Regardless of the size of the business, a constant, carefully planned supply of production materials is critical to success. Failure to properly plan material procurement will result in costly production downtimes and expensive redundancies due to the purchase of surplus stocks. In this article, we will consider direct and indirect methods used by various companies to optimize their business processes.
Direct vs. Indirect Procurement
Depending on the business model involved, supply chain professionals can take one of two approaches to procure the materials they require in their daily operations.
Procurement can either be direct (focused on purchasing materials to achieve a profitable outcome) or indirect, where materials, services, and supplies paid for are used to maintain the business but do not necessarily contribute to overall profitability.
In reality, every business will most likely require a mix of the two above-mentioned procurement strategies to continue functioning optimally. However, every business operator needs to understand the critical differences between these two methods to properly balance their use in real-life business processes.
Key Differences Between Direct and Indirect Procurement
There are some fundamental differences between direct and indirect procurement. These differences are outlined below.
- Supplier and purchasing team relationship
- The pattern of inventory management
- Company procurement policies/team structure
Supplier and Purchasing Team Relationship
Direct procurement setups typically involve creating and maintaining a harmonious long-term relationship between the supplier of work materials and the procurement team within the company. This process is a continuum that requires mutual understanding and communication on delivery schedules, demand, and timely supply of necessary materials.
By contrast, indirect procurement doesn’t prioritize a relationship between the purchasing unit within a business and the material suppliers. Indirect procurement is purely transactional, with business purchasing units constantly comparing vendors and selecting the supplier with the most competitive and cost-effective delivery proposals.
The Pattern of Inventory Management
Direct procurement involves an efficient, predictive approach to material purchasing. The procurement team running a direct purchase system constantly updates their inventory, ensuring required components are always available when due. In contrast, with indirect procurement, materials are ordered when there is a demand for them. While this method might eliminate redundancies, it can result in delays in production due to the unavailability of raw materials needed for production activities.
Company Procurement Policies/Team Structure
Companies operating direct procurement systems typically have centralized purchasing teams dedicated to specific supply needs. Consequently, they have more rigid budgets and procurement targets. Indirect procurement is often more flexible and decentralized, with spending done on variable material demands. Spending is often unpredictable, and purchase redundancies are more likely to occur.
Direct Procurement Process
The direct procurement process simply involves purchasing raw materials, components, and services from vendors or suppliers to generate a net profit. A business running a direct procurement setup typically has a dedicated purchasing team that liaises with a chosen vendor to supply the necessary items. The in-house team usually keeps an inventory of materials, predicts deficits, and communicates to their vendors to supply the required items.
Examples of Direct Procurement
Some common examples of direct procurement in the everyday business world include the following:
- Purchase of mechanical components for production equipment
- Supply and installation of industrial machinery
- Provision of raw materials needed for manufacturing finished goods
- Outsourcing and subcontracting labor/manpower in construction
Challenges of Direct Procurement
Although direct procurement is an efficient approach to supply acquisition, it is based on the assumption that the business model remains profitable. If there are any issues in this tightly wound supply, utilization, and profitability cycle, direct procurement becomes an impractical business approach.
Indirect Procurement Process
A common misconception is that indirect procurement is not directly involved in creating profits for a business but is nonetheless critical to its continued survival. An indirect procurement process allows the purchase of items used in running day-to-day activities. This process is typically decentralized and run on a departmental level, in which each team or unit pulls resources for their supplies as demands surface.
Examples of Indirect Procurement
Indirect procurement activities include the following examples:
- Purchase of MRO (maintenance, repair, and operation) consumables used during the manufacturing process and to maintain plant operations and equipment maintenance parts.
- Freight and logistics
- Purchase of office furniture, stationery, and other supplies
- Payments on utilities (heating, electricity, water)
- Employee improvement/training costs
- Fees for external consultants and services
- Marketing and advertising expenses
- Fees for purchasing and maintaining business hardware (computers, printers, phones) and software (computer programs, archiving, and storage systems)
Challenges of Indirect Procurement
Due to its largely decentralized nature, indirect procurement is more chaotic than a direct process of obtaining materials. As a result, the traditional indirect process is more prone to surpluses and redundancies as each team within the company operates separate procurement budgets while many required materials are similar. This lack of central organized material demand and flow may negatively impact the overall costs of running the business.
DXP Has Procurement Solutions for Your Business
At DXP, we are committed to providing excellent procurement services for all your business needs. We understand that business models vary and approach each client with the best strategy to optimize their processes.
Let us show you how to turn your indirect process from a necessary evil of redundant business processes, into a profit-generating streamlined system through a focus on cost reduction. DXP is the expert in re-thinking the indirect MRO procurement process to make it a competitive advantage for industrial customers.
If you are looking to access streamlined, cost-effective material procurement, DXP is the right choice. Contact us online today!