The Right Way to Procure Indirect Materials and Services

This is an excerpt of the original article. It was written for the March-April 2018 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2018

"Inflation creeps into U.S. Supply Chain.” So said the headline on a Wall Street Journal article I read this morning before writing this column. The Journal went on to write that U.S. companies are grappling with rising material and ingredient costs on top of pressure from higher wages—a potential double whammy— and noted that companies like Whirlpool and Ford have already issued warnings to the market.

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Strategic sourcing can be a source of competitive advantage for those firms that do it right. Yet, the majority of articles on procurement best practices have centered on direct spend, or the raw materials and goods that go into manufacturing a product. Very little attention has been paid over the years to the indirect materials and services that are used internally by a firm, such as MRO, fleet management and utilities, even though a large firm may spend a billion dollars or more on this category (see sidebar for a definition of indirect spend).

In many respects, indirect spend is the neglected pet of a procurement organization, no one individual or entity is paying attention to the category. Or, as a commodity manager for a U.S.-based medical equipment manufacturer once summed it up in an industry magazine: “There was no focus on indirect spend. As a result, organizations learned to fend for themselves in the indirect spend categories, and everybody was doing their own idea of what they thought sourcing was.”

We found similar attitudes toward indirect procurement (what we’ll refer to as IP) during discussions with a number of IP executives through the course of our research into the state of indirect procurement (see sidebar: About our research). Their experiences can be summed up in three points:

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