Indirect spend refers to a type of Tier II Reporting spend where a Tier I Prime Supplier’s Diverse Spend cannot be attributed to any specific Customer or contract.  Indirect Spend is the most common form of spend and can be attributed to multiple customers versus Direct Spend which is attributed to a specific contract or Customer.

Indirect Spend is calculated by taking a Tier I Prime Supplier’s Customer Sales and dividing it by Total North American Sales.  This Indirect Spend percentage can then be used to determine the amount of Diverse Spend that is attributed to a Customer.

An example of Indirect Spend allocation is shown below:

Tier I Prime Supplier (Prime A) has 3 Customers.  Customer sales are provided in the example below

Prime A

  • Customer A Sales:  $10,000,000.00
  • Customer B Sales:  $20,000,000.00
  • Customer C Sales:  $10,000,000.00

Prime A also completes the amount of Total North American Sales it has achieved for the reporting period

  • Total North American Sales:  $100,000,000.00

In addition, Prime A also submits the amount of Total Indirect Spend

  • Total Diverse Indirect Spend: $20,000,000.00

To figure out how much Diverse Indirect Spend is attributable to each Customer, the Indirect Spend Percentage must be calculated on a customer to customer basis.  As noted previously, Indirect Spend is calculated by taking a Tier I Prime Supplier’s Customer Sales and dividing it by Total North American Sales.

Customer A Sales ($10M) / Total North American Sales ($100M) = Indirect Spend % (10%)
Customer B Sales ($20M) / Total North American Sales ($100M) = Indirect Spend % (20%)
Customer C Sales ($10M) / Total North American Sales ($100M) = Indirect Spend % (10%)

Once calculated, to discover the dollar amount that is attributable to each Customer, Prime A will use the Indirect Spend % and multiply it by the Total Diverse Indirect Spend.

 

Customer A Indirect Spend % (10%) X Total Diverse Indirect Spend ($20M) = Customer A Allocated Diverse Indirect Spend ($2,000,000.00 or $2M)

Customer B Indirect Spend % (20%) X Total Diverse Indirect Spend ($20M) = Customer B Allocated Diverse Indirect Spend ($4,000,000.00 or $4M)

Customer C Indirect Spend % (10%) X Total Diverse Indirect Spend ($20M) = Customer C Allocated Diverse Indirect Spend ($2,000,000.00 or $2M)

 

Total Indirect Spend refers to the total amount of Indirect Spend a Prime has completed with its suppliers while Allocated Indirect Spend refers to spend that is specific to a Customer based on the Indirect Spend percentage.

The product or service can include anything from manufacturing to logistics to IT to  janitorial services just as long as it can be directly tied to a Customer or contract.

 

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