improving quality,
cost, flexibility, and reliability of purchasing. (2015) (González-Benito & Rodrguez-Escobar)
"

Purchasing-related"research established corporate models and philosophies that are currently

known as purchasing procedures, policies, organisational structure, key performance
indicators, and purchasing strategies in the 1960s and 1970s. (Schneider and Wallenburg
(2013), p. 147) There is no information on indirect purchase or spend management in this
early research, or even in some later publications. Only when firms began to handle the
acquisition of manufacturing point of view "C-parts" did the topic grow into a more
autonomous area of knowledge. These minor components were categorised as MRO Materials
Management, Indirect Procurement, or Operating Resource Management. During this phase,
the first e-procurement systems for indirect material purchasing were introduced. Personnel in

7
the purchasing department were assigned solely to indirect purchases. Following this,
academic academics were increasingly interested in indirect spend and e-business topics in
purchasing. (Knolmayer, Mertens & Zeier, 2002, pp. 68, 150; Schneider & Wallenburg,
2013) "

The ability to deploy"e-business solutions for a company's purchasing functions has increased
management teams' knowledge, as has the popularity of the Ariba solution. In the late 1990s,
Ariba Inc. released an e-business solution that included capabilities for spend management,
sourcing, procurement, contract administration, and a variety of other purchasing-related
tasks. (Silicon Valley Historical Association, 2008) By the end of 2008, this e-business
solution had grown to include customer organisations' purchase transactions twice the size of
eBay, and many companies had accepted the new concept for their indirect purchasing. Since
then, spend management and indirect spend have been the topics on which organisations have
aggressively studied a competitive advantage with the strong assistance of e-business
solutions. (Master, 2006; Maurillo & Martin, 2004; Master, 2006) "

Other competitors"have emerged in the twenty-first century for Ariba, which has dominated
the marketplaces for purchasing e-business solutions. Companies that provide e-procurement
and e-sourcing solutions, such as Coupa, Promena, and eBid Systems, are examples of such
new competitors. These solutions offer functions that strive to provide higher value as a
service to their clients than before. When these new tools are used in a firm, they transform
the indirect purchasing processes, and spend management must change to accommodate the
full deployment of these new technologies. This study looks at a case company that has
already gone through a comparable development process and has decided to adopt one of the
e-procurement and e-sourcing systems for the first time. This change urges the purchasing
function to re-evaluate spend management planning and optimization to support the maximal
use of the selected system. "

8
3.2 RESEARCH GAP

Since 2011, international indirect spending has climbed by an estimated 7% each year.
Nonetheless, many organisations do not pay enough attention to indirect categories.

There are some challenges that are ubiquitous throughout sectors. Spending is usually
scattered across multiple locations, company divisions, and categories, making enterprise-
wide cost-cutting possibilities difficult to identify and capitalise on. Indirect-procurement
leaders frequently lack the organisational power required to secure the technologies and skills
they require. Furthermore, most organisations lack procedures for tracking and reporting the
performance of indirect categories on financial statements.

Firms demand a new vision for indirect procurement that merges cutting-edge technologies
and processes with traditional category management methods to address fundamental
concerns about procedures, capabilities, and data. Global organisations are already realising
considerable benefits from this integrated, technology-enabled approach, which enables them
to capitalise on the hidden value of indirect procurement.

To put it simply, evolution is insufficient. To thrive in the 2020s, businesses will require a
revolution in indirect procurement.

9
4 INDIRECT SPEND

Most expenses are too often left to the group in charge of the budget: finance, human
resources (HR), administration, or marketing. The difficulty is that the stakeholders who
administer the expenditure category or signed the original agreements were most likely not
chosen for their abilities to manage costs or budgets and have little or no formal procurement
or strategic sourcing training.

When management realises this, they have a knee-jerk reaction. Regardless of the product or
service category, their first instinct is that the price is too high. The executive team sends a
directive to minimise costs in any way feasible. To make matters worse, the executive team
frequently sets a goal with no rationale or reasoning behind it, such as "save 10% in the next
12 months."

When confronted, stakeholders and end users instantly go on the defensive, attempting to
rationalise why the costs paid over the last several years are reasonable. They begin to
highlight unusual instances in which the incumbent provider went above and beyond the
typical course of business for them.”They compiled a long list of reasons why no other
supplier could perform what the existing supplier does. They give market information used in
the most recent bid, which could have occurred years earlier (while, in reality, over time, the
stakeholder and the sales rep have worked closely together as a team, even becoming friends,
thus compromising the objectivity of the data). With the initial goal of the selection process
long forgotten and the market untested in recent years, the reasons for picking a specific
supplier become more subjective.”

