Why is there a distinction made between direct and indirect procurement?
Both direct and indirect goods and services are vital business functions that consolidate enterprise purchasing. So why treat one function as more important than the other?
Well, as the world of procurement evolved, two decidedly separate disciplines emerged into what we now know as direct and indirect procurement. Granted to the uninitiated this can get a little confusing.
That’s why in this blog we are going to look at what exactly these procurement disciplines are, what makes them unique, and the key differences between them so you can work on improving your procurement strategy.
What is Direct Procurement?
Direct procurement, also known as direct cost or direct spend, is a business function that supports the core of the enterprise’s offering. It involves the purchase of goods (typically raw materials) and contracting of services that are supplied by a third party (vendor). These goods and or services are used directly by the buyer and are usually consumed in the manufacture of finished products or Goods for Resale (GRF).
What is Indirect Procurement?
Indirect procurement is a discipline that concerns the contracting of services or purchase of goods required to keep the enterprise’s operational processes running. Indirect procurement is not viewed as a core function of the business’ income generation and product offering.
The Major Differences Between Direct and Indirect Procurement
Now that we know what direct and indirect goods and services procurement are, let’s examine some of their differences.
Firstly, direct procurement is considered operational in nature while indirect procurement is a tactical task.
Secondly, the volume of goods that are procured during direct procurement is always of a very large quantity compared to the quantity secured in indirect procurement.
Additionally, it can be mentioned that should there be a disruption in the supply of raw materials in direct procurement this will undoubtedly affect the bottom line. Whereas with indirect procurement, there wouldn’t generally be a halt in business operations if the supply of goods or services is interrupted.
The frequency of purchase is another distinguishing factor between direct and indirect procurement. Procurement teams do make quite a lot of direct purchases on a regular basis because the products being purchased are fundamental to the offering of the business. The frequency in the case of indirect procurement is on an ad hoc basis. So goods and services are sought after only when needed.
Despite these differences, these two practices cannot exist without each other.
We’re now going to look at three areas in which the distinctions between direct and indirect goods and services procurement are seen practically.
1. Vendor Relationship Management
With direct procurement, sourcing teams are seeking to establish long-term relationships with reliable suppliers that can provide high-quality raw materials in the required quantities and at a cost-effective price. Therefore, vendor management best practices are very vital.
With indirect procurement, the priority here is minimizing spend so not much time and effort is spent cultivating relationships with suppliers.
2. Inventory Management
Because raw materials need to be in stock and ready for use, direct procurement employs inventory management best practices to make sure that the business always has enough raw materials on hand to keep operations running.
This is unlike indirect procurement where products and services are sought based on demand.
3. Enterprise Setup
Direct spending is typically the business of the procurement and sourcing teams in most companies. Their efforts are centralized and consolidated. The raw materials needed by the entire enterprise are secured through them.
With indirect procurement, on the other hand, efforts are decentralized with each internal stakeholder capable of procuring as needed albeit using spend protocols for that particular department.
Understanding the key differences between direct and indirect goods and services procurement allows CPOs and their teams to come up with robust and actionable procurement strategies and vendor management best practices.
Armed with this knowledge of direct and indirect procurement, you can find ways to improve your bottom line, streamline operations, and properly organize your procurement campaigns.
Also, having reliable procurement software will simplify things.
If you would like to discuss supplier management software with a consultant, or to schedule a demo, contact us today.