There are two types of procurement – direct (basic) and indirect (subsidiary). About differences between them we have written in our article “Direct and indirect purchases: management differences“.
Often companies are ready to invest more resources in direct purchases since the connection with the profitability of the company is more visible. The more profitable you get raw materials for the goods you produce, the more you can get a higher profit from sales. The higher the quality of your products, the more satisfied customers will be. They will come back to you again and again and gladly recommend you to their acquaintances.
The importance of indirect purchases is often underestimated, because without them it is impossible to carry out their entrepreneurial activity qualitatively. Indirect purchases may include the purchase of equipment, packaging and office supplies, office furniture and equipment, travel expenses, IT and marketing services, and more.
Problems emerge in indirect purchases
Untimely receipt of goods/services needed for work
There are more initiators (stakeholders) in indirect purchases than in direct. It means that the management of the requests of employees becomes very complex and time-consuming, and in large companies it is almost impossible at all. Requests come from different channels – by email, by phone, by private conversation, in a shared document. The time for their processing, orders creation and their approval takes a lot of time. Due to a lot of information some orders may get lost and some of the employees may not receive the goods necessary for the performance of their duties on time.
Inefficient supplier and contract management
During creation requests it is very important to process them correctly and consolidate them into orders. If purchasing managers process more than 100 requests per month, order creation from them becomes a problem: you need to collect purchase requests from all channels, create many new tables and begin to fill in them with purchase orders, sort them by suppliers or categories. It’s very difficult.
Lack of money wasting control
Working manually it is almost impossible to collect reliable data to understand total spendings, withdraw analytics by a period, control budgets and other information that managers often need. All that can be seen after as a result of this work are over budget and obscure data on what has already been purchased for the period.
Strategies to avoid chaos in indirect procurement
The development and implementation of a strategic approach to indirect purchases will help the company reduce the negative impact of the problems described above on the company’s profits.
The first step in the indirect procurement strategy is to pool spendings and understand their categories. This will be useful for determining the potential for cost reduction.
Process centralization on a single online platform
Companies from any industry have initiators, approvers and executors of orders and requests. Somewhere they can be more (retail, manufacturing, IT companies), somewhere – less (construction company, distributor).
It is very important to centralize the process in a single software that will help:
Track the complete chain of actions – from the request to the payment;
Get analytics and data in real-time;
Allows to see the state of costs to date.
Increase employee productivity
It sounds promising enough, but it’s very simple: to give all employees a simple interface from which they can make requests and, most importantly, track their statuses.
Purchase request creation is one of the most important and most underestimated factors that help employees to be more effective.
To optimize purchase request creation you need to give employees the ability not only to enter their needs, but also a catalog that will speed up request creation, as well as repeated purchase requests.
Improving conditions with suppliers, not prompt service of orders
According to our research, the procurement department employee should not spend more than 28% on the creation and processing of orders. The rest of the time should be spent on strategic work with suppliers like improving prices and terms for deferred payment, finding new suppliers, etc.
To do this, you need to automate work with orders – automatically generate orders from requests and send them to suppliers.
To increase the efficiency of employees, which will lead to an increase in the profitability of the enterprise, we recommend automating the routine processes for working with requests and orders and centralizing the work of all participants in the procurement process in a single purchasing platform.