If we were to list all the possible expenses a business can face on a daily, monthly, quarterly, or annual basis, there’d be too many to count. For many business owners, this is a painful reminder that there’s an endless list of expenses and that each one requires management.
But, there’s good news! We can lump these expenses into two groups (however expansive) – direct costs and indirect costs. We can also lump these two groups into two categories – direct suppliers and indirect suppliers. While most suppliers are both, you can (and should) differentiate between the two, with a few exceptions.
Before we begin: direct costs vs indirect costs
As explained by the good folks at Business Dictionary, direct costs are “expenses that can be traced directly to (or identified with) a specific cost centre or cost object such as a department, process, or product.”
In short: indirect costs account for good or services that don’t impact revenue.
Indirect costs, however, are “expenses (such as for advertising, computing, maintenance, security, supervision) incurred in joint usage and, therefore, are difficult to assign to a specific cost centre.”
You can group indirect costs under fixed costs and are usually constant for a wide range of output.
In short: indirect costs are not directly related to producing a revenue-generating good or service. However, they do impact day-to-day business performance.
What exactly is indirect supplier management?
Indirect supplier management is the discipline of proactive analysis, feedback, and relationship building with suppliers. And these suppliers provide the goods and services required to maintain the day-to-day operation of your organization.
This differs, subtly, from direct supplier management. Ultimately, if a direct supplier fails to perform as expected, it will directly impede the delivery of revenue-generating products or services.
Rightly so, it’s important to properly manage direct supplier management. But this does not minimize the importance of closely monitoring and managing indirect suppliers, too.
Indirect suppliers and indirect supplier management
Technically speaking, suppliers can be both direct or indirect, depending on how you use them and how you categorize your spend. And to clearly differentiate between the two requires a lot of input from your finance organization.
Indirect suppliers run the gamut, from consultants to IT professionals to cleaning and catering supplies and suppliers. As you can tell, indirect costs are a varied group and, as such, indirect suppliers are, too.
Indirect supplier management can vary from direct supplier management. Generally speaking, this is because indirect purchases that have issues are less likely to have a direct impact on your business’s bottom line. Consequently, they tend to get less attention from procurement.
While this is a valid means of prioritization, it’s important to manage indirect suppliers with equal weight to direct suppliers. While improving your indirect supplier management process may not directly result in more revenue, it will impact cost efficiencies. And ultimately, this impacts your business’s profitability. After all, a penny saved is a penny earned.
Some examples of areas where indirect procurement can save costs and reduce risk include:
- Efficiently managing indirect suppliers: having a reliable supplier means less time is required to manage orders, deliveries, and invoice issues.
- Consolidating items or suppliers: sourcing the same products from multiple indirect suppliers creates additional effort for set up and management, as well as lost opportunities for volume discounts.
- Maintaining good relationships with suppliers: reducing the effort required to manage indirect suppliers through good relationships impacts timeliness and trustworthiness.
Ignoring your indirect supplier spend and indirect supplier management can result in procuring too much, at too late a time, and for too high a cost. This will lead to reduced overall profits.
How can e-procurement help?
Without clearly recording and cataloguing each of your indirect purchases (or any purchase), it can be tricky to reign in rogue spending. This is especially true where there’s less accountability around indirect spend.
Your best defence against out-of-control indirect spend is to implement an e-procurement or purchasing tool. With the right platform in place, you can effectively manage your indirect spend in the following ways:
- Enable employees to easily enter purchase, expense, and travel requests ensuring indirect (or direct) spend is captured in one place.
- Create a catalogue for employees to choose from, which reduces the time for sourcing and the number of vendors, and increases the chances of price certainty.
- Control workflows to prevent uncontrolled spend thereby reducing inventory levels or unnecessary procurement of goods or services.
- Increase the efficiency of employees directly affected by indirect spending, including requesters, approvers, procurement, logistics, and finance teams.
With the help of a well-designed e-procurement system, managing indirect costs and improving efficiency becomes immediately more manageable. For example, teams can:
- Autonomously put through requests from anywhere
- Easily generate a purchase order
- Upload important receipts and invoices
- View real-time data and analytics into company spending
Of course, decision-makers and leadership teams retain control over costs and supplier negotiation. But a purchasing tool makes this management infinitely easier.
At any business, welcome indirect cost and supplier management with open arms. This is an important part of your supply chain, and if left unchecked, it can negatively impact profitability and overall business performance.
To find out more about indirect supplier management and Procurify, book a demo with us today.
Editor's note: Original publish date: 19 November 2014 Original author: Sean Kolenko