Procurement is the broad term that describes all activities and processes to acquire goods and services. There are two main types of procurement: direct procurement, and indirect procurement. This article defines and describes each type, and compares and contrasts the benefits of each.
Most organizations have a clear definition of ‘direct’ procurement and use it to make their supply chains more efficient. Direct procurement is often described as the procurement of goods that go into production.
Indirect procurement involves purchasing goods or services that likely will not end up in the product or service being delivered to the customer, and are certainly not the core of the product.
Clarified by Alf Noto, Vice President of Indirect Sourcing at Nokia in his article Procurement Leaders, there are five major differences between indirect and direct procurement.
- The first difference between indirect and direct procurement is between creating business advantage. With direct procurement, people normally work with supply chain integration. Supplier who can support the supply chain integration are managed and sourced under direct procurement. In indirect sourcing, these concerns are usually not dealt with.
- The next major difference between indirect and direct procurement involves preferred suppliers. In terms of indirect procurement, when trying to cuts costs, using a preferred supplier is essential to success. Although it is optimal to specialize with one supplier, there is still the option to not prefer a supplier. In direct procurement, the preferred supplier will always be used. With the standardized processes involved in direct procurement, it is obvious that a non-preferred supplier will not be used.
- The number of stakeholders is the third difference seen between direct and indirect procurement. In terms of direct procurement the number of stakeholders involved is usually quite small. This is because it does not take many to manage the direct categories because they all involve the actual good the customer will get. Indirect procurement involves many stakeholders who have a large influence on indirect expenditures of the company.
- The power of the buyer-seller relationship varies greatly between direct and indirect procurement. With direct procurement, a manufacturing firm can easily obtain great authority over their suppliers, making the decisions often times one sided. The buyer is clearly the more powerful partner in the relationship. In indirect procurement, the seller has no restrictions with who they can supply too, and the buyer has basically no say over them. This relationship is less one-sided than in direct procurement. The buyer rarely will have power over the seller in indirect procurement.
- The last and greatest difference between direct and indirect procurement is the measuring of savings. In direct procurement, savings is measured by the cost of good reduction. Profit and loss is clearly measured by an enterprise resource planning (ERP) system which measures how effective procurement is. In indirect procurement, it is very vague what the savings will be. All savings cannot be easily measured like in direct procurement.
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