What is the Difference Between Indirect and Direct Procurement?
Procurement’s importance as a key business process has increased significantly in recent times. Originally procurement started as a way 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.
Direct procurement is the act of acquiring raw materials and goods for production. These purchases are generally done 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.
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 called 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, such as Procurify can digitalize 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.
Now that we have a grasp of indirect and direct procurement, let’s move on to Indirect vs Direct Goods.