Indirect Purchasing: Transparency, potential analysis and performance measurement

In many companies, the purchase of so-called direct materials that are incorporated into the final products is part of the core business. These purchases make up approx. 70% to 85% of the purchasing volume within the manufacturing industry. All other purchasing categories, such as services, IT, marketing, etc., which are often referred to as “indirects”, make up the remaining 15% to 30% of a corporation’s purchasing volume that is controlled via indirect purchasing.

Challenges, areas of focus, software tools

Interestingly, indirect purchasing is given a low priority in many companies. Therefore, the degree of procurement professionalism in this regard is correspondingly low in many corporations. Yet quite a bit has happened in this area over the last few years ...

Headed by industries such as banks and insurance companies, which exclusively purchase indirect categories like IT or marketing, the degree of maturity of indirect purchasing has increased.

Professional procurement organizations for the indirect sector have been increasingly relying on innovative, analytical software systems in the last few years. These replace classical Spend Management or Spend Analysis solutions, which were primarily qualified for direct purchasing. This is, among other things, due to the fact that indirect purchasing places very specific requirements on procurement controlling or purchase reporting

Specific requirements of indirect purchasing on procurement controlling:

  • Data quality

    The data conditions and purchasing data quality of indirects is often worse than that of directs, since material numbers or material groups for orders or invoices often do not exist. Moreover, the Maverick Buying Quota is often significantly higher than it is for direct sourcing categories.

  • Repeatability

    In an indirect setting, there are often no repeatable requisitions or it is believed that this is the case (as will be explained later on, it is very possible to work in indirect purchasing with a large number of repeated requisitions).

  • Complexity

    The relative number of suppliers – as measured by Spend – is often much higher, as are the management costs and complexity, since these are usually in reference to specific services and goods.

From the viewpoint of a Spend Management software manufacturer, the leading indirect purchasing companies stand out because they actively incorporate the abovementioned challenges and focus on the following areas in order to increase their degree of maturity.

Areas of focus in order to increase your degree of maturity

Orpheus’ software modules offer all the necessary functions and key figures for indirect (and direct) purchasing. As previously described in the text, special emphasis for indirect categories is on Points 1, 2 and 3. With the help of the DataCategorizer, sourcing category structures can be defined interactively. Furthermore, the software guarantees that the classification of purchase orders is automated and that the master supplier and material data is consolidated and clustered. The SpendControl and InitiativeTracker modules provide the assessment and potential analyses with all of the required KPIs, as well as measurement management and controlling for indirect purchasing.

1. Establishing a company-wide relevant and consistent sourcing category tree

Like with direct categories, a company-wide category structure, which takes the specifics of the own company into consideration on the one hand, must be established for indirects as well. On the other hand, it must also take the supplier markets and correspondingly the purchasing aspect, into consideration. Technical material groups, such as ERP data structures, are often incongruous here. Most of the companies are currently relying on standards such as eCl@ss or UNSPSC. Unfortunately, these standards are neither optimally suited for automated classification (see Point 2), nor do they always depict supplier markets and cost structures reasonably.

According to this, for example, neither a classification according to software in general nor one according to licenses and maintenance/ support exists for eCl@ss in the IT category. The significance and the cost transparency in the case of a 1:1 acquisition of such standards thereby remain suboptimal.

Recommendation: use the standard as a starting point for your own category structures that have been optimized for procurement. For example, with its classification tool DataCategorizer,Orpheus already delivers category structures for some indirect categories that have proved to be successful.

2. Automated classification of purchase orders (PO) as per the predefined category structure

Once indirect purchasing has defined its own category structure in line with supplier markets, cost and management structures, it will also be implemented in the assessment, potential analyses and management of procurement organization.

This requires that all purchase orders of the company/corporation (all invoices and orders, goods receipt) must be allocated (categorized or classified) to the individual procurement categories. For larger corporations, this means several hundreds of thousands or millions of invoice line and order items. Due to the large amount of data and the expected categorization quality, modern corporations use automated software tools, such as DataCategorizer from Orpheus, since manual classifications are too time consuming and lack in quality.

