Defining indirect procurement?
A company’s procurement function can be split into two: direct and indirect procurement. What’s the difference, and does your business have a firm handle on both types of cost?
Direct procurement is the procurement of product that will be sold on to a customer.
Indirect procurement, also referred to as GNFR or goods not for resale, is the procurement of materials, goods or services that are used internally in a business and are not generally sold on to a customer. In an average business, indirect spend is equivalent to 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 where costs can be substantially reduced without dramatic structural impact to the business.
Both types of procurement, direct and indirect, have a symbiotic relationship which keeps a business running. One can’t exist without the other. To have an effective procurement department it is important to focus on both.
To illustrate, let’s take the 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
As you can see from the example above, indirect procurement is very broad-ranging and covers numerous spend categories. It’s Procurement’s role to educate stakeholders into what drives the spend in these categories and how to optimise processes going forward.
The involvement of multiple stakeholders and the wide variety of specialisms required to truly understand all of the various spend categories included 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 whilst maintaining, or often exceeding the quality level of suppliers. We’re self-funded: our job is to generate money back to your bottom line and we always deliver a substantial return on investment.
Contact us to find out how we could help your business.