Indirect Purchasing

MRO is still an elusive category in purchasing, says Michael Dennis, Head of Indirect Strategic Sourcing at Schreiber Foods. The biggest challenges for him and his fellow procurement executives remain how to collect and organize data, and how to recruit and keep high-level talent. Hear him talk about these key issues in indirect purchasing and how Schreiber is addressing them in this exclusive video.

Creating leverage in indirect purchasing negotiations will help companies to create favorable contract terms that lower costs. Instead of purchasing items from vendor catalogs, companies are choosing a limited supplier base and negotiating more long-term contracts that create lower line item costs. By forming relationships with suppliers, companies will encourage them to provide constant improvements in quality and service because suppliers will want to keep the contract.

If more than one supplier is bidding for a company's business, then the company can leverage their competitive position to obtain better pricing. In these cases, procurement teams will have to know the strengths and weaknesses of each potential supplier in order to know which contract offers the best value. An inexpensive contract from a company with frequent supply chain disruptions, for example, may cost more in the long run because of the consistent interruption of service.

When the company's contract will comprise a large portion of the supplier's business, the company has a better negotiating position. Companies that consolidate indirect purchasing to a smaller supplier base will improve their leverage because they will make larger buys from individual suppliers. The more a supplier depends on a company contract for revenue, the greater the company's advantage in contract negotiations. Even though indirect materials tend to cost less, volume buying comes into play just as it does with direct purchasing.

Market, industry and geopolitical trends may also play a role. A supplier from a politically unstable area, for instance, could be a source of lower pricing if a company is willing to risk a certain level of instability in the supply chain. Regarding market trends, companies that expect to see an upswing in their purchasing in the near future can leverage that momentum to obtain better pricing. If the price of a source commodity lowers substantially, perhaps due to improvements in technology, then understanding the trend will help procurement teams to know when to go back to their suppliers to ask for lower pricing.

Some procurement teams tend to think that purchasing direct materials is more important than purchasing indirect materials. However, indirect purchasing, according to a study by A.T. Kearny, accounts for 50 to 60 percent of all purchases within most organizations. Therefore, creating favorable contracts for indirect materials can provide a significant boost to a company's bottom line. Companies should not hesitate to leverage their purchasing power.