Reducing Direct and Indirect Purchasing Costs

Increasing revenue, however desirable, isn’t always in the cards. Sales teams hit slumps. And marketing departments, despite their best efforts, sometimes attract less-than-fantastic leads.

All in a day’s work, it seems.

In order to weather those inevitable slow periods, it is incumbent on organizations to reduce costs – specifically reducing direct and indirect purchasing costs.

A quick refresher

So, what are direct and indirect purchasing costs? Glad you asked.

Direct costs are those explicitly related to the production of a good or service (think materials, equipment and labour).

Indirect costs, on the other hand, are costs such as marketing spending, office equipment, even coffee. This realm is a varied one – there is a diversity of materials and services that fall under the umbrella of indirect costs.

Tips and tricks

Now that we’ve gotten that out of the way, here are a few tips on reducing direct and indirect purchasing costs.

Direct costs:

• Labour – this is always a tough decision, but a critical area to examine. Can you afford to trim your staff? Will the product or service you offer suffer as a result? If there wouldn’t be a dramatic drop in quality, then reducing the number of employees at your company is a sure fire way to save on direct expenses.
• Outsourcing certain production tasks is another option to save on labour. Of course, outsourcing labour won’t save you as much as reducing your staff outright, but it remains a popular route for many companies.
• Materials – to save money on required materials, the first option is to use cheaper stuff. Such a decision, needless to say, will affect the quality of your product. This presents a difficult situation for business owners, as the quality of a product is (should be) a central concern for very business. That said, this is a critical avenue for reducing direct purchasing costs.
• Equipment – The cost of equipment can be substantial, so a business can (and should) investigate purchasing refurbished equipment or lease the necessary equipment.

Indirect costs:

As I mentioned at the outset of this post, there are many examples of indirect purchasing costs. So, to tackle that wide-ranging realm and realize some savings it is critical for a business to establish a coherent plan of attack – this is more difficult than examining three major spending avenues that represent direct costs.

Our friends at consulting giant EY have assembled an excellent scheme for analyzing, attacking and reducing indirect costs.

• Identify the number of stakeholders – this is a complex realm, with a lot of moving parts. As such, it behooves an organization to clearly define all of the stakeholders that could potentially participate in/assist in the reduction of indirect purchasing costs.
• Classification of spend data – all spend data should be analyzed and catalogued in a spend portfolio. The spend portfolio should include: the amount, category and suppliers where the spending occurred.
• Identify opportunities for savings – this is just as it sounds: each and very opportunity to reduce indirect purchasing costs should be outlined/earmarked/highlighted and discussed.
• Design a short and long-term implementation plan – not all plans/ideas to reduce indirect purchasing costs are equally challenging, nor can they all happen at the same time. An organization must draft a clear implementation plan that includes projects that can take place straight away, as well as those that will take more work and time.
• Design and implement a monitoring system – you must (must!) monitor and record all of the savings realized by your organization. It is critical to know what worked…and what didn’t.

An organization should consistently/routinely look to reduce indirect purchasing costs and the roadmap a monitoring system will provide will prove important.

During those periods when revenue is stagnant, reducing direct and indirect purchasing costs will go a long way.