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what is Direct and Indirect Procurement| Direct vs Indirect Procurement|

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by Beroe Inc
11 March 2021

Procurement is a process to acquire the necessary goods and services for running a business. This includes the purchase of items that are used in production and those that don’t directly contribute to the production but are vital for the effective functioning of the business. Procurement can be of two types: direct and indirect procurement. Both types of procurement are present in a business and while they differ in their contribution to the running of a business, both are essential for business survival and growth.

Direct And Indirect Procurement

In order to understand direct vs indirect procurement, it is vital to understand what they mean.

Direct procurement is the process whereby materials that are directly used in the production of goods and services are acquired. For example, a restaurant owner will require items such as spices, raw meat, vegetables, and so on which fall under direct procurement. On the other hand, indirect procurement is different. 

What is indirect procurement? Indirect procurement is the process of acquiring items that are required for a business to operate on a daily basis. These items aren’t directly a part of the end-product but are essential for the business. For example, training employees, machines that are used in the manufacturing process and office supplies come under indirect spend.

Businesses oftentimes focus more on direct procurement because it is necessary for supply chain management and it ensures production can go as planned. It is easier to track direct procurement when compared to indirect procurement. However, both of these are critical if a business wants to grow and continue to survive in a competitive market. Businesses must track and ensure they build the right strategies to maximize procurement functions; both direct and indirect ones so that businesses can cut costs and reach their full potential. Let us find out how businesses can ensure proper indirect procurement.

How Can You Achieve Efficient Indirect Procurement Management?

When developing an indirect procurement strategy you need to keep the following in mind:

Acknowledge it deserves attention

Direct procurement is easier to deal with in comparison to indirect procurement which is one of the reasons why businesses prefer to give it more attention. However, if you want to see change then you must accept that change is required. You need to acknowledge that indirect procurement deserves more attention and allocation of resources just like direct spend. Even a little improvement in indirect procurement can help businesses of any size reap the real benefits sooner rather than later. Being firm about putting a system for ensuring proper indirect procurement is the first step to do that.

Plan well

When it comes to developing a strategy for indirect procurement, you need to spend time in planning. This starts with the evaluation of the current procedures and processes in place for indirect spend. What do you want to change and how do you plan to measure the success of your strategy? You need a solid plan before you embark on your journey to build an indirect spend strategy so you stay on track the whole time and don’t deviate from it. You want to look at where wastage is occurring at present and try to uncover saving opportunities in your supply chain.

Have the data

The reason for complexities in indirect procurement is the inability to find the right data. That is, while indirect spending is happening across the business, it isn’t transparent because there is no proper data management system in place. If you are building a strategy, then it is vital to store all the necessary information in one place and to manage the existing data so decisions can be made based on that. This can take time but the sooner you start the better it is for your business. Spending time collecting valuable data is key for building a strategy that works for your business.

Pick the right technology

Investing in technology for indirect procurement helps automate processes and is crucial for making informed quick decisions. Businesses that don’t have technology in place often fumble because they don’t have a centralized repository of information from which they can make clear decisions. Technology can help streamline processes by capturing what is important to businesses and presenting information to them in an easy-to-understand manner. It can help save time, cut down on costs, and increase efficiency within the organization.

Communicate effectively

Communication cannot be left out when building an indirect procurement strategy. It is vital that people who deal with indirect spend understand why it is important to follow procedures. If you have certain policies in place then clearly telling everyone in the organization about their importance is valuable as it will instill a sense of accomplishment and will allow employees to see the bigger picture. This helps curb maverick spending. You want to inform all the stakeholders about the strategy and take their inputs to ensure you have a robust and reliable indirect spend strategy in place.

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