Direct and indirect procurement

What is Procurement?

Procurement can be described as a strategic and process-oriented operation where not many calculated decisions are made. Traditionally procurement has been depicted as an essential record-keeping department to make sure that an organisation follows industry standards and lets the organisation be audited.

An organisation’s Procurement operation is accountable for managing spending. To rephrase it, Procurement is buying goods and services that are used to make the products sold to customers. Also, the purchasing of products and services is used to run the organisation daily. Further, procurement can be subdivided into two types; Indirect procurement and Direct procurement.

What is Indirect Procurement?

Indirect procurement is the process of obtaining resources that help the proceeding existence of the business. Indirect procurement is also known as indirect spending that involves the acquisition of the goods and services, supplies, and materials that are essential in business operations.

What is Direct Procurement?

Direct procurement is a process to acquire resources that are employed in building the exact product or service the business is offering. It deals with the inputs that assemble the backbone of what an organisation wishes to offer.

Here are the five differences between Direct and indirect procurement:

1. Supplier relationship management:

One of the major differences in practice is supplier relationship management.

• Direct procurement – Direct procurement teams implant a lot of effort, time, and energy into structuring and maintaining relationships with suppliers. Supply schedules and continuity affects production; the quality of raw materials influences the quality of the end product, and thus the company’s prestige.
• Indirect procurement – Indirect procurement emphasizes spend management and not supplier partnership advantages. The relationship with suppliers is transactional, with competitive costs being essential to focus on.

2. Cost management:

• Direct procurement – Cost analysis conducted by a client of the expenses incurred by the supplier in delivering goods and services, to instruct negotiations — is a much-used cost management practice.
• Indirect procurement – Indirect spending squads have zero-based budgeting as a best practice. The technique of drawing up the funding from scratch rather than establishing on the previous budget. Indirect procurement demands a justification for every expense before it is counted into the budget. In short, Indirect spending aims to reduce costs as much as possible.

3. Inventory management:

Inventory management is understanding what materials you have? where they’re stocked? and how much do you need?

• Direct procurement – Here, direct procurement provides a smooth production cycle to control delays and materials that need to be held in stock.
• Indirect procurement – Indirect procurement is controlled by demand; that is, acquisitions are made when needed, so the stockpile, as well as the associated costs, are lower.

4. Use of technology:

• Direct procurement – Companies believe that boosting direct procurement technologies can assist to simplify the processes, cut risks, uphold quality, and trimming costs. However, many teams resume being taken down by unmanageable systems that may be feature-rich but have unreasonable user interfaces linked to the organization’s legacy enterprise resource planning (ERP) systems.
• Indirect procurement – Indirect spending generally has various, fragmented conditions usually caused by a huge number of users from an organisation’s internal and non-procurement operations. To simplify and facilitate the process, when choosing e-procurement solutions, indirect procurement teams are concentrated on making an uncomplicated buying experience through easy-to-use indirect procurement technology.

5. Organisational setup:

• Direct procurement – Most of the companies that employ direct costs are controlled by centralised procurement and supply chain teams and category managers concentrating on specific areas of spend. Direct spend teams can look to their peers for practical lessons in soft skills that are essential for operating a large number of prerequisites, internal stakeholders, and vendors, all of which make indirect procurement so complex.
• Indirect procurement – On the other hand, indirect procurement tends to be decentralised in the hands of numerous internal stakeholders with self-reliant budgets and spending protocols. Building a centralised structure and categories for indirect procurement can enhance efficiency and observation and reduce costs. Also, even more so in service-oriented businesses where indirect spending is high.

6. Impact on business:

• Direct procurement – Direct spending concerns the production of the goods, which means that any delay or miscalculation can adversely affect the profits and prestige of the business. By carefully analysing direct procurement processes, strategists expect and attack any future inconsistencies that may damage the company.
• Indirect procurement – Unlike direct procurement, indirect procurement does not have any considerable impact on the profitability or reputation of the business. Unpredictability in the indirect procurement process is manageable and can be contradicted.

Conclusion:

It is necessary to have a complete understanding of what splits direct procurement from indirect procurement. Knowing these procurement procedures helps strategists and employees to comprehend where to invest the company’s resources. In addition, it helps in concentrating on the challenges that a company might face during the completion of the product.

Author bio:

Praveen Dokania brings 10+ years of tech expertise with him. Praveen is a wizard in software development modules like cloud ERP, procurement software, vendor management, inventory management, sales order management, finance management, asset management, supply chain management and equipped with the latest technology of front-end and back-end processes. He has exemplary knowledge in database administration, server management, app development, and IT development consulting. In his previous role, he was instrumental in developing various applications and software. Praveen is the backbone of tech-development at TYASuite and is the man behind digitising decades of knowledge and experience of finance professionals in the field of business process including financial process.