The Impact of Indirect Procurement on the Procure-to-Pay Process

Saving 10% on indirect procurement can lead to an increase of up to 50% in gross margin

In view of this finding, indirect procurement, considered the “poor child” until now, are undergoing a genuine transformation: 76% of companies surveyed have an Indirect Procurement Department and 57% of them manage them differently to direct procurement. A process undergoing a complete transformation and whose benefits on the value chain are directly impacted by its digitisation rate.

The challenges of indirect procurement

There are two main purchasing categories:

• So-called “strategic” or “production” procurement, which include raw materials and the components used to make up end products. They are incorporated into the direct costs of the sold manufactured products.
• So-called “indirect” or “off-production” procurement, which includes the supplies used in the everyday operation of organisations, but which are not involved in the production process: service provision, intellectual services, all kinds of consumables (administrative supplies, office automation, etc.) and off-production investments (furniture, real estate, IT and computer equipment, etc.)

This indirect procurement can represent up to 81% of the expenses depending on activity sector. Although strategic procurement is widely covered in companies because it represents 75% of company expenses, this is far from being the case with indirect procurement, which only represents 25%. However indirect procurement represents 92% of order volume, 96% of the number of suppliers referenced and 97% of the volume of items ordered. A process subject to little control and that includes many hidden costs: management of deliveries, problems with off-process procurement, invoice checking and validation, loss and theft, errors and returns, non-existence of acceptance processes and management of disputes, etc.

Result: a considerable cost related to the management of indirect procurement that 57% of companies believe to be too high. This process therefore has to be digitised and its automation maximised.

The impact of digitalisation of indirect procurement on Procure-to-Pay

The ordering process is making its way into the supplier invoice processing chain and its digitisation offers improved reading of budget consumption, optimisation of cash management and makes it possible to prepare cost accounting allocation correctly. Some immediate benefits that have an impact throughout supplier invoice processing :

• Accounting: major reduction in processing times due to automatic order/invoice checking, optimisation of dispute management due to improved traceability throughout the cycle, and reduction of account closing deadlines because the provisions are facilitated by this same traceability
• Validation: major reduction in the number of validations required because the invoices match the order placed upstream, immediate identification of instructing parties through the order and generation of a reliable audit trail more in line with regulatory requirements
• Payments: accelerated due to the entire automation chain upstream, which allows, on the one hand, movement of the invoices pending payment in record time and, on the other hand a reduction of risks linked to payment as a result of more secure “order suppliers”.

The performance of supplier invoice processing is therefore “purchase-driven”: the more the order process is managed and tracked on entry to the chain, the faster accounting performance will be.

The benefits of a purchasing module within an automation solution