What is the difference between direct and indirect procurement? In this article we will highlight the key differences, and why both processes are vital for an organisation’s ability to function. Let’s get stuck straight into it!
What is direct procurement?
What is direct procurement? Direct procurement refers to the process of securing any goods / materials that are necessary to deliver a finished product to your customers.
So, for example: if you are a baker, you would need all of the necessary ingredients to make bread and bake cakes. A shoe maker on the other hand would need to procure leather and laces and all of the other necessary components to make shoes and deliver them to the customer.
Direct procurement is what keeps your business selling products and engaging with your customers. But direct procurement doesn’t necessarily refer to physical products alone. For example, if you are a recruitment agency, direct procurement could relate to securing new clients and picking up new candidates – both of which are essential in fulfilling your service.
What is indirect procurement?
What is indirect procurement? Indirect procurement refers to the process of securing any necessary supplies or services that help you fulfil on your promises and keep your business functioning.
So, for example, using the same baker scenario – indirect procurement would refer to any of the necessary tools or appliances required to operate your business. Similarly, a shoe maker would need stationary supplies in order to take care of the books and deal with all of the administrative sides of the business.
Indirect procurement is what enables you and your employees to carry out your duties. It’s not about getting your goods and products manufactured and to the customer’s doorstep – it refers to all of the necessary supplies or services that you require to function as a business. A good example of this could be: marketing services to spread your brand awareness, IT support to keep your sales team up and running, and the more physical “indirect” supplies as mentioned above, such as stationary supplies (e.g., printer paper, ink, Post-its).
What is the difference between direct and indirect procurement?
The key difference between direct and indirect procurement is simply the function that both processes address. Direct procurement is focused on the essential products / materials and processes that deliver your end product to your customer. Indirect procurement deals with the supply of any spontaneous goods and those that are required to keep your business operating at its core.
As both direct and indirect procurement have different functions, it also means that both processes should be operated differently as well. There isn’t a one-size-fits-all approach to both direct and indirect procurement.
Direct procurement has an emphasis on supplier relationships
The fact that direct procurement deals with the acquisition of products and materials that end up in front of your customers, ensuring that you have a stable and steady supply is an essentiality. If you maintain poor supplier relationships and find yourself without the materials and products that you need to fulfil customer orders, you’re going to start losing revenue, and indeed customers. Without the product of direct procurement, everything falls to pieces! As such, direct procurement has a clear emphasis on strong supplier relationships that will weather any storm and keep those vital goods moving through your business and to your customers without fail.
Indirect procurement allows more flexibility with suppliers
Indirect procurement offers much more flexibility when it comes to suppliers. Of course, whilst it is always good practice to maintain solid relationships with any of your suppliers, indirect procurement is more spontaneous and as such, you can work with a wider variety of suppliers without too much cause for concern.
For example: if your stationary supplier is unable to assist you for whatever reason, your business isn’t going to come grinding to a halt. You can secure printer ink and Post-its from elsewhere quickly enough and the wheels can continue turning. With direct procurement on the other hand – if you find yourself without all of the materials and products that you need to fulfil customer orders, you’ll be in a world of trouble.
This is why you can have a shortlist of vendors and suppliers and use those services as and when they are called for.
Direct vs. indirect procurement = planned vs. spontaneous spend
Another differentiation between direct and indirect procurement is the fact that one tends to be planned spending, whereas the other can be more spontaneous.
- Direct procurement: Knowing how many goods and products you will need to source in order to maintain a steady flow of order fulfilment is essential. You should have a pretty good idea as to how much volume you will require in any given month and as such the spend on direct procurement will tend to be planned.
- Indirect procurement: Indirect procurement can be more spontaneous, depending on the commodity. For example, you may have a list of suppliers on hand for when you want to send a prospective client a gift-basket after a promising sales meeting. This type of procurement process is much more spontaneous and thus rarely needs to be planned carefully or with any strategic thought.
As different as direct and indirect procurement are, both processes are important to an organisation and its operations. Certainly, having your key manufacturer and product supplier let you down can be devastating for your business – but that’s not to say that indirect procurement does not have its merits.
We hope that this article has been helpful for you. If you would like to know more about direct and indirect procurement – or if you would like to outsource these requirements to a reputable third-party like UCT (Asia), then please visit their site https://uct-asia.com/.