There are two sides to every coin and every story. The world of procurement is often divided into two sections: indirect sourcing and direct sourcing. While there are distinct differences that are important to understand between indirect and direct sourcing in the context of procurement, it’s also vital to realize that indirect and direct sourcing have a symbiotic relationship and directly affect one another. As such, like with most things in life, striking a balance for your procurement team between indirect and direct procuring will lead to more efficient procurement functions.
Direct Sourcing Vs. Indirect Sourcing
Direct sourcing is the aspect of procurement that likely comes to mind almost immediately. That’s because direct procurement refers to the sourcing of goods and services that the company or organization needs to fulfill its production obligation. In other words, direct sourcing often refers to the raw materials and other goods or services that are directly related to the end product that your company or organization then sells to consumers.
This is an absolutely vital aspect of procurement because, as the name implies, it directly contributes to the actual product-creation lifecycle.
A few more examples of direct sourcing are, the purchasing of raw materials, mechanical parts for manufacturing, ingredients for food products, or subcontracted labor in the context of construction. These examples demonstrate a few varieties of goods and services that are widely recognized as an aspect of direct sourcing.
Benefits of Deploying a Direct Sourcing Strategy
- Significant cost savings. With a direct sourcing strategy, you get to enjoy significant cost savings associated with better negotiation processes. Working with unknown suppliers and anonymous agencies comes with a higher price tag, and as the cost of products continues to roar, you will find this cost continues to grow.
- Faster procurement cycles. With a direct sourcing strategy, procurement processes are faster because operational bottlenecks are eliminated. Faster procurement cycles also lead to better efficiency and time savings.
- Time-saving. Having a direct sourcing strategy saves you time in selecting and vetting suppliers. It is also easier to handle supplier requests and to satisfy other requirements required for a positive supplier relationship.
- Healthy supplier relationship. Having a direct sourcing strategy helps you to stick to commitments with suppliers, thus building trust. This trust, in the long-term, culminates in better supplier relationships since commitments are settled in real-time.
- Compliance and performance. A direct sourcing strategy will help you meet compliance requirements associated with cost, policy, safety, and standards. With a direct sourcing strategy, you can easily comply with different requirements and fulfill major national and international standardization requirements.
Indirect sourcing, on the other hand, is the procuring of goods and services for everything that your company requires to run internally. Rather than products or ingredients that directly contribute to the production of your company’s goods and services; indirect sourcing manages the flow of internal organization consumption.
Indirect sourcing is just as necessary to the organization’s function and operation as direct sourcing. Although both indirect and direct procuring ultimately have the same goal, they just serve two halves of the same circle.
Traditionally, indirect sourcing has been considered largely administrative and dealt with organizational expenses and spending. However, the scope for indirect sourcing activities has expanded significantly since then. Today, indirect sourcing includes technical hardware and software that your employees and organization rely on, travel, utilities like gas and electric, office supplies, management development training, and even spend management.
While it remains true that administrative and organizational expenses are still included in the basket of indirect sourcing, they are no longer the sole focus, as companies have turned to a much more comprehensive definition of indirect spending.
Indirect and direct sourcing activities need to remain in a balance with one another. After all, without both halves doing their part, neither would exist. Keeping these two aspects in harmony with one another will allow your organization to run through its full procurement cycle with minimal interruptions. Another added benefit to keeping indirect and direct procuring in a purposeful balance is that your organization will naturally see a reduction in one-time-buys and other off-cycle purchasing activities that create holes in the budget.
A Quick Recap
Procurement and sourcing cycles look slightly different from industry to industry and from organization to organization. While procurement cycles will certainly vary and morph between organizations, one constant remains. There’s a balance between direct procuring and indirect procuring.
Tending to direct sourcing needs in a company allows the organization to remain operational, producing goods and running through its normal cycle of business without interruptions and ensuring that there is enough inventory to continue production.
Indirect sourcing is all the goods and services for the rest of the organization’s functionality. From administrative spending and office supplies to tech hardware and software, and even marketing spends. The indirect sourcing activities are essentially the oil to keep your company running smoothly.
For more information on direct versus indirect sourcing, or anything else related to procurement keep browsing ProcurePort. ProcurePort is the internet’s premier place for everything procurement from information and knowledge, to technology and software, and everything in between.