Find out more about Direct and Indirect Procurement

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Procurement functions vary from one organisation to another, sometimes mistakenly consider within the organisation’s structure, production, cost, and revenue, resulting from purchasing activities. Differences exist!

Purchasing and Procurement; their corresponding definitions.

–        Purchasing applies to:

·       The direct buying of commodities, goods, and services.

·       Encompasses functions such as ordering, raising purchase orders, receiving, and payments.

–        Procurement is:

·       The procuring of goods, works, and services for organisational purposes. It has to do with identifying necessities, strategic sourcing, selection, negotiation, ordering, receiving, and payments.

·       Strategic Sourcing focuses on upholding the different partners in the SC, making the most of buyer-supplier relationships and their capabilities, providing value and cost efficiencies for the customer.

Both functions have a common target: the ‚acquisition of goods’; however, the approach in the corporation scenario is different; both are elements of the SC that involves along all process stages until the finished product reaches the end consumer and the acquisition of raw materials for production.

We divide Procurement into Indirect Procurement and Direct Procurement. Indirect Procurement is a crucial component of Procurement, representing only a small portion of manufacturing firms’ expenditures in most cases. Specific businesses such as manufacturing are incredibly reliant on Direct Procurement, many others, as service-oriented corporations depend more on Indirect Procurement.

Direct Procurement definition 

It is the expenditure that interacts directly with the product or service we as a company sell when spending on materials, goods, and services, which can multiply incomes, operation, and competitive advantage. Some examples of Direct Procurement are raw materials, machinery, mechanical parts for manufactured goods, and much more, used to improve profits saving costs and adding value and competitive advantages to company performance.

Indirect Procurement definition:

Operating expenses intended for services, materials, and maintenance cost essential to the internal running of a company, most of the times related to maintenance to keep going. The things that do not go into the goods and services you sell to your customers will not directly affect the company’s profitability.  Indirect Procurement is a crucial component of Procurement, representing, in most cases, only a small portion of manufacturing firms’ expenditures.

Indirect Procurement categories 

·       HR services (recruitment agencies, hiring, training.)

·       Professional Services (consultants, mentors.)

·       Capital Goods (Plant location, facilities and machinery.)

·       Marketing-related services (media buying, agencies.)

·       IT services (digital technology, hardware, software.)

·       The managing of headquarters facilities and office services (Telecoms, printers, communication devices, furniture, cleaning, catering.)

·       Utilities (gas, electricity, water.)

·       Consumables (Grease, Oil, and more.)

·       Maintenance, Repair and Operations (MRO.)

·       Fleet Management.

Further comments: there are evident differences between the two forms of Procurement regarding different areas, such as operating the business Procurement structure, how to deal with supplier relations, how to manage inventory. If there is no Indirect Procurement role, the company will not operate efficiently.  Typically, it could represent almost 27% of the company’s total revenue.

Are your Procurement functions well-established in your company?

Dave Food

Prophetic Technology

M: +44 7775 861863

Photo by Jan Huber on Unsplash