Many businesses cannot run without procurement. Workflows, supplier connections, and inventory management depend on it.
Procurement has evolved into indirect and direct disciplines.
We’ll explain procurement, compare direct and indirect methods, give examples, answer your questions, and discuss the industry’s future in this post.
Overview of Procurement
You must first understand “procurement.” to distinguish direct and indirect procurement.
Procurement may account for up to 70% of an organization’s income and involves buying products and services and managing contracts and supplier relationships to function ethically and profitably.
Four key value generation steps are needed for direct and indirect procurement success:
- Analyse expenditure data to spot patterns, opportunities, and category management strategies.
- Select the finest suppliers using tools and sourcing methods.
- Contract provider and buyer duties and obligations with the correct P2P solution to assure compliance.
- Value measurement provides a complete perspective of supplier relationships and source-to-pay.
60–70% of procurement teams now prioritise strategy. Knowing the main distinctions between indirect and direct procurement helps firms prioritise and optimise tasks.
Define direct procurement.
Direct procurement involves buying commodities, raw materials, supplies, products, parts, components, and services for your firm. Some processing gets these important things to clients. These materials are used in the final product.
Direct procurement purchases are usually conducted in bulk from a select group of suppliers at the greatest price and quality. These purchases are frequent and essential for business.
Direct procurement issues prevent a company from manufacturing and making money. Thus, it is generally associated with industrial enterprises that turn raw materials into goods.
Daily Direct Procurement Examples
- Construction firm ordering cement
- A cook purchasing salt
- A car component manufacturer buying raw steel
- Fabric factories order textiles and cloth for processing.
- Plumbers purchasing new parts
What’s indirect procurement?
Indirect procurement buys non-essential products, services, and supplies for a corporation. This includes paper clips, decorations, travel, maintenance, and equipment repair.
These items are still vital to your company, but they have no direct impact on your products or services. Instead, indirect procurement helps direct supplies become processed items.
Indirect procurement only boosts a company’s top line. However, a business cannot function without it.
Common Examples of Indirect Procurement:
- Technology – Software Subscriptions, Computers
- Office Supplies – Coffee, TP, pencils, staples
- Outsourced Services – IT, janitorial, security, marketing
- Travel – Transportation, motels, business meals
- Utility – water, electricity, maintenance
- HR duties – include hiring and training
Key Differences Between Direct and Indirect Procurement
Function is the major distinction between indirect and direct procurement. Direct procurement supplies essential resources that are processed and sold to customers, whereas indirect procurement supplies unexpected commodities.
Different functions make both techniques distinctive.
Customer-Vendor Relationship
42% of CPOs questioned planned to prioritise supplier relationship management.
Purchase Directly
Direct buying builds long-term supplier ties, reducing supply chain disruption. These business essentials cannot be stalled in shipment. You should create long-term, sustainable supplier partnerships.
Contracts, minimum order volumes, and vendor management build long-term commercial relationships. Both parties need to feel secure and reliable. Start with a solid strategic sourcing plan.
Indirect Buying
Direct procurement gets more attention than indirect procurement, which deals with non-essential commodities and supplies. Supplier connections too. Indirect procurement is faster and uses services as needed.
Shortlisted vendors have less loyalty. You’ll probably get office pens from someone with a better bargain. Nothing wrong with the supply chain. The parties know there is minimal attempt to maintain services long-term.
Manage Spending
Direct and indirect procurement spend differently.
Purchase Directly
Business resilience requires emphasising direct procurement’s core supply chain. These key components must be planned and acquired wisely. Prepare the budget in advance to minimise interruptions.
Indirect Buying
The indirect procurement process involves spontaneous spending. Purchases are made as needed to promote the larger good and keep things moving. Purchasing is done on demand without any preparation or budgeting for indirect procurement.
Manage Inventory
The method of procurement you choose affects how you acquire, store, and arrange for goods.
Purchase Directly
Given the risk and value of controlling the whole supply chain for direct inputs, inventory management is usually limited to direct purchase.
Indirect Buying
No long-term indirect procurement inventory management plan exists. More like “first-come-first-serve”. No long-term strategy may emerge because these purchases are usually unanticipated.
Thus, indirect procurement inventory management is difficult. Maintaining quality and supplier compliance with corporate requirements is tough. Inventory management becomes less important for indirect purchase.
Structure of Organisation
The structure of direct and indirect procurement differs greatly.
Purchase Directly
Direct procurement requires several decision-makers due to its “make-or-break” nature. Typically, a core team oversees direct expenses. So, the supply chain is centralised, the budget is precise, and they focus on certain spend areas.
Indirect Buying
Businesses handle indirect buying differently. This expenditure is haphazard and decentralised between stakeholders and departments. It makes sense. One section won’t know another lacks essentials. This budget is more flexible and meets particular demands.
Performance Evaluation
These two expenditure kinds also demand distinct evaluation methods.
Purchase Directly
Timely order fulfilment is direct spend’s major goal. Here, cost reductions are as important as inventory management and delivery KPIs.
Unused goods costs money and takes up storage space. Late deliveries and bad supplier management prevent consumer satisfaction. All of this might hurt a company’s profits.
Indirect Buying
Indirect procurement evaluates performance by cost. Controlling expenditures and eliminating redundancy are its goals. Cost-savings, avoidance, and reduction KPIs are common.
Impact on Industries
Industry-specific effects of direct and indirect procurement vary.
Purchase Directly
Direct procurement dominates indirect procurement in businesses where inputs directly impact the end result. This covers retail, construction, and manufacturing.
Indirect Buying
Professional services firms prioritise indirect spend. Consultants, IT firms, and recruiting agencies are examples.
Manage Direct and Indirect Procurement Tips
It’s apparent that indirect and direct procurement have different aims, roles, tactics, and stakeholders. Thus, everyone requires a unique strategy.
Here are some ideas to improve procurement in your company:
- Check your contracts for savings or limits that raise expenses or limit services. Contract renewals, termination fees, and automatic price hikes are examples.
- Understand trends and establish category management plans using analytics and expenditure data.
- Partner with finance to better financial reporting, demand planning, and decision-making.
- Fully measure pre-determined KPIs to connect purchases with goals, corporate objectives, and plans.
Don’t be afraid to embrace technology and digital change. This promotes ethical sourcing and sustainable procurement.
Automation of Procurement
Procurement automation can handle the entire business. Digitising procurement is estimated to reach 72% by 2025. Thus, your competitors may be shopping.
Procurement solutions give direct and indirect procurement teams 360-degree view to manage supplier relationships, inventories, and cost-cutting and sourcing options.
Many e-procurement platforms provide market research, sourcing, and other data-related activity that supports procurement success.
Finishing Up
Indirect and direct procurement differ mostly in who and how they serve. Functions and purposes differ completely.
Direct procurement buys company necessities, whereas indirect procurement buys luxury items. A well-oiled machine needs both.
A vehicle manufacturing requires parts to make an automobile and water to hydrate staff. Both solutions meet every demand, but how depends on the need.
