Indirect Procurement: The hidden lever for cost reduction in companies

In most companies, the focus of the purchasing department is clearly on optimizing direct procurement - i.e. the purchase of raw materials and components that flow directly into production. But what about all the other expenses? Office supplies, IT services, marketing, business travel - these items, known as indirect procurement, often make up a significant proportion of total expenditure but are strategically neglected. It is precisely here that an enormous, often untapped potential for increasing efficiency and reducing costs lies dormant.

This comprehensive guide will show you why indirect purchasing is a strategic goldmine for your company. We explain the fundamental differences to direct procurement, highlight the typical challenges and provide you with practical strategies that you canuse to optimize your indirect procurement, sustainably reduce costs and professionalizeyour procurement processes.

Indirect procurement refers to the procurement of all goods and services that are necessary for the daily operations of a company but are not directly incorporated into the end product or service for sale. Indirect procurement therefore supports internal processes and general business activities rather than contributing directly to value creation in the supply chain.

Differentiation: What is the difference between direct and indirect procurement?

In order to fully grasp the strategic importance of indirect procurement, it is essential to clearly differentiate it from direct procurement. Although both areas pursue the goal of procuringrequired goods and services, they differ fundamentally in their function, their influence on the core business and the associated processes. A clear understanding of these differences is the first step to optimizing your overall procurement strategy.

Direct purchasing includes all materials, components and services that are directly required for the production process and therefore flow directly into the end product. These purchases have a direct influence on the production costs (cost of goods sold, COGS) and the quality of the final product. Errors or bottlenecks in direct procurement can bring production to a standstill.

Incontrast, indirect procurementfocuses on the acquisition of resources that keep business operations running. While these purchases are essential to the organization, they are not part of the end product. The challenge here often lies in the variety of categories, the high number of low-value orders and the decentralized nature of procurement, which makes the entire procure-to-pay process complex.

Typical categories in indirect purchasing: a diverse portfolio

The diversity of goods and services is one of the most defining characteristics of indirect procurement. While direct procurement focuses on an often manageable number of strategic commodities, indirect procurement encompasses a wide range of requirements across all departments of a company. This range makes centralized management and bundling of requirements particularly challenging.

To give you a better overview, we have summarized the most important categories of indirect procurement:

• Information technology (IT): this includes hardware such as laptops and servers, software licenses, telecommunications services and external IT service providers.
• Marketing and sales: expenditure on advertising agencies, printers, trade fair appearances, online marketing and advertising materials.
• Maintenance, Repair, and Operations (MRO): Maintenance, repair and operation of plant and machinery. This includes spare parts, tools, lubricants and other C-parts.
• Office supplies: Classic consumables such as paper, pens and printer cartridges.
• Human resources (HR): Costs for external recruitment agencies, further education measures, training and employee benefits.
• Travel and fleet management: Booking flights and hotels, rental cars and managing the vehicle fleet.
• Facility management: services relating to building management, e.g. cleaning, security services and energy supply.

This diversity means that indirect spend is often highly fragmented and carried out by many different employees without central coordination. It is precisely this characteristic that is at the root of the typical problems faced by companies in this area.

The biggest challenges in Indirect Procurement

Although there is considerable potential for savings in indirect procurement, specific challenges often prevent their realization. Strategic neglect leads to inefficient processes, a lack of transparency and unnecessarily high costs. In order to optimizeyour indirect procurement, you must first recognize and understand these hurdles.

• Maverick buying (wild purchasing): One of the biggest problems is so-called maverick spending. Employees order goods and services on their own initiative from unauthorized suppliers, bypassing established procurement processes. This not only leads to a loss of economies of scale and negotiated discounts, but also increases process costs and compliance risks.
• High transaction diversity: Indirect purchasing is characterized by an enormous number of orders, often with a low individual value. These are known as tail spend This mass of small transactions, known as tail spend, causes a disproportionately high administrative effort in management.
• Lack of transparency and control: Due to decentralized purchasing activities and a large number of suppliers, most organizations lack an overall view of their indirect spend. Without transparent data, it is impossible to identify potential savings, bundle requirements or evaluate the performance of suppliers.
• Low strategic priority: In many companies, indirect purchasing is seen as a purely administrative task. As the PwC Digital Procurement Survey repeatedly shows, the focus of purchasing departments is often on direct procurement, which means that the indirect area lacks the necessary resources and strategic attention to sustainably improve processes.

