Procurement plays a pivotal role in the operations of any organization, serving as the bridge between goods and services and their ultimate use. Within the realm of procurement, two primary approaches take center stage: direct and indirect procurement. While both encompass the purchase of goods and services, each address very different purchasing needs. Understanding the difference between these two procurement methods is paramount for businesses seeking to optimize their procurement strategies. In this blog post, we’ll explore the differences between direct vs indirect procurement to shed light on their unique characteristics and applications.
Direct Procurement: A Strategic Endeavor
Direct procurement, also referred to as direct spend management or direct sourcing, is the end-to-end process involving the acquisition of goods and services that are directly linked to an organization’s core production processes. Think raw materials, machinery, and components critical for manufacturing. These purchases are often made in bulk and sourced from vetted and approved vendors who compete based on reliability, delivery times, quality, and cost.
The importance of a fine-tuned and frictionless direct procurement system cannot be overstated. Even minor delays in any part of the process can mean lost revenue, reputation, and opportunity, as well as missed production deadlines and increased costs.
Direct Procurement Examples:
- A clothing manufacturer procuring thread, fabric, and buttons essential for shirt production.
- An auto manufacturer purchasing aluminum, tires, and microchips within the production of trucks.
- A construction company ordering steel and cement as fundamental construction materials.
- Outsourcing and subcontracting labor in construction.
Indirect Procurement: Operational Agility
In contrast, indirect procurement revolves around the acquisition of goods and services that support an organization’s day-to-day operations but are not directly related to its core production. Some examples include staffing, office supplies, maintenance services, and software licenses.
Indirect Procurement Examples:
- A fabrication company acquiring cyber security software.
- An engineering firm purchasing hardware such as computers and phones.
- An agriculture company procuring office furniture, stationery, and other office supplies.
- An energy company investing in a safety seminar for their staff.
Direct vs Indirect Procurement: 5 Key Differences
In terms of the procurement process itself, both direct and indirect procurement involve similar steps, such as identifying the need for goods or services, selecting vendors, negotiating contracts, and managing the delivery of goods and services. However, while both approaches involve purchasing goods and services, there are some key differences between them.
1. Strategic Complexity
One notable distinction between direct and indirect procurement lies in the complexity of their respective purchasing processes. Direct procurement is inherently strategic, characterized by intricate technical specifications, quality standards, and compliance requirements. The planning process is extensive, primarily due to the sizable nature of purchases and often lengthy lead times.
Conversely, indirect procurement is primarily operational in nature, focusing on standard products and services with smaller-scale purchases and shorter lead times.
2. Organizational Hierarchy and Setup
Direct procurement is typically managed by centralized procurement teams. These teams are often comprised of procurement professionals with well-defined roles, such as sourcing specialists, category managers, buyers, expeditors, or vendor account managers. This dedicated approach ensures an organized and efficient process with clear responsibilities.
In contrast, indirect procurement is often decentralized and scattered across various organizational departments. More often than not, it is managed in silos by various stakeholders, each with their own budgets, authorization procedures, and purchasing processes.
3. Vendor Relationships
Direct procurement places emphasis on building strong and sustainable vendor relationships. Beyond price considerations, factors like delivery schedules and quality significantly impact production. Reliable vendor relationships must be mutually beneficial, and focused on success.
Indirect procurement, however, often prioritizes cost optimization, resulting in more transactional vendor relationships.
4. Inventory Management
Inventory management revolves around understanding what goods you have, where they are stored, and how much you need. In direct procurement, maintaining a sufficient supply of goods is imperative to prevent delays and ensure uninterrupted production.
Within indirect procurement, purchases are dictated by demand, meaning they are made as the need arises, with minimal planning or budgeting involved.
5. Technology and Systems
For indirect procurement, different departments often use an array of fragmented systems, processes, and approval workflows. Although technology is gaining traction in this space, indirect procurement has been slower to embrace it.
Direct procurement has seen significant technological advancements. Cloud-based procurement software is empowering teams to collaborate more effectively, streamline processes, accomplish more, maintain or improve quality, and reduce costs.
Harnessing the Unique Strengths of Each
While both direct and indirect procurement involve purchasing goods and services, they serve very different business needs. Direct procurement serves as the driving force behind your product, responsible for sourcing the essential materials and services that form the foundation of its creation. In contrast, indirect procurement plays a vital role in maintaining the operational efficiency of your business.
Effective procurement is not solely about securing the most favorable prices in the market; it extends far beyond that. It encompasses the optimization of processes, the implementation of effective collaboration & communication tools, the cultivation of robust supplier relationships, the mitigation of potential risks, and the formulation of strategic decisions that underpin long-term growth and sustainability. By recognizing and harnessing the unique strengths of both direct and indirect procurement, organizations can lay the foundation for a more resilient, efficient, and competitive business model that adapts to the evolving demands of the market and secures a sustainable future.
Engaged in Complex Procurement?
Current SCM is the first of its kind – supply chain management software purpose-built to support the most complex procurement & materials management projects. With Materials Management and Vendor Document Requirements (VDR) uniquely integrated into the Order, Current SCM provides a unified, collaborative platform to streamline the end-to-end process of project-driven procurement & materials management.
If you engage in any of Direct Procurement, Technical Procurement, Project Procurement or Third Party Procurement, Current SCM will improve your procurement & materials management workflow. If you engage in all four, Current SCM will revolutionize the way you do business.
Contact the team at Current SCM today to learn more!
