Indirect vs Direct Procurement
In a hardware or robotics start-up, along with efficient purchasing software, you'll likely have several procurement processes. In fact, procurement is likely one of your business’s fundamental operational processes. If it's not, you will encounter difficulties in acquiring the necessary goods and services to ensure the successful operation of your business. However, procurement extends well beyond the mere acquisition of goods or services needed for producing your end product or managing your business; it can involve quite complex considerations.
So, in this post, we’ll dig a little deeper and look at what indirect and direct procurement is and how they differ from each other.
What is Direct Procurement?
Direct procurement is the process of purchasing the products, goods, or services you need to perform your core business activity. In other words, direct procurement involves purchasing those products that, after some processing, make their way to your customers. For this reason, direct procurement is mostly found in manufacturing industries where manufacturers buy raw materials to produce their products.
Some examples of direct procurement include:
- A carpenter buys tools and wood to manufacture furniture.
- A steel mill buys materials like iron and carbon and equipment like blast furnaces to manufacture steel.
- A bakery buys flour, sugar, and other ingredients and equipment like pans and ovens to produce cakes and bread.
- A construction company buys cement, concrete, bricks, and sources labor to construct a building.
What is Indirect Procurement?
In contrast to direct procurement, indirect procurement is the process of purchasing the products, goods, or services that you need to support your business operations. This typically involves those products that, while not playing a direct role in your business providing its products or services, play a supporting role and help your team serve your customers. Indirect procurement is typically found in industries where there are no tangible products but rather services that need to be delivered to customers.
Some examples of indirect procurement include:
- A software development company buys SaaS subscriptions to support its team and make team members more productive.
- A financial services company buys laptops, desktop computers, and printers to allow its team members to do their jobs.
- A construction company pays rent and utility bills and buys food and drinking water for its employees.
What are the Differences Between Direct and Indirect Procurement?
We've now looked at a broad overview of both direct and indirect procurement. Let’s now look at specific differences between these two concepts. Obviously, based on the above, the major difference between direct and indirect procurement is that direct procurement focuses on purchasing the products and goods necessary to produce and deliver a product to a business’s customers. Conversely, an indirect procurement process involves purchasing those goods that support a business's employees in doing their jobs.
Flowing from the above, another significant difference between these two concepts is that direct procurement relies on a customer–vendor relationship. In other words, direct procurement relies on a relationship that allows businesses to buy products or materials of consistent quality. This is simply because the quality of materials purchased impacts the quality of the product the business is able to deliver to its customers. Conversely, indirect procurement does not rely on a customer-vendor relationship businesses these products or services as and when they are required.
Another difference between direct and indirect procurement is that direct procurement involves that businesses purchase products or services based on their budget and they will plan for these purchases based on demand planning projections. This is because these products are essential to the successful operation of the business and need to be planned in advance to keep the business resilient and the supply chain intact.
In contrast, indirect procurement involves purchasing products only on a need basis. As such, indirect procurement does not involve a significant amount of budgeting or planning and is mostly a spontaneous spend. For instance, using the software development company example above, the company will only consider investing in a specific tool once there’s a need for it, for example, when they need to improve collaboration between their team.
Finally, there is also a difference between direct and indirect procurement when it comes to inventory and supply chain management. Because indirect procurement is not planned, it does not involve any inventory or supply chain management processes. However, because direct procurement influences a business’s end product and needs to be resilient, it involves inventory and supply chain management processes that deal with how businesses will purchase, store, and plan these products or goods.
To ensure that your business runs efficiently, you need to make sure that all its processes, including procurement, runs smoothly. That means you need to implement the right strategies and to streamline your procurement, no matter if it's direct or indirect. To learn more about how to do this and how ControlHub’s procurement solution can help your procurement team, visit our website for more details.