The importance of procurement as an important business process has increased quite a bit recently. Procurement was originally a way of integrating purchasing with supply chain management in a time when large companies are struggling to manage operational costs.
In fact, the date of the ascendance of procurement can be marked all the way back to 1983 when purchasing was identified as a strategic implementation in organizations instead of just being tactics that are part of supply chain management. Before this change, organizations only thought of procurement as a sub-discipline of supply management.
With time, the result of this is development of a couple of overlapping disciplines in procurement, direct and indirect procurement.
Direct Procurement Definition
This is basically the act of getting raw materials as well as goods for production. The purchases are usually done in very large quantities, from a pool of various suppliers at the lowest possible cost, best reliability, and greatest quality. The purchases are made regularly and necessary for important business practices like a baker getting flour in order to make bread. If direct procurement doesn’t function or has problems, companies aren’t able to manufacture products or create revenue. Historically, this stems directly from manufacturing.
Indirect Procurement Definition
This is the act of buying services or supplies that are needed for keeping a business running. One of the ways of classifying this is by considering all purchases that do not add to the bottom line of a business. This can include a number of things like repairing equipment, acquiring services, and buying office supplies.
Without functions of indirect procurement, businesses will not be able to operate effectively. Typically, it can account for as much as 15-27% of the total revenue of a company.
Irrespective of whether purchases are an example of indirect or direct procurement, procuring items to process final invoices is known as Procure to Pay.
This pay cycle is a system which breaks down the whole procurement cycle from identifying suppliers to final invoice payment. The term had been coined by developers of software as a means of identifying procedure which required to be optimized. E-procurement software like Precoro can help you with this process and save you a lot of valuable time and money which makes it very easy for organizations or employees to get the goods or services required for operation.
Research which has been conducted with supply management has found all businesses to have indirect procurement. Research has even found indirect procurement strategy to be unambiguously different from direct procurement since it has smaller supplier spends, maverick spend, more suppliers, and a complex environment of stakeholders.
Indirect procurement strategy calls for different disciplined processes and tech, engagement with stakeholders and expertise across various suppliers.
In the indirect supply market, there are a number of different categories which all need a deep understanding in order to work properly. Also, there are a large number of suppliers who all invest heavily in convincing buyers to purchase from them. In the case of large contracts, it is quite common for suppliers to have management teams which are way larger than the procurement function which they are selling to.
Considering the high turnover associated with indirect procurement, it is also quite common for large numbers of transactions of low value are frequently carried out.
There are a number of stakeholders here all having the knowledge of their area while still needing support from procurement. This means procurement needs to be an internal advisor which influences functional budget holders and decision makers on their spending.
Professionals don’t actually have mandates over budgets of internal stakeholders. Managing this type of expenditure requires a number of skillsets which can change every week. Some of the skillsets include:
- A wide range of expertise in various categories.
- Changes management.
- Data analysis
- Technological know-how.
- Negotiation, facilitation, and supplier management. Engaging, influencing and advising stakeholders.
Hopefully, you have now understood the difference between direct and indirect procurement. If you still haven’t then, you can speak with a Precoro professional. They will certainly be able to help you understand this better. So what are you waiting for? Go online right now.