Strategic Sourcing for Indirect Spend
When most organizations think about sourcing strategy, they typically focus on direct materials, where strategic sourcing initiatives are well-established and commonly used to implement category strategies.
Indirect categories like IT, facilities, logistics, marketing, and MRO are often left behind because they are decentralized, complex, and dispersed across numerous stakeholders and suppliers.
Strategic sourcing is a structured initiative designed to align the supply base with organization needs and expectations.
In practice, it aims to deliver:- An optimized supply base, with suppliers that align with company objectives and category strategies
- Reduced total cost, improved value, and improved continuity assurance
When applied to indirect categories, strategic sourcing also serves as an early collaboration tool—helping purchasing teams better understand diverse stakeholder needs, which are typically more complex than those for direct materials.
Here are a couple of examples of strategic sourcing projects that delivered for indirect categories:
$1.4M Savings on MRO Items with Improved Service Levels
An automotive supplier was using a third-party MRO commodity manager to handle $25M in annual MRO purchases across six U.S. facilities.
Rising costs, inventory issues, and poor service prompted them to engage APD to identify direct sourcing opportunities and potential cost-saving substitutes.
APD conducted stakeholder interviews to identify pain points and unmet needs, while simultaneously developing a market basket of over 3,000 items across 14 MRO categories.
After identifying 33 potential suppliers and running a multi-round market test, APD recommended the optimal supplier mix for each category and provided a roadmap to evaluate substitution opportunities for low-complexity, high-savings items.
Total impact:- $1.4M in annual savings
- Elimination of the ~6% fee previously paid to the commodity manager
$1.2M Savings on Corrugated Packaging
A U.S.- and Mexico-based manufacturer spending nearly $8M annually on corrugated packaging lacked a systematic category management approach.
They assembled a cross-functional team—led by a buyer and a packaging engineer—to analyze spend, interview stakeholders, identify alternative suppliers, and conduct a market test.
They discovered that 41% of total spend was concentrated in just 12 SKUs supplied by five companies. A market test of these 12 SKUs identified a new supplier offering $575K in annual savings while meeting all stakeholder needs.
Within 18 weeks, they implemented a 17% cost reduction on the $3.3M spend represented by these items.
Two additional phases were planned to target the remaining spend:- $1.3M in high-value SKUs
- $3.5M in tail spend covering over 200 SKUs
Expected total savings: $1.2M annually.
Lessons Learned from Strategic Sourcing Indirect Categories
APD has helped clients achieve lower total costs, improved value, and enhanced continuity assurance through strategic sourcing across numerous indirect categories.
Three recurring success factors stand out:1. Spend Analysis
Classifying and segmenting spend into actionable subcategories often requires significant effort.
To conduct an efficient market test, focus on identifying high-spend, repeat-buy items and gathering detailed information such as drawings or technical specifications that ERP systems often lack for indirect categories.
2. Stakeholder Engagement
Indirect categories typically involve multiple stakeholder functions – often five to eight across various plants or divisions.
Best practice is to interview at least one representative from each relevant function to ensure that the sourcing strategy addresses all perspectives and requirements.
3. Supplier Identification
Supply market knowledge is often limited for indirect categories that haven’t been strategically managed. Start broad by identifying dozens of potential suppliers, then narrow the list through structured evaluations and interviews.
This process often benefits from leveraging stakeholder experience and external professional networks to uncover capable suppliers familiar with similar needs.
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.