Academic journal article Journal of Supply Chain Management

Sourcing Indirect Spend: A Survey of Current Internal and External Strategies for Non-Revenue-Generating Goods and Services

Academic journal article Journal of Supply Chain Management

Sourcing Indirect Spend: A Survey of Current Internal and External Strategies for Non-Revenue-Generating Goods and Services

Article excerpt

INTRODUCTION

There has been increasing recognition that the purchasing and supply management (PSM) function may have a significant role to play in an organization's pursuit of competitive advantage (Ellram and Carr 1994; Spekman, Kamauff and Salmond 1994; Carter and Narasimhan 1996; Carr and Pearson 1999). This advantage, it is argued, may be achieved through improvements in the total costs of ownership, in quality, in service levels, and in on-time delivery. In fact, some researchers have argued that PSM can be a significant source of both costs savings and competitive advantage for corporations (Tully 1995; Kapoor and Gupta 1997).

This view is not universally supported. Indeed, even though the apparent general consensus among PSM researchers is that purchasing is strategic, recent research supports the notion that the purchasing function's level of involvement in key strategic activities is rather limited (Johnson, Leenders and Fearon 1998a, b). Recent work by Ellram, Zsidisin, Siferd and Stanley (2002) investigated the link between the application of "best practices" in PSM and organizational success (defined as total return to shareholders). They argued that, while PSM may have a broad impact in organizations, it is essentially a support function. This confirms the views developed by Pearson, Ellram and Carter (1996) that purchasing performs essentially low-value-adding activities and Ramsay (2001a, 2001b) that although PSM can sometimes have a strategic impact, it is normally only a tactical function.

Much of the discussion about the strategic importance of PSM has necessarily focused on the relative significance of the management of direct, revenue-generating expenditure on corporate success. There has, however, been much less concern by academics about the efficacy and appropriateness of current approaches to the sourcing of indirect, or non-revenue-generating and support, expenditure. This is arguably because the effective management of indirect expenditure is unlikely to impact directly on competitive advantage.

Despite this, as practitioners know, managing indirect spend is one of their key responsibilities and in recent years many companies have begun to take a more structured approach to managing this area. Given this, and the relative paucity of academic writing about the management of indirect spend, this article seeks to shed light on what major companies are doing in indirect areas of expenditure. After a literature review, the article reports the findings from a survey undertaken into the indirect sourcing activities of 124 organizations. Some managerial and academic recommendations are also provided.

LITERATURE REVIEW

Indirect spend has been less discussed in the academic literature than direct revenue-generating expenditure. Before discussing the current literature in this area, it is important to define what is meant by indirect spend, commonly termed MRO (maintenance, repair and operational expenditure) in the literature. According to Barry (1999), indirect spend refers to the following types of spend:

1. Electrical and mechanical parts and equipment (including materials to support capital projects)

2. Electronic parts and equipment (including computers and peripherals)

3. Professional equipment (including laboratory equipment and supplies)

4. Industrial supplies (including general maintenance supplies)

5. Safety and healthcare equipment, parts and supplies

6. Machine shop supplies (industry machinery, equipment and tools)

7. Office supplies and equipment

8. Chemical supplies and equipment

9. Vehicle and fleet parts, equipment and supplies

Given the breadth of materials and services covered by this definition, and the multiple channels through which they are procured, MRO is often a highly complicated area to manage. This complexity is also frequently seen as a deterrent for firms wishing to achieve quick-wins in value for money leverage. …

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