Direct or Indirect Procurement makes no difference any more

Procurement gains a position as a central factor for the business process over time; the outcome is ...

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Posted by Dave Food on Sep 17, 2019 3:26:52 PM
Dave Food

Procurement gains a position as a central factor for the business process over time; the outcome is the growth of two intersecting-disciplines within Procurement: Direct and Indirect Procurement. Traditionally, they used to play different roles.

Direct Procurement is the action of procuring or buying raw materials and goods for production, purchases done in large amounts and from a cluster of suppliers, at the best possible cost, quality and reliability. This sort of purchasing is essential for basic business practices (e.g. a tailor buying fabrics to manufacture clothing.)

Direct Procurement is where the most significant part of the budget is spent, seen as more central to the business. If Direct Procurement stops functioning or encounters problems, companies would neither manufacture their product nor generate revenue.

Indirect Procurement is the action of buying services or supplies vital for the day-to-day business. It does not add to business results (e.g. travels, hardware, software, repairing equipment, maintenance, external professional services, training, Marketing, buying office supplies or services of any kind to keep the enterprise going on.)

If managing Indirect Procurement incorrectly, the business might undergo unforeseen disruptions to workflow, could have a problem locating and handling expenses, campaigning its products, or mediocre services.

Does the character of each still matter?

The two parts of the Procurement roles hold a different cultural perception.

When looking at the business from the CFO or a CEO viewpoint, they might question the convenience of integrating more widely, all indirect tools, spends, and efficiencies directly to the managing of Direct Procurement. Direct Procurement creates competitive advantage while considering Indirect Procurement just an addition.

Direct and Indirect Procurement represents around 67% of a business cost. However, without these two, the company would not exist, as both are essential to run a business to achieve same goals; objectives like the purchasing of goods at the right cost, of the highest quality, deliveries in the right place and at due time.

Earlier, Indirect Procurement teams often tried to be in charge of both part of the Procurement, exposing businesses to the interfering from other participants; centralising and adding vendors who would cause limited options, needs not fulfilled, or poor-standard of services.

These possible risks took Procurement leaders to adopt new technologies to deploy a single-minded digital transformation, and place the ground-work for more bright-adaptable purposes, and on the way, to achieving a mature-unique Procurement role across the business.

There could be cultural-trace outlooks about changing a program: obligation instead of agreement, institutional resistance (either because of uncertain benefits or concern around their possible-affected roles, or due to technological mismatch. However, the advantage brought into administrative costs, along with the developing of edge technology when uniting both Direct and Indirect Procurement would higher-up the company values.

Further comments: No doubt, technology is blurring the differences between the two. Take the example of Tesla that is now both, an automated-technology company and a car maker.

By sharing resources, information and insights, Direct and Indirect Procurement working-parties can break down silos and build a more positive relationship to drive benefits to the operation, other shareholders and the business too. All Procurement processes should be supported by the same edge-technology to avoid constrains in collaboration, causing costly incompetence.

Many of the technological tools developed to make indirect spend highly competent can be applied to direct spend and used to transform Direct Procurement digitally. Businesses that don't modernise, innovate and invest now, could quickly be left behind by their competitors.

 

Dave Food

Prophetic Technology

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