What is indirect procurement? Breaking down day-to-day spend

Indirect procurement often gets overshadowed by its flashier counterpart, direct procurement. But don’t be fooled—from office supplies to IT services, indirect spend can quietly drain your coffers if not managed effectively.

In this article, we’ll define indirect procurement and explore strategies to optimize your spending and streamline processes. Whether you're a seasoned procurement pro or just starting your journey, you'll discover practical tips and insights to help you maximize the value of your indirect spend. 

What is indirect procurement?

Indirect procurement involves purchasing goods, services, and supplies that support a company's operations in a non-essential role. This can include everything from paper clips and pens to IT contracts and travel expenses.

Although these items are still essential to your organization, they don’t directly impact the finished products or services you deliver to customers. Instead, indirect procurement plays a supporting role in making sure your day-to-day tasks run smoothly.

Indirect procurement won’t add to your company's bottom line. But without it, your business wouldn’t be able to operate.

Examples of indirect procurement

Indirect procurement covers a wide range of expenses that keep your business up and running, like: 

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• Office supplies: From laptops to office snacks, these everyday items keep your team productive.
• Software subscriptions: Essential tools like Microsoft 365, CRM software, and project management tools often require subscriptions that must be paid on a regular basis.
• Hardware: This includes computers, servers, and any other network equipment your team needs to operate.
• Outsourced services: Companies often outsource non-core functions like IT support, accounting, and legal services so they can focus on what they do best.
• Travel: Business travel, including flights, hotels, and transportation, is a significant indirect expense for many organizations.
• Rent and utilities: This covers the costs associated with office space, electricity, and other utilities.
• HR functions: Investments in your team’s growth, like recruiting, onboarding, training, and employee benefits are considered indirect expenses.

Indirect vs. direct procurement: Key differences

While both types of procurement are essential, indirect and direct procurement serve different purposes and require distinct strategies:

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Supplier relations

Supplier relationships may look different depending on the purpose they serve. 

Indirect procurement: Supplier relationships in indirect procurement tend to be more transactional. The focus is on finding the best deal at the time of purchase rather than building long-term partnerships.

Direct procurement: Direct procurement prioritizes long-term, strategic relationships with suppliers. These relationships are important for building a reliable supply chain, maintaining consistent quality, and finding cost-effective solutions.

Spend management

Spend management is important in both direct and indirect procurement, but the process varies widely between the two. 

Indirect procurement: Spend management in indirect procurement often takes a more decentralized approach, with various departments making purchasing decisions. This can lead to inconsistencies and potential overspending if not managed closely.

Direct procurement: Direct procurement typically involves a more centralized approach to spend management, with a dedicated procurement team overseeing purchasing decisions. This allows for better control over costs, improved negotiation power, and more efficient processes.

Inventory management

While it’s a bummer to run out of complimentary coffee at the office, it wouldn’t necessarily have the same impact as running out of packaging for your product. The level of complexity and importance differs significantly between direct and indirect procurement. 

Indirect: Inventory management in indirect procurement is less intense—it focuses on optimizing stock levels to maintain availability while minimizing holding costs.

Direct: Inventory management in direct procurement is critical to maintain a seamless production flow. It requires careful planning to balance supply and demand, minimizing stockouts and excess inventory.

Organizational structure

Who’s in charge of what also differs between indirect vs. direct procurement. 

Indirect: Indirect procurement teams are often more decentralized and have a broader focus. They might be part of different departments like HR, IT, or facilities, and they often have more flexibility in their purchasing decisions.

Direct: Direct procurement management teams are typically more centralized and specialized. They work closely with production and engineering teams to make sure the right materials are available at the right time. They often have a more rigid structure with clear roles and responsibilities.

How to develop an indirect procurement strategy

An indirect procurement strategy is your roadmap to streamlining your non-production purchases. It's not just about saving a few bucks—it's about optimizing your spending, building strong supplier relationships, and making sure your business runs smoothly. 

Here’s how to create a solid strategy:

1. Conduct a spend analysis

The first step to building a solid indirect procurement strategy is to understand your spending habits with a spend analysis. A spend analysis is like a financial checkup for your non-production purchases. You'll dig into your past spending data to identify trends, patterns, and opportunities to improve.

Analyzing your spending can help you find areas where you might overspend or underutilize certain suppliers. You'll also be able to identify high-value categories, like those with high spending, risky suppliers, or complicated requirements. These categories could benefit from a more strategic sourcing approach.

2. Define your procurement goals

Once you have a clear picture of your spending, it's time to set some goals. What do you want to achieve with your indirect procurement strategy? Are you aiming to reduce costs, improve supplier performance, or streamline your indirect procurement processes?

