When manufacturers think about costs, they often focus on raw materials, production labor, and equipment. These are all direct spend—expenses tied directly to making a product. However, indirect spend—purchases that support operations but don’t go into the final product—can add up quickly and impact profits. These costs can significantly affect a company’s bottom line, from office supplies to maintenance services.
Managing indirect spend efficiently is key to controlling costs and increasing profitability. Automated processes, centralized procurement, and real-time spend data help manufacturers optimize spending and eliminate waste. These benefits and more are available when you invest in the best ERP systems for manufacturing.
What Is Indirect Spend in Manufacturing?
Indirect spend refers to all expenses that support a business but are not directly linked to making a product. This includes these goods and services:
If you don’t keep an eye on your indirect spend, your bottom line will feel the pain.
- Office supplies and IT services
- Facility maintenance and utilities
- Marketing and travel expenses
- Software subscriptions and consulting fees
- Equipment maintenance and repair
- Logistics and warehousing
While these costs don’t directly contribute to production, they are necessary for a manufacturing business to function. However, without proper oversight, indirect spending can spiral out of control, leading to waste and inefficiencies.
Direct vs. Indirect Spend: Why It Matters
Manufacturers carefully track direct spend because it impacts pricing and profitability immediately. However, indirect spend is often spread across multiple departments, making it harder to manage.
Unlike direct spend, which is usually well-monitored and planned, indirect spend often lacks structure. Employees may order supplies, contracts may be renewed, and departments may make purchases without oversight. This unstructured type of spending can lead to:
- Overspending because of no bulk purchasing spend analysis
- Unnecessary purchases that go unnoticed
- Missed opportunities for vendor negotiations and strategic sourcing
- Budget overruns and reduced profitability
Through indirect spend optimization, manufacturers can reduce costs, improve efficiency, and free up resources for more strategic investments.
The Challenges of Managing Indirect Spend
Many manufacturers struggle with indirect spend management due to:
- Lack of Visibility – Without a central system tracking purchases, it’s difficult to see where money is being spent.
- Decentralized Procurement – Different departments often make purchases separately, leading to missed opportunities for discounts.
- Vendor Management Issues – Without contract oversight, companies may pay higher prices or work with underperforming suppliers.
- Compliance and Approval Delays – Manual approval processes can slow down purchasing and create inconsistencies.
These challenges make it harder to control costs and maximize profitability. This is why many manufacturers turn to ERP systems to streamline spend optimization.
How ERP Systems Optimize Indirect Spend
The best ERP systems provide the structure and automation manufacturers need to optimize indirect spend and prevent unnecessary costs. By centralizing procurement, enhancing supplier management, and integrating with financial systems, ERPs ensure that every dollar spent is tracked, analyzed, and optimized. Here’s how:
Centralizing Procurement Control
Frontier ERP’s Supply Chain Management module offers full procurement administration for spend optimization.
One of the biggest challenges with indirect expenses is decentralized purchasing, where different departments order supplies independently. This can lead to inconsistent pricing, redundant purchases, and missed opportunities for volume discounts.
An ERP system centralizes procurement functions, requiring all purchases to go through a structured process. Employees submit purchase order requests, which are automatically routed for approval based on predefined rules. This ensures that only necessary purchases are made and that they align with budget constraints. Additionally, ERP systems can restrict purchases to preferred suppliers, ensuring compliance with negotiated contracts and reducing maverick spending.
Supplier and Contract Management
Managing vendors manually can be inefficient and costly. Manufacturers may overpay for goods and services since supplier relationship management is not made a priority.
ERP procurement solutions include supplier management tools that track vendor performance, pricing, contract terms, and delivery reliability. This data helps businesses negotiate better pricing and identify the best vendors for specific needs. By consolidating supplier contracts within the ERP, manufacturers can avoid unauthorized purchases, ensure compliance with contract terms, and leverage strategic sourcing for cost savings.
Real-Time Spend Visibility
Many manufacturers struggle with spend visibility because indirect purchases often occur across multiple departments. Without a clear picture of where money is going, it’s difficult to control costs or identify inefficiencies.
Manufacturing ERP systems provide real-time expense tracking through interactive dashboards and reports. These tools help finance teams watch spending patterns. That way they can find savings opportunities and spot budget issues before they become problems. By analyzing historical spending trends, manufacturers can also forecast future expenses more accurately and adjust their budgets accordingly.
Automated Approvals
Manual approval processes for indirect purchases can be slow and inconsistent. Delays in approvals can disrupt operations, while inconsistent enforcement of approval rules may lead to unnecessary expenses.
ERP systems offer automated approval workflows, ensuring that every purchase request follows a structured review process. Approvals can be based on spending thresholds, department budgets, or predefined authorization levels. This prevents unauthorized purchases and keeps spending within budget while ensuring that essential purchases are not delayed.
Integration with Finance & Inventory
Indirect spending impacts multiple areas of a business, from procurement and finance to inventory and operations. Without a connected system, companies may struggle with duplicate purchases, incorrect budget allocations, and inefficient resource planning.
An ERP system integrates procurement, finance, and inventory management, ensuring that every purchase is aligned with business needs. If a department requests a specific item, the system can check existing inventory levels before approving a new purchase. This prevents unnecessary
Supplier relationships are key to harnessing direct or indirect spend habits that can hinder your profitability goals.
stockpiling and optimizes resource utilization. Additionally, integration with financial modules ensures that indirect spend is properly recorded in accounting systems, improving budget accuracy and financial planning.
Key Frontier ERP Features for Indirect Spend Optimization
The top ERP systems for manufacturing come with various tools to help manufacturers take control of their spending. Frontier ERP offers a Supply Chain Management module that provides:
- Procurement and Supplier Portals – Simplified vendor management and contract tracking. This opens the door for stronger supplier relationships through better contract and performance management.
- Spend Analytics & Cost Reporting – Insights into spending trends and potential savings. This allows companies to lower procurement costs by consolidating vendor agreements and negotiating better terms.
- Increased budget control – Integrated financial and procurement processes for seamless real-time tracking and budget control.
- Approval Workflows & Compliance Management – Reduced waste and inefficiencies by preventing duplicate and unnecessary purchases. This also ensures that all purchases go through the proper channels.
- Accounts Payable Automation – Automated purchase approvals to eliminate unnecessary spending. This also reduces processing costs and improves cash flow management.
Manufacturers using Frontier ERP have successfully cut indirect costs, streamlined procurement, and improved their overall financial performance.
Conclusion
Indirect spending may not be as visible as direct costs, however, it plays a crucial role in manufacturer profitability. Without proper oversight, small inefficiencies can add up quickly, leading to unnecessary expenses and missed opportunities for cost savings. Manufacturers can take the essential steps toward indirect spend optimization by leveraging the Frontier ERP Supply Chain Management features.
Investing in manufacturing ERP software isn’t just about cutting costs. It’s about making smarter, data-driven decisions that improve efficiency and boost profitability. If you’re looking to take control of your indirect spending, now is the time to explore how Frontier ERP can help.