Taken together, these factors make it difficult to effectively manage indirect procurement and prevent companies from realizing the full benefits of a strategically aligned procurement system.

Strategies for optimization: How to leverage the potential in indirect procurement

The good news is that each of these challenges can be overcome with the right strategic approach. Instead of viewing indirect procurement purely as a cost factor, you should see it as a strategic area that can be actively shaped. Successful management of indirect procurement aims to increase efficiency, reduce costs and minimize compliance risks. The following best practices have proven to be particularly effective in practice.

1. centralization and bundling of requirements

The most effective lever against maverick buying and fragmented spending is the centralization of purchasing activities. By bundling responsibility for indirect purchasing in one department or defining clear responsibilities, you create a central control body. This can consolidate requirements across departments, use the entire purchasing volume to negotiate better conditions with suppliers and drastically reduce the number of ordering processes. The result is a significant reduction in costs and administrative effort.

2. digitalization with e-procurement solutions

Managing countless small orders manually is almost impossible. This is where digital solutions come into play. Modern procurement software or an e-procurement platform automates and standardizes the entire procurement process. Employees order from pre-approved digital catalogs at negotiated prices, approval processes are automated and all expenditure is recorded digitally. This not only creates maximum transparency, but also significantly reduces the process costs per order and gives your procurement team more time for strategic tasks.

3. establish strategic supplier management

Instead of an unmanageable number of suppliers, you should maintain a consolidated and strategically selected supplier base. Active supplier management involves the systematic selection, evaluation and development of your partners. By negotiating framework agreements with preferred suppliers, you not only secure better prices and conditions, but also ensure quality and delivery reliability. This is a decisive step towards minimizing procurement risks.

4. establishment of clear processes and purchasing guidelines

Without clear rules, any attempt at control is doomed to failure. Define a binding purchasing guideline that specifies who may order what, how and from whom. This structured process must be known to all employees and consistently enforced. Clear guidelines for approval workflows, value limits and the use of the e-procurement platform are essential in order to curb uncontrolled purchasing. A strategically aligned procurement process is becoming increasingly important for the competitiveness of companies.

Measuring success: the most important KPIs in indirect procurement

Implementing new strategies is only half the battle. In order to prove the success of your optimization measures and drive continuous improvements, you need data-supported performance measurement. Key performance indicators (KPIs) make progress in indirect procurement management transparent and provide management with convincing arguments for the strategic importance of procurement.

Selecting the right KPIs helps you to focus on the key objectives: reducing costs, increasing efficiency and minimizing risk. Instead of getting lost in the details, you should concentrate on a few, but meaningful KPIs.

The following five KPIs have proven to be fundamental for managing indirect purchasing:

• Spend under Management: this KPI measures what percentage of total indirect spend is actively controlled and managed by the purchasing department. A high value indicates strong control over spend and is a direct indicator of the effectiveness of centralization measures.
• Cost Savings: The classic in purchasing. A distinction is made here between "Hard Savings" (directly realized savings through price reductions) and "Cost Avoidance" (avoided costs, e.g. by averting price increases). This KPI documents the direct financial contribution of your procurement activities to the company's success.
• Maverick spend rate: This KPI indicates the proportion of "wild purchasing" in the total volume. A falling maverick spend rate is a clear sign that your new processes, guidelines and digital tools are being accepted by employees and that compliance is increasing. Reducing maverick spend is a key objective.
• Supplier consolidation: This key figure shows the reduction in the number of active suppliers in a given period. A smaller number of strategic partners leads to better conditions, reduces administrative effort and lowers procurement risks.
• Process costs per order: The digitalization and automation of the procurement process should significantly reduce administrative costs per transaction. This KPI proves the increase in efficiency through your new procurement software and the optimized workflow.

Systematically recording and analyzing these key figures is crucial. For an even deeper analysis of success measurement, we recommend our further article, which deals specifically with the most important procurement KPIs. The data obtained forms the basis for the continuous development of your procurement strategies and helps the procurement team to make data-driven decisions.