How is Direct Procurement Distinguished From the Indirect Procurement

Procurement is the process of obtaining or buying products or services, usually for business reasons. It covers the acquisition of goods that are used in production as well as those that are necessary for the firm to run smoothly. Direct and indirect procurement are the two categories of procurement that exist. Both forms of procurement exist in businesses, and although they have different roles to play in day-to-day operations, they are both necessary for the survival and expansion of businesses.

An Introduction to Direct Procurement

Direct procurement refers to the process of buying out materials, goods, or services that can be directly incorporated into the final product; in other words, those materials and supplies that the company requires to manufacture its products. An automobile manufacturer, for example, might directly purchase materials like steel, tire rubber, or electronic components.

Other examples of direct procurement:

• A baker purchasing flour for bread-making.
• A building company is ordering cement and blocks for an ongoing project.
• A fabric manufacturer ordering textiles and cloth materials for processing and stitching down the line.

Direct procurement is majorly found in physical manufacturing sectors, where physical products are manufactured from direct raw materials. Businesses are unable to produce and market their goods to make money if direct procurement falters or experiences issues. For sectors like manufacturing, direct procurement plays a critical day-to-day role.

The Concept of Indirect Procurement

The process of obtaining goods needed for a business to run daily is known as indirect procurement, sometimes known as indirect spending, operating costs, SG&A (selling, general, and administrative), or MRO (maintenance, repairs, and operations) expenditures. These supplies are required in the company, irrespective of the fact that they are not directly incorporated into the production line, which consists of things such as stationery, machinery used in the production process, and staff development.
Even though indirect supplies are often not a factor that comes into direct contact with the clientele and hence do not directly affect the goods and services offered to the clients, they are essential in the company’s operations.

Examples of indirect procurement:

• Utilities and rent.
• Promoting services.
• Travelling and costs.
• Services connected to IT and SaaS subscriptions.
• Office supplies and stationery.

Key Differences Between Direct and Indirect Procurement

The main difference between indirect and direct procurement is the purpose for which each is used. Indirect procurement deals with the acquisition of goods and services needed to establish and sustain efficient operations, whereas direct procurement concentrates on obtaining the essential supplies that are processed and supplied to your clients.

• Strengthening Customer-Vendor Connections: Direct procurement is the process of acquiring the materials from the core of what the company offers to its clients. In direct procurement, it is crucial to establish a proper relationship between the customer and the vendor that can remain resilient, especially during incidents, and provide security to both aspects. However, in indirect procurement it is rare to dedicate much time and effort to the searches as in the case of direct procurement.
• Effective Inventory Management: In the case of direct procurement, inventory must be kept on hand to provide a seamless production process and prevent delays. On the other hand, demand is used in indirect procurement whereby supplies are bought only when needed, thus are few and cheap than direct supplies. They can, however, be controlled, and as a result, spending can be done more efficiently, hence minimizing the indirect expenses.
• Designing an Efficient Organizational Setup: The majority of companies have a centralized procurement function for direct costs, with certain procurement categories being the responsibility of the category managers. Indirect spending is often fragmented, decentralized, and regulated by multiple internal spending authorities, each having its own budget and spending standards. Direct procurement is better managed as compared to the manual processes of procurement since they allow leaving money on the table. Thus, if there is a stable digital platform that provides reliable compliance for indirect purchasing, the team of finance may only control the indirect procurement.
• Balancing Planned and Spontaneous Expenditures in Budgeting: Since direct procurement is responsible for acquiring the necessary resources for production, which are the main elements of your business, this area must be given utmost attention to ensure that it is rather solid. In contrast, there needs to be more planning or budgeting for indirect procurement because it might be challenging to report on precise numbers to forecast demand for indirect goods in the absence of a digital solution. Unlike direct supplies, indirect supplies are frequently acquired on the spur of the moment as needed.

Best Practices for Successful Indirect Procurement Management:

The following should be considered while creating an indirect procurement plan:

• Emphasizing the Relevance of Indirect Procurement: One of the reasons organizations like to focus more on direct procurement is that it is simpler to handle than indirect procurement. But you must acknowledge that change is necessary if you want to comprehend it. You must admit that, like direct spending, indirect procurement requires greater consideration and resource allocation. Any size company can profit sooner rather than later from even modest improvements in indirect procurement.
• The Importance of Strategic Planning: You will have to spare considerable time to plan when you are developing an indirect procurement strategy. In this process, the evaluation of the existing indirect spending policies and procedures is the first step. To keep yourself in check and avoid getting sidetracked, it is thus essential that you have a clear plan to follow, especially realizing that the idea is to follow an indirect spend.
• Data-Driven Decision-Making: The main reason for complications in indirect procurement is the inability to find the proper data. It is essential to manage the current data and keep all relevant information in one location while developing a plan so that decisions can be based on it. Spending time in the process of collecting such information is one of the best practices when you are working on business-winning plans.
• Selecting the Appropriate Technology: Bringing technology into indirect procurement is the best way to automate the procurement process; it gives prompt, proper decision-making power. This helps save money and time and increases productivity within the organization.
• Communicating Effectively in the Workplace: This means that communication must be given a thought when it comes to indirect procurement strategy formulation. Making everyone in the company aware of the importance of whatever policies you have in place is one way of making them proud of their work so that they can see the big picture.

The Impact of Direct and Indirect Procurement on Spend Management Strategies

While indirect procurement affects earnings indirectly, the less you spend, the bigger your profit margins will be, direct procurement directly affects an organization’s bottom line because it involves revenue-generating spending connected to products being sold. Therefore, it’s vital to record all business expenses, direct or indirect.

Direct procurement involves purchasing materials and components for a company’s products, requiring strong supplier relationships and careful inventory management to ensure production continuity. Indirect procurement focuses on acquiring goods and services needed for daily operations, such as office supplies and maintenance. Technology information and proper planning can assist in successful management and more results in terms of operation effectiveness, cost reduction, and corporate expansion of both types of procurement.

Procurement Resource enhances the suppliers’ performance, decrease costs, and enhance efficiency to help your organization achieve best-value procurement to make sound business decisions. Understanding the market and controlling the risks associated with spend management is conducted with the help of market intelligence and procurement analytics, combined with the large expertise in the sphere of the supply chain intelligence, as well as data science teams. The raw data of our products provide you with some details concerning certain categories through category insights, helping your company compensate for the lack of assessment of competitive settings and missing expansion prospects. To get to know how we can help your company to achieve desired results in the fast-growing economy, please, stick to the points mentioned above and contact our company immediately.

Author

Mansi Singh (Associate Business Analyst in Procurement Resource)