4C Associates’ Milan Panchmatia examines how a focus on indirect spend can help retailers impact the bottom line.
Most procurement functions do not consider indirect spend the most glamorous area to focus on. In many cases it is an area of spend which is only considered once savings have begun to dry up elsewhere. A somewhat surprising state of affairs given that it is one of the largest costs facing most organisations – particularly in the retail sector.
Times are changing and despite a historical lack of interest, indirect spend is making its way up the priority lists of many retailers. This is partly due to the increased cost pressure facing suppliers and the higher costs linked to uncertainty surrounding Brexit. However, indirect spend is also an area where an innovative approach can deliver significant gains, particularly given the lack of attention afforded to it.
Varying levels of experience
Depending on the organisation there are two main reasons to focus on indirect spend. For many retailers it is an area of spend which has simply not received the amount of attention it deserves. I mentioned the reasons for this above, however, indirects are often the biggest expense for retailers after staff wages and cost of goods. 4C has delivered double-digit percentage savings working with retailers, in the space of two or three years.
On the other hand, 4C has also worked with businesses which are at their third generation of outsourced indirect spend. In these cases, savings are undoubtedly lower, however, there are still significant gains to be made in terms of optimising processes. For example, a retailer at a 4C event explained how an initiative to cut the cost of packaging also led to a better and more consumer-friendly final product.
Implementing best practice
When it comes to indirect spend, there are a number of proven methods to reduce costs and increase performance. In some circumstances, aggregated sourcing can prove an effective model and retailers can leverage their combined buying power to secure better terms. Working more closely with suppliers is also important and enables the development of mutually beneficial sourcing processes. Sharing business requirements and data, often leads to the discovery of new opportunities, ranging from different delivery times to the mutual adoption of solutions.
The latest e-sourcing technology has rendered tasks that previously required high resource much more manageable. I have seen retailers employ e-sourcing solutions to support single aggregated sourcing events for much of their indirect spend and deliver significant savings. Finally, engaging with a consultancy that boasts a broad client list enables retailers to access data available to industry experts. In-depth knowledge of emerging trends and market conditions, often proves invaluable when negotiating.
Now not later
Despite a history of being unjustly shunned, indirect spend can prove a real goldmine for a procurement function looking to drive savings and improve margins. This is particularly true in organisations of a certain maturity, where indirect spend represents one of the best opportunities available. After all, there is huge scope in an area that includes store facilities and materials, displays, furnishings, transportation and logistics, in addition to corporate services.
Optimising indirect spend during an economic climate characterised by uncertainty is a great way to emerge in a stronger position. The gains that can be unlocked could prove a great benefit and represent a real competitive advantage. In this context, it is unfortunate that many retailers only turn to indirect spend as a last resort.