Driving Cost Savings on Indirect Spend

The 2025 tariff wars are bringing a new level of turmoil for manufacturing purchasing teams.  Quick reaction plans fall into two areas that should be addressed in parallel: 

1. Actions to mitigate increased costs

Understand the impacts from changes to tariff policies in all countries where you and your suppliers manufacture, engage suppliers in cost containment discussions, activate alternative sourcing activities, support sales in getting relief from customers, investigate tariff engineering, etc.  

2. Actions to maximize cost savings

Increase cost saving delivered to offset increasing costs as much as possible.   

This article highlights a few of the lessons from APD’s Indirect Purchasing Certification course on how to drive cost savings on indirect services and materials. 

Segment Categories and Sub-Categories  

There are different cost savings strategies depending on the impact on the business as well as the number of supply options available.   

Start by mapping categories and sub-categories into the Kraljic Matrix (also called the Purchasing Portfolio Matrix). 

• Leverage = High impact on the buyer’s business + buyer has many options 
• High Attention = High impact on the buyer’s business + buyer has few options 
• Low Attention = Low impact on the buyer’s business + buyer has few options 
• Non-Critical = Low impact on the buyer’s business + buyer has many options 

For categories in the 𝗟𝗲𝘃𝗲𝗿𝗮𝗴𝗲 box: 

• Ideal for cost modeling when you can get suppliers to share cost details 
• Market tests are effective if you can’t get suppliers to share cost details 
• Use long-term agreements with cost and quality targets to leverage supplier’s expertise 

For categories in the 𝗛𝗶𝗴𝗵 𝗔𝘁𝘁𝗲𝗻𝘁𝗶𝗼𝗻 box: 

• Finding substitutes  
• Develop new entrants 
• Establish buying consortiums 

For categories in the 𝗟𝗼𝘄 𝗔𝘁𝘁𝗲𝗻𝘁𝗶𝗼𝗻 box: 

• Use long-term agreements with cost and quality targets 
• Outsource buying responsibility 
• Use P-cards 

For categories in the 𝗡𝗼𝗻-𝗖𝗿𝗶𝘁𝗶𝗰𝗮𝗹 box: 

• Outsource buying responsibility 
• Bundle with Leverage categories 
• Leverage buying consortiums 

Use the Right Cost Control KPIs 

Cost savings – the reduction in total spend through negotiation, contract improvement, rebates, or supplier changes is a starting point.  Take your KPIs to the next level by tracking four additional KPIs as well. 

• Cost Avoidance (% or $) – Track savings from price increases avoided through negotiations or alternative sourcing​; best practices include: 
• Track all supplier requests for price increases – no matter how ridiculous 
• Report monthly 
• Notify stakeholders of significant requests when received 
• Budget Adherence (%) – Ensures spending remains within approved budgets for indirect materials​ 
• Total Spend Under Management (%) – Measures the percentage of indirect spend actively managed through contracts or purchasing policies​ 
• Cash Improvement ($) – Improved payment terms, supplier financing, etc.​ 

Expand the Ways You Report How Procurement Delivers Value 

Here are 12 ways indirect purchasing teams deliver value.  Consider including additional items for reporting to management how the purchasing team delivers value.    

1. Price Savings: Reducing the unit cost of goods or services by negotiating lower prices with suppliers​ 
2. Process Efficiency Savings: Streamlining procurement and operational processes to reduce costs associated with procurement and management​ 
3. Volume Consolidation Savings: Combining spend across departments to increase purchasing power and secure better pricing​ 
4. Standardization Savings: Reducing variety by standardizing products and services lowering procurement costs​ 
5. Supplier Rationalization Savings: Reducing the number of suppliers to create efficiencies and leverage better relationships​ 
6. Demand Management Savings: Controlling and optimizing internal consumption of products and services to reduce costs​ 
7. Contract Optimization Savings: Improving contract terms to reduce total cost of ownership and improve service delivery​ 
8. Compliance Savings: Ensuring adherence to internal procurement policies and using preferred suppliers to avoid maverick spending​ 
9. Inventory Reduction Savings: Reducing inventory levels by improving demand forecasting and implementing just-in-time procurement​ 
10. Lifecycle Cost Savings: Reducing total cost over the lifespan of a product or service by considering maintenance and operational costs​ 
11. Payment Terms Improvement: Negotiating more favorable payment terms to improve cash flow or reduce financing costs​ 
12. Warranty and Service Level Savings: Enhancing warranties and service levels to reduce future repair or replacement costs​ 

Use Cost Tables to Find Savings Opportunities 

A cost table is a list of everything you buy with the key factors that drive their cost. It helps you see what’s really behind the prices you pay. This makes it easier to spot cost savings opportunities.  

For example, if you’re buying janitorial services, the cost drivers might include:  

• Square footage of your building  
• Number of rooms  
• Labor categories needed (cleaners, supervisors, etc.)  
• Hourly labor rates  

You can build a cost table for any indirect spend category to help identify savings.  Start by gathering data on the things you buy in an indirect category. Look at contracts, purchase orders, and invoices. List out each item and break down the cost drivers. Then, compare costs across suppliers or locations. This will highlight any areas where you may be overpaying.  

We’ve seen companies use cost tables to identify and implement cost savings on a wide variety of indirect categories.  Some examples include:  

• $670k/year savings on miscellaneous hardware at a truck components supplier  
• $1.2M/year savings on IT contract resources at an industrial manufacturer  
• $132k/year on corrugated packaging at an automotive supplier  

Interested in learning more about the live virtual Indirect Purchasing Certification course? In addition to cost savings topics, this multi-session course addresses: 

• Playbook for successfully engaging stakeholders for indirect categories  
• Developing an effective Statement of Work to ensure supplier capabilities align with needs 
• Understanding contract language and clauses for indirect spend 
• Evaluate the capability of potential indirect suppliers 
• Assessing and managing indirect supplier risks 

Interested in more blogs, on-demand webinars, and more resources on Indirect Purchasing?

Interested in cutting costs strategically? Dive into APD’s dedicated hub for savings-focused resources and services.