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Understanding the Indirect Supply Chain

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By Michael Wilson

With the onslaught of big data over the past decade, coupled with the downturn in 2008, we’ve witnessed enormous strides being made in supply chain optimization. From strategic sourcing to technological innovations and predictive analytics, businesses around the globe have done a fair job of eliminating costs from their direct supply relationships. But the quest for continuous improvement is never over in today’s highly competitive environment. So, while there are still a number of organizations that need to play catch-up, the innovators, trendsetters and thought leaders are now asking, “What’s next?”

If you’ve mined every possible opportunity in sourcing your organization’s raw materials, squeezing freight costs and analyzing logistics, maybe it’s time to look elsewhere. Otherwise, you may be working harder and harder in pursuit of diminishing returns. However, there is one less glamourous area that often goes unnoticed in today’s businesses, but is full of opportunities: the indirect supply chain.

The term “indirect supply chain” refers to all of the things that are necessary to keep your business running, but aren’t an integral part of the final products or services you sell. For example, if you make automotive batteries, lead is part of your direct supply chain. The tools your employees use to safely handle the batteries are part of your indirect supply chain, along with paper, packaging, lighting – even more ancillary things like bathroom and breakroom supplies. Because those goods, often referred to as commodity or consumable items, aren’t directly linked to a product’s profit margin, they all too often fly under the radar. Though seemingly inconsequential, any maintenance and operations personnel will attest that the spend here is large, and as such deserves attention.

Optimization Opportunities

The optimization opportunities in the indirect supply chain can be quite substantial. For a huge portion of businesses, consumable supplies can account for as much as 40 percent of total annual procurement expenditures. And that number is likely conservative, as much of the costs associated with these supplies – like the labor it takes to handle them – doesn’t show up on your invoices. Additionally, there is also rampant duplicity in vendors and SKUs, not to mention significant factors of  waste involved:

* Global inventories of maintenance, repair and operations (MRO) items grow by 9 percent each year.

* 55 percent of MRO inventories haven’t moved in three years.

* 30 percent of the items currently in stock will never be used.

The rate of errors and inefficiencies is also shocking. In one review, order points were wrong 62 percent of the time, quantities were wrong 81 percent of the time, and lead times were wrong 97 percent of the time.

Understanding Inefficiencies

There is a wealth of reasons for the endemic inefficiency of the indirect supply chain. One obvious reason is simply a lack of focus, because the direct supply chain has always been seen as more important than its indirect counterpart. Lack of visibility is another problem. Although management typically has good insight as to the total cost of ownership for the finished goods they sell, they rarely think to run the same calculations for what they use. Lack of standardization is another issue: the procurement of indirect supplies is often local rather than centralized, meaning different budgets, different suppliers, different processes and a lack of bargaining power that could be leveraged across all business locations if congruent processes were implemented.

There’s often no mechanism in place to monitor and track orders, inventory levels or product usage either. Without proper visibility into this aspect of the supply chain, maverick spending becomes the norm and employees place ad hoc orders that might jeopardize the enterprise’s goals and objectives.

Finding a Solution

The solution is to approach indirect supply chain management in the same strategic way you manage your direct supply chain – with data and analytics.

One alternative to a time-consuming and expensive third-party consultant coming into your business is a free online supply chain health check. You’ll want to start with a good understanding of your specific business priorities – considering solutions that analyze ways to decrease total costs, improve health and hygiene, enhance your corporate image, increase productivity and satisfy any sustainability objectives.

You will also want to look ‘below the water line’ to examine not only what you buy, but how you buy it and where you’re storing it. Lastly, labor can be the largest single expense on a company’s maintenance and operation budget, and conducting a labor usage analysis is a great way to identify and then drive costs out of the system.

If you’ve been racking your brain trying to come up with a way to get even more out of your direct supply chain, maybe it’s time to shift gears and focus on driving efficiencies in your indirect supply chain. This untapped area is likely full of treasures that can be easily found, if you’re willing to roll up your sleeves and do a little digging. 

Michael Wilson is AFFLINK‘S vice president of marketing and communications. He has been with the organization since 2005 and provides strategic leadership for the entire supply chain team.