What is indirect procurement (and how to manage it)

Indirect procurement is the process that companies use to purchase goods or services that support their business (rather than provide materials for a sellable product). These goods and services are crucial for operational efficiency—but getting them in a cost-effective, compliant manner introduces a unique set of challenges. 

Teams at your organization have different needs, so they might order from a wide range of suppliers. But when procurement leaders have to juggle multiple suppliers and their associated documents, the whole procurement process grows more complicated. 

Because of this operational complexity, businesses of all sizes and in all industries need an indirect procurement strategy. With the help of data-driven forecasting and workflow optimization, you can efficiently manage indirect procurement, control costs, and maintain a competitive advantage.

Direct vs. indirect procurement

The following table breaks down the key differences between direct and indirect procurement:

Categories of indirect procurement

Most companies focus their indirect procurement management on these five primary areas:
 

• Office suppliers and equipment: Items such as  printer paper, computer monitors, and desks help employees work efficiently every day
• Software and communications: Digital tools like contract lifecycle management, software subscriptions, and invoicing software that keep internal operations running count as indirect procurement
• Marketing and advertising: Subcontracted and outsourced services, like marketing and employee hiring, and internal campaigns, like paid ads, are types of indirect procurement that help your organization stay competitive in the marketplace
• Travel and events: Companies accrue indirect expenses—such as  hotel rooms, coworking spaces for remote teams, food, and airfare—whenever employees travel to  conferences or company on-sites
• Facilities management and maintenance: Utilities, janitorial services, and other outsourced maintenance services are necessary for keeping internal operations running smoothly and providing employees with a high-quality work environment

Categorizing your indirect spend pulls back the curtain on your organization's needs and their costs, which makes managing spend and order efficiency easier.

Challenges in managed indirect procurement

Procurement teams that are responsible for managing indirect procurement will face challenges throughout the entire procurement process. Here are a few of them:

Visibility and control

A team might order writing materials from one vendor, printer ink from a second, and keyboards from a third. If you multiply the number of vendors this team uses by every procurement team in your organization, you’ll see that your buyers deal with an intimidating number of suppliers and corresponding documentation.

Additionally, mismanaged indirect procurement increases the risk of contract leakage. If a buyer makes a quick in-the-moment purchase from their personal account, they may want to request a reimbursement from their employer, even if they purchased from a contracted buyer with a negotiated price in place. This purchase from a personal account isn’t part of the contract, creating a purchasing control challenge for your organization. 

It’s likely that these teams have overlapping supply needs, but without visibility into spend, they won’t discover consolidation opportunities and will continue to overspend. As a result, controlling costs will become more difficult. 

Maverick spending

Maverick or rogue spending is when employees purchase from suppliers that lack established contracts with their company. This can result from exhaustive manual approval processes, lack of access to the vendors they need, or improper insight into approved vendors. The risk of rogue spending rises when individual teams lack purchasing guidance.

Supplier fragmentation

An efficient procurement process uses a small number of vendors to move materials from end to end. However, supplier fragmentation occurs when companies use multiple disconnected providers. Indirect procurement processes have a higher risk of vendor fragmentation because they require sourcing from several suppliers.

Fragmented suppliers can make your supply chain less sustainable. Multiple suppliers means more individual purchases, so you’ll end up with several smaller orders instead of a few large ones. Even if your organization takes steps toward more sustainable business practices, ensuring your suppliers have the same priorities is difficult.

Compliance and risk management

Decentralized procurement increases the risk of regulatory violations. When employees can’t access the information they need to make compliant purchases, they’re more likely to purchase unapproved supplies from non-contracted vendors. 

Additionally, without centralized procurement, maintaining a comprehensive risk management strategy becomes more challenging. Procurement teams don’t have complete insight into their operations if their software and databases are disjointed, so it’ll be more difficult to spot and address vulnerabilities. 

You can get a big-picture understanding by organizing indirect spend into the above five categories. However, it’s crucial to drill down into the specific items in each since this line-item view of your purchases can prove an impactful insight for strategic sourcing. 

Strategic sourcing involves optimizing the suppliers you work with to consolidate orders, uncover better deals, and reduce risk. This strategy helps you avoid wasted spend and efficiently manage indirect procurement.

The consequences of mismanaged indirect procurement

If a company doesn’t manage its indirect procurement challenges effectively, these problems can evolve into more significant organizational setbacks. 