Stakeholders”provide numerous reasons why their initial decision was correct: the supplier
provides the best service, the supplier is the only one who can provide a specific type of
report, the supplier comes in each week and brings donuts for the administrative staff (usually
unstated), and the cost of leaving the supplier is prohibitively expensive. The team entrusted
with cutting expenses is swamped with data accumulated by stakeholders over years of
administering the category. Pushback comes from the most unexpected sources, even those
who advocated for the formation of the squad in the first place. Even indirect spend
categories, it turns out, have political repercussions within an organisation. The explanation is
straightforward: purchasing is a touchy subject. Consider this: in your daily life, you want

10
your friends and neighbours to know how much you saved on that car, TV, or even a dinner
bill. But, in truth, have you ever met someone who claimed to have gotten a bad deal on a
new car? Everyone believes he or she is the best negotiator conceivable and is not afraid to
tell you so. Corporate purchasing follows the same rules, and questioning someone else's
ability to secure a fair deal can result in bruised egos and heel-digging.”

Finally, one or two suppliers are replaced, the team disbands, and the can is rolled down the
road for another year. What begins as a simple assumption, lowering expenses for noncritical
products, ends in failure or underwhelming results.

The inherent problem is that, despite the fact that indirect spend typically accounts for
approximately 40% of an organization's total costs of operations, these expenditures are
frequently viewed as a collection of one-time purchases or tangential to the main focus of the
business, and are generally not targeted as savings categories. The acquired product or service
is required for the firm to function, but it is not a raw material, a substantial capital
investment, or salary. Somewhere along the way, the duty for managing these costs was
delegated to someone with no training in strategic sourcing or negotiation, and spend
management was pushed to the bottom of their priority list. Territory has already been
designated by the time management understands that the prospect for savings exists. The most
difficult obstacles to overcome have not been placed where you would anticipate them to be
—getting suppliers to drop their pricing. Internal obstacles, such as obtaining relevant spend
data, understanding the scope of work and specifications, and dealing with egos and internal
political issues, are instead the most significant roadblocks to success.

11
4.1 WHAT IS INDIRECT SPEND?

In any procurement-related setting, you will almost likely hear the terms "indirect spend" and
"direct spend" Other terms you may come across include "indirect materials," "GNFR,"
"indirect procurement," "overhead," and "variable and fixed indirect costs."

These terms may surprise you, but their origins date back to 1760, during the Industrial
Revolution, when cost accounting was first used to measure the cost of a product in order to
compute the price based on the desired profit. The difficulties of running a large-scale
business prompted the development of cost accounting.

Businesses rely on both direct and indirect procurement. They are, however, extremely
different functions that necessitate very different techniques and instruments. Direct
procurement, also known as direct spend or direct cost, is the purchase of goods, materials,
and services that are directly related to the creation of goods and/or services offered by a firm.
The term "indirect spend" refers to expenses incurred for supplies, services, and maintenance
required to run a business. Both are equally important to the operation of a business, and one
cannot exist without the other. However, while both teams are fundamentally procuring, their
techniques and answers are vastly different.

Here are five core areas of procurement where the distinctions between direct and indirect
spend are highlighted:

1. Supplier Relationship Management

One of the most significant contrasts in approach is in supplier relationship management.

Direct procurement teams devote a significant amount of time, effort, and energy to
developing and maintaining relationships with suppliers. Supply schedules and continuity
have a direct impact on production; the quality of raw materials influences the quality of the
finished product, and hence the reputation and credibility of the organisation. Relationships
with suppliers are typically long-term and collaborative in this setting.

The emphasis in indirect procurement is on spend management rather than the benefits of
supplier engagement. The supplier relationship is transactional, with competitive costs being
the primary goal. Indirect expenditure teams can learn from their rivals about investing in
strategic rather than tactical partnerships and creating excellent supplier relationships. Also, as

12
direct procurement does, consolidating suppliers and pooling volumes might generate superior
savings chances for indirect spend.

2. Cost Management

Should-cost analysis – a study undertaken by a client of the expenses incurred by the supplier
in delivering a product or service to steer negotiations — is a common cost management
strategy in direct procurement. Zero-based budgeting is a best practise for indirect expense
teams. It is a method of creating a budget from scratch rather than using the previous budget;
it requires that every item be justified before it is included in the budget; its goal is to cut costs
as much as possible. Both teams can benefit from using each other's tools in their respective
major spend categories.

3. Inventory Management

Inventory management is understanding what materials you have, where they are stored, and
how much you will require. Materials must be kept in stock while using direct procurement to
guarantee a smooth production process and to avoid delays. In contrast, indirect procurement
is driven by demand; that is, purchases are made only when they are needed, resulting in a
smaller stockpile and reduced associated expenses. Direct procurement can provide valuable
lessons in inventory management best practises, assisting the indirect spend function in
striking the correct balance between supply and demand activities.

4. Use Of Technology

Indirect spend is often comprised of various, fragmented requirements generated by a large

number of users from an organization's internal, non-procurement departments. In order to
streamline and simplify the process, indirect procurement teams focus on creating an
uncomplicated buying experience through easy-to-use indirect procurement technology when
selecting e-procurement solutions.

