15 May 2014 | Gurjit Degun
Indirect procurement may have an “image problem,” but teams should still aim to be a “beacon of excellence” according to Brian Davy, head of non-production procurement at Jaguar Land Rover.
Many agree with Davy, who was speaking at the ProcureCon Indirect conference last month. His thoughts were reiterated by other speakers at the event. Some companies, such as clothing manufacturer Levi Strauss are only just tapping into indirect. Director of global indirect procurement Celeste Smith, who is in the process of establishing centre-led function, explained indirect is still “very much in its infancy”.
Mike Lander, executive director at procurement services provider ProfitFlo, does not believe firms have been ignoring indirect spend. “The reality for many companies is that a lot of attention has been focused in the past five years on direct spend due to its impact on EBITDA and the ability to focus category experts,” he explains. “Therefore, the next wave of improvements need to come from the indirect spend categories.”
George Bordon, co-founder of PSM Advantage which provides procurement training and consultancy, points out manufacturing companies focus more on direct procurement because it is the lifeblood of the business.
“Historically the direct side has taken the lead, particularly so in manufacturing companies because direct materials are really the lifeline of the company, so they get a lot of the attention,” he says. “Most of the categories are pretty strategic and they directly impact the cost of goods sold so as a result indirect spend becomes less visible.
“Service-based companies might have started to look into indirect side earlier because most of their spend is going to be indirect and when they have to reduce cost that’s where they go. I would guess that if we studied it we would probably find they are the early pioneers in that space.”
Umair Bin Zubair, who manages marketing and indirect sourcing at communications firm Telenor, believes indirect plays an important part in manufacturing firms to support areas such as production and the supply chain “for things like spare parts and fuel”.
But John Champion, director of indirect procurement services at BAE Systems, which centralised indirect purchasing 10 years ago, believes many firms “seem to underestimate, and therefore undervalue, the impact of this area of spend”.
“Perhaps because it’s complex and difficult to manage well, it’s been left until last,” he tells SM. “BAE Systems, however, did recognise the potential benefits and the need for a specific function to grow this area of responsibility and become more effective. The indirect world still has many opportunities for consolidation in the market place, meaning the buyer can enjoy a fairly competitive environment. And whereas the direct commodities scope is limited by specific tolerances in design requirements, the indirect buyer has more freedom over the service delivery specification.”
Bode Tijani, indirect buyer UK commercial at Wrigley, also believes there is a move towards innovation. “Organisations are asking how results are achieved in terms of process, cost and risk exposure. This latest thinking is changing the matrix across geographies. Industry trends are driving innovation and discipline and therefore bringing indirect procurement to the forefront.”
This innovation can also help with career progression, Lander points out. “The reality is that indirect is broader and can yield some interesting opportunities,” he says. “It’s an interesting career progression for people to work on complex IT infrastructure projects. Some of the opportunity areas come from quite innovative creative solutions for IT
Other benefits of tapping into indirect procurement include rationalising your supply base, according to Champion. “Reducing the number and variety of suppliers within any given category allows you to focus your attention on better directing your spend and reaping the benefits of closer working relationships,” he explains.
Bordon, who has worked in indirect procurement for 18 years, adds that indirect purchasing calls for a lot of spend analysis which “really showed us where we were spending less wisely. We were doing some things where we did not have visibility,” he says. “We were able to see huge opportunities. It helped with discipline in business processes.” At one firm he saved $1 million (£595,000) a year simply by putting processes in place to disconnect company phones when employees left the business.
How then can companies starting to focus on indirect categories overcome the problem of a negative perception? Davy said he overcame this by using a “playbook” – a presentation of what the team does and its purpose – to engage with senior stakeholders. “Every time I take it to any board director they love the interactive nature of it,” he says. “It’s your shop window, it’s what you can sell to the rest of the business.”
Bordon agrees communication is vital. At a previous company, he told staff why the changes are taking place. “Sometimes it’s a difference between people keeping their jobs and not,” he says. “I think communicating what your strategies are within the categories to the key users is important as well.”
He also advises buyers give as much credit as possible to internal customers. “When you’re getting started, look for some early wins and publicise them and try to make the people who are not in procurement the heroes of the day. If you crow too much about what you did it’s probably going to be resented.”
Bordon also believes in making new ways of working easier for internal customers. “You’ll get more compliance if you set up a catalogue than if you set up a 15-step process. So make the right thing the easiest thing to do and the wrong thing a little harder and then you’ve got the right combination.”
Champion disagrees being seen as an important function is tough. “It could be argued it is difficult for one to exist without the other,” he says. “Whether direct or indirect, we operate in an area of the enterprise central to everything the corporation does. In the direct arena, 70 per cent of what we make and deliver includes a proportion of purchased goods. An even greater percentage is in the delivery of indirect services consumed on an hourly basis.
“Ultimately, the application of good buying principles are just as relevant in the indirect as in direct. I would go so far as to say the opportunities and freedom to influence are greater and can yield significant benefits.”
Another big challenge is that practitioners have to “do a lot more to get the same amount of dollars back to the bottom line” because indirect involves a lot of one-off purchases, according to Bordon.
Bin Zubair advises professionals to make sure they have a high level of visibility and are involved with business forecasting. “If you can’t plan your indirect purchasing, you don’t have a decent enough lead time to deliver, so everything becomes urgent. That’s when you lose focus and start buying on an ad hoc basis which means you can’t drive better prices.”
An outsourced opportunity
An approach some companies take to tackle indirect procurement is through outsourcing. Proxima Group’s client director John Hatton says many businesses see indirect as “non-core so they outsource it to someone it is core for”.
Mike Jones, group managing director at Optimum Procurement Group, adds some clients have said they “typically get less than capable procurement people who deliver less than capable results” which is why they look to outsourcing.
However he explains outsourcing can leave current procurement staff concerned about job security. “Typically procurement officers will look at us with fear, a risk to their own jobs,” he says.
“If they’re capable themselves they needn’t. We help them improve.
The clever ones don’t need to be fearful as there’s a much bigger opportunity for them as individuals.”