I recently read an article on Purchasing.com about HP’s Purchasing Organization titled HP’s purchasing organization looks beyond price. At $104B in annual revenue, HP is quite a large organization with $16.5B in Indirect and Services Spend. The article talks about about how HP’s Procurement Organization initially focused their efforts on cost reductions but have since transformed to focus on Supplier Partnerships and Supplier Diversity.

While I don’t disagree that Supplier Partnerships and Supplier Diversity are quite important, I do believe most large manufacturing organizations need to focus more time and energy into the Indirect spend areas. Large organizations typically focus on Direct Material sourcing activities as these are much easier to measure though Purchase or Material Price Variance (PPV or MPV). Direct Material Sourcing is a been there, done that area. More mature sourcing organizations need to focus on Indirect areas to continually drive savings impact.

There are a few obstacles that organizations need to overcome to address their Indirect Spend and a few ways to address them:

1. Unknown Spend- Because Indirect categories are usually not managed centrally, it is challenging for organizations to get their hands on the data. To solve this, reach out to your key suppliers for data collection. Most indirect suppliers will have good systems and can readily provide you information on who in your organization buys what from them. I am a firm believer that the harder the data is to collect the more opportunity that lies within that category.
2. Resistance to Change- Why do you wear your watch on a certain hand? Try doing the opposite! While it may take a while getting used to you eventually will. This is the same with Indirect Sourcing. Just because a supplier has been a supplier for a long time does not necessarily mean they are the best supplier for your organization in terms of price and other service requirements. Testing the market and potentially forcing a change may be in the best interest of your organization.
3. Hard to Track Savings- As I mentioned above Direct Material Savings are easy to track through PPV or MPV. Indirect savings are usually not as straight-forward to track. In addition to comparing old invoice price to new invoice price you will also need to take into consideration other factors such as demand management.
4. Lack of Procurement Influence/Control- Again, because savings are harder to track it may be tough to show Procurement’s value. Relationship building in the Indirect area will need to happen gradually over time.

Depending on your type of organization you may read the above points and say that’s too easy or too hard for my organization. The bottom line is that no matter how large or small your organization is, you need to focus time, energy and resources into the indirect spend category. While you may face hurdles along the way I have seen numerous clients tackle this category with great success!

Jason Restivo is a Manager in Ariba’s Spend Management Services group. Jason’s focus is on strategic sourcing projects for major global manufacturers.