Procurement is an important step that directly determines the output quality and product production process of an enterprise. In general, this process is complicated and requires a lot of manpower. In this article, we provide information to compare direct vs indirect procurement to help businesses stay informed and make appropriate procurement decisions.
What is procurement?
The process of planning, developing a strategy, and maintaining purchasing are collectively known as procurement. The object of the procurement activity here can be the materials or services needed for the production of the finished product, the equipment for the production process, or the goods or services needed to keep the company running.
What are direct procurement and indirect procurement?
Direct procurement is the process of purchasing products, supplies, goods, and services that are necessary for the core business. If direct procurement stops working or has problems, companies will almost completely lose the ability to produce, thereby not being able to continue to generate revenue. Direct procurement occurs mostly in commodity manufacturing industries, where raw materials are directly processed into commodity products.
Indirect procurement refers to the purchase of products and services that support the day-to-day operations of the business but are not directly related to the production of goods or the provision of services. Indirect supply plays its role more clearly in the digital spheres, where there are no tangible goods but mainly providing services to customers.
Direct vs Indirect Procurement
These two have their own advantages and disadvantages for the development of a business.
Managing Supplier Relationships
Relationship management with suppliers is one of the factors that show the difference between the two forms of procurement.
To be able to realize the importance of direct procurement, businesses always need to focus on building good and long-term relationships with reputable suppliers. As a result, businesses can increase their resilience after an event. In addition, maintaining a relationship with a supplier also provides assurance for both parties, namely the guarantee of supply for businesses and output for suppliers. A business often finds it easier to choose indirect supply, so indirect procurement does not receive as much attention as direct procurement. Therefore, businesses choose to focus more on managing and reducing spending than maintaining relationships with suppliers.
For goods, businesses often encounter questions such as: “What kind of goods are they?”, “Where will they be stored?”, “What is the way to manage and store goods? ”,… Therefore, inventory management also makes a difference between the direct vs indirect procurement.
To avoid delays, effective inventory management is critical to direct procurement. If a supplier runs out of stock, it can cause problems for the entire supply chain, more seriously, it can affect the company’s bottom line. However, often, inventory management is less of a priority for indirect purchasing teams. However, this depends on the nature and needs of the company. Here, inventory management is more tactical and less strategic.
The organizational structure of expenditure is also what makes the difference between these two types of procurement.
Direct procurement spending is so important that materials to keep operations running must be planned and budgeted in advance to avoid supply chain disruptions. However, for indirect procurement, it is difficult to obtain accurate figures to estimate organizational needs because indirect supplies are often procured spontaneously when there is demand.
Understanding the difference between direct vs indirect procurement can help businesses choose and use the right methods for their goals. Choosing the method of procurement will have a direct impact on service costs, thereby affecting both the cost of the supply chain as well as the image of the business in the market. Contact us for business management support for your business.