4 Ways Mismanaging Your Indirect Spend Can Hurt Your Business
Companies have long prioritized optimizing direct materials spending over indirect spending such as MRO inventory in order to focus more on business growth.
However, dynamic changes in the global market demand a closer look at procurement strategies. As the global marketplace shifts, lead times become unreliable, and economic uncertainty casts a shadow on businesses, optimizing your indirect materials and MRO inventory is more important than ever.
Properly managing and streamlining your procurement processes can help you continue to drive operational efficiency and resilience regardless of how the supply chain changes.
What you need to keep an eye out for
Lack of indirect material visibility
It might surprise you to learn how many modern businesses still track their expenses with manual solutions.
Outdated practices that are prone to human error result in disparate data collection and slow system management. These “minor” issues trickle into bigger problems with purchasing and inventory.
Disparate data is synonymous with a lack of indirect material visibility, and once the ball gets rolling with inaccurate data pushing it along, it’s hard to slow it down until operations come to an unwanted stop. Downtime in operations, plant closures, and inventory shortages can cost thousands of dollars in lost time and production.
When it comes to managing indirect spend, it’s critical to have an accurate set of coordinated data. It’ll give you true insight into MRO inventory numbers and keep spending at optimized levels. Not only that, but it helps ensure that spending happens with vendors who offer you competitive prices and reliable delivery streams.
Decentralized purchasing strategies
Uncontrolled spending in your organization, also known as maverick spend, can be:
- intentional—such as when a stakeholder doesn’t agree to follow the proper indirect procurement process due to a needed expedite or drawn out approval requirements
- accidental—due to poor communication, inefficient workflows, or the absence of a Procure-to-Pay (P2P) program
Whatever the case may be, if you lose control of where cash is flowing out of your organization, it can wreak havoc on your business by creating unauthorized and unnecessary expenditures, logjams in your workflow, and draining resources that could have otherwise been invested elsewhere in your business.
For instance, decentralized purchasing strategies can lead to redundancies in MRO inventory and increased spending through non-negotiated vendors. It may even lead to downtime if non-negotiated vendors have unreliable delivery methods.
Consistency in procurement strategies ensures that your organization is leveraging the lowest negotiated price and keeps your supply chain reliable and resilient.
Inconsistencies in reporting
Lack of consistency across sites regarding spare parts inventory and spend reporting may be keeping you from taking the steps needed to cut corners where you can.
When spend reporting is inconsistent, it makes it especially difficult to draw meaningful conclusions about the data being collected.
This, in turn, makes it difficult to make fruitful decisions about action items, vendors, and production optimization.
Worse yet, these inconsistencies make it hard to optimize even if you have identified other pain points in production. Phased out optimization strategies can be totally undone by inconsistent reporting, making consultant-based solutions archaic and ultimately ineffective.
Strive for consistencies in reporting that allow you to make sense of data across sites, identify your best procurement practices, and roll out dynamic solutions.
Disorganized spend category management
Complex spend data that is jumbled across sites can make it hard for managers to connect with efficient suppliers and foster strong relationships with them. It can lead to an excessive amount of procurement contracts that are difficult to navigate, compare, or leverage for efficient spending.
As the old adage goes, you’d rather have four quarters than a hundred pennies when it comes to vendors, and maintaining healthy relationships with your suppliers can help you do just that.
How is all of this related to indirect spending?
Well, it keeps your manufacturing processes resilient and efficient. Your vendors should be reliable and trustworthy, and managing a long list of vendor relationships can be taxing from a managerial perspective.
Instead, developing a shortlist of strong, reliable suppliers can make your purchasing far more efficient, and can cut back on the maverick spending that throws your bottom line for a loop.
These healthy partnerships help you ensure your MRO inventory levels are in compliance, delivered on time, and reach you at a fair price. Having the insights needed to weed out good vendors from rotten ones is crucial, so leverage a tool to analyze your spend and delivery data whenever you can will help build a trustworthy ecosystem.
Inconsistent action items and inventory strategies across sites
It isn’t uncommon for you to have different efficiency strategies across sites. While different plants and site managers may have their own processes for managing MRO, inconsistent action items can wreak havoc on operations, especially if you are trying to optimize.
When action items clash, they can undo positive changes and create new problems. So as you implement action items and optimization strategies, ensure that the data and action items that arise from implementing change are harmonized so that you can see an ROI.
How to tackle some of these common problems
Rely on clean, meaningful, and harmonized data
Using a management strategy that prioritizes dynamic digital solutions can help mitigate the risks of disparate data and indirect material spending.
Strive for a SaaS solution that keeps reporting consistent across multiple departments and sites before consolidating it into a single, intuitive dashboard. This eliminates siloed and redundant data and creates data analysis and reporting that is accessible anywhere and at any time.
Organization-wide, real-time data harmonization offers a bird’s-eye-view of spending, inventory use, and procurement. It allows management to make sense of indirect spend comprehensively by seeing it as a dynamic aspect of your business.
Having a centralized and robust management solution to manage your entire enterprise network is what ultimately will allow you to implement multifaceted solutions that adapt as you optimize, rather than phasing out piecemeal solutions. The more you can see where indirect spend savings are possible, the more you can recoup them.
Leverage the power of new technology
Investing in an AI-based solution is the most effortless way to pinpoint areas of overspending and redundancy. These cutting-edge tools not only outperform manual expense tracking methods by achieving a 41% reduction in data classification errors, but they also streamline operations by recommending action items that help you cut costs while simultaneously reducing risk of unplanned downtime.
Data collection is an ongoing process for these systems, so spend analysis happens on scheduled cycles. The data it returns is cleaned and primed to be used in optimization strategies that target persistent pain points like:
- Rogue spending
- High procurement costs
- Redundancies in MRO inventory
- Shortages of critical parts
- Production downtime
- Supplier reliability issues
- Unclear usage metrics
These may be tiny bottlenecks you notice now, but accumulated across time and across sites, the expenses can pile up.
Improve category management
One way to manage indirect material spend is by consolidating indirect spend categories.
This allows businesses to simultaneously secure savings and strengthens existing supplier relationships. Streamlined spend categories help negotiate procurement contracts and develop mutually beneficial vendor partnerships.
The only way to make sense of your data is if you have a clear set of Key Performance Indicators. The right MRO software should help you leverage KPIs to make sense of optimal indirect spend, and may even recommend adapting your KPIs as you scale up or begin to optimize.
Making the most out of these management strategies helps you make sense of productive vendor relationships and surplus inventory.
Use an MRO software that helps you identify potential problems before they begin
Technology, like our AI and machine learning platform, has completely changed the landscape of supply chain operations making MRO optimization a critical part of driving organizational improvement.
Investing time and effort to manage indirect spend can unlock substantial rewards—rewards that include material visibility, resilient supply chain strategies, and minimized downtime.
However, managing indirect spend is a challenging task on its own.
Investing and equipping yourself with the right MRO software will do the heavy lifting for you. The right solution should offer meaningful insight into indirect spending so that you can control and optimize your bottom line.
Whether you’re looking to grow your margins or scale up, understanding your operations procurement strengths and weaknesses is a crucial next step. And, as manufacturing operations and their supply chains become increasingly complex, there’s little room for human error.
You can up your MRO management game by investing in the efficiency and accuracy of new MRO technology.
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