In the past, organizations primarily focused on optimizing direct spend because of its close relationship to a product or service’s profit margin.
Today, however, indirect spend is gaining more attention than ever before. Recent disruptive events such as the Covid-19 pandemic have led businesses to realize that so much value can be harvested from an organization’s indirect spend strategy. Careful management can present rich opportunities for cost-cutting by reducing overspending, increasing visibility, and minimizing risk exposure.
Thanks to advancements in technology, businesses today have the luxury of leveraging purpose-built tools to streamline procurement spend strategies to minimize costs and maximize profit margins. Here’s how your organization can use some of these strategies.
A modern approach to optimizing indirect procurement spend
Leverage new technology
The old adage “the only constant is change” is especially true when it comes to today’s global market.
Fuelled by rapid advancements in technology, the rate of change is increasing, and demand almost always never remains static. Staying one step ahead of these changes is the only way to ensure that resources and spending are allocated where they need to be.
However, today’s chief executives are facing serious challenges in using traditional man-powered efforts to solve these dynamic problems.
Not only are these solutions prone to a high margin of error, but they also can’t keep up with the massive amount of data most businesses are collecting at exponential rates.
An intelligent materials management solution equipped with Industry 4.0 tools such as artificial intelligence and machine learning does the heavy lifting for you when it comes to harmonizing your materials data and optimizing your indirect and MRO procurement spend.
For instance, these tools allow you to quickly analyze your inventory data and adjust your spending to ensure that you have enough of what you need at the right time and at the right place while simultaneously eliminating or reallocating overages of other materials..
Powerful algorithms analyze large datasets containing valuable information about inventory numbers, safety stocks recommendations, part replacement, and the most cost-effective vendor options so that you can keep spending as efficient as possible without running the risk of unplanned downtime.
Strategic replenishment also helps keep costs low by avoiding downtime and ensuring plant managers have access to the maintenance parts they need to keep your plant running. It also avoids the mysterious sunk costs that come from rogue spending, which is more likely to happen when procurement processes aren’t streamlined or operations and sourcing departments have competing objectives.
Make the most of MRO data collection
Many businesses face the challenge of integrating multiple enterprise resource planning (ERP) systems thanks to data being fragmented across multiple locations, departments, business units, and categories. This not only severely limits the visibility and transparency of your indirect spend data, but also creates data silos that are redundant, inaccurate, and unreliable.
The right software solution can help you streamline data collection processes and consolidate data into a single, intuitive platform. Machine-learning features facilitate data collection, cleansing, analysis, and categorization according to different spend categories with little to no need for human intervention and fewer errors in reporting.
Since data from multiple sub-systems is harmonized to a single place, you’ll not only be able to keep things consistent, but you’ll also have access to real-time, accurate data that yields meaningful insights. For instance, advanced analytics are often used to review historic data about previous indirect spending on category-specific levels to reveal total cost of wasted working capital that can be removed.
These smart solutions even go as far as providing actionable suggestions to reduce costs for networked facilities across your enterprise.
Make internal processes seamless
Materials management involves much more than working with procurement and operations teams, it’s a role that involves carefully considering the expertise and needs of multiple stakeholders. To squeeze the best value out of your indirect procurement spend strategy, it’s essential to craft a strong, mutually beneficial contract that is fine-tuned to meet everyone’s needs.
Supplier performance metrics that are kept out of the view of other employees are a surefire recipe for wasted cash and rocky relationships. These metrics should be easily accessible to those making purchases and using parts to help management build the most resilient and practical procurement strategy possible. Being transparent about average lead time, terms and conditions, payment details, and services offered should be standard practice.
Once you have a good system going, a cloud-based SaaS solution that integrates Key Performance Indicators (KPIs) will help fine-tune the process and identify any kinks, or opportunities for optimization, in the system.
For instance, tracking supplier performance by monitoring data about late shipments or faulty equipment allows you to assess your strategic relationship and find a more cost-effective partner. It may also allow you to identify ways you can consolidate spending with a shorter list of vendors, earn discounts on bulk purchases, and make procurement processes simpler.
Since you’re ensuring that suppliers are kept accountable on the go, you won’t have to wait until occasional data cleanse project results are revealed to start optimizing savings.
Keep your strategy dynamic and reliable
Keep your supply chain resilient
1. Prepare your inventory
Redundant spending is different from intentional overstocking. Setting money aside in your operations budget to periodically overstock on frequently used parts or supplies for machinery that is on its last leg allows you to absorb the shock of these disruptions to your operations.
While it may cost upfront, this can ultimately boast significant savings when it comes to production downtime. Smart solutions will clue you in on how frequently certain action items take place for parts maintenance, allowing you to make smart decisions about when to bulk up.
2. Building flexibility
There are many strategies that an organization can adopt to build flexibility. Holding all your inventory in a single place isn’t a sensible approach, nor is it likely to be viable in the long term. Distributing physical inventory across multiple locations is a great way to overcome disruptions such as restrictions caused by the pandemic, intense weather events, employee strikes, or any other scenarios that may affect logistics operations.
If you currently host offshore production, you may consider relocating it closer to home operations. Not only will you be able to cut down on shipping costs and taxes, but you can also speed up delivery time and increase customer satisfaction.
3. Changing corporate culture
The reasons for this behavior include miscommunication in the supply chain, a lack of an effective MRO inventory review process, or a lack of transparency between plants and facilities. Getting everyone on board and educating them about internal procurement controls, indirect procurement spend best practices, and the nature of indirect spend itself can help shift focus towards constructive strategies that require less data collection and analysis and more actionable decisions.
Use strategies that work as you go
Optimization is an ongoing process. Markets change, customer preferences vary, and new indirect procurement challenges crop up along the way—managing your indirect procurement strategy is a constant work-in-progress.
One-size-fits-all solutions don’t work when it comes to optimizing your indirect procurement because of how complex problems can be.
For instance, production downtime can be caused by a range of unique reasons, so though your goal may be to reduce downtime, a solution that works for system failure will not work in the context of low-inventory stock.
A purpose-built intelligent material management software should be well equipped with technology that uses historical data from previous usage details to create accurate recommendations that identify pain points before disruptions actually occur. Using machine learning and pattern recognition, the system should come up with suggestive solutions for various scenarios to mitigate existing risks and prevent new ones from arising.
Modern problems require modern solutions
The challenge of properly managing indirect procurement is real and growing. Because the process can be complex and unwieldy, many businesses are opting for expensive consultations that lead to limited results.
But it doesn’t have to be that way.
Investing in the right cloud-based solution that hosts a range of optimization features can help any business pull the reins on inefficient procurement strategies.
The value of leveraging digital solutions is crystal clear: improved visibility, dramatic reduction in inventory costs, harmonized data, and reduced downtime lead to smoother manufacturing operations.
So why wait? Arm yourself with these purpose-built solutions today and see real change in your indirect procurement strategy.