Many companies have a department that negotiates steel prices with suppliers. And they have a maintenance team that approves an invoice for forty euros for a seal on a Friday afternoon. Both are procurement. But only one gets attention.
This article shows what indirect procurement covers, why it is so hard to manage and which levers have proven themselves in practice.
What is indirect procurement?
Indirect procurement covers all the goods and services a company needs that do not go into the end product. Direct procurement buys raw materials and components for production. Indirect procurement buys everything else.
Typical categories are:
- MRO: spare and wear parts, maintenance materials, tools
- C-parts: standard parts, fasteners, low-value small parts
- Consumables: lubricants, cleaning agents, gases
- Occupational safety: protective clothing, gloves, safety glasses
- Services: maintenance contracts, cleaning, facility management, IT
In this article we focus on the technical part, meaning MRO and C-parts. That is usually where the lever is particularly large in industrial companies.
Why indirect procurement so often gets overlooked
Small amounts, many transactions
A large share of orders in indirect procurement has a low value. At the same time, it accounts for a large share of all ordering transactions. The ratio is the reverse of direct procurement: little money, a lot of work.
Scattered responsibility
Often it is not procurement that orders, but maintenance, the workshop or a shift supervisor. Everyone has their trusted suppliers. Nobody has the overview.
Poor data
Free-text orders such as ‘bearing for pump 3’ can hardly be analysed. If you do not know what you are buying, you cannot consolidate it either.
Long tail
The so-called tail spend, meaning the many small expenses with many small suppliers, grows quietly. Each new one-off supplier is harmless on its own. Added together, they produce a list that nobody can maintain any more.
In indirect procurement, price is not the problem. The problem is everything that happens around the price.
Categories and their levers
Not every category in indirect procurement needs the same treatment. A rough guide:
| Category | Typical problem | Effective lever |
|---|---|---|
| Standard parts, C-parts | many small orders | catalogue, framework agreement, consolidation |
| Manufacturer-specific spare parts | many manufacturers, long search | sourcing partner working across manufacturers |
| Discontinued parts | no regular source any more | international market search, alternatives |
| Consumables | fluctuating prices | framework agreement with price adjustment clause |
| Occupational safety | wide variety of models | standardise the range |
The hidden costs: an example calculation
Take a single order for a spare part with a low value. The process is almost always the same:
- Recognise the need and identify the part
- Search for suppliers and request a quotation
- Check the quotation and approve the order
- Create and send the purchase order
- Follow up on the delivery date
- Book the goods receipt
- Check and pay the invoice
Each of these steps costs working time. If you allow just fifteen minutes per step, you end up with almost two hours. Run the numbers with your internal hourly rate. With many small orders, process costs quickly exceed the value of the goods. This calculation is a simplified example. Your own figures may be higher or lower. The principle remains.
Five levers in indirect procurement
1. Create transparency
Analyse last year's orders. How many suppliers are there? How many orders below a certain amount? Which categories dominate? These figures alone often change the discussion.
2. Consolidate suppliers
The fewer suppliers, the less master data, fewer purchase orders and fewer invoices. That does not have to mean you only have one supplier left. But there should be a clear first choice for each category.
3. Catalogues and framework agreements
Recurring demand belongs in framework agreements with fixed terms. That saves a round of quotations with every order.
4. Improve master data
Manufacturer, part number and description should be stored cleanly for every recurring item. That speeds up enquiries and makes analysis possible.
5. Outsource the complex cases
Not everything can be squeezed into catalogues. Rare spare parts, parts from many manufacturers or demand for plants abroad are typical cases in which an external sourcing partner takes over processes. You submit an enquiry. The partner searches, compares, inspects and delivers.
Typical scenario: the month-end close
At the end of the month, invoices pile up in accounts. Many of them come from suppliers that deliver only once a year. For each one, a supplier account had to be created, the bank details checked and the invoice matched against the purchase order and goods receipt. One document is missing the order number, on another the quantity is wrong. Clarification drags on for days. The combined value of the goods on all these invoices is less than the salary of the person processing them.
Almost every industrial company knows scenarios like this. They show that the costs in indirect procurement do not arise only in procurement itself, but along the entire process chain right through to accounts.
Metrics that really tell you something
You do not need complex software to manage indirect procurement. A few simple metrics are enough to start with:
- Number of active suppliers in the indirect area, by category
- Share of orders below a small-order threshold of your choice
- Share of free-text orders without an item number
- Cycle time from the requisition to the purchase order
- Share of rush ordersthat run outside the normal process
Measure these values once as a baseline and then at fixed intervals. The trend says more than any single figure.
Digital tools: what helps and what does not
Procurement platforms, electronic catalogues and automated approvals can simplify indirect procurement considerably. But they only help with demand that can be standardised. There is no catalogue for the rare spare part of an old machine. That takes people who can identify parts, know suppliers and evaluate alternatives. A realistic plan therefore draws a clear line between what is digitalised and what is outsourced or handled individually.
Where to start? A pragmatic approach
Many indirect procurement projects fail because they start too big. A pragmatic route: take a single category, such as spare parts for a particular group of plants. For three months, record who orders what from whom. Then decide whether this category will be consolidated, catalogued or outsourced. The experience from this first step carries the next project. And it delivers the arguments you need to convince plant management.
Who needs to be at the table?
Indirect procurement only works if procurement and engineering work together. Procurement brings methodology, contracts and supplier knowledge. Maintenance brings technical understanding and knows which parts are truly critical.
A common mistake is to bypass maintenance for the sake of efficiency. Prices may fall, but the risk of breakdowns rises. The better way: shared rules on which orders run in a standardised way and which need a technical check.
Where a procurement partner helps
KTB Europe has worked as a sourcing partner for industrial customers since 1976. We source for maintenance and procurement, from the small screw to the large component, across manufacturers and internationally. For companies that want to take the load off their indirect procurement, we handle enquiries, supplier searches and inspection of the goods.
You can find out more about the model on our page on procurement outsourcing. How we reduce costs through sourcing strategies is described on our page on cost optimisation.
Conclusion
Indirect procurement is not a sideshow. It is a place where many small decisions add up to large costs. If you create transparency, consolidate suppliers and outsource complex cases in a targeted way, you lower costs. And usually the everyday hassle too.
Would you like to know which parts of your indirect procurement could be outsourced? Write to us via our contact page.
Frequently asked questions
What is meant by indirect procurement?
Indirect procurement covers all goods and services a company needs for its operations that do not go into the product it sells. These include MRO parts, C-parts, consumables, occupational safety equipment, tools and services such as maintenance or cleaning. Direct procurement, by contrast, buys raw materials and components for production.
What is the difference between direct and indirect procurement?
Direct procurement buys material that becomes part of the end product and is usually easy to plan. Indirect procurement buys materials and services for operations. It involves many items, many suppliers, small order values and often unpredictable demand. That is why the levers there lie more in process costs than in unit prices.
What is tail spend?
Tail spend refers to the many small expenses with many suppliers that together make up only a small part of the purchasing volume. However, they generate a large share of ordering transactions and invoices. Tail spend usually builds up unnoticed, because individual orders seem harmless. Consolidation and clear supplier guidelines help to manage it.
How can costs in indirect procurement be reduced?
The most effective levers are transparency over suppliers and orders, consolidating demand with fewer suppliers, framework agreements for recurring items and clean master data. Complex individual cases, such as rare spare parts or parts for plants abroad, can be outsourced to a sourcing partner that handles searching, comparing and inspection.