Direct Vs. Indirect procurement

Procurement, both direct and indirect, might be considered subsidiary, both play an important role in the development of a firm. Understanding the similarities and distinctions between the two can eventually help you prepare for effective supply chain and spend management strategies, even if they are different functions that demand different techniques and technologies.

Key Takeaways

Any production process involves inputs and outputs.  

Inputs refer to the raw materials that go into making a new product, while output refers to the finished product.

Procurement of the raw materials is a critical part of business operations, as without timely procurement, the production process will be hampered.

The procurement of tangible products is categorized as direct procurement. Indirect procurement consists of both tangible and intangible elements such as human capital recruitment, cleaning process, legal advice, consulting service and so on.

While, the nitty gritty of indirect procurement is easy to comprehend, indirect procurement happens to be a complex field, and hence, not easy to track and measure.

When it comes to getting a picture of organization-wide spending, both direct and indirect expenses need to be considered.

Transcript

Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.

I am Hélène, and today we will be talking about Direct Vs. Indirect Procurement. However, before that, let me recap what we said last week about the different types of consultancies.

There are ‘N’ number of roles that Consultants play to enable smooth day-to-day running of a business. And every project is different.

Consultants are hired when the client lacks the specific expertise required to solve a complex business problem. In order to know what their capabilities are and what value they can add to your consulting project, you need to look into various dimensions of the firm, like the size and geographic footprint of the firm, ownership structure, partner’s profile, and the delivery model.

With that information, you’ll have a better understanding of the types of consultants based on their respective skill sets and their areas of specialization.

As a result, you will know “what” they might accomplish for you, or at the very least, “what initiatives” they could add value to. And that’s a prerequisite to buying consulting services better.

Listen to the complete podcast about types of consultancies by capabilities and specialization

However, this week I want to talk about Direct versus Indirect procurement because it is important to better understand the consulting category.

A consistent, well-planned supply of goods and services is vital to success, regardless of the company’s size. Procurement is a complicated job because you need at the same time design the right strategies to deliver the best purchasing value while also supplying materials and services on time and quality to keep the company running.

Procurement – both direct and indirect- might be considered secondary activity, but both play an essential role in a company’s growth.

Understanding the similarities and distinctions between the two can help you better handle your indirect spend, and in particular consulting.

So let’s get started, shall we?

 

What are Direct and Indirect Procurement?

Whether you are in the manufacturing business or not, and whatever business you are in, you need to understand that there are inputs that go into processing and come out as outputs that you are selling. So it’s essential to control the raw material, parts and components, sub-assemblies, etc. Without these materials, the production will be disturbed, so you need to be excellent at procuring all the items used as inputs.

The acquisition of raw materials utilized in the company’s operations is known as direct procurement. For example, wood, nails, concrete, and other building materials are used as raw materials for home construction. Similarly, raw food items available in retail stores are used as raw materials for a restaurant business.

Direct procurement is used by firms that offer tangible things to customers or other enterprises to generate money. Businesses like software services, where the ultimate output is intangible, and no raw materials are utilized in production, are an exception.

 

Let’s see what the differences are between direct and indirect procurement?

 

Direct procurement is more recognized internally.

Now, when I say direct procurement is more well-known than indirect procurement in many firms, it is because direct procurement helps with production. As a result, it receives more attention, resources, and access to internal stakeholders.

Direct procurement is frequently better supported and has more senior management backing. This isn’t to say that indirect procurement isn’t vital; it just means that getting the awareness and resources it requires can be more difficult.

Young professionals want to utilize their talents and expertise to make a difference globally, and many believe that working in direct procurement would allow them to do so more successfully.

On the surface, Direct procurement seems to provide young workers with more significant possibilities to learn and grow. Much of the work in an indirect procurement function looks routine and repetitive.

Finally, direct procurement positions often pay and benefit more than indirect procurement positions.

It’s no surprise that young procurement professionals are leaning into direct jobs for all of these reasons. However, indirect procurement has a lot to offer too.

Indirect is more diverse.

Indirect spending is complex, often made up of a mix of both tangible and intangible services. Tangible goods like office supplies or tangible benefits like maintenance or cleaning can be easily recognized as part of indirect spending.

However, less recognition is given to the intangible services that are also classified as indirect. These intangibles, such as legal, executive search, or consulting services, can often be more complex and challenging to track.

As a result, many organizations struggle to get a complete picture of their indirect spending. However, understanding all aspects of indirect procurement is essential for developing effective strategies for reducing costs.

From a category management standpoint, indirect is a heterogeneous group of categories. The criteria for defining a category are a discrete marketplace, homogeneous customer preference, homogeneous regulations, and it is small enough to work on but large enough to find opportunities.

However, many of the categories within indirect do not fit these criteria neatly. This can present challenges when trying to manage these categories effectively.

For example, some customer groups may have disparate preferences for products in the same category. Hence, strategic sourcing that requires knowing the supply market inside-out is also time-consuming and complex, making it challenging to create homogeneous customer segments.

If you look at the different categories in indirect procurement, you realize that it is not generally organized; regulations vary significantly from one jurisdiction to another, making it difficult to create homogeneous regulatory environments.

Indirect procurement is constantly evolving. Indirect is an ever-changing job, with new categories emerging all the time. Cloud computing and e-payments are two of the most recent additions to the indirect category, complex and often misunderstood. They are already having a significant impact on businesses.

As cloud computing becomes more prevalent, businesses are finding that they can save money by using cloud-based services instead of traditional IT infrastructure.

E-payments are also becoming more popular, as they offer a convenient and secure way to make payments online.

And these new categories require different skills & address different supply markets. Exciting right? And this is only the

the tip of the iceberg. Clearly, indirect procurement will continue to evolve over the years to come.

In Conclusion,

In many firms, direct procurement is more well-known than indirect procurement because it helps with production and has more senior management backing. Whereas Indirect spend is complex and made up of a mix of tangible and intangible services and is seen as less attractive, it is changing very quickly with some exciting challenges.

Indirect categories are difficult to manage because they have different customer preferences and regulations. Categories in the “indirect” group are very diverse and do not fit neatly into specific criteria.

But both direct and indirect procurement are essential to the business and can offer exciting opportunities to young professionals.

And that marks the end of our podcast, folks. Next week, I want to talk about What is Maturity Grid? So, stay tuned.

Till then, stay safe and happy sourcing!

Useful Links :

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Gergana Nikolova, the director of Adventure Travel Trade Association is in conversation with David Beurle, the CEO of Future IQ about the connection between adventure tourism and sustainability and more. #AdventureTourism #travel . @ITB_Berlin

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Helene Laffitte

Hélène Laffitte is the CEO of Consulting Quest, a Global Performance-Driven Consulting Platform. With a blend of experience in Procurement and Consulting, Hélène is passionate about helping Companies create more value through Consulting. To find out more, visit the blog or contact her directly.

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