Companies are realising that improving direct procurement systems can assist to expedite
procedures, reduce risks, maintain quality, and lower costs. Nonetheless, many teams are still
stymied by cumbersome systems that, while feature-rich, have non-intuitive user interfaces
that are linked to the organization's legacy ERP systems. Complicated processes have a
negative influence on compliance and production.

13
To meet the problems of direct spend, it would be prudent to learn from indirect
procurement's emphasis on user experience. The most effective strategy would be for
corporations to invest in user-friendly, end-to-end single-platform technologies that can be
used by both departments.

5. Organizational Setup

Direct expenses are often managed by centralised procurement and supply chain teams, with
category managers focusing on specific areas of spend. In contrast, indirect expenditure is
often decentralised and distributed, with many internal stakeholders controlling their own
budgets and spending regulations.

Creating a centralised structure and categories for indirect procurement can improve
efficiency, compliance, and cost-cutting, particularly in service-oriented organisations with
significant indirect spend. Direct spend teams can gain critical soft skills from their indirect
procurement colleagues, which are necessary for dealing with the massive number of
requirements, internal stakeholders, and vendors that make indirect procurement so difficult.

Few of the reasons for Indirect Spend are as follows:

1. Maverick Buying (MB)

Maverick buying (MB) is a type of non-compliant work conduct that affects numerous firms.
Despite the fact that people who work in procurement are continually exposed to an
environment that encourages dishonesty, this problem has received little attention. Maverick
purchasing is defined as "purchasing goods and services outside of the company's formally
defined processes and authorised vendors."

2. Purchasing strategy

Purchasing strategy, as described by Watts et al., is "the pattern of decisions related to

acquiring required materials and services to support operations activities that are consistent
with the overall corporate strategy." Strategic decisions should be based on the organization's
particular status and circumstances. Many businesses may not have a well-thought-out plan
for indirect spending. According to Cox et al research's 15% of organisations did not have an
internal plan and 11% did not have any external strategies in place. Organizations without a

14
solid indirect spend strategy risked increasing costs, negative consequences on quality and
delivery, and other factors such as an unpredictable supplier base.

3. Category management

The process of categorising the major areas of organisational spend on purchased goods and
services into discrete groupings of products and services based on the purpose of those goods
or services and, most crucially, to match how individual marketplaces are organised.
Organizations utilise this category segmentation to work cross-functionally on individual
categories, assessing total category spend, how the organisation uses the items or services in
the category, the marketplace, and individual suppliers.

15
4.2 CATEGORIES OF INDIRECT SPEND

There are numerous approaches to categorising indirect spend, and the optimum one is
dependent on the company and the situation. Table 1 contains the key categories and some
indicative instances adopted from Iloranta and Pajunen-Muhonen (2008).

Group Examples
Facility & Infrastructure Buildings
Technical systems & services
Maintenance & repair
Energy
Security
Waste management
Cleaning services
HR Recruiting
Travelling
Accommodation services
Lunch restaurant and catering
Working clothes
Health care
Training and education
Consulting services
IT & Data Transmission Machines and devices
Computers and software
IT-systems
Phones
Support services
Printers
Office Supplies Office supplies
Books and professional literature
Packing materials
Brochures and marketing material
Other Services Courier services

16
 Marketing
Legal services
Communications
Table 1: The main categories of indirect spend and some indicative examples

The categories of indirect spend are fairly broad, as seen in table 1. The objects range in size
from basic office supplies like pens and papers to major items like office buildings. The
intricacy of the products and services also varies greatly. There are basic packing materials as
well as high-end IT devices and systems.

Looking at the various sorts of spend on this list, it is presumably clear to see why significant
spend data is difficult to come by. For starters, most of these categories' management might
be very decentralised, especially if your firm has many locations. Along with several
expenditure owners, there are numerous suppliers, requirements, and product types to be
acquired. Gathering this information across all locations or expenditure owners might be time-
consuming.

Second, determining where this information is located within your business is frequently
difficult. Many of these categories may not have purchase orders (POs), and even if they do,
the PO may lack the degree of detail required to fully comprehend what is being purchased.
While your inventory or enterprise resource planning (ERP) system may be capable of
capturing line-item detail of spend for direct materials (products and services required to build
your finished product or service), these systems are frequently not used effectively, if at all,
for indirect materials. Unfortunately, in many firms, the only method to obtain internal data
and information that clarifies what you're getting from your supplier is a mound of paper bills
and, if you're lucky, some old contracts.

17
4.3 CHALLENGES TO MANAGE INDIRECT SPEND

In addition to accounting for a sizable amount of the company's total expense, indirect spend
has other features that make it difficult to manage. There are three categories to the topics:
item and cost issues, process and tool challenges, and organisational challenges.

