Procurement is an essential part of business operations but often the most challenging process to streamline. If your company wants to compete with industry leaders, you must have a solid procurement process. In fact, organizations with a well-managed procurement process do almost 50% better than their competitors.
Procurement is the channel that ensures the availability of goods and services for business purposes. The process works for all commodities, from raw materials to office supplies. This process is split into two types: direct and indirect procurement.
Here, we’ll discuss the two concepts and highlight some of their differences.
Explaining Direct Procurement
Direct procurement refers to obtaining the goods and services that are vital to manufacturing your final product. You usually purchase these raw materials and components in bulk. Without the supply of these commodities, your business will not produce any output. It is an integral part of your business that must be carefully managed to keep the production process continuously working. Here, you require your supply to be cost-effective, continuous, reliable, and of high quality.
Explaining Indirect Procurement
Indirect procurement deals with those goods and services that you need to keep your business’s daily operations running smoothly. Equipment that hastens the production of goods or software that manages operations fall in this category as well. These commodities do not appear in your final product but are still vital to support workflows.
Other goods and services that are obtained through indirect procurement include utilities, office supplies, and maintenance services. You may consider indirect spending to be less important, but it can make up 15% to 30% of your company’s revenue.
Differences Between Indirect Procurement and Direct Procurement
Here’s an in-depth comparison of the two procurement functions:
1. Relationship with Vendor.
For direct procurement, you must maintain a reliable relationship with your supplier, which will benefit both in the long run. As orders for such goods and services will occur continuously, you will need a steady supply chain. You can not afford errors in the direct procurement process as it will hinder your output levels. You should invest in mutually beneficial, long-term contracts with your vendors and not switch from supplier to supplier to maintain consistent quality.
In indirect procurement, you have to invest comparatively less in vendor relationships. Since the services you seek will vary and be seasonal, you can shortlist a list of reliable suppliers, seek their services when your company may require them, and switch between the vendors at your convenience.
As direct procurement manages the core supply of your business, you can calculate its demand. The quantity and types of goods and services you require can be planned and budgeted beforehand, and the details can be given to the supplier in advance, so no issues arise in the supply chain.
For indirect procurement, the demand is often unknown. You do not know when a piece of machinery will need repair or when you may need to make a business trip. This uncertainty results in there being little planning and budgeting for indirect supplies. The spending usually occurs when required and is often spontaneous.
Direct and indirect procurement both play an integral part in generating your company’s output and profits. While it is true that the production process relies more heavily upon the efficiency of direct procurement, we can not ignore the vitality of indirect procurement. Without indirect procurement, you may not be able to enhance the efficiency of your processes. Without direct procurement, you can not afford indirect procurement. These two aspects of procurement go hand in hand. No matter whether you are a start-up or an industry titan, you must give the procurement process due regard to ensure your business’s efficiency.