In the world of supply chain, most of the attention is typically on the direct materials that go into the final product. While direct materials clearly essential, indirect products can be just as essential to an organization and having an effective indirect sourcing strategy can be the difference between delivering substantial value to an organization or taking on unmitigated risks.
Indirect Material Procurement refers to an organization’s goods and services spend that does not make it into the final product. This can obviously cover a wide range of products and services that a company may require to run their business. The common example used for indirect spend is office supplies, however, this can make indirect sourcing seem trivial or non-essential. In reality, indirect spend covers many things that are just as critical as direct spend such as factory tooling and equipment, machine maintenance and repair, building maintenance, software, and utilities. It is easy to see how if any of those things were not available, it would not be possible to manufacture anything.
While direct procurement refers to items that show up in the Cost of Goods Sold (COGS), Indirect procurement spend can show up in multiple places on the income statement and can depend on an individual company’s reporting practices. However, Indirect spend will typically show up under Operating expenses (OPEX). Within Opex, there is typically Selling and administrative expense and oftentimes depreciation expense broken out. Professional services, travel, marketing, office suppliers, and software will often be included in administrative expenses, while tooling and factory equipment are often included in the depreciation expense.
Tooling: Tooling refers to items used in a manufacturing facility to produce, assemble, or process goods and are essential for ensuring precision, efficiency, and repeatability in production processes. This can include drill jigs, assembly fixtures, weld fixtures, inspection fixtures, molds, dies, transportation carts and many others. Like direct materials, strict quality standards are required for tooling because if the tolerances, dimensions, or calibrations are incorrect then the tool will not be able to produce quality parts.
Factory Equipment: Factory equipment refers to all the machines required in the factory. This can include automation equipment, such as robotic arms, conveyers, lathes, CNC machines, laser cutters, and many others. It is important for all factory equipment to be properly calibrated and maintained on a regular basis. Defective factory equipment can easily cause quality defects in the direct components and affect the quality of the final product.
Facilities: The factory building provides a workspace for all the workers and equipment. In addition to the building itself, there are also maintenance services such as electricity, plumbing, and HVAC.
Office & Administrative Supplies: This includes what most people associate with indirect spend such as the desks, computers, paper, and the multitude of other things necessary to run an office.
IT & Technology Services: Technology services can sometimes be overlooked, but in the modern day and age, having an efficient technology stack is critical to remain competitive. This can include software and databases used to run the production floor, the office, and in the case of indirect procurement software, the interface to the supply chain.
Professional Services: These can be consultants, accountants or various other services that a organization may need to gather specialty expertise that is not in their core competency.
Travel & Employee Expenses: Depending on the business, travel expenses can be negligible or a considerable expense to strategically manage.
With some of this background on indirect material procurement, the common refrain that indirect spend is not critical to business is simply not true. Goods and services categorized as incorrect spend are, in many cases, just as critical as direct materials.
Centralized Processes & Systems: A centralized procure-to-pay platform can streamline the entire indirect procurement organization. Indirect procurement software can manage lists of approved suppliers, users roles & permissions, enforce procurement policies, increase compliance and transparency, and store all indirect sourcing data digitally.
Data & Analytics: Using indirect sourcing software, all relevant indirect procurement data can be stored, queried, and analyzed in real-time. No more sifting through countless documents looking for a needle in a haystack. This allows organizations to quickly analyze indirect spend and find efficiencies in their supply chain.
Strategic category management: Indirect spend needs to be managed strategically to achieve the best deals. To build this strategy, an organization needs data and indirect procurement software provides easy access to all relevant spend data in real-time.
Supplier Management: Long-term supplier relationships are critical, not just for the big-ticket items, but also for the tail-spend. Even when items are low-value and high-volume, it is still important to have strong supplier relationships which can help with price discounts, fast response times, priority service, and many others.
Optimized Workflows: Whether it’s goods or services, sourcing software will provide a deep selection of features and tools to optimize workflows, save time on repetitive tasks and focus on higher-level strategic initiatives.
Lasso provides a full suite of indirect procurement software solutions. This includes the ability for stakeholders throughout the organization to request items, for buyers to run requests for quote, evaluate supplier proposals, award the package to the best value supplier, execute the purchase order, track status, and then process the receipt, invoice, and payment. Lasso is also free to start – create your free account and get started with Lasso!
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