Small, indirect, tail-end, small supplier, non-strategic, non-core, tactical, etc. The list doesn’t go on much longer, but the spend unquestionably does. From our procurement perspective at SDI, indirect spend refers to the sourcing and purchase of goods and services that are not directly incorporated into a manufactured product.
For example, consider the components typically used to construct most computers. Processors, motherboard connector cables, random access memory (RAM) modules and precious metals used for wiring are among the many components used in the direct production and manufacture of laptops. These direct components are considered strategic purchases and are judiciously sourced and purchased by the procurement unit within the company.
Now consider the support or peripheral products and services that are necessary to market and sell the product – in this example, the laptop. Not quite as strategic and not used directly in the production of the laptop, indirect spend such as office furniture and supplies, maintenance services, travel, and contingent labor enable the manufacture and sale of the product but are certainly not components. Since these products and services are indirectly used to facilitate laptop sales, they are referred to as indirect spend.
Often, indirect spend categories are not as judiciously sourced purchased as their direct counterparts.
Why the difference matters
Implementing the trusty 80/20 rule, tail end spend is characteristically referred to as the final 20% of company spend. The graphic below, courtesy of Capgemini Consulting, crisply depicts the segmentation of the smaller supplier, tail-end base.
Since this indirect spend is considered non-critical, less strategic and frequently paid to smaller suppliers procurement organizations often employ fewer resources on the cost management of these indirect categories. Worse, these fragmented costs and spot purchases are not even managed by procurement, but within individual business units that may be unfamiliar with effective procurement methodologies.
Yet, both types of spend are critical to the bottom line of the business. Efficient cost management of the tail drives increased savings for the enterprise. Reaping significant savings can be achieved by applying in-house procurement best practices to all cost categories. Or, relying on a third party with the right expertise.
Not surprisingly, organizations have made small supplier spend a priority in recent years. Last year, the Hackett Group, recognizing that many procurement organizations, “may be leaving money on the table and deploying their resources inefficiently is in the low-value purchasing generally known as tail spend, “conducted a webinar to share their insights on small supplier best practices.
But not all companies are equipped to manage the complexities of smaller spend in-house. They rely on third party service providers such as SDI, whose primary focus is supply chain optimization. At SDI, we are a full lifecycle Business Process Outsourcing and Managed Services provider with extensive proficiency in small supplier, non-critical, tail-end spend.
You can learn more here on how we can deliver immediate and long-term benefits for you, as we have for many of our Fortune 500 customers.