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Inventory Issues: Streamlining the Indirect Supply Chain

By Michael Wilson

Many equate the word “indirect” with “unimportant.” But when it comes to the indirect supply chain, that could not be further from the truth. The indirect supply chain for an institutional or commercial facility can account for up to 50 percent of its procurement costs, which is easily enough to tip the scale as to whether the financial statements are written in black ink or red.

What is the indirect supply chain?
The indirect supply chain is anything that does not go directly into the product or service the organization sells. It is the stuff that keeps buildings and business running — and building occupants happy and comfortable — but does not contribute to the bottom line. It includes things such cleaning items, break room supplies, tools, and safety gear, as well as the costs associated with ordering, paying for, receiving, and storing those items.

Why does it matter?
By now, most forward-thinking companies already have implemented cost-saving strategies for the direct supply chain. Sure, there are always a few more tweaks to make. For the most part, though, the low-hanging fruit already has been picked. If maintenance and engineering managers still need to cut costs — and who does not? — the indirect supply chain, much of which falls under facilities management is the next logical target. The opportunities are just as big, but, since indirect costs tend to fly under the radar, it has not received the attention it deserves.

What are the steps for optimization?

There are some tactics for optimizing the direct supply chain that also apply to the indirect supply chain, but most are unique.

First, figure out what you are currently spending and where you are spending it. This comes down to the basic principle of knowing where your money is going. Some of the most important data points include:

• how much you spend on each item
• how many vendors supply that item, as well as the price point for each
• who procures these items
• relationship between expenditure and usage, as many companies find that they are spending the most on items that they use the least
• what the current procurement process is
• how much of each item is in inventory
• how often that inventory turns.

In a nutshell, start by conducting an audit of the indirect supply chain and using the results to identify patterns and opportunities.

Second, reduce the number of vendors. Sometimes companies use multiple suppliers for the same product because they think it gives them leverage in negotiating prices. More often, however, it is unintentional. For example, several people from different departments could order their own supplies, and each has a favorite vendor. But that lack of coordination comes at a cost.

One of the most obvious benefits of reducing the number of vendors is being able to negotiate a volume discount. But it can also cut costs by eliminating inefficiencies. Among small- to medium-sized businesses, for example, the top 35 percent spend an average of $5.28 in labor to process each invoice. The bottom 65 percent, however, spend $11.95 per invoice. That’s a gap of more than $6 – a difference that can be reduced by consolidating vendors and, in turn, streamlining vendor payments and reducing the number of invoices.

Third, centralize processes. Similar to having too many vendors, having too many people involved in the procurement process has inherent inefficiencies, too, that the cost to place a single order can range from $1.26 for top performers, in terms of efficiency, to $50.70 for the worst performers, according to APQC’s Open Standards Benchmark Database. Centralization lets managers eliminate the most inefficient and costly processes and fine-tune the rest.

Centralized processes also make it much easier to track spending, spot anomalies, and avoid inventory problems.

Fourth, consolidate product lines. Inefficiencies also crop up when everybody is ordering a different version of the same item – for example when a business uses five different kinds of trash bags. Each of those orders has to be received and stocked, which costs an average of $6-12.  Consolidating product lines means consolidating orders, which reducing the associated labor costs.

The potential impact of optimizing the indirect supply chain is huge, but it is also a great deal of work. The process can be especially challenging for smaller businesses, which might not have employees with the time or talent to tackle such a big project.

Fortunately, there are options other than doing all of the legwork yourself. One is to hire an outside consultant, but for some companies, this could be cost prohibitive. Another is to do it yourself with an online tool like ELEVATE, which analyzes current spending patterns, highlights areas of opportunity, and provides a clear roadmap on how to achieve cost reductions.

However you decide to go about it, don’t let another day go by without taking a look at your indirect supply chain. It’s just too big an opportunity to pass up.

Michael Wilson — www.afflink.com/press-room/leadership/michael-wilson —  is AFFLINK'S vice president of marketing and communications. He has been with the organization since 2005 and provides strategic leadership for the entire supply chain team.