Big multinational companies like Shell have a revenue of more than 260 billion dollars. The net profit depends in part on the total costs. Like every company Shell would like to reduce the cost till the minimum. There are multiple ways to save on costs. One way is to outsource indirect procurement. It sounds maybe a bit weird, but we will explain how you can save money by outsourcing the indirect procurement.
The difference between direct and indirect procurement
The procurement is a department in the company responsible for the expenses. For a company like Shell, the expenses are huge. Every possibility to save on these expenses is can save the company millions. You can split procurement in two:
Direct procurement is the expenses on raw materials, goods and services which are important for the core business of the company. I case of shell the purchase of crude oil. Without crude oil Shell can’t produce petrol. So crude oil is important for the ongoing of core business of the company. Shell has already the arranged the best prices and conditions by their suppliers.
Indirect procurement is the expenses of materials, services and good which are not influence the core business of the company. For example, office supplies. Without office supplies Shell still can produce petrol, it only affects the office workers. For companies like Shell the indirect procurement is not that important and therefore don’t get a lot of attention. Because most of the time they only place one order at those suppliers. Therefore, Shell won’t start a tendering and selecting process. Because they don’t search for the best prices and conditions, they miss the possibility to save on these expenses. Companies like Shell will outsource the indirect procurement. They make another company responsible for all the indirect procurement. Instead of all the different suppliers with their invoices, the company will receive one total invoice. By outsourcing the indirect procurement companies like Shell can save up to 21% on the internal costs, reduce the supplier base up to 80% and unburden different departments in the company.
Procure to pay and Source to pay
Companies can outsource the indirect procurement in different stages. If a company like Shell choose for Procure to pay (P2P), they still are responsible for the selecting of the suppliers. The ordering, monitoring and payment will be outsourced. In addition to that a company like Shell can choose for Source to pay (S2P), in that case the external company also provides the tendering and selecting process, so the company is assured for the best prices and conditions.