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• Direct purchase orders are issued in the acquisition of raw materials that go into the final product in a manufacturing enterprise.
• For an automaker, direct purchase orders would be issued for the acquisition of finished and semi-finished components, parts, fasteners, paints, rubber parts, plastic parts, castings, metal sheet parts, and forgings.
A direct purchase order is critical to the profitability of an enterprise. The cost of the raw materials directly impacts the pricing of the final product. In addition, direct purchase orders are often for large dollar amounts and businesses will seek to get favorable pricing arising from the large volume of business. There are other key elements of direct purchasing that set it apart from indirect procurement.
Due to the importance of direct purchasing, a business must maintain smooth and long-term working relationships with suppliers. In many cases, manufacturing enterprises will require suppliers to make parts to very specific instructions. For instance, a car manufacturer may be working with tens of suppliers, each producing a part with very particular dimensions and components. It may take several years of shipping before the automaker turns a profit from a particular car. Therefore, they need to maintain a harmonious relationship with the suppliers.
Supplier relationships are also important because of the speed of technological evolution. If a new element that works better than an existing one emerges, a business may help its suppliers transition to the new element. They may facilitate this through joint ventures for research and development purposes. The new technology that proves viable ends up benefiting both parties.
The process of inventory management indirect purchasing bears a stark contrast to indirect procurement. In indirect procurement, items or services are requested when the need arises. Indirect purchases include catering services for company events, consultancy services, replacement of company furniture, and other non-manufacturing related items. Manufacturing is a continuous process. The business must project its production volumes weeks and months ahead of time. It requires a meticulous projection of raw material needs ahead of time.
Procurement Team Structure
The procurement team responsible for direct procurement is often centralized. They analyze and determine the organization’s needs. They also are more likely to work with targets in terms of quality and prices. This is because their work directly affects the final product. Manufacturing enterprises often will have a budget for their direct purchasing needs. Any major deviations from the budget will need to be investigated.
Challenges of Direct Purchasing
The direct purchasing process presents several challenges to any procurement team. Dealing with numerous suppliers and dynamic market conditions is a tough balancing act. Here are some specific challenges to consider.
Direct purchasing is a complex undertaking for any new business. There are numerous contracts to negotiate, sign, and monitor. The team must constantly ensure that suppliers meet quality demands, quantity, and other specifications in their contracts. They must also ensure that suppliers are properly always licensed. The sourcing team also needs to monitor the market for new opportunities, such as new suppliers, new technology, or new processes.
As highlighted, the procurement team works with constraints such as the budget and production timelines. Fortunately, procurement technology makes the process of contract management a little easier and more structured. A contract repository is used to maintain all contract documents. Alerts are set up to send reminders when such things as permits and contracts are about to expire. The business can also use listening tools and other information mining technologies to keep up with news about their suppliers and to respond to any reputational threats.
Supply Chain Risk Management
Another challenge that the team must deal with is the mitigation of risk. Quality issues in raw materials affect customer satisfaction, especially when there is a sudden drop in reliability or durability. It can quickly become a PR crisis. As such, supplier relationship management must include conducting quality checks on deliveries from vendors.
Potential disruptions in the supply chain also pose a risk to the manufacturing operations of a company. The team has to monitor the supply routes for any potential bottlenecks, supply fluctuations, or geopolitical crises that may disrupt shipping.
Lack of Visibility
Procurement teams do not always have access to all the information they need for decision-making. This is a common problem in companies that have complex supply chains, with suppliers operating in many jurisdictions. In such situations, there are multiple tiers of suppliers, some acting as aggregators for smaller suppliers. Visibility may become an issue, especially for ESG-related issues.
Attempts to combat a lack of visibility through data tracking may be met with challenges.
Proper direct procurement requires investment in procurement software. Modern cloud-based systems incorporate AI-based technology to draw insights into data being gathered from a company’s procurement operations. Such insights are great when looking at assessing supplier performance, spot trends and patterns in prices, and deciding whether to renew supplier contracts.
If your company is seeking to invest in reliable technology to manage the direct purchasing process, consult ProcurePort for the right choice. ProcurePort is the world’s leading provider of e-procurement software. We help businesses streamline their purchasing efforts and all other procurement-related functions through customized software solutions.