In recent time, the importance of procurement is increasing drastically. Originally, it started as a method to integrate buying and purchasing into supply chain management. Over time, organisations are seeing changes in their discipline with direct and indirect procurement. Before you understand the difference between direct and indirect procurement, let’s get the idea about the roles played by these two aspects within a company.
What is direct procurement?
Direct procurement is the one where raw goods and materials are purchased for production. Generally, these purchases are made in massive quantities and acquired from suppliers listed by sourcing agents. The products are brought at the best possible price and have top-notch quality and reliability. In direct procurement, items are purchased repeatedly and are compulsory for prime business practices. If direct procurement encounters an issue and stops functioning, companies can no longer produce products and earn a profit.
What is indirect procurement?
Indirect procurement is the one where supplier or services are purchased to maintain the day to day business. The range of purchasing includes things like office supplies, repairing devices and tools, or acquiring any kind of service. If there is no indirect procurement, companies will fail to operate properly and effectively.
What are their differences?
Whilst direct procurement is acquiring goods, services, and materials that enable performances, revenue, and competitive advantage, indirect procurement is spending on maintenance and services needed for everyday operations. The latter options do not contribute directly to the company’s bottom line. Let’s take a look at how these two features are managed internally.
Managing relationship with suppliers
To improve quality and efficiencies, procurement subcontractor teams managing direct procurement tend to nurture a long-term relationship with suppliers. Therefore, they spent more time developing and nurturing supplier relationships. On the other hand, the indirect procurement team concentrates mainly on the company’s expenditure. They focus on having a transactional relationship with suppliers because all they want to do is manage and reduce spending.
One thing people should note that vendor management can be beneficial to companies with indirect procurement needs. Organisations and hotels located in various locations can negotiate better discounts and deals when they work on building relationships with a pool of vendors, hence, reducing the overall cost.
Again, software companies with less or no need for procurement like, acquiring raw goods, maintaining transportation costs, and more can also lessen the overhead expenditure by strategically managing the vendor that support activities related to indirect procurement.
If you want to avoid delays, inventory management is important to direct procurement. If a supplier has no stock, it can lead to various issues for the whole supply chain. The sourcing agents must arrange a pool of suppliers so that you can get in touch with another one if one runs out of stock. However, in the case of indirect procurement, managing inventory is not a priority. But, this too depends on the business needs and nature.
The structure of the organisation
Direct procurement can make or break the revenue of a company. The direct spending must be looked upon by a dedicated team of procurement specialists. During indirect spending, the company does not maintain the same approach. No functions are unsystematically delegated to stakeholders throughout various departments.
What are examples of direct and indirect procurement?
Spending related to raw materials, machinery, resale products, mechanical parts for manufactured goods, subcontractor labour for construction services, and food products ingredient are some of the few examples that fall under this category of procurement.
Expenditure related to office furniture, transport cost, computers and hardware equipment, utilities (water, gas and electricity), maintenance cost, facilities and workplace management (cleaning and bathroom supplies, office supplies and more), software, advertising and marketing expenditure (contractors, creative agencies, public relations and advertising), employee management and development cost (human resources, training and more) and computer devices are some of the examples of indirect procurement.
Whether the purchase is made by direct procurement or the services are acquired indirectly, you need both for your company to run smoothly and effortlessly. Now, procurement has become easy with the e-procurement app where you can connect with procurement subcontractors, agents, vendors, suppliers and other resources. This makes the purchase easy and convenient.
Now when you know the difference between direct and indirect procurement and how important they are for your business, hire teams effectively and delegate works. Nevertheless, keep the expenditure, business model, company’s size, business niche and the resources in mind before settling down for acquiring goods.
Make sure that you have a list of suppliers, vendors, sellers and distributors in hand so that you can keep your options clear. Procurement looks easy but there are a lot of stages involved. Do not jump in without the help of professionals.