What is indirect procurement?

Indirect procurement plays a key part in keeping businesses running smoothly, yet it often presents significant challenges for finance leaders.

Managing indirect procurement can seem like an overwhelming task with issues like lack of visibility, cost control, and supplier management taking over.

Without clear processes and effective tools, expenses can spiral out of control, and compliance can become a headache. But it’s also an opportunity to boost your profit margins and give your business a competitive advantage. Ahead, you’ll learn how procurement automation software can help, how to solve common challenges, and some best practices.

What is indirect procurement?

Indirect procurement, also known as indirect spend, is the purchase of goods and services that help a company run its operations but are not part of the products it sells.

For example, these everyday needs might include:

• Office supplies
• Software licenses
• Maintenance services

Indirect procurement impacts a company’s operating expenses but not its COGs. Although it may seem unimportant, effective indirect procurement helps lower costs, improve the bottom line, and enhance overall business operations.

Examples of indirect procurement

Indirect procurement covers your business operating expenses and services that provide behind-the-scenes support. It includes any goods and services not directly used in making a product. Some examples are:

Facilities management and utilities:

• Electricity, water, heating, and air conditioning costs
• Office rentals, equipment leases, and maintenance contracts
• Building cleaning and waste management service

Information technology:

• Computers, phones, and other electronic device purchases
• Software subscriptions like Office 365 and Salesforce
• Business technology consulting services

Marketing and advertising:

• Event management agencies and convention center bookings
• Promotional products and branded merchandise
• Website design, media inventory, and SEM services

Business services:

• Legal counsel, compliance services, and consulting fees
• Temporary labor, recruiting services, and training development
• Accounting, finance, and marketing freelancers

Travel and entertainment:

• Airfare, rental cars, hotels, parking, taxis
• Corporate credit card expenses and employee meals

Office supplies and miscellaneous:

• Coffee, snacks, kitchen supplies, cleaning items
• Printing paper, stationery, laptop bags, desk organizers

The examples are extensive, but the concept is simple—if it doesn’t directly go into making a product, it qualifies as indirect spend.

What is direct procurement?

Direct procurement, also known as direct spend, involves buying raw materials, components, and goods that your business uses to make products for the end consumer. These items are essential for producing the final product and are a key part of your supply chain.

Efficient direct procurement means your company can produce high-quality products on time and within budget.

Examples of direct procurement

Direct procurement includes all the direct materials, ingredients, and machinery your business needs to produce the products it sells. Some examples are:

Raw materials:

• Metals, plastics, and chemicals

Components:

• Microchips and electronic parts

Ingredients:

• Food and beverage ingredients for production

Fabric and textiles:

• Materials for clothing manufacturing

Packaging materials:

• Paper, cardboard, and plastic for product packaging

Machinery and equipment:

• Anything used to make or assemble the products

Indirect vs. direct procurement: what’s the difference?

At first glance, indirect and direct procurement can seem very similar. Use this quick comparison table to understand their key differences:

Common challenges of indirect procurement and solutions

Managing indirect procurement comes with its own set of unique challenges. From a lack of visibility to unexpected costs and supplier management, here are the top eight challenges you might face, along with some solutions:

1. Fragmented processes

Fragmented processes occur when different departments handle their own purchases without a central system. Separate efforts cause confusion, double work, and make it hard to track spending, often resulting in inefficiency and higher costs.

Solution: Use a centralized system to manage all purchases in one place. You’ll find it easier to handle orders, budgets, and suppliers. Procurement software like Ramp automates the procure-to-pay process, simplifying it and reducing mistakes.

You can also say goodbye to long email threads and centralize procurement discussions in Ramp. For example, comment and tag team members directly in requests or purchase orders. Plus, you can access the same information across approvers to reduce the time-consuming back-and-forth.

2. Limited visibility and control

Sometimes, it’s hard to see where each department spends their budget. Without clear real-time data, it's tough to identify wasteful spending or savings opportunities. For example, your operations department may regularly go over budget on office supplies while your product team hasn’t noticed they could cut some costs when sourcing packaging.

A high volume of low-value diffuse transactions makes gaining insights into who buys what from which supplier even more challenging.

Solution: Use procurement software that includes advanced spend management analytics and category management. That way, you’ll get clear insights into spending patterns, giving you control over where to optimize your indirect procurement process.

Regularly reviewing spend data will help you identify areas for cost reduction and more strategic sourcing.

3. Supplier management

Dealing with multiple vendors and suppliers isn’t without its challenges. For instance, your business may spend small amounts with multiple vendors so you lose out on any potential volume discounts.

Poor planning and supplier management can also result in last-minute orders with higher costs.

Solution: Look for preferred supplier programs to concentrate a significant portion of spend with a single vendor, so you can access better rates and reliable delivery. For example, you could consolidate office supply spend with a single national vendor partner, and lower pricing through committed spend volumes over a multi-year contract term.

Prioritizing strong relationships with key suppliers can also help ensure better service, consistency, and cost savings. Check your contracts routinely and look for ways to negotiate terms and maintain favorable agreements.

4. Disjointed stakeholder influence

When departments have conflicting procurement goals or priorities it makes day-to-day operations much more challenging.

Miscommunication, delays, and inefficient procurement practices can all stem from a lack of alignment.

Solution: You canalign stakeholder interests by creating a procurement team that includes representatives from all key departments. Clear communication on expectations around processes, budget, and forecasting helps keep everyone on the same page.

When you centralize all your procurement function in one place, it’s much easier to streamline communication between team members. For example, Ramp makes it easy for approvers to access same information reducing the time-consuming back-and-forth.

5. Risk management

Risk management in indirect procurement involves identifying and reducing risks like supply chain disruptions, supplier failures, and compliance issues. Without proper risk management, these issues may result in unexpected costs and operational disruptions.

