Direct goods vs Indirect goods
In any organization, money is spent on two different types of goods and services: direct goods and indirect goods. Direct goods and services are purchases that are directly related to the production of the particular good or service that is being offered. Often, companies look deep into ways to cut the cost of production by finding a cheaper source of direct goods such as raw materials or services.
While this method, initially, does have a significant effect on the cost of goods, it will eventually reach a plateau. Optimizing the spending being done on indirect goods, however, is often overlooked or completely ignored. Items are sometimes un-tracked in an organization due to their low value versus the gain indirect goods are perceived to have. Furthermore, when employees are empowered to order as they need, a negative outcome is often produced. Research has shown that 41% of revenue gain in an organization is often spent on indirect goods and services.
>>For more on indirect spending: Indirect Spending – Creating and Sustaining Superior Performance
If such a significant amount of money is being spent by the company on indirect good and services, why hasn’t this been investigated more for ways to optimize and save on spending? The answer lies with the fact that companies do not usually have a process or system to optimize and manage these spending.
Small- to mid-sized enterprises often cannot justify or afford to pay hundreds of thousands, or even millions, of dollars on a legacy system to track or manage these expenses. They often don’t realize the costly nature of implementing expensive legacy systems, which results in the gains not equaling the cost of implementing those systems.
Well, the answer lies with a new method of spend optimization!
Companies now have a way to afford these systems by using a service called Software as a Service (SaaS).
These online solutions often cost a fraction of the current ERP, or legacy systems, available and can often do the job more effectively. By tracking employee spending in your organization, you now have the ability to see and approve all of the orders in your company and gain real-time reports to see where there can be room to optimize company spending.
If you’re not taking advantage of these services, isn’t it about time you looked into it?