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Controlling Indirect Spending Costs in Manufacturing

In manufacturing, indirect spend reductions can have a deeper, more profound impact than other industries. What must manufacturers do to optimize indirect spend management strategies?

Traditionally, indirect procurement spend for all sectors consists of things nobody really talks about at boardroom meetings: the furniture in the break room, the cleaning supplies under the communal sink, the paper clips in the supply closet, etc. In recent years, businesses have brought indirect spend out of the darkness as a pocket of costs susceptible to steep reduction without compromising productivity – as many as half of Fortune 1000 businesses agree with that sentiment, according to a Harris Interactive survey.

Start tracking indirect spend
Taking advantage of indirect spend may require some culture changes. Like direct procurement spend – those things contributing to the product and a manufacturer’s bottom line – all financial decisions regarding indirect spend should receive at least a modicum of attention. Otherwise, manufacturers run the risk of wasting revenue considerably without notice.

Furthermore, if these organizations do wish to reduce indirect spend to increase revenue, they’ll need visibility into the matter. Supply Chain Brain reported “non-core spending” comprises anywhere from 15 percent to 40 percent of the average business’s revenue. That’s a considerable gap to leave unchecked, low end or high end. Manufacturers should regularly compile basic data on things like from whom they procure indirect purchases, the quantity, the overall cost, and who on site made the purchasing decision. Manufacturers don’t have to treat this information like operational or throughput data and send it through analytics or employ visualization to observe trends, but even casual awareness could bring areas of improvement to light.

Use data to develop an indirect procurement plan
Although indirect procurement would naturally fall under indirect spend management, cost associated with obtaining these goods should be segmented from Bill of Materials, similar to what a business would normally do with direct spend. For manufacturers, directing sourcing strategies should include building a working relationship between them and their suppliers, one that may include the transference of demand data, perhaps through an intermediary.

By building a comparable procurement architecture for indirect spend, manufacturers decrease their chances of overspending on shipping costs through bulk order negotiations or even simply by picking suppliers located closer to their facilities. As manufacturers cultivate a system for indirect procurement monitoring, they’ll establish preferred vendors for each classification of items, preventing procurement managers from simply buying whatever from whomever, regardless of impact on cost.

“Machines operating as commissioned shouldn’t require frequent component replacements.”

Spend Management

Don’t forget about preventative maintenance and spare parts inventory
Indirect spend also includes spare parts, tools and equipment related to a manufacturer’s production assets, transportation fleet and peripheral electronics. Manufacturers with full spare parts inventories may see themselves as forward thinkers, but a preventative maintenance plan focused around reliability may not only offer greater support to important manufacturing assets and processes but an opportunity to cut wasteful indirect spending habits.

There’s nothing wrong with having a few spares on hand, but manufacturers must examine the reasons why they feel the need to keep an emergency supply in the first place. Machines operating as commissioned shouldn’t require frequent component replacements. Moreover, each spare replacement takes time out of production to complete, eating away at productivity. While preventative maintenance may cost more upfront than doing nothing at all, this is likely a drop in the bucket compared to the recurring costs of spare parts and downtime. Preventative maintenance can isolate and analyze repeat breakdowns, uncover the root cause, and possibly eliminate spares from a manufacturer’s indirect spend budget altogether.

Don’t let the name fool you – indirect spend management has an immediate impact on the ways in which any business operates, especially if the business in question works to optimize procurement and rein in costs.