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Indirect Spend: The Next Generation of Savings for Manufacturers

Mon, 11/11/2013 - 12:00pm
Jeff Cooper, Manufacturing Practice Lead, Procurian, Foley & Lardner LLP

In the wake of the protracted economic downturn and equally slow recovery, manufacturers have been challenged to find new ways to improve margins and revenue growth. Those companies that have best adapted, both operationally and strategically, have set new standards in cost-savings, quality control, and productivity. Although most cost-savings efforts have been focused on cost of goods sold, manufacturers spend 20 percent or more of their total revenue on non-product or “indirect” expenditures.

Indirect expenses include areas such as HR, benefits, IT, capital equipment and other goods and services that do not go into the finished product. These costs represent a large area of spend — and a significant opportunity for savings. This opportunity is not lost on business leaders: half of Fortune 1000 Executives say reducing indirect and non-product input costs could provide significant savings, without disrupting business. (Source: Harris Poll Survey) However, capturing this opportunity requires a new model for managing indirect spend.

Despite the bottom-line opportunity, indirect purchases tend not to get the same level of expert attention and proactive management that is usually applied to direct materials procurement. In fact, a recent survey of procurement executives conducted by Procurement Leaders found that two-thirds of organizations leave as much as 40 percent of their indirect expenditures relatively unmanaged. (Source: Procurement Leaders Plus: Statistical Nightmare) Why?

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