1. Item and Cost Related Challenges

Indirect spending includes a wide range of items and services. The division of which things
correspond to indirect or direct expenses may fluctuate among organisations due to
differences in their industries, but the core idea remains consistent, as shown in Table 1.
Indirect purchase differs greatly from direct purchasing, which typically has a restricted
number of various commodities and services. Only the MRO section, including office
supplies, can contain over 10,000 items. In addition, indirect cost includes support services
that are required to conduct day-to-day operations. These services might account for half of
the company's expenditures.

When all of the different expenditure sectors, which are deemed indirect, are added together,
the number of things expands, making harmonious administration difficult. A vast number of
items makes it difficult to obtain consistent data on purchases or track compliance. Typically,
all indirect purchases do not have Purchase Orders (POs), or if they do, the item level is not
captured since there are too many products and services to be defined in the ERP system.
Even if a description of the item is provided, it may be difficult to identify the purchased item
because information quality varies greatly depending on the category and region.

Aside from the fact that they are distinct types of things, another problem is their actual cost
nature. Indirect spending includes a wide range of costs that can be classified as either fixed
or variable in terms of financial value. Even as activity increases, fixed expenses remain
constant and react identically. Rent and business rates are typically fixed costs because they
are contracted once for a set period of time during which the costs stay consistent. Variable
costs are those that rise in proportion to the size of the purchase. These types of purchases are
usually material prices. Some costs may behave similarly to both types, in which case they are
referred to as semi-variable costs. Costs that behave differently pose difficulties for indirect
purchase.

2. Processes and Tools Related Challenges

18
The majority of supply chain management and purchasing literature focuses on the direct
expenditure phenomenon, such as make-or-buy decisions or inventory level optimization.
Because of the supporting character of indirect spending, these findings are largely
inapplicable. As a result, direct purchasing receives more tools and interest from company
executives. While traditional solutions are inapplicable, indirect spend management tends to
focus on cutting supplier pricing. If the organisation met its price-negotiation targets, the
purchasing function's effectiveness has gone unnoticed.
Indirect spending is associated with a number of processes that are typically paper-intensive
and inefficient. Process inefficiency significantly complicates spend management. Indirect
spend processes include not just sourcing and procurement, but also purchase requisition and
in-voice approval, agreement negotiation, and supplier relations management activities. In
terms of payment, indirect spend can be managed by payment card processing, invoicing, or
other means, depending on the nature of the transaction. Because of the interdependence of
the processes, the process development and management perspective is crucial. Processes are
a technique to avoid focusing too much on departmental performance metrics that are
unrelated to the company's customers and value creation.

In some spend management sectors, independent software solutions may be required to

manage a specific business process. Meetings and Reservations Management, Online Travel
Booking and Expense Management, Building Maintenance and Asset Management, e-
procurement, and other solutions are examples of independent software solutions.
Furthermore, there are suppliers who operate payment card operations and can handle a
portion of the spend. Because of the utilisation of various solutions and external processes,
spend information is fragmented and difficult to consolidate. In the future, there may be more
software solutions for specialised spend optimization, and payment card solutions may cover
a larger portion of spend than they do now.

3. Organizational Challenges

When a corporation provides value for its customers, direct costs are created. Indirect
purchase, on the other hand, adds value to the company's internal customers and stakeholders
— its employees and other divisions. In order to be effective in producing value and realising
savings, indirect purchasing requires the participation and engagement of all stakeholders.
The opinions of stakeholders influence supply decisions, which can create a difficult
environment for purchasing and sourcing organisations to find the best solutions. This
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circumstance has been described as "one of the most difficult challenges in optimising supply
chains."

Globalization is one organisational difficulty in indirect expenditure management. Suppliers

and purchase can be managed at the global, regional, or local levels, which should also be
understood in terms of expenditure management. The majority of indirect categories
necessitate decentralised administration, particularly when the organisation is spread over
numerous sites. There are regional disparities in the item's nature and shipping cost.
Decentralized management gathers resources and necessitates knowledge of the local market.
Furthermore, categories often have a low capacity for managing and analysing qualitative
components of value production. In addition to price, quality may influence the company's
supplier selection and spend formation. The quality perspective makes overcoming regional
variances in monitoring and assessing spend and its management even more difficult.

Because category teams are typically overburdened with supplier relations activities,
resources for expenditure management may be restricted. As a result, establishing strategic
activities for spend management may be overlooked. For example, switching suppliers may
result in additional work, and purchasing concentrates on supplier relations rather than
strategic sourcing. Long-term and short-term planning of cooperative projects,
communication channels, data interfaces, or joint development is referred to as supplier
relations management. Supplier performance management examines the expectations and
capabilities of suppliers and develops a strategy plan for utilising the various supplier
relationships required by the business. Even though a commodity strategy may incorporate
multiple and various types of supplier strategies, supplier strategies can simply be blended
with commodity sourcing strategies. For example, a sourcing plan may include preferred
suppliers.

