In today’s cost environment, indirect spend is finally getting the attention it deserves.  At Pare, we’re seeing more and more food manufacturers with dedicated “Indirect” or “Goods not for Resale” procurement teams, which is fantastic!  It finally feels like the drum banging is getting heard!

And for many food manufacturers, it’s long overdue.

Because unlike direct costs, indirect spend often flies under the radar.

It hides in:

• Courier spend that’s grown without clear control or consolidation
• Lab spend; micro and chemical testing testing, sampling & external services creeping up without review
• PPE and janitorial ranges that have expanded well beyond what’s actually needed
• Chemicals and effluent costs that have increased gradually, often without challenge
• A long tail of suppliers with limited oversight

Individually, these costs don’t always stand out.

But collectively? They create significant drag on margin.

Especially now.

We’re seeing more businesses ask difficult but necessary questions:

→ Do we really understand where our indirect spend is going?
→ How much of it is driven by legacy decisions?
→ Where are we paying for complexity without realising it?

Simplification in indirect spend isn’t about cutting corners.  It’s about removing inefficiencies.  And right now, that shift is becoming critical.

Background

Our client is a manufacturer of frozen foods, with 3 sites, based in the UK.  Across all sites, there is a common need for a large amount of non-stocked consumables – items like PPE, uniforms, janitorial and paper products.

With several buyers across the three sites, the company was concerned that a lack of budgetary control was leading to fluctuating/inflated prices – and that there was a not enough visibility around supplier on-time/in-full delivery performance and quality. They also felt there was a significant number of possibly duplicate or marginally different specifications for the portfolio of circa 350 products and that PO errors and the number of deliveries were excessive.  The client also wanted to drive cost reductions.

Approach

The team at Pare analysed the purchase data to identify inefficiencies, reducing the range of standardised product specifications from around 350 to just 131.  This product range, along with a defined set of stringent service requirements was then sent out to tender.

Outcome

As a result of the tender exercise, the supply base has been reduced from seven to just two (reducing deliveries), with both successful suppliers agreeing fixed price contracts which deliver a significant 16% cost reduction.

The introduction of service KPIs provides clear visibility of supplier delivery performance which has led to much more consistent supply and quality.

A formalised price increase review process has been implemented which has not only eliminated PO errors, but also given the business better control and greater ability to forecast and budget for the future.

Do you have a procurement policy outlining your procurement process, spend thresholds and rules? Do teams adhere to it? Do they even know it exists?

A procurement policy is an important pre-requisite for controlling spend. It should be accessible to all staff who have the authority to purchase goods and services in an easily readable format.

Procurement Policy Basics

A procurement policy is a set of guidelines used to establish and standardise the procedure for purchasing goods and services in a business and should cover the following:

• Policy objective. What are the goals of the policy? For example, is it to provide a consistent process for use by all departments? Is it to ensure that all procurement activity is aligned with company goals and values?
• Process overview. The policy should include a high level summary of the procurement process detailing the steps involved (a flow chart is often useful here).
• Procurement thresholds. Spend limits for staff and the criteria for the type of procurement activity required, e.g. number of quotes, tender, etc.
• Tender process. The policy should include an outline of the formal tender process for purchases that meet the established criteria.
• Sustainability and diversity statement. Include a brief overview of goals and initiatives.
• Ethics and anti-bribery (as above).

Pare can support with the development and delivery of a procurement policy to ensure a consistent buying approach across the business.

What % of your business’ overall spend is not “managed” in the same way as the spend which falls under the control of your procurement team?

There are opportunities to make savings and reduce risk when the same procurement principles are applied to tail spend, not to mention the raft of other benefits (improved credit terms and cashflow, measurable supplier performance KPIs in place, fixed pricing, budget control, simplified procurement processes, etc)

In many instances, tail spend is overlooked mainly due to lack of resource but also due to the accessibility of  the purchase data available for these types of categories.

This is where you would benefit from having an outsourced procurement partner; a dedicated resource to get into the granular detail of this spend and ensure that these often overlooked categories are managed in exactly the same way as your internal procurement team would.