Managing indirect spend - a critical comparison of the status quo compared to direct spend management (ePub)

Over the past years purchasing and supply management received increased attention from the senior management of primarily large corporations. In an attempt to professionalize purchasing, companies increasingly follow the trend towards customizing their supply organizations and focusing on their core activities. Due to this significant reduction in real net output ratios and a higher portion of externally sourced goods and services, purchasing disposes of a large lever for cost savings. While firms focused and still focus primarily on managing the purchase of goods, the procurement of indirect goods and services, and especially the procurement of services only gradually evolves to a more important activity. The service spending is often fragmented along several business units and functions within a company, having the consequence that services are not procured and managed centrally. When taking into account that indirect spend amounts to 50 percent of total company's purchases, there exists a great opportunity to decrease the company's cost structure by augmenting the involvement and participation of the purchasing department in the procurement process. Especially purchased services, which account for about 30 percent of total spending, play a key role in the operation of an organization. With the growing outsourcing activities of the companies' non-core capabilities, the share of services spend in total spend will increase and thereby raise the importance of managing indirect spend. As Fearon and Bales state, 'the opportunity to increase profits through more effective purchasing probably is greater in the buying of services than in the purchase of goods.'
The aim of this paper is to analyze the different status quo of direct and indirect spend management, to investigate to what extent direct spend management is more developed than indirect spend management and what possible reasons exist for less professionally managed indirect spend. Given the increased importance of indirect spend, this paper will thus examine particular characteristics and problems that may hinder supply management of getting further involved into managing indirect spend.