Direct vs. Indirect Procurement: What are the key differences?

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Direct vs. Indirect Procurement What are the
key differences?
Direct Procurement vs Indirect Procurement
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The literal definition of procurement is the
action of obtaining or procuring an entity or a
commodity. Here, the term procurement is used in
the realm of business. On the surface level,
procurement might seem like it is all about
acquiring supplies of an organization that needs
to function daily. These include vendor
management, fraud prevention, payment
processing, invoice processing, quality control,
etc. However, there is more than which meets the
eye. Procurement can be divided into two niches
- direct and indirect procurement. While both
direct and indirect procurement are essential to
the smooth functioning of any business, it is
very important to understand their place in the
business so that you can prioritize and
emphasize where and how they are required.
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What is direct procurement?
Direct procurement is the acquisition of raw
materials and goods required for production.
Such purchases are made in bulk amounts and are
acquired from a supplier based on the best
possible price, quality, abundance and
reliability. This is necessary for the everyday
functioning of a business. For example, rice is a
direct procurement commodity for someone who
works as a chef. Cement is a direct procurement
commodity for a builder, metal is for the iron
and steel industry and so on. Direct procurement
is so essential that if it stops functioning or
encounters any kind of blockage, companies will
no longer be able to manufacture their product
and generate revenue. Hence, it can be said this
niche of the procurement software stems from the
manufacturing sector.
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What is indirect procurement?
Indirect procurement is the purchase of services
that are required to keep the business running.
They do not directly influence the functioning of
the business, but they do affect the outcome. It
is defined as the activity directed at ordering
goods and services that support your primary
business, but do not deliver directly to end
customers. For example, in the mobile phone
industry, silicon chips are a direct procurement
commodity, because without them, a phone will not
function, but a proper service center is an
example of indirect procurement. Would the
manufacture of mobile phones get halted because
of a lack of service centers? Of course not.
However, would the outcome of the company as a
whole be affected? Absolutely. So, we pretty
much understand the difference between the two in
the basic form.
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How to manage direct procurement?
Direct procurement process is one of the most
overlooked yet important aspects of business
operations. It is directly related to the
processes involved in purchasing of the raw
materials required to make a product. Managing it
isnt very easy, especially when it's across an
organization with thousands of products and
services.
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Direct vs. Indirect Procurement
Direct procurement software involves the
performance of two main functions. First, it is
concerned with purchasing the core component of
your products. Second, it is concerned with
enabling you to meet your customers needs more
effectively by granting you access to capital
that will enable you to increase your inventory
levels. Furthermore, this function is concerned
with ensuring that the organizations stock of
raw materials has an appropriate turnover rate,
so as to enable not only efficient meeting of
customer demands but also effective exploitation
of assets. On the other hand, indirect
procurement software functions are aimed at
securing goods whose consumption does not have a
direct effect on customers or production
cycles. Here are three core areas of procurement
where the distinctions between direct and
indirect procurement are laid-out
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Managing Supplier Relationships
Managing Inventory
Organizational Structure
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Managing Supplier Relationships
Direct procurement requires suppliers need to be
on good terms with the company to ensure long
term procurement of goods. However in terms of
indirect procurement, companies focus mainly on
expenditure. Hence their focus is mostly on
managing and reducing the same. This is
especially true in terms of companies that have
little to no direct procurement requirements
such as software companies, digital marketing
companies etc.
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Managing Inventory
Having the right amount of inventory on hand is
essential for smooth production. It can be
highly inefficient to hold large amounts of
inventory if the expected demand level isn't
known. Direct procurement is beneficial when you
expect a constant stock level, when the
purchasing process is rather traditional, when it
takes time to place orders, when you deal with
many suppliers and in some cases when dealing
with very expensive and perishable goods.
Indirect procurement is more appropriate when the
inventory levels fluctuate dramatically in
accordance with production cycles, in
environments in which customization is possible
and when time-to-market is required
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Organizational Structure
In most companies, direct costs are managed by
centralized procurement and supply chain teams,
with category managers focusing on specific areas
of spend whereas indirect procurement in most
large organizations tends to be decentralized in
nature. Organizations have multiple stakeholders
with independent budgets and spend protocols,
resulting in inefficiency in the indirect
procurement process. Lack of centralized
structure for indirect spending leads to
operational inefficiencies. A significant
proportion of global Fortune 500 companies are
moving to managed indirect outsourcing, saving
10-18 of their overall operating costs each year.
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In a Nutshell
Inefficient procurement management directly
impacts the bottom line. Without well-defined
and streamlined procurement practices, businesses
experience high overhead costs. The objective of
procurement is to make the best purchase at the
right price for the right item, at the right
time and in the right quantity and quality within
the organization. Businesses need to invest
resources towards understanding about what
differentiates direct from indirect procuring. It
must be noted that it is imperative that direct
and indirect procurement goes hand in hand in
industries that require it. One is not more
important than the other. By focusing on both,
organizations can cohesively grow by honing in
on the holistic view of the procurement field.