Solution: Start by developing a risk management strategy that includes regular risk assessments and contingency planning.

Next, maintain a diverse supplier base to reduce dependency on a single source. Procurement software lets you monitor supplier performance and compliance in real-time. Plus, you can implement risk mitigation measures such as backup suppliers and inventory buffers.

Every quarter, set aside time to review and update risk management plans so it’s easier to adapt to changing conditions.

6. Off contract spending

Sometimes departments aren’t aware of existing contracts and make off-contract purchases. Maverick spending, even if only small and occasional can result in higher costs, reduced control and potential compliance issues.

Solution: Off-contract spending is avoidable when you implement clear purchasing policies. Let all departments know that any time they need to make a purchase, it needs to be within approved contracts and suppliers. If they do need to purchase something off-contract, make sure you have clear approval workflows.

Some procurement solutions like Ramp lets you set predefined limits and category controls so spending remains within contracts and agreed budgets.

7. Low average spend

Low average spend is when you make multiple small low-value purchases. The issue is when these low-volume indirect purchases become frequent.

Multiple high-touch small transactions require more resources to coordinate and prevent your business from accessing large purchase discounts.

It’s often a result of decentralized purchasing and a lack of consolidation.

Solution: Byconsolidating frequent purchases, you can increase the average spend per transaction, and limit the frequency of small purchases. Encourage departments to plan and combine their needs into larger, less frequent orders. Then, negotiate volume discounts with suppliers to save money.

The right procurement software will help identify patterns of low-value purchases and implement strategies to group them. For example, Ramp gives you a consolidated view of every request and purchase order. Plus, as more requests go through Ramp, there’s more insight into negotiating ideal vendor terms and identifying cost savings opportunities.

8. Compliance issues

Compliance issues happen when indirect spend doesn’t adhere to company policies, industry regulations, or legal requirements. These issues may result in legal risks, financial penalties, and damage to the company's reputation.

Solution: Creating a set of clear and standardized procurement policies will help employees understand company expectations around indirect spend. Instead of using time-consuming manual approval workflows, use procurement software to automate approvals and track adherence to guidelines. Ramp lets you build automated approval workflows that fit your procurement processes.

You can route any request that falls out of guidelines to approvers based on conditions specific to your business.

How to increase the efficiency of your indirect procurement strategies

To avoid overspending and get the most out of your indirect procurement management, implement these five strategies:

1. Standardize procurement processes

Standardized processes reduce confusion and ensure everyone follows the same guidelines. Develop clear, consistent procedures for all purchasing activities across your business. Then, make sure all employees are aware of these standardized procedures and how following compliance helps reduce errors and delays.

Procurement software can help enforce and automate these processes, so it’s easier to manage and track all procurement activities.

2. Use procurement software

Procurement software streamlines time-consuming tasks. Look for software that automates order processing and approvals and tracks spending in real time.

These key features reduce manual work, speed up processes, and minimize errors.

Your software should have data analytics tools that give internal stakeholders clear spend visibility and insight into vendor relationships and contract management.

Train your team to use the software effectively, so they can benefit from its features. Using software is the first step to getting

With Ramp Procurement, construction, and engineering company, Viking Well Service was able to consolidate its bills and purchase orders in one central place. “Having the purchase order and bills all in one place just makes a whole lot more sense for the type of business that Viking’s doing, because you can simplify it down to a one-line-item type deal,” says Senior Controller Chris Lowdermilk.

Chris is now leveraging Ramp’s matching mechanism to track multiple payments from various invoices on a given PO. “That’s really important for control purposes, for visibility,” says Chris. That new process enables Viking to better understand how much is left on an open PO.

3. Enhance supplier management

Improving supplier management and partnerships will improve your overall procurement efficiency.

Before you sign any long-term contracts, set clear performance metrics. These could include fulfilling agreed delivery time frames, maintaining high-quality product standards, and generally meeting expectations.

Look for procurement software with supplier management features that help you track performance, manage contracts, and streamline communication. procurement process.

4. Train employees

Aim to provide regular training sessions on procurement policies, procedures, and software. As a rough guideline, you could schedule quarterly sessions. Make sure everyone on the team understands the importance of following standardized processes and how to use procurement tools effectively.

When your other team members are well-trained in procurement best practices, they’re less likely to make mistakes and find it easier to follow company guidelines.

5. Track performance and measure KPIs

As you build out and optimize your procurement strategies, identify a few key performance indicators (KPIs) that align with your goals. These might include cost savings, order accuracy, and supplier performance.

Then use procurement software to monitor these metrics in real time. Regularly review the data to identify trends, areas for improvement, and overall success.

Using these insights, look at how you could tweak and optimize your procurement strategies.

Consistent tracking and evaluation will ensure that your procurement processes remain effective and aligned with business objectives.

Streamline procurement processes with Ramp

Ramp helps you get your indirect spend under control. You’ll find Ramp’s automated procurement software easy to use.

Ramp procurement has powerful features designed to make your life easier, including:

• Advanced AP automation: Benefit from unlimited invoice processing using OCR technology, simplifying your accounts payable process.
• Procurement categories: Divide spend into customizable spend categories to give you better insight into where the budget goes.
• Diverse payment methods: Facilitate payments via check, ACH, same-day ACH, card, or international transfers in both USD and local currencies.
• Intelligent vendor management: Automatically track vendors, extract contract details, and access price intelligence for better decision-making.
• Customizable request forms: Tailor request intake forms to suit your indirect procurement needs, ensuring all necessary information is captured efficiently.
• Efficient PO management: Streamline your purchase order process with our easy-to-use PO management system.

See how much time and money Ramp Procurement can help your business save.