Procurement’s importance as a key business process has increased significantly in recent times. Originally, procurement was started as a means to integrate purchasing into supply chain management during a time when most large companies were struggling to manage their operational costs.
In fact, the exact date of procurement’s ascendance can be dated to October 1983 when Peter Kraljic identified that purchasing must be a strategic implementation in an organization, rather than a simple tactic in their supply chain management process. Prior to this change, organizations had only considered procurement to be a sub-discipline of the supply management process.
Over time, the result is the development of two overlapping disciplines within procurement: indirect and direct procurement.
In this guide, we’ll explain the difference between direct and indirect procurement. But first, let’s get clear on the roles that direct procurement and indirect procurement play within an organization.
Direct procurement is the act of acquiring raw materials and goods for production. These purchases are generally made in large quantities, acquired from a pool of suppliers at the best possible cost, quality and reliability. These purchases are made frequently and are necessary for key business practices, such as a baker acquiring flour to produce bread.
If direct procurement stops functioning or encounters problems, companies are no longer able to manufacture their product and create revenue.
Historically, direct procurement stems from manufacturing.
Indirect procurement is the act of purchasing services or supplies required to keep the day to day business alive. One way of classifying indirect procurement is that it does not add to a business’s bottom line. This includes things such as repairing equipment, buying office supplies or acquiring services.
Without indirect procurement functions, businesses wouldn’t be able to operate in an effective fashion. Typically, indirect procurement includes somewhere from 15-27% of a company’s total revenue.
Direct vs Indirect Procurement: What are the differences between the two?
Direct procurement is spending on services, goods, and materials that drive profit, performance, and competitive advantage. Whereas indirect procurement is expenditure on the maintenance, goods, and services needed for day-to-day operations, which do not directly contribute to a company’s bottom line.
While both of these functions ultimately follow the Procure to Pay Cycle (see below), there are a handful of key differences between direct and indirect procurement that affect how they are managed internally.
Managing Supplier Relationships
To drive quality and improve efficiencies over time, direct procurement teams tend to foster long-term, collaborative relationships with their suppliers. Hence, more time is spent on developing and managing supplier relationships.
Indirect procurement teams are predominantly focused on managing company spending, hence they tend to have more of a transactional relationship with suppliers than their direct procurement counterparts. Thus, their focus is more on managing and reducing expenditure.
It’s important to note that vendor management can still benefit companies with indirect procurement requirements. Hotels and companies with multiple locations can often negotiate better deals and discounts when they centralize relationships with their vendors, thus reducing their overall expenditure.
Similarly, software companies with little to no need for direct procurement (e.g. purchasing of raw materials, transportation costs, etc) can also reduce their overhead costs with strategic vendor management of suppliers that support indirect procurement activities.
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 (and have devastating consequences for a company’s bottom line).
Typically, inventory management is less of a priority for indirect procurement teams. However, this will always depend on the nature and needs of the company.
Because direct procurement has a “make or break” impact on a company’s revenue, it’s typical for direct spending to be managed by a dedicated, centralized procurement team.
Companies don’t typically take the same approach for indirect spending, which tends to be a decentralized function haphazardly delegated to a variety of stakeholders across multiple departments.
Examples of Direct Procurement vs Indirect Procurement
Here are some real-world examples of direct procurement and indirect procurement.
Direct Procurement Examples
Indirect Procurement Examples
As always, a company’s business model and the services and products it sells will determine its involvement with direct and indirect procurement. Hence, this list of examples is by no means exhaustive.
Direct and Indirect Procurement both follow the Procure to Pay Cycle
It’s helpful to keep in mind that regardless of whether the purchase is an example of direct or indirect procurement, the process of procuring an item to processing the final invoice is the same — Procure to Pay.
The Procure to Pay Cycle is a system that breaks down the entire procurement cycle from identifying suppliers to the final invoice payment. The term was coined by software developers as a way to identify the procedure which needed to be optimized.
E-procurement software like Procurify can digitize your procure to pay process, saving valuable time and money and making it easy for your organization and employees to obtain the goods and services needed to operate.
Procurify helps organizations regain control of their spending with cloud-based procurement software that integrates perfectly with any accounting system. If you’re looking for a better way to manage purchasing, procurement, and spending in your company, try Procurify free.