Indirect spend has never quite enjoyed the same limelight as direct spend. Seen largely as the lowly cousin of the two, businesses ignored it for a long time. But as the search for efficiencies and savings continues, indirect spend is getting more attention than ever before. While this is a good thing, the right performance measurements need to be in place if buyers are to deliver as efficiently as possible.
Spend on goods and services that are not part of the manufacturing process or the product itself is said to be indirect. Typical examples include spend on the maintenance of production lines, facilities management, as well as marketing or consultancy services.
Direct and indirect spend also have different value drivers. While large quantities of goods are turned over in manufacturing, services are usually bought in smaller quantities to meet specific demands. The relative share of indirect spend might be limited, but the absolute value can be significant. German premium carmakers BMW and Daimler, for example, each report an indirect spend in excess of €15bn each year. This should be reason enough for anyone to take a closer look at indirect spend and its idiosyncrasies, especially performance.
Managing performance should always start with a target against which key performance indicators (KPIs) can be measured, and this is no different when measuring indirect spend performance; these objectives should be derived from a company’s strategy.
Savings and other contributions to the bottom line, such as increased revenue or supplier-enabled innovation, are important and should provide a starting point.
Procurement executives should also look at structural indicators – such as how lean the function is, among other markers – which show spend under procurement’s management and how well this is being managed commercially. Since procurement is a people business, employee satisfaction should also be measured through regular surveys.
It is also vital for an indirect team to work well with stakeholders. While this is an area in which it is difficult to the quantify performance, there are a number of ways to analyse and improve communication and the effectiveness of collaboration. Regular, structured reviews of what lies ahead for the business strategy and projects are key here, while there should also be a focus on lessons learned from the communication process and supplier performance.
Christoph Quick-Timmerhaus and Dr Wolfgang Schnellbaecher
If you like to learn more about the setting of key performance indicators in the indirect space then you can download the full report by Christoph Quick-Timmerhaus and Dr Wolfgang Schnellbaecher above.
This contributed article has been written by guest writers at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publication of this content.