By Michael Wilson
Direct spend refers to the purchase of more costly items necessary for a business or church to operate. For a church, this could be cleaning supplies, light bulbs and lighting equipment, desks in offices and classrooms, computers and tech-equipment, new sanctuary chairs, carpet, and other items when and as needed, etc.
On the other hand, indirect spend is much different. This refers to smaller purchases such as miscellaneous office supplies, printed materials such as notices, wanted but not necessarily needed computers as well as software, printers, and other day-to-day products and services that a church could get along with and still be able to function and open its doors.
While there are no estimates for churches, typically, indirect spend amounts to about 15 percent to as much as 50 percent of an organization’s spending. However, it is invariably a smaller amount than is spent on direct spend items, and that is actually the problem. Because it is smaller and involves many smaller purchases, it’s rarely monitored. And because it is not monitored, it can get out of control and grow much larger than anyone realizes.
One reason it is not monitored is that many organizations, including churches, allow managers and staff to order supplies without authorization and often with no concern about costs. But, let’s say this is a very large church. What if the education department orders office supplies, as an example, not aware that the administration office, right next door, has more than enough to share? Education has just made a purchase that was unnecessary. As this scenario is played out over and over again, you can see how indirect spending can spiral out of control.
Why Indirect Spend Is Such a Problem
If your church or organization is not monitoring it’s indirect spend, join the club. A study a few years back found that as many as 50 percent of the Fortune 500 companies in the United States had no idea how much they were paying for indirect spend items and to whom.
While things have improved, especially due to the 2008 economic crash, many organizations still are unaware of how much money is going out the door without any form of monitoring.
And why does this continue to happen? Among the reasons are the following:
- No one person or group is in charge of indirect spending; no system or technology is in place to monitor these expenditures.
- Frequently procurement departments must deal with many direct spend issues such as changing supplier policies and prices, new vendors coming on board or leaving, etc. The result is that the small indirect spend items get lost in the shuffle.
- Even if an indirect spend monitoring system is in place, with time, priorities change, and departments go back to making purchases when needed and as needed. Monitoring is out the door.
Reining in Indirect Spending
First of all, we should mention that staying on top of indirect spending should be viewed as a journey. It’s an ongoing process, and as it continues, church administrators will likely find new opportunities to reduce indirect spending. So, how do we begin this process?
Among the steps are the following:
- Start by creating a team to monitor indirect spending. The team should start small, working with one or two departments initially, and then as they learn the ropes, spread their wings and work with more departments in the company.
- The team must ask each department to list all the indirect spend products now being purchased as needed/when needed, without necessary authorization, along with the annual expenditures for these commodities. This will serve as our indirect spend benchmark.
- Some reporting tool must be created. This is the big missing component. At first, this may just involve providing spreadsheets on a quarterly basis, but some type of computerized system should be implemented.
Once these steps have been taken and your team has a better idea of what is being purchased, to whom, and for how much, they can take the following steps:
Make an announcement. Announce to all managers and staffers that the church has set a priority of monitoring and reducing indirect spending.
Create indirect spending categories. Review the spreadsheets. Create categories for the various items – office supplies, printing costs, etc. – and start tracking these expenditures for each category.
End sporadic purchasing. We gave an example of sporadic purchasing earlier. That’s when the education department needed something, say ink cartridges, but administration right next door has more than enough to share. Inventory all indirect spend items in all departments of the company so if one department has plenty to share, no purchase is necessary. Note that this typically requires managers to get authorization for any purchase.
End “on-the-spot” purchases. This is sporadic purchasing but made on the spot. This may occur when buying online. Say the online vendor indicates that the item you are purchasing is often purchased together with another item, so you go ahead and buy the other item as well. The second item may not be needed or wanted.
Make larger purchases. When working with distributors, some will offer more competitive pricing if larger quantities of an item are purchased at the same time. This can also help eliminate sporadic purchasing and make it easier to track indirect spending.
Hire a procurement specialist. It is often a wise investment to hire a procurement specialist, otherwise known as an astute distributor. For instance, some distributors have access to online dashboard systems that compare a variety of products used for the same purpose. This allows managers to select those products that are more cost effective; offer manufacturers rebates, special pricing, etc.
View the procurement specialist as your personal business shopper. Using such technologies, he or she can find areas where spending can be trimmed, whether indirect or direct.
Michael Wilson is vice president of marketing for AFFLINK, a global leader in supply chain optimization, www.AFFLINK.com.