-75%
Compare and contrast the tools & techniques that can be applied to map categories of direct &
indirect expenditure
Solution
Mapping categories of direct and indirect expenditure is crucial for effective category management and strategic sourcing. Direct expenditure includes costs directly related to the production of goods and services such as raw materials and manufacturing inputs. Direct expenses can be effectively managed using tools like portfolio analysis, market growth models, supply chain mapping, and SWOT analysis (CIPS, 2022). Indirect expenditure includes costs not directly related to production such as office supplies, utilities, and marketing expenditures. Indirect expenditure can be effectively managed using tools such as STEEPLED analysis, vendor management systems (VMS), benchmarking, market analysis, and Porter’s Five Forces analysis (CIPS, 2022). Below are the key tools and techniques applicable to each type of expenditure. A summary or the direct and indirect expenses is illustrated in the following;
Table 4:Summary of direct and indirect expenses
Source: Summarised from CIPS Notes
Kraljic Matrix Analysis for Direct Expenditure
Portfolio analysis also known as the Kraljic matrix is a critical tool for mapping direct expenditure that provides a framework for categorizing procurement activities based on their impact on profit and supply risk (CIPS, 2022). This technique categorizes spending into four categories namely strategic, leverage, bottleneck, and routine items as shown in the following;
Figure 10:Kraljic Matrix Analysis
Source: CIPS Notes
- Strategic items such as specialised drilling (Salamah1, Al Saadiyat, Al Sila, Ramhan and Yas) equipment are high value and high risk. Category management hence require careful management and strong supplier relationships to ensure continuity and quality.
- Leverage items which include bulk purchases of raw materials like steel for pipelines offer significant cost-saving opportunities. The category management would influence sourcing volume discounts due to their high value but low risk.
- Bottleneck items which include spare parts for critical machinery are low-value but high-risk. This necessities need for strategies to secure supply and reduce dependency on single sources.
- Routine items which include office supplies and consumables are low value and low risk but managed through automated procurement processes to minimize administrative costs. In category management, ADNOC can allocate resources effectively, develop targeted procurement strategies, and achieve cost efficiencies in direct expenditure.
STEEPLED Analysis for Indirect Expenditure
The STEEPLED analysis is a tool used to evaluate the external factors that can impact an organization’s indirect expenditure (CIPS, 2022). The analysis is done on social, technological, economic, environmental, political, legal, ethical, and demographic factors (CIPS, 2022) as shown in following illustration;
Source: CIPS (2022)
In summary, the analysis helps ADNOC to understand the broader context in which they operate and anticipate changes that could affect procurement strategies. For instance, economic factors such as inflation rates and currency fluctuations can impact the cost of indirect goods and services. Technological advancements may provide opportunities for cost savings through automation and improved efficiency. Environmental and ethical considerations are increasingly important, especially as organizations strive to meet sustainability goals. By systematically evaluating these external factors, STEEPLED analysis helps align procurement strategies with long-term organizational objectives, ensuring resilience and adaptability in a changing environment.
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