How to Better Manage Product Categories to Reduce Indirect Spend

May 16, 2012 by  Filed under: Management 

Expenditure or spend is an important part of every company regardless of whether it is providing a product or service. Based on its relation to the final product or service offered by the company, spend can be classified into two. Direct spend involves the purchase of goods that are directly included in the final product. Hardware, components, manufacturing services and raw materials are some such goods. The purchase of services or goods that will not be directly incorporated into the final product is classified as indirect spend. Building facilities, computers, maintenance supplies, office supplies, furniture and printed forms come under this category.

All supplies that are required by the company to maintain its day-to-day activities come under indirect expenditure. This includes capital expenditure, electricity, water and other utilities. A major part of the indirect spend will be common for all companies. Generally, direct spend is greater than indirect expenditure. However, this can be vice versa for some organizations. Nowadays, a lot of companies outsource internal services such as legal, IT, facilities management and catering.

This has a direct effect on the indirect expenditure. Managing the indirect expenditure is one of the most difficult challenges faced by most companies. Ideally, this part of the overall expenditure should be as low as possible. This is because the company cannot lower the direct spending without compromising on quality and quantity of the final product. In earlier times, companies focused more on direct spend than the indirect one. However, the fickle nature of today’s economy has forced them to look for ways to bring down the indirect expenditure. Nowadays, professional services are available which specialize in the procurement of direct and indirect goods.

While such services do not come cheap, the costs of employing them is negligible compared to the savings in expenditure. Some companies have an internal team dedicated to analyzing the expenditure. Product category management is a concept which is directly related to expenditure. The company can categorize the indirect expenditure into various groups and analyze each group. This is a good way to identify areas where expenditure can be reduced.

The main drawback of this process is that it is quite comprehensive and time-consuming. Thankfully, the company can outsource this task to professional services which are adept at category management. The popularity of procurement outsourcing is increasing on a daily basis as more and more companies are becoming aware of the various advantages of this technique.

If you are tasked with indirect spend in your company, read more insightful articles on our webpage.

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