In challenging times, retailers and consumer goods companies are focused on enhancing operational efficiency and reducing costs. However, one area that often receives insufficient attention is indirect spend, which often represents 6% to 8% of revenues. Despite its significance, indirect spend is rarely scrutinized in the same way as costs like labor or direct procurement costs, making it a major untapped source of savings — even for companies that have attempted to control their expenses.

Many organizations resort to temporary cost-cutting measures or simple budget adjustments, such as restricting travel or reducing marketing budgets. These tactics are often seen as arbitrary by employees and fail to produce sustainable savings. As a result, spending patterns remain unchanged, leading to a rebound in costs.

Only a small number of companies have created a comprehensive indirect spend operating system, which provides a competitive advantage by generating considerable savings while leveraging supplier innovations to enhance commercial effectiveness and customer experience.

With that kind of approach, our experience indicates, there is potential to reduce indirect spend by 10% to 15% over three years, equating to a total cost reduction of 50 to 100-plus basis points. The value at stake is substantial, but achieving these results requires more than just optimizing procurement transactions through renegotiation or volume pooling. There are three primary strategies for managing indirect spend: buy cheaper, spend better, and spend less. All three must be coordinated for effective optimization.

Innovative sourcing strategies for cost saving

Many companies focus on reducing costs by purchasing the same products or services at lower prices through enhanced competition, pooled volumes, or renegotiation. While this method often yields quick wins, innovative levers can provide additional savings. For example, some retailers have implemented creative sourcing strategies that leverage low-cost country sourcing alongside their direct import structures.

Optimize spending with total cost and energy efficiency insights 

Spending better involves shifting focus from the products purchased to the business needs they fulfill. It also needs to include total-cost-of-ownership (TCO) calculations and consider scenarios for lifetime cost implications. Whether it is cooling systems or automated warehousing, the differences in power efficiency can lead to very different vendor rankings. Spending decisions also depend on the considered time horizon and assumptions on the future evolution of energy costs. Many companies still struggle with the resulting CAPEX/OPEX-trade-off as it is allocated to different budgets.

Reduce consumption with effective cost optimization strategies

Spending less entails reducing consumption volumes, which is conceptually straightforward but challenging to implement. Effective cost optimization requires monitoring consumption, setting rules and policies, and fostering a culture of cost control across the organization. Communication programs can help share best practices and raise awareness among employees.