Direct vs. Indirect Procurement: What's the Difference?
Essentially, procurement involves acquiring the supplies every organisation needs to function day-to-day. When you get into the details, you start to bring in all the supporting factors that make procurement work.
The procurement process can be broken down neatly into two niches—direct and indirect procurement. Despite the fact that both of these are necessary for a business to function, it’s important to understand their respective roles so that each can be given the attention it deserves. Your company will be able to build excellent supplier relationships, manage procurement efficiently, and ensure a steady flow of the goods and services it needs. Embracing digital technology is one of the best ways to improve procurement efficiency.
What is Direct Procurement?
Your core business activity requires the acquisition of products, supplies, goods, and services directly from the manufacturer.
A direct procurement process involves purchasing products and services directly from the manufacturer and distributing them to your end users after some processing.
Essentially, it deals with the inputs to your organization’s operation.
Two examples of direct procurement:
- a car manufacturer ordering components for a car engine
- a construction company ordering bricks and cement to build walls
Note: Direct procurement is most prevalent in industries where raw materials are processed directly into products.
What is Indirect Procurement?
Indirect procurement involves buying products and services that support a business’ operations, albeit in a non-essential capacity. Indirect supplies include office and IT supplies, energy, couriers and travel.
It is important to note that indirect supplies are still essential to your organization in their own way. However, they have no direct influence on your finished products and services.
Their role is rather to ensure that the process of turning direct supplies into finished goods runs smoothly.
Two examples of indirect supplies include:
- Mobile phones and accessories
- Consultancy services
The indirect supply of goods is especially apparent in the digital economy since there are no tangible goods to be delivered to the customer, only services.
Direct Versus Indirect Procurement Differences
It is the function that they address that differentiates direct and indirect procurement. Direct procurement involves securing the core supplies that are processed and delivered to your customers, whereas indirect procurement involves purchases that support the operation of the business,
As direct and indirect procurement have different functions, their operations differ. To get both branches right, you need to slightly tweak your approach.
The importance of customer-vendor relationships
The term direct procurement refers to the acquisition of the supplies that make up the base of your company’s offerings. Without direct procurement products, nothing works.
Long-term, sustainable relationships with your suppliers are essential to guaranteeing a steady supply chain.
The management of suppliers and contracts both play a crucial role in this.
When it comes to direct procurement, it is important to build a reliable customer-supplier relationship that is able to remain resilient when needed, ensuring stability for both parties.
Meanwhile, indirect procurement involves non-essential supplies that assist your business operations but aren’t part of your core business. As a result, indirect procurement doesn’t ususally receive the same attention as direct procurement.
As a result, your organization can get a shortlist of vendors at any time and use their services as needed. You have many options if they do not meet your expectations. The supplies could even be delayed if they don’t meet your expectations.
Due to its importance, direct procurement leads to stronger supplier relationships, whereas indirect procurement can be handled relatively easily without an effort to maintain their services over the long run.
The number of indirect supplies is too vast and often insignificant to offset the cost of contract lock-in.
Spontaneous Vs Planned Spend
The direct procurement of the core supplies your business needs to run day-to-day requires emphasis to ensure resilience. To avoid supply chain disruptions, you should plan and budget for the essential inputs you need to run your business.
For indirect supplies, on the other hand, it can be difficult to estimate demand and, as such, there is little planning or budgeting. Indirect supplies are often procurement spontaneously as the need arises, unlike direct supplies.
Since indirect inputs are often unplanned, there is no long-term strategy for managing them.
As a result, managing inventory, maintaining quality, and ensuring suppliers adhere to your company’s specifications can be challenging.