Every company must control costs to remain profitable. For every dollar saved in procurement, there is a direct increase in profit, whereas each additional dollar of sales only partially contributes to profit, depending on the profit margin.

To fully optimize financial outcomes, managing both direct and indirect procurement is essential. However, optimizing indirect spend is often more challenging. Organizations may issue broad mandates to “cut spending” without strategic oversight. At Apex GPO, our Group Purchasing Organization (GPO) model streamlines the management of indirect costs efficiently and with minimal risk.

 

Understanding Direct vs. Indirect Procurement

Indirect procurement involves purchasing goods and services that support a company’s operational needs but do not directly contribute to the end product or service. In contrast, direct procurement pertains to acquiring materials or services essential for production. Reducing direct procurement costs can improve gross margins, while trimming indirect procurement impacts net margins.

Common categories of indirect procurement include:

• Office and administrative supplies
• Facility services (e.g., cleaning, maintenance)
• IT equipment and software
• Professional services
• Travel and related expenses
• Marketing and event-related costs
• Small, ad-hoc purchases

The primary goal of indirect procurement is to provide teams with the necessary resources to perform their duties effectively. These expenses may be covered under vendor agreements (e.g., paper supply) or through individual transactions (e.g., travel expenses).

While direct buying emphasizes risk analysis such as pricing and delivery, indirect buying requires a focus on cost-effectiveness. Despite being a significant expense category, indirect procurement often lacks robust budget control measures.

 

Key KPIs for Tracking Indirect Procurement Performance

Monitoring performance with the right KPIs is essential for improving procurement processes. Here are five key metrics:

1. Spend Under Management: Indicates the percentage of total spending that falls under the procurement team’s control, aiding in efficiency and cost management.

2. Cost per Invoice: Evaluates the cost-efficiency of processing invoices, revealing areas where spending could be streamlined.

3. Supplier Lead Time: Measures the time between purchase and delivery, a vital indicator of supply chain efficiency. Shorter lead times improve speed-to-market and resilience.

4. Compliance Rate: Assesses a vendor’s adherence to internal and external regulations, helping mitigate risks like data breaches or regulatory violations.

5. Procurement ROI: Evaluates the financial effectiveness of procurement activities, examining cost savings and process efficiency to ensure optimal performance.

 

How GPOs Enhance Indirect Spend Management

GPOs play a pivotal role in helping organizations optimize their indirect procurement processes. By leveraging collective purchasing power, GPOs provide access to pre-negotiated contracts and cost-effective vendor agreements. This strategic approach benefits organizations in several ways, directly aligning with key procurement KPIs:

1. Spend Under Management: A GPO prepares comprehensive spend reports covering the areas under its program, allowing companies to track and increase the proportion of spending under formal management oversight. By consolidating purchases through the GPO’s established contracts, companies can reduce maverick spending, improve compliance, and strengthen overall procurement governance.

2. Cost per Invoice: GPOs streamline procurement by minimizing the number of vendors and transactions, reducing administrative workload, and thus lowering the cost per invoice. With fewer suppliers to manage and more standardized purchasing practices, organizations achieve efficiency in their accounts payable processes.

3. Supplier Lead Time: GPOs often partner with reliable, vetted suppliers with proven track records for efficient delivery. This helps minimize supplier lead times, addressing potential delays that can impact business operations. Shorter lead times translate into faster access to necessary resources and better supply chain responsiveness.

4. Compliance Rate: With a GPO, organizations benefit from suppliers that adhere to stringent compliance standards set in negotiated contracts. This reduces the risk of non-compliance, whether related to regulations, industry standards, or internal company policies. A GPO’s oversight also helps identify and mitigate third-party risks associated with indirect procurement.

5. Procurement ROI: Utilizing a GPO often results in significant cost savings through volume-based discounts and enhanced negotiation capabilities. This leads to a higher procurement ROI, as the reduced costs and improved efficiencies contribute directly to the financial benefits of the organization. Companies can focus on their core activities while the GPO handles strategic sourcing and vendor management.

 

Overall, partnering with a GPO provides organizations with a structured, resource-efficient way to manage indirect costs. This partnership leads to streamlined operations, reduced risk, and measurable financial gains that align with essential procurement KPIs.