Some other challenges faced while managing indirect spend are:

1. Lack of Visibility

Lack of visibility provides a huge issue in streamlining indirect expenditure because the
essence of indirect spend is that it cannot be seen, therefore one may not pay attention to how
much money is spent. The diversified character of indirect spending highlights the difficulty
in tracing the places of interactions and interventions. Nestle, for example, implements a

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supplier development programme at the lowest tier, which means that Nestle always tries to
preserve the quality of farm produce at the marginal farming level by providing various
assistance and services. In this situation, it would be a difficult effort to monitor and track
indirect cost at every stage of procurement, from procuring from terminal farmers through
distributing to final customers.

2. Un-negotiated Spending

Because indirect spending is inherently unrelated to a specified bill of materials (BOM), the
individuals in charge tend to opt for unnegotiated contracts with suppliers. A survey
conducted by Modern Distribution Management in 2000 on "How Companies Order MRO
Supplies" revealed that the smaller the company, the less formal the process, and those
companies do not recognise purchasing as a core competency, and that 84 percent of indirect
materials are procured by simple store visits by the concerned employees.

3. Low Average Spends

The product volume is generally on the lower side because of the wide assortment of product
and service categories and their suppliers. Therefore, procurement is unable to dictate terms in
negotiations with suppliers.

4. Frequent Low-volume Purchases

The sheer volume and frequency of purchases, albeit of small individual values, makes
indirect sourcing difficult and resource-intensive to handle.

5. Difficult to Evaluate

It is difficult to verify the quality of indirect goods and services since indirect spending is
extremely fragmented and managed at the individual business unit level, and there are no
fixed guidelines. Traditional performance matrices may not be appropriate for indirect
spending. Because of the critical importance of the definition of indirect procurement,
devising cost control measures to control indirect costs is quite difficult. Cox et al. (2005)
discovered that almost 10% of organisations had no plan for managing indirect spend at all,
and that many chose their methods based on hunches rather than actual facts.

6. Dispersion of Spending Authority

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The authority for indirect spending is largely delegated and disseminated to the lowest rung of
organisations, making cost monitoring and management difficult. For example, the marketing
section can decide whether or not to print an advertisement. Other divisions may have some
indirect spending authority on their own. Furthermore, the procurement division/function may
believe that those separate business units lack sourcing skills, which could result in a
problematic scenario.

7. Spending Focus Mentality

The organisational departments in charge of indirect sourcing usually place a greater

emphasis on obtaining goods and services as soon as feasible while always striving to stay
within budget constraints. They prefer a lower price without taking the total cost of ownership
(TCO) into account. According to current literature, for example, Koskei and Kagiri (2015),
indirect procurement is considered as a sub-functional office work that is unknown to many
firms. However, the scope and quantity of indirect spending in any business appears to be
underestimated and, to some extent, understated. Lack of skills in dealing with the different
nature of indirect expenditure, as well as a lack of understanding and investment, among other
things, may provide additional difficulties to realising the benefits of indirect spend.

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4.4 WAYS TO OPTIMIZE INDIRECT SPEND

Setting specific goals and focusing on categories and subcategories is the first step in
transforming indirect procurement. A corporation can then use benchmarks and expenditure
visibility tools, such as spend cubes, to assess the potential value of categories and
subcategories. To capitalise on the potential and move quickly, it must employ category
levers, validate the baseline, and find global and local champions who will lead the
programme and drive change. To track and sustain success, the organisation must plan
resources, track revenues, and fine-tune the process for continual improvement. A cloud-
based platform allows all functional departments to transmit information in real time, while a
"control tower" monitors the impact.

1. Intelligent spend engines.

These digital solutions, in conjunction with machine-learning technology, use automated

engines to classify and categorise spending. Automatic data extraction from ERP systems and
databases, as well as automated harmonisation and classification, provide total visibility into
analytical opportunities and validation status. By integrating data pools and analytical
procedures, the technologies can find cross-category synergy. Machine-learning capabilities
improve the tools and perform tasks such as data purification, categorization, and enrichment.
Visualisation tools translate the results into reports and drillable dashboards. Taxonomy
booklets provide up to five levels of detail based on global best practises.

Transparency and uniformity can lead to huge cost savings. Merging corporations, for
example, face challenges such as integrating disparate ERP systems, fragmented taxonomies,
and limited visibility across organisations on real spend. Intelligent spend engines, for
example, can identify and consolidate vendors who utilise comparable maintenance
components that are used by both organisations. In our work assisting post-merger integration
activities, we have seen these strategies enable savings of 10 to 12 percent.

