Do you really know what your operational costs are and the details of the products or services that you are purchasing?
Many manufacturing companies know what they’ve spent in direct material and direct labor.
But when it comes to indirect expenditures, the clarity is just not there.
Ironically, a company can grow substantially and be spending tens to hundreds of millions of dollars on indirect expenses and not have the right process or program in place to analyze or manage it.
To properly analyze this type of spend, it is necessary to,
- Define the company’s indirect categories of spend
- Answer questions about ‘agency’
- Create, publish and support a ‘company-wide’ Procurement program
Defining the Company’s Operational / Indirect Spend
The first step in understanding a company’s ‘operational spend’ requires categorizing, coding and documenting the spend, i.e., the company must have a way of grouping and associating multiple transactions.
This allows the firm to document, tally and analyze dollar amounts and transactions in each category.
The next step, creating an agency doctrine, is more complex but perhaps even more important and must be addressed for a company to manage the indirect spend.
The important questions senior executives must ask themselves about agency is,
- Where, for what categories and amounts, and whom should have the responsibility for the stewardship of purchases on behalf of the company?
- What are the reasons that the control has been specified in this manner?
Creating, Publishing and Supporting an Agency Doctrine and Procurement Policy
For a company to control spend, there needs to be an agency doctrine, i.e., a written policy that specifically authorizes individuals to act as ‘agents’ for the company when expending company assets.
Likewise, the company will need to create a procurement program so that all company personnel (and suppliers alike) know what needs to be done to obtain the necessary products and services needed to support the company operation.
Senior Management Support
Understandably, the agency doctrine and procurement program must be thorough, working as intended (and absolutely should be tested before release).
However, unless executive management supports all facets of this program, it will not be followed and in that case not provide the information required to properly manage this spend.
The Bottom Line. Knowing what the company’s operational costs are is the first step that is needed to manage these costs. To properly analyze spend, companies must categorize what is being purchased. Likewise, the company must develop and publish an agency doctrine and procurement policy. Finally, executive management must completely support these programs.