One of the toughest challenges for procurement organizations tasked with managing indirect spend is that they don’t do it – their suppliers and stakeholders do. Consider the sometimes limited visibility procurement has into demand, pricing, contracts and related areas for indirect spend, especially those that are managed and/or negotiated at a decentralized level in the business. In addition, procurement often lacks the same level of understanding of the physical and financial supply chain flow for indirect material that they do for direct.
There’s also that nagging issue of quantifying the total “cost” of indirect goods. Grainger will tell you in its own assessments that its all about demand management and reducing inventory. There is certainly quite a bit of truth to this. But total cost is not just about inventory – it is all about right-sizing the supply base without over or under specifying attribute and requirements for what we’re buying.
It’s also negotiating for total cost basis and reasonable margin. Granted, their may be tremendous value in having Grainger hold inventory for us for certain tail items when we need them – but is that worth a margin we would never otherwise pay to suppliers? Maybe it is, maybe it isn’t depending on the organization.
Behind cost, there’s the challenge of management indirect services (a vexing area in and of itself – and not just about contingent labor). Add to this the fact that we generally do a poor job in procurement at measuring and metering indirect services requirements and consumption – not to mention supplier performance – in comparison to direct spend.
Vendors are sneaky and smart. But perhaps most insidious of all are the 2 final points I’ll raise today. First, stakeholders tend to get what they want (unless we spend the upfront time educating and changing their perspective on what to buy and directing them to the best choice). And final our technology is disjointed and often poorly deployed at best.
(Cross-posted @ Spend Matters)