In the world of sourcing, procurement, and logistics there is a multitude of different abbreviations and terminology being thrown about – so it’s no wonder why many people who are new to the industry end up feeling a little lost and overwhelmed. For example, what’s the difference between direct and indirect procurement? Is there an important distinction between the two?
In this article, we’re going to outline the differences and tell you everything that you need to know about the subject. But first, let’s briefly outline what procurement is in general – then we can focus on how direct and indirect differ and what that means for you and your business.
What is procurement?
Procurement is, in a nutshell, all about the acquisition of the supplies and/or services that an organization needs to function on a daily basis. If you were to go into more detail, this would include a wide variety of supporting factors such as:
- Processing invoices
- Vendor management
- Fraud detection and prevention
- Processing payments
- Quality control
But beyond that, it can get a little more complicated. You see, procurement is divided into two main niches (you guessed it): direct and indirect.
Both direct and indirect procurement are essential for any business, but it’s crucial that you fully understand their place so that you can better prioritize them. By doing so you will be in a far better position to build superior supplier relationships, to manage your procurement processes more efficiently, and ultimately ensure that all of the inputs you need to keep your business running operate smoothly.
One such way of improving the efficiency of your procurement is through the digitization of your business. The same can be said for your logistics and indeed your customer relationship management – but let’s remain on topic.
What is direct procurement?
So, what is direct procurement? Direct procurement refers to the process of sourcing all of the products, materials, supplies, goods, and services that the core of your business requires to operate. In essence, direct procurement is all about getting your essential products are services to the end customer. The backbone of your business, if you will.
Let’s look at some clear examples:
- A car manufacturing company buying all of the necessary metals and materials to fabricate their vehicles
- A painting and decorating company placing an order for various paints, rollers, and decorative plaster / stucco for preparing surfaces for decoration
- A furniture maker sourcing wood and timber to fashion into a dining table
It’s important to note that direct procurement typically refers to physical manufacturing industries that rely on raw materials to be processed into physical products for the end consumer to purchase and receive.
What is indirect procurement?
Now that we better understand what direct procurement is, what does indirect procurement mean?
Indirect procurement refers to acquiring any products or services that support an organization’s operations, but are not necessarily essential. Take for example the stationary and supplies that your employees use in the office.
Certainly, these indirect supplies are required to operate – but they play no direct role in the products or services that you deliver to your customers. Running out of toner in your office printer isn’t going to affect your ability to manufacture your products and transport them from the warehouse to the end consumer.
So, in that light, indirect supplies play more of a supporting role in helping the process of turning your direct supplies into finished products more efficiently.
Let’s look at some clear examples:
- Software as a service, e.g., Microsoft Office
- Employee training resources, e.g., training manuals for new starters
- Office equipment, e.g., ergonomic furniture to support the comfort, health & safety of your office workers
It’s important to note that indirect procurement typically refers to digital fields such as CRM systems and SaaS that support your organizations’ processes (but do not directly influence a product’s manufacturing process).
What is the key difference between direct and indirect procurement?
The key difference between direct and indirect procurement is simply the function that they both address. Direct focuses on procuring core supplies and materials that are ultimately delivered to your end consumer whereas indirect procurement deals in the supply of spontaneous goods, e.g., all of the required merchandising and advertisement display materials for a promotional expo.
Of course, as both direct and indirect procurement have different outcomes, this means that there are slight differences in the way both are operated. As such, your approach to both niches of procurement should be different.
But, what does that look like?
Direct procurement – an emphasis on vendor relationships
As direct procurement is essential for keeping your business running and your products flowing out of your warehouses and into the hands of your consumers, one of the most important aspects of this process is nurturing vendor relationships. This is in order to ensure that you have a steady supply chain and a sustainable relationship. The last thing you need is for everything to come grinding to a halt over a disagreement or miscommunication with a crucial partner.
With indirect procurement on the other hand – vendor relationships are not as important. Certainly, it’s always good practice to maintain healthy relationships with any vendors and partners that you deal with. However, when it comes to indirect procurement, there’s no harm in having a list of multiple suppliers that you can deal with as and when the need arises.
The same applies with things like planned vs spontaneous spending and inventory management. Direct procurement needs to be as airtight as possible. Indirect procurement can be more spontaneous and having flawless inventory management isn’t an essentiality for things like stationery supplies.
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.
And there we have it:
• Direct Procurement: is the process of purchasing raw materials, resources, goods and services that are crucial in the core operations of a business.
• Indirect Procurement: is the sourcing of all goods and services for a business that enables it to maintain and develop its operations.
Both are important but the distinction between the two is important and each requires a different approach to partner relationships and general operations.
We hope that this article has been helpful for you. If you would like to learn more about direct and indirect procurement, or you find yourself in need of exploring new business relationships, please feel free to contact us at your convenience.