Indirect Spending: Creating and Sustaining Superior Performance
Today we’re gonna talk about indirect spending.
A critical piece to really getting indirect spending is understanding the value chain. The value chain is a theory created by Michael Porter in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance.
But What is a Value Chain?
The value chain was Michael Porter’s system of analysing a company’s activities or processes by breaking them down into supporting and primary activities. All activities will either increase or decrease with your profit margins. Primary activities are your Inbound Logistics, your operations, your outbound logistics, your marketing and sales processes, and your customer service system.
Let’s take the car industry as an example.
Your inbound logistics would be the process of acquiring materials such as plastics, leather, and steel. Your operations would be when you take these materials and turn them into a car.
Your outbound logistics would be when you ship this car to a dealer. Marketing and sales would take care of getting people interested in buying this car.
And finally you have customer service. And customer service would be when your car turns out to be a piece of garbage, at least you’ll have awesome customer service to help you out.
Whereas your supporting activities will be your firm infrastructure, human resources management, Technology and Procurement.
Firm infrastructure is everything to do with the administrative side of running your company. This can be anything from using a time-card system or having a chain of command to contact your boss. HR management is making sure everybody is happy, which makes them more productive.
Technology is well technology.
So where does indirect spending come in? Right here with procurement processes. Indirect spending is the acquisition of resources that aren’t explicitly related to the manufacturing of your product. When you buy lots of coffee for your office, your employees will be more energetic and more productive. When you have maintenance done in your manufacturing facilities, you’re improving your production capabilities.
An easy way of understanding what Indirect Spending is, is that you’re not buying something for resale.
Why is this important?
Everyone company has some form of indirect spending. Having a good indirect spending system will eventually lead to you either saving money or increasing your profit margins on Porter’s value chain.
If you’re looking for something to improve in your business, look at your indirect spending.
You might not know how much money you’re throwing away.
Thanks for listening.