2. Advanced analytics solutions.

 Advanced analytics combined with goal-setting tools can help businesses uncover
cost-cutting and process-optimization opportunities. There are several sorts of goal-
setting tools available:

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  Hard-coded into analytics, automated solutions in a certain category develop, apply,
and monitor category-specific standard and advanced levers.
 Intelligent workflows - These platforms analyse expected spending by category and
activity and provide a path to integrated best-practice actions for specific categories.
The information is used by buyers to develop negotiation strategies for each category.
 Buyers can increase category functionality with a variety of technologies, including
network optimization tools, automated, real-time KPI dashboards and executive
scorecards, parametric clean-sheets, and eSourcing systems powered by artificial
intelligence and sophisticated analytics.

Product and service prices can be decreased by 10 to 25%, while the manual work required
for supplier governance can be reduced by 30 to 50%.

3. Seamless B2B ordering

Partnerships with business service providers and automatic replenishment can be leveraged to
save costs while enhancing service levels. A number of tools and platforms have been
developed. Leading companies have compiled a catalogue of B2B offers that covers all online
markets, supplementary services, and supplier products. Supplier appraisal and selection,
cross-category orders, and financial traceability are all done through B2B e-marketplaces like
Alibaba, Amazon Business, and ThomasNet. Internet-of-things replenishment tools are
intelligent storage equipment that can automatically refill based on stock levels. E-commerce
integrator software powers an internal order-coordination platform that stores replenishment
data and automatically sends orders to B2B platforms.

Price reductions offer for savings of 6 to 15%, while access to a greater selection reduces a
company's reliance on a single supplier.

4. Zero-based budgeting

Many organisations use a repeatable strategy that builds costs starting at zero to meticulously
test every dollar in the annual budget. The strategy is based on a budget-creation tool that is
supported by software that implements zero-basing policies. The programme may track
expenditures, forecast them, and combine them with other systems. It consists of zero-based
"bluebooks" that include the analyses and processes, efficiency levers, and organisational
structure required to realise the full potential. The zero-basing process is supported by
24
traditional budget-building and budget-negotiation processes, as well as information,
guidance, and practises that allow the organisation to negotiate on a large scale.

Businesses ranging from energy and transportation to banking and telecommunications are
seeing early success with zero-basing, following in the footsteps of consumer industries.
SG&A reductions of 10 to 20% can be recognised in less than six months, and unproductive
resources can be reallocated to the most profitable industries. When category owners and
budget owners share responsibility for the process, joint accountability improves.

5. Automated procure to pay (P2P)

Businesses can utilise automation to assure supplier payment and improve cash-flow
management. RPA technologies use current user interfaces and motorised devices to automate
routine tasks. Machine-learning software searches for patterns in data using both supervised
and unsupervised learning (for example, decision algorithms), automating the evaluation of
improvement potential. Cognitive agents and natural-language processing tools in a virtual
workforce can help employees and customers by parsing and analysing task descriptions.

Companies that have implemented automated P2P have saved 15 to 25% on most transactions
and reduced processing times from days to minutes. These tools also help to move from spot
checking to overall quality control. Over a 12-month period, one organisation was able to
reduce value leakage by about 3% while also capturing savings by establishing better control
over spending.

6. Financial P&L interlink

A procurement-finance interlink system is powered by cost-management software, which

turns enhanced actions into monetary impact. The solution tracks the status of initiative
implementation as well as income projections. To automate forecasting, algorithms remove
volume, mix, and market effects from indirect performance. Because the application is linked
to financial department systems, the financial impact of projects is automatically uploaded to
the department's database. Data auditing functions validate data and compare it to supplier
reports as well as cross-functional data. To support the tool, a basic finance boot camp is
available. This online financial education academy teaches buyers how to improve their
bargaining skills, initiative definition, and outcome tracking.

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The organisation benefits from improved forecasting and budget planning, as well as clear
visibility into how procurement affects the P&L. These advantages, in turn, enable the
organisation to more precisely define the amount of funds available for reinvestment in
growth and strategic projects. Furthermore, the relationship boosts top management's
involvement in indirect-procurement efforts.

7. Agile organization

Category-specific managers are replaced in an agile organisation by a working group of

managers who negotiate for different categories depending on criteria such as negotiation
timing and required competency. The working group is made up of a wide range of expertise
from many professions. The agile operating model is comprised of well-defined procedures
with clear ownership, the participation of internal and external stakeholders, and standard yet
adaptable operations. Visualisation and communication technologies enable managers to
immediately share information, monitor, and make inter-departmental decisions, enabling
cross-functional collaboration. Benefits include a 20 to 30 percent reduction in time to market,
greater services to internal business partners, and improved cross-functional collaboration.

While implementing new ways, businesses should maintain an emphasis on established

approaches to achieve excellence in category management:

1. Value capture

Among the best approaches for extracting value is requiring more regular and thorough RFPs.
Clean sheets, which are bottom-up estimates of a supplier's costs for specific parts and
services, are particularly useful assessments. It is critical to seek for new vendors on a regular
basis in order to avoid the high costs that come with being "locked in" with a specific
provider. A corporation might engage the help of industry specialists to negotiate reduced
vendor costs. Furthermore, adopting off-the-shelf e-procurement technology to facilitate value
capture is a low-cost option.

