A company’s procurement function can be split into two parts: direct and indirect procurement. What’s the difference, and does your business have a firm handle on both types of cost?
What’s the difference?
Direct procurement is the sourcing of goods and services that will be sold to a customer. This will normally be a core focus for procurement and supply chain teams. As a business focused on selling a product or service this is where your expertise can make the most significant impact.
Indirect procurement is also referred to as GNFR or goods not for resale. This is the procurement of materials, goods and services that are used internally in a business and are not sold to a customer.
For the average business, indirect spend is between 30 – 40% of turnover. When fixed costs such as rent, rates, and salaries are excluded, c.15 – 20% of turnover remains as addressable spend. This is where costs can be substantially reduced without a dramatic structural impact on the business.
To illustrate, let’s look at an example of a restaurant chain.
Direct spend categories include:
- All ingredients that make up the menu
- Drinks sold at the bar
Indirect spend categories include:
- Restaurant fit-out: tables, chairs, wallpaper, lighting, toilets, signage
- Technology: software and hardware
- Ecommerce: online marketing, email distribution, digital creative material and services
- Payment gateway fees: in person via a card machine and online
- Cash collection
- Marketing: leaflets, posters, magazine ads, social media campaigns, television and radio
- Logistics: food deliveries from depot to restaurant sites, inbound freight of ingredients
- Consumables: take-away packaging, glassware, stationery, toilet roll, hand soap, PPE, paper
- Facilities management: repair & maintenance services, cleaning, waste, pest control
- Security: security guards, CCTV, alarms
- Utilities: electricity, water, gas
- Professional services: legal, HR, insurance
This demonstrates the broad range of indirect categories in a restaurant example, however, the indirect spend categories are applicable to all industries.
As you can see from the example above, indirect procurement is very broad-ranging. This can mean that smaller Procurement teams lack the specialist knowledge across all categories. The cost of bringing in additional in-house expert resource to plug these gaps is prohibitive.
Additionally the involvement of multiple stakeholders makes it complex for internal procurement teams to manage alone.
That’s why, at Ebit, we work with our clients to significantly reduce indirect spend. We’re self-funded: our job is to generate money back to your bottom line and we always deliver a substantial return on investment.
Our expertise has been applied across retail, leisure, charities, manufacturing, food & dairy and technology businesses (to name a few) and can be leveraged to ensure you are achieving best value in any or all of these indirect areas.
