INDIRECT PROCUREMENT HAS BECOME CRUCIAL FOR YOUR COMPANY SUCCESS - EXPLORE WHY

06 September 2019

Since 2011, global indirect spending has risen by about 7 percent annually. Nevertheless, companies still do not pay the attention they deserve to indirect purchasing categories. In contrast, leading purchasing organizations are increasingly adopting a radically new understanding of the contribution that indirect procurement can make.

In the last ten years, the role of purchasing has changed significantly. Indirect purchasing has long been defined as the administrative burden required for the day-to-day financial control and internal functionality of a company's facilities and staff. Today, however, the complexity of indirect spending makes this a very interesting and much more business-critical function than it was originally defined. In the course of the ongoing industry consolidation, a substantial
The focus was on indirect expenditure.

Three key trends

One could argue that indirect purchasing is more important for corporate success than direct purchasing since it increasingly has a direct influence on customer-driven wins. As a result, more and more companies have realized that global indirect expenditures can account for up to 50 percent of the company's total cash outflow to suppliers. As their share of the purchasing volume increases, their importance for the added value of a company increases steadily. Three central trends underpin this strengthening of indirect purchasing:

  1. In general, companies are more willing to outsource certain business processes/functions such as HR, accounting, travel management, etc., and this offers great potential for improving their cost structure in today's market. Accordingly, the share of indirect volume in the total purchasing volume is rising continuously.
  2. In today's networked world, it is important to know where the purchased products and services come from and which suppliers are significantly involved along the end-to-end supply chain. It is important to know whether a company is on a sanctions list in its supply chain or whether the products and materials are prohibited or restricted in any way. Otherwise, the company could face unpleasant fines and sanctions.
  3. As a result of the developments around the fourth industrial revolution and the associated wave of digitalization, manufacturing companies are adapting ever faster, new and innovative business models that are based on comprehensive and intelligent services ("Smart Services") and significantly supplement the world of the material good or make it recedes into the background. This tendency towards "servitization" creates unique mixes towards complex combinations of material goods and service packages. In combination with the continuing trend towards outsourcing non-core functions, the boundaries between direct and indirect procurement are becoming increasingly blurred.

For indirect purchasing, it is of central importance to understand exactly the strongly changing offer consisting of complex combinations of material goods and service packages. Only with a clear view of the drastically changed market conditions and supplier profiles can the new market opportunities be exploited and the best possible use is made of purchasing volumes.

Success factor "Business Intelligence"

Business Intelligence thus becomes the central success factor. This involves investments in the expansion of indirect procurement market know-how and suitable analysis methods and IT tools to develop supplier competencies that are critical for success and secure them in the long term. Through the use of new "smart" technology, indirect purchasing can achieve complete transparency and control.

The use of technological purchasing solutions that provide real-time visibility into all transactions at the value-posting level is the key to continuous visibility and management of expenses. In contrast to the purchase of goods, there are hardly any processes and structures available for the evaluation of services that are necessary to ensure their efficiency and effectiveness. The specific characteristics of services, but also the unclear value composition of such an "intangible good", are among the responsible factors here. Indirect buyers today are forced to understand these models. This is the only way to initiate the most economical steps for the required service.

The targeted expansion of analytical capabilities paired with the business intelligence described above enables the required high decision quality in indirect procurement processes. This is all the truer since many of the suppliers' business innovations in the field of servitization are still under development and are not always fully developed.


"Advanced Value Break Down" Method

The trends and optimization directions lead to a constantly increasing share - as well as a significantly higher degree of complexity - of intangible goods in the purchasing volume. It is therefore crucial for indirect purchasing to introduce appropriate evaluation procedures to ensure the continuous quality of the services purchased.

In contrast to conventional approaches to tangible goods, the procurement and production of services must take into account specific characteristics of services.

A new, systematic approach to purchasing complex services is the so-called "Advanced Value Break Down" method, which was developed in close cooperation between IPG and the Institute for Supply Chain Management at the University of St. Gallen, five Swiss practical partners and the Swiss associations procure.ch and Swissmem. This method combines the three approaches "value management", "cost-break-down" and "supplier management" and combines the structured data preparation of supplier management with the quality and cost consideration of value management and the cost-break-down procedure.

In addition to data evaluation, the primary objective is to normalize the offer price by including qualitative variables, which makes it much easier or even possible to compare different providers and offers. Besides, various performance-based payment models can be linked to this approach.

Bottom line

Indirect purchasing categories play an increasingly important role in the success of a company. Purchasing organizations that invest specifically in new competencies, business intelligence and smart technologies and take the time to understand and analyze the rapidly changing offerings consisting of complex combinations of tangible assets and service packages will significantly reduce indirect purchasing costs, minimize existing business risks and, above all, maximize the value contribution to their company's success through important growth impulses for initiatives for business model innovation.

New Seminar

For managers and specialists from purchasing, production or finance and controlling, who are new to the procurement of services or capital goods or want to refresh their knowledge in this regard, on 20 and 21 November, we will hold the first seminar on "Procurement of capital goods and services'. More information is available at: www.procure.ch/Seminare

 

Carsten Vollrath,CEO of SWISS IPG PARTNERS GROUP AG 

 

 

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