Direct and Indirect Procurement
Procurement is one of the business function in the company, which play an important role to acquire good or service for business purpose. It is one of the main department as the business need to acquire goods or service on a large scale. The company may purchase products for reselling or to support the business operation. Without the sourcing of the material, the company will not be able to run the operation.
Procurement needs to cover all the purchasing processes since purchase requests, quotations, bidding, select supplier, and cooperate with the finance department to make payment.
Mostly in business purchasing, processes are separate into direct and indirect procurement. These two processes are split from each other and have little connection besides the core function of sourcing the purchase.
Direct procurement is the purchase of raw material, product, resource, or other input which are the core operation of the business. We will be able to find these items in the finished products which will be sold to the consumer. For example, the grocery store buys milk, bread, cheese, cereal, and drink to sell to the customers. Cloth manufacturing purchase fabric, textile, and yarn in order to produce the final product. These are the core material and products for both companies to operate the business.
Company usually purchase these items in large quantities in order to receive a bulk discount and they really need a large amount when the sale increase. Moreover, the company needs to find reliable suppliers as they can’t take the risk of shortage otherwise they will miss deadlines with customers.
Direct procurement has a correlation with products’ quality management, operational performance, and consumer experience. If anything wrong with this process, there will be a huge impact on the company as well as the customers.
These materials will be recorded as the inventory in the balance sheet when they are not yet sold. They will become the cost of goods sold in income statements.
Indirect procurement is the purchase of material, product which use to support the operation but it is not the part of the core business. These products or items are not part of the final product which the customer will get. For example, grocery stores also purchase the desk, computer, and car for operation, however, they are not selling these items, they just part of the operation. They use them to support their business but they are not selling them.
Company has many options in purchasing these items regarding the brand, specification, and quality as they are almost no impact on the final products or customer. The customers at the grocery store do not care if the owner uses the MacBook or HP computer to record the transactions.
In other words, indirect procurement is the purchasing of service or material for internal use. Some companies call it the administrative expense necessary for daily use.
The campany can not run the business without both procurements. The direct-drive profit and customer to the company while the indirect procurement takes care of the daily operation.
Even indirect procurement has no impact on the customer, but the company cannot ignore its importance. Without proper facility management, business travel, utilities, and advertisement, the operation will not do well. It will have a long term impact on the company and more or less it will impact customers.
So as management, we have to balance between both procurements in order to operate well with sustainable growth.
Example of direct and indirect procurement
Key different between direct and indirect procurement
|Direct and Indirect procurements
|Supplier relation management