2. Measurement

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Scorecards connected to annual run-rate cost savings can be used to monitor procurement
performance. Supplier performance can also be measured using scorecards and a tracking
system.

3. Change management

The procurement function can take the lead in implementing changes to procurement
processes throughout the organisation. Members of business units and other functions can
learn how to improve procurement processes by "shadowing" experienced procurement
analysts. It is vital to link procedures to contract expiration dates and to develop a calendar
with timetables and deadlines for actions. Prior performance should be used as a guideline for
setting goals. By identifying common targets with their functional peers, procurement
specialists can ensure that their functional colleagues have skin in the game when it comes to
achieving excellence in category management.

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4.5 IMPACT OF OPTIMIZING INDIRECT SPEND

Getting the most out of indirect sourcing necessitates a well-thought-out, integrated approach.
Some businesses recognise that they lack the people, experience, systems, or infrastructure to
pursue such a strategy, forcing them to make a vital decision: create the capabilities internally
or outsource some or all of the indirect-procurement role. The benefits indirect-procurement
can offer include:

1. Category expertise

IPBPO providers have access to specialists with substantial domain and functional
expertise.

2. Market intelligence

As providers share information among clients, they may gain a better understanding of
market dynamics, suppliers, costs, and pricing, as well as pricing benchmarks. In other
cases, this information provides leverage for better-than-market pricing and catch-of-the-
day opportunities.

3. Process discipline

Firms can increase procurement productivity by using tried-and-true, fully integrated

source-to-contract (S2C) and procure-to-pay (P2P) processes paired with the discipline to
save money (for example, by reducing maverick spend, confirming contract compliance,
and installing catalogues).

4. The latest sourcing applications and technology

Many suppliers have proprietary as well as industry-standard sourcing technologies that a

client company would otherwise have to develop on its own. Although this feature has
grown less significant as improved sourcing solutions have become more widely
available, it is still largely considered as a value capture facilitator for outsourced
categories.

5. Risk mitigation

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 In certain regulated industries, having a third party or other intermediary participating in
procurement serves to limit risks or shift such risks onto an organisation better suited to
comprehend and manage them.

6. Cost advantages

Outsourcing providers can provide size and cost advantages, which can be particularly useful
in transactional sourcing tasks.

These value additions are projected to result in a shorter time to impact, improved spend
visibility and compliance, and lower operational expenses.

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5 CASES TO STUDY THE IMPACT OF OPTIMIZING
INDIRECT SPEND

5.1 CASE 1

A Fortune 500 manufacturing firm created a $500 million savings pindirect spendeline
in indirect procurement.

A Fortune 500 industrial manufacturer with operations in more than 20 countries wants to
restructure its global indirect procurement processes to improve efficiency, productivity, and
savings.

There was a wide range of positions with overlapping duties due to decentralised operations, a
lack of standard processes, autonomous business units, and a fragmented procurement
technology landscape, and each area was developing its own practises. Because of the
heterogeneous procurement software and tools in use, there were substantial process gaps, and
user acceptance was low. Visibility into spending was less than 50%, and the manufacturing
behemoth had little control; effective governance was an issue. The worldwide indirect team
of over 300 procurement specialists was too preoccupied with putting out fires and managing
tactical, day-to-day operations to serve as a strategic counsel.

The company desired comprehensive assistance in its path to establish an agile, digitally led,
unified indirect procurement organisation. It was looking for a partner who could assess the
present situation and develop a new operating model, secure executive buy-in, implement the
new model, consolidate indirect procurement under one system, lead change management,
and manage transactional activities.

GEP was chosen because of its competence in providing integrated solutions - a unified
platform as well as advice and managed services. For the transformation project, a worldwide
team was assembled, and the process began with a thorough examination of the operating
model. The team then worked with the company's team to codevelop a new model and create
a multiyear capability development road map, which required C-suite approval. The platform
was integrated with numerous ERP systems, and the guided buying portal's compliance
routines were automated to direct users to preferred suppliers, purchasing channels, and
catalogues.
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Objectives

 Simplify, digitalize and standardize indirect procurement operations across 24

countries and business units with a restructured operating model
 Unify the fragmented procurement technology landscape
 Gain end-to-end visibility into spend
 Improve buying and contract compliance
 Achieve significantly higher savings rates per year
 Drive automation across S2P processes
 Leverage advanced analytics for insights
 Enable indirect procurement team to take on a more strategic role
 Drive buy-in for the transformation project through change management and talent
training
 Increase engagement and partnershindirect spend with business stakeholders

