KEY TRENDS IN INDIRECT PROCUREMENT

03 October 2019

Since 2011, global indirect spending has risen by about 7 percent annually. Nevertheless, companies are still not paying the attention they deserve to indirect purchasing categories. By 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. For a long time, indirect purchasing has been defined as the administrative effort required for the day-to-day financial control and internal functionality of a company's facilities and employees. Today, however, the complexity of indirect expenditure makes this a very interesting and much more business-critical function than it was originally defined. As the industry continues to consolidate, there is now a significant focus on indirect spending. 

Three key trends

One could argue that indirect purchasing is more important for corporate success than direct purchasing, as it increasingly has a direct impact on customer-driven profits. 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 value creation increases steadily. There are three central trends that 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 own cost structure in today's market. Accordingly, the share of indirect volume in total purchasing volume is continuously increasing.
  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 own 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 today 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 goods or make it reced 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 the rapidly changing offering 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 purchasing volumes can be used in the best possible way.

Success factor "Business Intelligence"

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

The use of technological purchasing solutions that offer real-time transparency for all transactions at a value posting level is the key to continuous transparency and expense management.

Unlike the purchase of goods, there are few processes and structures in place to evaluate services and ensure their efficiency and effectiveness. This is due, among other things, to the specific characteristics of services but also to the unclear value composition of such "intangible assets". Today, indirect buyers 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 only enables the required high decision quality in indirect procurement processes. This is all the more true since many of the suppliers' business innovations in the filed 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 of crucial importance for indirect purchasing to introduce appropriate evaluation procedures in order to ensure the continuous quality of the services purchased. 

In contrast to conventional approaches to tangible assets, the procurement and creation 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 analysis of value management and the cost-break-down procedure.

In addition to data evaluation, the primary objective is the normalization of the offer price, taking into account qualitative parameters, which makes it much easier or even possible to compare different suppliers and offers. In addition, various performance-based payment models can be linked to this approach.

Conclusion

Indirect purchasing categories play an increasingly important role in the success of a company. Purchasing organizations that invest specifically in the competencies, business intelligence and smart technologies and take the time to understand and analyze the rapidly changing offering 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 own 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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