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Direct vs. Indirect Procurement

Direct vs Indirect Procurement

Procurement is another way of saying purchasing in the business world. Procurement is a bit more complex than making a purchase, but they are almost interchangeable. 

Procurement includes identifying the required goods or services, choosing the right supplier or vendor, negotiating prices and contracts, and managing the delivery of the goods or services. 

Procurement is at the core of the supply chain, so it’s important to understand how it works, and the different types of procurement—mainly direct and indirect procurement.

Direct Procurement

Direct procurement is a purchase that’s essential for the core purposes of the business. Without direct procurement, the business doesn’t function.

For example, this is a residential painting company buying paint, paint sprayers, and drop cloths. Or Wendy’s purchasing hamburger patties and buns, frying oil, or replacing the broken ice machine. Direct procurement is directly tied to the business functions and their customers. 

A good direct procurement strategy is essential for business success. Working with the right vendors and suppliers, ordering the proper amount of inventory, and negotiating on prices all impact the customer. 

If the painting company mismanages their direct procurement and buys low-quality paint, the customers end up with a lower quality product. When the HVAC repair company fails to order enough replacement parts, their customers experience delays and dissatisfaction. On the other hand, if the business negotiates a discount on their purchase, the customers can also enjoy the discount.

The price, quality, and inventory of the goods and services are determined by the direct procurement, which impacts the customers either positively or negatively.

Indirect Procurement

Indirect procurement is the goods and services a business buys that don’t directly impact the business functions or customers. 

These purchases are still essential to the business, but they don’t have the same effects.

For example, indirect procurement is the maintenance and upkeep of the paint company’s truck. When they get an oil change or fill it up with gas, they’re making a purchase necessary for the business. However, unlike the paint and sprayer, the upkeep of the truck doesn’t directly impact the customer. Another example is the mops and brooms Wendy’s uses to clean their kitchen and dining area. 

The mops and brooms are necessary, but people aren’t buying cleaning supplies from them, and they’re not used to make the food or drinks.

Differences between Direct and Indirect Procurement

The main difference between direct and indirect procurement is how the goods or services are used. 

Direct procurement is the purchase of things used to make or manufacture something a customer will buy, while indirect procurement is the purchase of goods and services that aren’t directly related to the production process.

Direct procurement is better planned and has a greater impact on the business. Businesses can better plan how much raw materials they’ll need based on demand forecasts. This needs to be planned, because if a business runs out of essential goods, they can’t help their customers. 

Example: If the office break room runs out of coffee cups or plastic forks, they can continue serving their customers. There’s also spend more time building relationships with suppliers so the business can get the best materials at the lowest prices.

Indirect procurement is less planned. These purchases are based on the needs of the business and less impactful on the success of the business.

Strategies for better direct procurement

The goal of direct procurement is to get the necessary resources at the best possible price, quality, and delivery time. Here are a few ways businesses do that:

Building strong vendor relationships: Having a solid relationship with vendors helps businesses get better service, greater reliability, and more favorable pricing. 

Consolidating suppliers: Working with fewer suppliers also helps lower prices and streamline the supply chain. However, it’s worth noting that this can also cause a bigger problem if there’s an issue with a supplier.

Long-term contracts: Establishing long-term contracts with suppliers helps secure stable supply and negotiate favorable pricing and terms.

Strategies for better indirect procurement

As we mentioned, indirect procurement isn’t as important to the business, but it definitely matters and should be optimized as much as possible. Here are some methods for better indirect procurement:

Consolidation of suppliers: This involves consolidating purchases from a limited number of suppliers to reduce transaction costs and leverage volumes to secure better pricing.

Standardization of products: Standardizing the products and services that are purchased can lead to cost savings through increased efficiency and reduced complexity.

Contract management: Establishing effective contracts with suppliers can help ensure that the company receives the products and services that it needs at a fair price, with favorable terms and conditions.

Vendor evaluation: Evaluating suppliers on various parameters such as quality, delivery times, and pricing can help identify the best suppliers and eliminate underperforming ones.

Demand management: Managing demand for goods and services by monitoring usage and controlling spend can help reduce overall costs.

Using technology in procurement

Technology has become a significant driving force in modern procurement, transforming the way organizations manage their direct and indirect procurement processes. Here are a few of the ways technology is impacting procurement:

  1. Procurement Software: Procurement software solutions enable organizations to streamline their procurement processes, automate manual tasks, and improve visibility into their supply chain. These systems can help manage supplier information, track orders, monitor inventory, and generate reports for better decision-making.
  2. E-Procurement: E-procurement platforms allow organizations to conduct their procurement activities online, simplifying the sourcing, purchasing, and payment processes. E-procurement can lead to cost savings, reduced cycle times, and improved supplier collaboration.
  3. Data Analytics: Advanced data analytics tools can help organizations analyze vast amounts of procurement data to identify trends, patterns, and opportunities for improvement. By leveraging data analytics, procurement professionals can make more informed decisions, optimize their procurement strategies, and achieve cost savings.
  4. Artificial Intelligence and Machine Learning: AI and machine learning technologies can enhance procurement processes by automating routine tasks, improving demand forecasting, and identifying potential risks in the supply chain. These technologies can also help organizations analyze unstructured data, such as supplier reviews or social media posts, to gain insights into supplier performance and market trends.
  5. Internet of Things (IoT): IoT devices can provide real-time data on inventory levels, shipment tracking, and equipment performance, enabling organizations to optimize their procurement and inventory management processes.

By embracing and integrating these technologies, organizations can improve their procurement efficiency and effectiveness, leading to cost savings, better supplier relationships, and more strategic decision-making.

Spex offers a large selection of custom precision machined parts for whatever your project needs. We are an ISO 9001:2015 certified company, and our team specializes in precision machining and supply chain efficiency.

Reach out to our team to get a quote for precision machined parts, and supply chain solutions. 

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