Approach

 Assessed current state of operating model and led a three-month collaborative effort to
design new model and gain C-suite alignment
 Deployed GEP SMART™ to integrate source-to-contract and procure-to-pay
processes
 Led a phased rollout across regions over a period of 10 months to avoid disruptions
 Customized the guided buying module, integrating it with ERP systems and
automating compliance functions
 Deployed over 80-member team for transformation, change management,
communications and talent upskilling
 Set up CoE for supplier relationshindirect spend management, contracting, reporting
and continuous process improvement

Results

 Drove 15% improvement in operational efficiencies

 Delivered over $100 million in P&L savings, with a road map to deliver $500 million
through the global sourcing program in three years
 Improved spend visibility from less than 50% to over 95%

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 Reduced number of blocked invoices and cleared backlogs
 Achieved high user adoption: 80% adoption of sourcing and contract management
tools compared to prior adoption rate of less than 20%
 Improved compliance buying with one-stop guided buying tool
 Achieved high levels of customer satisfaction
 Took over transactional activities from client’s indirect procurement team, enabling
them to focus on strategy and stakeholder relationshindirect spend management

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5.2 CASE 2

Leading airline partners with GEP, saves $8 million on Indirect Spend

Due to changing market conditions, a major airline needed to minimise overall spending
while maintaining optimal cash flow. It attempted to reduce indirect costs, particularly in the
long tail, but there was little visibility into spend in areas such as IT, in-flight cuisine, flight
equipment, engineering, professional services, and airport services. For low-value
transactions, ad hoc, off-contract spending was high.

To handle fulfilment effectively while driving more spend under supervision, a closed-loop
proactive and reactive method was used. So, while all project-based sourcing requisitions
were managed on an ongoing basis to drive compliance, spend trends and opportunities were
analysed concurrently to identify opportunities through redirection via preferred channels and
accelerated sourcing by leveraging GEP's expertise with RFQ templates, auction tools, and so
on. This included bringing tail-spend acquisitions within the scope of current contracts if
practicable. A spot buy desk was also established to maximise the value of tactical purchases
at the point of requisition.

Objectives

 Improve spend visibility and bring more spend under control

 Reduce long tail of global indirect spend
 Identify and accelerate savings by implementing a tail-spend management program

Approach

 Deployed a team of 12+ members to deliver services

 Conducted detailed spend analysis and opportunity assessment
 Drew up buying channel optimization strategies
 Identified opportunities and implemented accelerated sourcing activities
 Set up a spot buy desk to manage tactical purchases

Results

 Brought tail spend under control

 Reduced indirect spend by $8M in 24 months

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  Achieved a savings run rate of 10% on addressable spend
 Improved cost savings through spot buying
 Improved compliance buying with preferred suppliers

The company reduced its global indirect spend by around $8 million in 24 months. The
savings run rate has improved by 10%, setting the client firmly on the path to a long-term
savings journey. It’s indirect spend is being managed far more efficiently and is driving
greater cost savings for the business since it started the program with GEP.

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 CONCLUSION

Despite the fact that indirect spend is more difficult to track, manage, and properly analyse,
applying best practises in tandem with Source-to-Settle and On-Time Delivery Control
systems can make a significant difference in your company's bottom line. Understanding the
logistics of indirect spending can assist your organisation in analysing its cash flow and
optimising savings. It is a critical component of procurement that should never be
disregarded.

When it comes to maximising indirect procurement, there is no right or wrong approach. The
response is heavily influenced by organisational drivers and circumstance. Comprehensive
choices have a higher potential for value generation but are more difficult to implement than
partial options. Third-party options emerge as credible options as well. Before making a
decision, it is critical to consider all of the possibilities and examine many scenarios – the
appropriate initial step is a precursor to future success. A corporation must build the correct
culture and add new digital and analytics talents to the procurement team in order to
successfully implement the new approach. This necessitates tactical steps to instil the essential
mindsets and behaviours, as well as the development of the hard and soft capabilities required
for the organisation to realise and sustain its maximum potential.

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 REFERENCES

[1] Mohammed Salah Uddin, Md. Aknur Rahman, and Md. Rabiul Hasan, “Indirect
Procurement (IP): Strategy for Improving Cost Effectiveness of the Organization”, 2021.

[2] Dan Israel, Sime Curkovic, “Indirect Procurement: A Literature Review and Study of
Trends”, 2020.

[3] Daniel Israel, “Trends in the Study of Indirect Procurement”, 2019.

[4] Tarandeep Singh Ahuja, Yen Ngai, “Shifting the dial in procurement”,
McKinsey&Company.

[5] Saurabh Gupta, Abhishek Menon, “Optimizing Indirect Spending - Finding the Right
Transformation Strategy”, 2011.

[6] Steve Hoffman, Britta Lietke, Patricio Ibáñez, “Turning indirect sourcing into a
multimillion-dollar profit center”, 2017.

[7] https://www.beroeinc.com/blog/managing-indirect-spend-categories-new-approach/

[8] https://tipalti.com/spend-analysis/

[9] https://www.bergankdv.com/resources/blog/shaking-off-stigma-indirect-costs/

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