Your goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Examples of a SMART goal include:

• Reduce indirect procurement costs by 10% over the next year.
• Improve supplier performance by 20% in terms of on-time delivery and quality.

By setting clear goals, you can measure your progress and make sure your strategy delivers results.

3. Invest in procurement orchestration software

Gone are the days of juggling multiple spreadsheets and sifting through bank statements. Procurement orchestration systems like Zip bring all your purchasing processes together into one streamlined platform. This means no more switching between different tools or chasing down information. Everything you need is right at your fingertips.

By automating tedious tasks and centralizing your data, procurement orchestration frees up your team to focus on more strategic initiatives. You can spend less time on paperwork and more time negotiating better deals with suppliers and finding new ways to cut costs.

4. Develop category strategies

With your indirect procurement goals set, it’s time to develop category strategies. Start by breaking down your indirect spending into different categories, like: 

• Office supplies
• IT services
• Travel and entertainment
• Subscriptions

For each category, create a tailored strategy that outlines your objectives, key suppliers, and cost-saving opportunities. By developing category strategies, you can focus your efforts on the areas with the highest potential for savings and improvement. For example, you might discover you need to consolidate suppliers, negotiate better terms, or set up a preferred supplier program for certain categories. 

5. Implement procurement processes

Now you can put your strategy into action. This means setting up clear procurement processes and training your team on how to use them.

You'll define:

• How purchase requests are submitted
• How suppliers are selected
• How contracts are negotiated
• How invoices are processed

Make sure your processes are easy to follow and aligned with your overall strategy. You might even consider creating a procurement playbook to guide your team. By having well-defined processes, you can make sure your entire team understands how to report and track their own indirect spend. 

6. Monitor and evaluate performance

You've got your strategy in place and your processes are humming along. But don't rest on your laurels just yet. It's crucial to keep a close eye on your progress.

Regularly review your key performance indicators (KPIs) like cost competitiveness, supplier concentration, and product quality. Use your procurement orchestration software to track your spending and identify any areas where you might be falling short. By continuously monitoring and evaluating your performance, you can make adjustments as needed and ensure you’re on the right track to achieving your procurement goals. 

Benefits of a well-structured indirect procurement process

Indirect procurement might not be the most exciting part of your business, but it's a great tool for saving money and boosting efficiency. By streamlining your spending and leveraging procurement automation, you can unlock benefits like:

• Reduce maverick spending: Having an indirect procurement process with clear guidelines and approvals can help you control spending and reduce unauthorized purchases.
• Improve supplier relationship management: A structured process allows you to track supplier performance, find opportunities for collaboration, and negotiate better deals.
• Simplify bookkeeping: Automated workflows can streamline invoice processing, payment approvals, and expense reporting, reducing errors and saving time.
• Consolidate spending: A structured process can help you identify opportunities to consolidate spending with fewer suppliers, leading to better pricing and terms.
• Enhance spend visibility: With a centralized procurement system to manage your indirect purchases, you can track your spending in real time and identify areas to save money.
• Reduce supply chain risks: A well-structured process can help you diversify your supplier base, implement contingency plans, and monitor supplier performance to mitigate risks like supplier disruptions or quality issues.

Indirect procurement best practices

Ready to tackle your company's day-to-day spend? Get started with these best practices for managing indirect procurement: 

• Maintain strong supplier relationships: Build strong relationships with your suppliers by encouraging open communication, fostering mutual trust and respect, and providing timely payments to ensure reliable deliveries, competitive pricing, and excellent service.
• Prioritize category management: Group similar items into categories to easily identify opportunities for consolidation, standardization, and cost reduction.
• Utilize automation and AI: Automate repetitive tasks like purchase order creation and invoice processing to save time and reduce manual errors.
• Ask for volume discounts and rebates: Use your buying power to negotiate better deals with suppliers.
• Standardize procurement processes: Implement consistent processes across your organization to improve efficiency.
• Consolidate suppliers: Reduce the number of suppliers you work with to simplify your procurement and secure better prices.
• Implement robust contract management: Make sure all your procurement contracts are well-defined, compliant, and aligned with your business objectives.

Get everyday spend in check with Zip

Just as a car manufacturer needs parts to build the car, they also need water to keep employees hydrated. These indirect procurement expenses might not directly impact your bottom line, but they’re essential nonetheless.

But it’s easy to lose track of indirect spend without a procurement process in place. Zip can help you regain control and optimize your supply chain with features like AI-guided vendor consolidation, intake routing, risk management, and more. Request a demo to learn how you can manage indirect procurement with Zip.