Understanding indirect category management to manage spend

Understanding indirect category management to manage spend

With indirect expenses accounting for around 35-45% of the average company’s overall spend, understanding indirect category management is now crucial.

What is indirect category management?

First, we begin with direct and indirect procurement spend. Every organisation has both direct and indirect procurement spend, and understanding how they fit and feed into an organisation’s spend patterns is pivotal to taking control of its fiscal and operational impacts.

For a fish monger, the fish would be an example of direct procurement, whereas the computer systems to log all the expenditure in relation to fish, would be an example of indirect procurement.

You can read more about direct and indirect procurement in our recent article, here.

In this article, we pointed out that identifying clear categories and subcategories is key to taking control of procurement spend.

This is where indirect category management comes in.

Indirect category management: Definitions and classifications

Indirect category management is the process of managing and optimising spend on goods and services that are necessary for the day-to-day running of an organisation, and as stated, not directly related to the company’s core business.

Indirect categories can include expenses such as IT, office supplies, travel, shipping and logistics, facilities maintenance, staffing costs and energy costs.

The goal of indirect category management is to identify and capture enterprise-wide savings opportunities by addressing fundamental issues relating to processes, capabilities and data.

This can be challenging because spending on indirect categories is often fragmented among multiple locations, business units and classifications.

In other words, before your company can begin optimising indirect category management, it needs to be able to identify which categories are in fact, indirect, and then break these categories down into smaller subsets, to be able to properly understand its true spend-footprint and identify opportunities for costs savings and improvements.

AI-powereed procurement intelligence platform BEROE points out that indirect expenses account for around 35-45% of the average company’s overall spend, meaning that it’s imperative for a company to have, what we could call ‘a taxonomy of spend’, to be able to go about gaining control over indirect categories.

The role of tech in indirect category management

According to McKinsey, to overcome these challenges, companies need a new vision for indirect procurement that combines cutting-edge tools and practices with traditional approaches to category management.

This coordinated, technology-enabled approach can help companies achieve marked improvements in their indirect procurement processes and capture the untapped value of indirect spend.

One key element of this new vision for indirect procurement category management is the use of intelligent spend engines. These digital tools use machine learning technologies to classify and categorise spending data automatically.

By integrating data pools and analytics functions, these tools can recognise cross-category synergies and drive significant bottom-line savings.

Another important element is the development of a robust category strategy for indirect spend.

This involves setting clear goals for each category and subcategory and using benchmarks and spend visibility tools to analyse their potential value.

By focusing on high-impact categories and implementing best practices for sourcing and supplier management, companies can achieve significant cost reductions while also improving the quality of their goods and services.

Conclusion

Understanding indirect category management is essential for any organisation looking to optimise its spend on non-core goods and services.

Getting a hold of indirect spend rests entirely on indirect category management, and your company needs to have take a systematic approach to identifying which outgoings fall into indirect categories.

Technology can help. By adopting a coordinated, technology-enabled approach that combines cutting-edge tools with traditional best practices, companies can unlock the full potential of their indirect spend and achieve significant bottom-line savings.

If you don’t have the technology yet, and are about to invest in them to unlock your organisation’s full potential, what you spend on the relevant tech, would be a fine example of indirect spend.

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The focus of Procurement Magazine's Digital Community is to provide our users with the Ultimate Digital Experience - an incredible digital magazine, a world-class website, an award-winning newsletter service as well as video reports, podcasts, blogs, webinars, white papers, research reports, virtual events and a database second to none.

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