Companies experience these consequences most often: 
 

• Budget overruns: Poorly coordinated indirect procurement makes cost management difficult and increases the odds of going over budget
• Reduced efficiency: Without automation, exchanging documents between buyers and vendors and managing internal workflows takes longer
• Operational bottlenecks and delays: Manual approval processes can’t keep up with the workflows and paperwork from several vendors, resulting in operational delays
• Compliance risks: Regulatory violations may result in fines and can harm your organization's reputation in the industry, making it harder to find quality suppliers
• Less supplier reliability: Without insight into your supplier’s performance or supply chain, you have less understanding of their ability and resources to meet your needs
• Disjointed supply chain: A disorganized supply chain makes it more challenging to monitor spend and control costs, which inevitably leads to overspending
• Vulnerable to disruptions: Mismanaged indirect procurement can make it harder for teams to identify risk areas and mitigate supply chain disruptions

Operationalizing indirect spending is vital for maintaining smooth internal operations—but mismanaged indirect procurement can make it harder for employees to do their jobs. Your company can avoid these setbacks by implementing indirect procurement best practices. 

Best practices for effective indirect procurement

These indirect procurement best practices hinge on creating operational transparency and data-driven decisions. You can leverage these strategies to make impactful procurement decisions:

Centralize procurement

Centralize indirect procurement by aligning your procurement, finance, and IT teams, ensuring everyone is on the same page. In doing so, you foster space to create clear buying policies and name spend controls, and you can accomplish all this with robust integrations. 

Integrations help make sure data processing and storage is accurate. Here at Amazon Business, we leverage third-party systems to connect your current operations and drive efficiency. So, you can rely on it to get better insights into your network and make good data-driven decisions to manage costs. 

Implement e-procurement solutions

E-procurement software can automate and simplify the procurement process by automating purchase requisition approvals, invoice management, and order reconciliation. It’s one of several ways that procurement teams are leveraging technology to revolutionize their workflows. With the help of these solutions, procurement teams can have more time and money to reinvest in other parts of the business.

An end-to-end e-procurement solution is usually the most efficient approach here, but there are many other options based on your timeline and budget. Solutions like Amazon Business offer seamless integrations with 200+ e-procurement systems, offering increased visibility and simplifying purchasing processes to help you stay competitive. This way, you can do more than just make purchases—you can also optimize the entire procurement workflow for the greatest savings.

Nurture strong supplier relationships 

With stronger supplier relationships, it’s more likely that both parties will agree on mutually favorable long-term contracts. Likewise, if you’re on good terms with your vendors, they may be willing to add last-minute order conditions to the contract. That way, if you accidentally place orders with incorrect quantities or have a sudden material need, the supplier can support you to avoid operational disruption. 

Supplier diversity is also important. If your primary supplier experiences a significant disruption, you can pivot to another and minimize the impact on your organization. 

Conduct regular spend analysis

A comprehensive spend analysis reveals where each dollar goes and its impact on your business. This gives you a big-picture view of organizational spending so you can identify opportunities for your teams to consolidate orders and suppliers. 

Spend analysis also gives you data for sustainable indirect spend. But you don’t have to manage your organization’s spend analysis alone. For enterprise customers, Amazon Business does it for you. We can quickly identify tail spend trends and find opportunities for shift buyer habits to save money. 

Establish clear policies and procedures

A leading reason for maverick spending is a lack of transparency concerning budgets and approved vendors. You can resolve this by establishing clear procedures for indirect procurement and adopting a solution that grants buyers insight into the information they need to make on-budget purchases. That way, your budget will be common knowledge for your teams—and as a result, purchases will comply with company procedures.

The benefits of optimizing indirect procurement

When you implement indirect procurement best practices, your company can experience these benefits throughout the procurement process: 
 

• Cost savings: Opportunities to consolidate orders or suppliers can save you money and boost your bottom line
• Improved efficiency: Operational efficiency directly translates to cost savings by reducing errors, bottlenecks, and delays
• Boosted compliance: Centralized procurement gives everyone insight into approved vendors and regulations to ensure buying policy compliance across the organization
• Enhanced supplier performance: Efficient indirect procurement can lead to stronger vendor management and auditing, which allows teams to always work with the highest-performing suppliers
• Strengthened risk mitigation: Complete visibility into your indirect procurement allows you to create accurate risk management strategies
• Organized supply chain: A well-structured supply chain promotes efficiency in both your operations and finances
• Improved vendor relations: Good relationships with vendors can open doors for more favorable contracts in the future

A wide range of tools is available to help you optimize your indirect procurement—but you can make the most of your efforts by opting for a full-scale procure-to-pay solution. 

Optimize your indirect procurement to increase cash flow and efficiency

The goods and services your company acquires through indirect procurement help ensure operations run smoothly. Without these materials, teams can face unnecessary complications that make it harder for them to do their jobs efficiently. 

With Amazon Business, you can optimize your indirect procurement by consolidating suppliers, controlling spending, and streamlining purchases with built-in analytics and automation. 

Learn more today about how Amazon Business can simplify your organization’s indirect spending management to help you save money.