smart spending

Smart spending, spending or just shopping? How do you save money and create more value through better managed indirect spend?

Despite large differences between industries and companies, almost all organizations have a significant part of their costs associated with external suppliers. For example, retailers and manufacturing companies often have a larger share of external costs, while it may be smaller for service companies and knowledge driven companies.

Review your offering from a customer point of view

Costs not directly connected to input material are usually labeled indirect. Thus, the indirect spend category is rather broad, containing costs related to IT, Equipment, Travel, Facility, Office supplies, and Marketing. These costs are necessary for running a successful company and are truly value creating.

“Even large organizations often disregard indirect costs and are, as a result, lacking both overview and management of these.

Some organizations appoint a responsible category manager for indirect spend, ensuring cost levels correspond to the value created. However, even large organizations often disregard indirect costs and are, as a result, lacking both overview and management of these. The fight against non-value adding activities and costs is vital for organizations in their search for competitive advantage and business success. Companies continuously need to become leaner, more efficient, and increase the focus on what brings value to the customer.

Everyone is a buyer – make them and the organization aware

Everyone realizes that when the organization buys a new machine for 100 000 EUR it is an investment that needs a business case, and probably a contract with the supplier. When 100 people in the organization buy subscriptions, reports from research firms or web agencies for 1 000 EUR each, the need for a business case and contract with the supplier is not as obvious.

Today’s organizations are typically full of buyers that make decisions daily, that together generate large costs. Bundled together, these decisions can constitute a need for a business case and motivate agreements with the suppliers. How do we make the organization and the individuals aware, without being too bureaucratic and creating new non-value adding activities and costs?

There are several ways to do that and most of them start with identifying, categorizing and visualizing the cost through a spend analysis.

Smart spend, spend or just shopping?

Once visualized, the spend is possible to communicate, benchmark, and address. By assigning category managers to contextualize and evaluate the spend, the organization can correlate the purchasing efforts with the potential savings. They can also evaluate the relation between cost and value creation of each purchase.

Some spend is truly smart and value creating: e.g marketing, training for staff, and computers. Some spend is truly necessary but not obviously value creating, cleaning, travel, packaging and logistics being examples. While some spend is just shopping, done without the perspective of value creation and without a “strategic purpose”.

Savings and cost reductions of 6–15 percent are possible and easy to achieve

Capacent has worked with a large number of customers over numerous industries, supporting with spend management, category road maps and realization of savings potentials. An indirect spend project typically generates savings of 6–15 percent of total addressed spend. Moreover, the organization is given the tools and competences to keep up the efforts against non-value adding purchasing. 

Is your organization ready to take on the challenge to becoming more cost aware in your indirect spending? Contact us, and we will gladly discuss indirect spend and how to help you on the journey from shopping to smart spending!

Author: Niklas Andersson is a senior manager at Capacent Sweden and an expert in spend management.