key takeaways
If you only read 30 seconds of this article:
- Indirect materials are essential to operations but often poorly governed, which drives excess, inconsistent pricing and expediting.
- Some analysts estimate that about 40% of a typical company's annual expenditure is spent on indirect materials.
- They are hard to manage because legacy systems track direct materials and ignore the rest.
- Six moves help most: track indirect inventory, increase visibility, strengthen supplier relationships, review contracts, standardize, and automate with AI.
Direct vs indirect materials
| Direct materials | Indirect materials | |
|---|---|---|
| Examples | Parts built into the product | MRO spares, consumables, tools, supplies, equipment |
| Tracking | Part numbers, costed into the product | Often loosely tracked, spread across sites |
| Buying | Planned, centralized, long-term suppliers | Ad hoc, decentralized, many suppliers |
| Typical problems | Supply risk, price | Excess, duplicates, rogue spend, expediting |
Why indirect material optimization matters
Many companies know that indirect expenditure puts a drag on their bottom lines. Seemingly insignificant indirect materials such as glue and fuel can quickly pile up costs when consumed in high amounts. Some analysts estimate that about 40% of a typical company's annual expenditure is spent on indirect materials. (apexanalytix)
In many cases, only direct materials, which normally have part numbers and are physically built into the product, are tracked and added to the cost of the finished product. Indirect materials such as manufacturing equipment are seldom managed as meticulously. (Supply Chain Dive) As a result, many companies lose tens of thousands of dollars each year due to ineffective management of indirect materials.
According to McKinsey analysts, AI-enabled cost reduction technologies can help industrial companies cut indirect costs by up to 20% in as little as 12 to 18 months. These technologies give supply chain managers visibility into indirect expenditure and connect disparate indirect materials data across facilities. (McKinsey)
Why indirect materials are hard to optimize
They are harder to quantify and measure
Poor indirect material management stems partly from legacy and manual systems that can't quantify and measure indirect materials. These systems focus on the movement of trackable, direct materials and often ignore materials that are not used in the finished product. (Planergy) Some organizations also lack internal controls to categorize and attach value to indirect spending, or employee education on why indirect materials must be managed.
Industry analysts estimate that US manufacturers could save over $5 trillion annually just by optimizing their indirect material management processes.
They have traditionally been deprioritized
Supply chain managers have historically focused on the cost of direct materials and labor, which feel more visible and impactful than indirect materials ordered in high volumes and lumped into bulk contracts. Overlooking indirect cost has gradually reduced manufacturing efficiency and bottom lines. Manufacturers are now applying data-focused approaches to indirect and MRO materials, and those with better insight into their materials data have been able to reduce production costs.
Six ways to optimize indirect materials
1. Track your indirect, as well as direct, inventory
"That which cannot be measured cannot be improved" applies well to materials management. Tracking indirect and direct inventory builds a dataset you can analyze for operational and production costs. AI-driven analytics can monitor that data across thousands of SKUs and suppliers, compare categories, record quoted prices and set optimal inventory levels. See MRO inventory optimization.
2. Increase data visibility across sites and systems
Analytics consolidate indirect expenditure data that is often fragmented across multiple systems, so managers can find gaps in inventory levels and usage trends. Unlike spreadsheets and legacy systems, AI-enabled platforms combine data from many sources at once. See material search and discovery.
3. Strengthen strategic supplier relationships
Indirect supplier relationships are often transactional and price-focused, which leaves little leverage. A more collaborative approach with all suppliers helps you negotiate shorter lead times, better payment terms and fairer prices. (GEP) See MRO supplier segmentation.
4. Review indirect spend contracts and leverage
Indirect buying can involve many suppliers and contracts. Without a proper contract system, you can miss agreed pricing and terms, overpay, or let employees sign contracts outside procurement's scope. Review contracts regularly against what you actually ordered, and replace those that no longer fit. See category and supplier spend analysis.
5. Standardize the indirect materials you use
Indirect procurement is notorious for being decentralized: teams with their own budgets order from suppliers and brands of their choice. Standardizing on a few trusted brands and suppliers reduces cost and complexity, helps materials arrive on time at competitive rates, and makes duplicates easier to spot. See duplicate material identification.
6. Use AI-enabled technology and automation
Automating materials tasks such as replenishment and order analysis lowers the cost of indirect expenditure and gives real-time insight into which categories could be optimized further. Modern AI-enabled platforms work on the data you already have, without a cleanse project first.
Where to start
Just getting started? Pick one indirect category, such as MRO spares at your largest site, and measure what you hold, what moves and who you buy from. Talk to an MRO expert.
Already managing indirect spend? Connect inventory, purchasing and supplier data across sites so excess, duplicates and consolidation opportunities show up in one view. Explore the MRO software platform.
Verusen harmonizes materials data across your sites and systems and recommends where to reduce, transfer and consolidate. We've helped customers identify savings opportunities of up to $10 million in under 60 days of using our platform. Book a demo or estimate your opportunity in under 3 minutes.
FAQ
It is managing the materials that support operations but are not part of the finished product, such as MRO spares, consumables and supplies, with the same tracking, visibility and supplier discipline as direct materials.
Direct materials are built into the product and usually tracked by part number. Indirect materials keep operations running, such as spares, tools and supplies, and are often bought ad hoc and tracked loosely.
Legacy and manual systems focus on direct materials, indirect buying is decentralized across teams and sites, and many organizations lack controls to categorize and value indirect spend.
According to McKinsey analysts, AI-enabled cost reduction technologies can help industrial companies cut indirect costs by up to 20% in as little as 12 to 18 months.
AI consolidates fragmented data across systems, finds duplicates and excess, compares suppliers and prices, and recommends inventory levels, giving managers real-time insight into where to cut cost without hurting service.
PN
