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Mhlnews 10313 Indirect Spend

How to Get Your Indirect Spend Under Control

Aug. 10, 2018
Having too much of some items can be just as costly to your bottom line as having too little.

If your facility is like most I’ve been in over the last few decades, you probably have some hidden problems buried in your indirect spend. Though individual items often don’t amount to a huge expense, your total indirect spend and associated costs likely constitute a significant portion of your overhead expenses.

Many facilities try to trim their indirect spend by negotiating lower prices on a few of their most expensive items. That approach can net some short-term savings, but if that’s all you do, you’re probably leaving money on the table.

So how can you better control your indirect spend? This article will look at three major issues that come up time and time again.

Too Much

A surprising number of facilities have too much of at least some of their supplies. Sometimes, this oversupply doesn’t really matter. If someone buys a year’s worth of trash bags all at once, it probably didn’t cost much and they’ll eventually be used. But I often see companies that have more cutting tools, for example, than they need.

In fact, I often visit sites where they can’t even quantify certain supplies they have in inventory, whether it’s because cribs have been poorly controlled or the company lacks up-to-date inventory data. This kind of overstocking can easily result in losses from waste or theft and force overbuying.

We also regularly find workers hoarding particular supplies. Machinists may set aside a box of inserts and drills at their work stations, for example, to ensure they don’t run out. If a specification changes or new tools come online, this excess inventory may end up in the trash.

Too Little

On the other side of the spectrum, some facilities find themselves with environments that are too lean or lack a well-controlled inventory process. This can result in a lack of machine parts or other indirect inventory, such as safety supplies, that can easily slow or halt production, which imposes costs in two ways.

First, idle machines, idle workers and lost production result in lower sales and margins. Depending on where in the manufacturing process these shortages take place, these idle processes can ripple through an entire facility even after the needed inventory has been resupplied. Second, since most site managers will do everything in their power to get back up and running as soon as possible, they will often pay extra for expedited shipping or choose a supplier that provides the quickest response rather than the optimal price or quality.

Too Costly

Finally, even when companies have well-managed inventories, I’ve seen many examples of poor or incomplete buying practices. Here are some common scenarios:

Failing to consider the total cost of ownership on a machine or a part. There’s more to consider than the cost per unit. If you’ve tried to trim costs by buying cheaper cutting tools, but their low quality means you’ll use more of them, are you really saving money? You should always be willing to reconsider the tools and whether they’re still the best choice for your application. In some cases, changes in tooling can result in supply savings and productivity increases.

Purchasing from many different suppliers instead of saving through consolidation. You may have found the cheapest supplier for a single item, but are you getting the maximum savings on your entire spend? Consolidating purchases can produce greater overall savings. Consolidation also offers opportunities for improvements in inventory management, payment systems and procurement processes when you choose the right partner.

Employees who fail to comply with supplier agreements. I have seen CFOs and plant managers celebrate after negotiating a comprehensive supply agreement that promises double-digit savings, only to find themselves disappointed months later when said savings fail to materialize. If the individuals handling purchasing aren’t required to change their practices, that supplier agreement will never produce the savings for which you’ve hoped.

Taking stock of your indirect spend can be a daunting task that requires expertise and insight. A business needs analysis, offered through a third party, can provide a fresh perspective and identify opportunities for savings and efficiency improvements.

Darr Greenhalgh is senior manager of customer solutions at MSC Industrial Supply Co., a North American distributor of metalworking and maintenance, repair and operations (MRO) products and services. He has more than 35 years of experience in procurement, project management, lean supply chain management and manufacturing in a range of industries.

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