3. Consolidation of suppliers and material clusters

The first important step towards increased data transparency has been undertaken once all purchase orders have been allocated to the corresponding indirect purchasing categories in the product group structure. For the first time, for example, the exact purchasing volumes (Spend) within the individual product groups or categories of the company/ corporation are known. Nonetheless, numerous uncertainties may still exist, since duplicates of master supplier records, which make clustering initiatives impossible, are still being found. A consolidation of the same or related suppliers, as well as the clustering of similar materials is therefore the second fundamental step toward increased procurement transparency. It is possible to achieve this sufficiently, due to the volume of data and the complex pattern recognition demands, using the specialized DataCategorizer software.

4. Potential analyses in indirect purchasing as well as fact-based procurement strategies

Through steps 1-3, indirect purchasing now has created the premise and transparency in order to execute potential analyses independently (and without the help of internal IT), to find starting points for possible savings or proceess improvements, as well as to lay the foundation for fact-based procurement strategies. Indirect purchasing now operates on a significantly better informational basis. It can rely on its data and key figures, which are now much more reliable and resilient. Furthermore, it can finally work strategically and deal with potentials that must be brought to light, instead of concentrating on the manual clean up and consolidation of data. The Orpheus software for indirect purchasing automates and manages this operative work.

5. The introduction of clusters for repeatable procurement procedures and objects, as well as for more efficient measurements of success in indirect purchasing

In the intermediate and long-term, however, indirect purchasing would like to improve performance planning and measurement in addition to transparency, in order to better present its value to the company. To this end, it is necessary to establish a kind of “modular assembly system” that is comprised of individual clusters in order to manage the Orpheus software. It was hereby successful to gradually measure the success of more and more parts of the procurement volume as repeatable Spend. With its InitiativeTracker and DataCategorizer modules, Orpheus makes tools available with which it is possible to efficiently manage the clusters of indirect purchasing and to measure the success or value.

Transparenz und Erfolgsmessung im indirekten Einkauf Figure 1: "Orpheus Software – a complete solution for indirect purchasing (as well)"
The most important system function for SpendAnalysis or procurement controlling in indirect purchasing
  1. Automatic data extraction and data consolidation from all ERP systems (incl. heterogeneous ones)
  2. Data management, data harmonization and data cleansing
    1. Consolidation and hierarchization of suppliers
    2. Classification of purchase vouchers (invoices, orders) as per the structure in No. 3
  3. Definition of a corporate or company-wide product group structure
  4. Key figures, KPI’s and analyses specific to indirect purchasing
    1. Support of all important KPI’s pertaining to indirect purchasing (cf. Table 2)
    2. Reports and analyses chains for all important questions pertaining to indirect purchasing (cf. Table 2)
Table 1: "The most important system function for Spend Analysis or procurement controlling in regards to indirect purchasing“
The 9 most important analysis and reporting fields in indirect purchasing
  1. Dashboards and KPI’s for Lead Buyer
    1. Product group dashboard
    2. Supplier negotiation sheet
    3. KPI developments over time
  2. Cluster and supplier structure
    1. ABC and XYZ analyses
    2. Supplier fragmentation within the product groups
  3. Internal benchmarking & Spend structures
    1. KPI benchmarking
    2. Spend quota per product group and corporation
    3. Category Spend per employee
    4. Spend Euro per revenue Euro
  4. Early warning indicators for Spend trends
  5. Maverick Buying & Compliance
    1. Order reference
    2. General agreement quota
    3. Price compliance
  6. Automation & Process analyses
    1. Buying channel
    2. Processing times
  7. Negotiation successes & Cost avoidance
  8. Single sourcing per product group & Risk analyses
  9. Working Capital analyses
    1. Payment terms
    2. Actual payment behavior
    3. Discount analyses
Table2: " The 9 most important analysis and reporting fields in indirect purchasing"
Orpheus - Procurement Performance Management 2016
Procurement Performance Management 2016

We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.

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Managing Partner - Orpheus GmbH
Dr Jörg Dittrich
Managing Director Orpheus GmbH
 
"Indirect purchasing has very specific demands in regards to procurement controlling or purchase reporting."

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