Managing indirect spend in the industrial sector is often overlooked, yet it represents a significant portion of overall expenditures. Indirect goods and services play a substantial role in supporting business operations. Indirect spend encompasses a broad range of categories — everything from PPE and safety supplies, to office products and facilities services, to logistics and pre-employment screening services. Optimizing these types of expenditures for large production-based companies can lead to substantial cost savings, improved operational efficiency, and more informed decision-making.  

Here are three actionable insights for enhancing indirect spend management in the industrial space. 

1. Leverage Data Analytics for Informed Decision-Making

Data is one of the most powerful tools available to manufacturing corporations. In the realm of indirect spend management, analytics can reveal insights into spending patterns, inventory demand, supplier management, savings opportunities, program compliance and site-level trends. By harnessing this data, organizations can make more informed decisions that drive cost efficiency.

However, despite the proliferation of digital technology and systems operations, many procurement professionals in large industrial organizations face a significant challenge: obtaining high-quality data, or GOOD data. Fragmented ERP systems, inaccurate product descriptions, and site-level purchasing practices all contribute to the difficulties of effective data gathering. 

What is good data?

Good data is far more than just the basics like historical purchase prices, supplier information, current inventory, and pricing structure. Good data should also include:

• Accurate product descriptions
• Part numbers
• Units of measurement
• Purchases by site
• At least 12 months of data  

If you can only prioritize two data points, these are the most critical:

1. Supplier name
2. Supplier item number

With these two data points alone, this will enable you to track spend more meaningfully, begin the spend categorization process, and trace back to where items are being purchased.

These data points are key to compiling a solid pricing analysis and making a more informed decision on category management. A holistic view of these data points and in-depth analysis will help ensure that purchasing decisions are strategic, cost-effective, and aligned with the company's operational goals. If you don’t already have access to good data for indirect, this article has a few tips to obtain it in the future. 

2. Start Broad, Then Consolidate

Don’t Overlook the Easy Savings

Many organizations use the RFP (Request for Proposal) strategy to manage indirect spend by consistently churning out RFPs for specific MRO categories to secure better pricing and control tail spend. While pursuing better pricing through RFPs for individual categories may seem beneficial, it can be shortsighted, failing to consider the organization’s broader purchasing needs. This methodology only captures a limited snapshot of purchasing data and trends, lacking a comprehensive view of total cost of ownership. Additionally, the resulting savings are often minimal, with limited leverage, and do not lead to sustainable year-over-year savings.  

Rather than issuing RFPs for single MRO categories, organizations should gather data to assess ALL of their suppliers in the industrial space. Oftentimes, large industrial companies are purchasing from hundreds or thousands of different MRO suppliers. Many procurement teams are lean and often tasked with managing 25+ indirect categories, making it challenging to drive compliance to agreements, develop tailored RFPs for a single category, or create comprehensive spend categorizations for informed purchasing decisions.

To address these challenges, some organizations leverage third parties, such as a data-focused group purchasing organization. These partners can help streamline the spend categorization process, capitalize on leveraged supplier agreements, provide deep analytical insights into MRO spend, identify rogue spend, and uncover opportunities to consolidate to preferred suppliers to increase savings. While you will likely never consolidate down to five suppliers, analyzing the broader MRO landscape can yield significant consolidation and standardization, cost savings, and operational efficiencies.  

Analyzing the MRO Landscape

3. Active Implementation and Compliance Analytics

Once you have a program in place, it’s important not to adopt a “set it and forget it” approach with your new or existing supplier agreement. Production sites are a busy place, and the people that you need to leverage a new agreement aren’t likely to feel like they have ample extra time to change their daily behavior. Simply establishing a contract at the corporate level without engaging your various sites would be a disservice. Oftentimes some of the most challenging aspects of program implementation are change management and obtaining site-level buy in.  

To set your new program up for success:  

• Gather implementation data like purchaser contact information and site level tax exemption forms early.  
• Clearly communicate the rollout to ensure site buyers are acquainted with the transition of suppliers.
• Disseminate supplier materials that outline the benefits of the programs and FAQs.
• Work with supplier representatives to schedule kickoff meetings to introduce the program to each site, explain the new process, and address any site-specific questions or concerns about the new purchasing procedure.  
• Hold meetings with every site to understand if they need vending, vendor-managed inventory or alter material masters.  

Measure Success with Data

During the data collection and program evaluation process, it is essential that your internal stakeholders establish key performance indicators (KPIs) to effectively measure the success of a new program. The program must be continuously monitored to track the buying data against expectations, allowing you to measure spending and identify any gaps. Reporting becomes key to not only track savings but also to spotlight sites that are not fully adopting the new preferred supplier agreement. This insight enables you to deploy actions to drive compliance, such as holding reimplementation meetings or focusing on site-level adjustments.  

In addition to savings and compliance reports, consider looking at subcategories as trends that may show opportunities for enhanced compliance and program growth. With a managed program and active implementation and compliance analytics, you can measure program adoption on a more granular level and identify key areas to drive spend under management. 

YoY Sales Performance

Source: CoVest

Effective indirect spend management is crucial for large corporations in the industrial space. By leveraging data analytics, crafting a holistic category management strategy, and actively implementing a program to measure success, organizations can greatly enhance their efficiency in managing indirect spend. As the landscape of industrial procurement continues to evolve, those who prioritize these practices will be better positioned for sustainable growth and competitive advantage. In a sector where margins are often tight, every dollar saved on indirect spend contributes to the bottom line, empowering organizations to reinvest in innovation and operational excellence. 

About CoVest

CoVest Sourcing Network is a Group Purchasing Organization focused on large corporations, founded on partnership, transparency, and providing value-added services. We enable members to realize significant cost savings through the utilization of our supplier agreements that drive down costs for indirect categories by leveraging the collective purchasing power of member companies. CoVest provides best-in-class pricing to our members through these negotiated supplier agreements.

To learn more about services and categories offered by CoVest, please visit www.covest.com.  

Opinions expressed by contributing authors are their own.