Procurement is one of the key business processes organizations use to source and obtain the products/services they require to run business operations.
The process includes several related activities, such as managing contracts, hiring suppliers, and negotiating prices to get the best possible product at the best value.
Based on the kind of business model a business has, supply chain teams have a choice to go with either of the two approaches to procure the materials required for their daily functioning. These are called direct and indirect procurement.
While the concepts of direct and indirect procurement can seem easy to those who are part of the industry, the finer details can be difficult to grasp.
In this post, we will cover what direct and indirect procurement processes are, what are the technical differences between the two types of spend, and how low-code automation using Hubler can enable a faster procurement process.
Direct procurement in any organization is a core business process. It involves purchasing products or services that are needed to produce value for customers and, therefore, generate revenue for the business.
Also known as direct spend management or direct sourcing, direct procurement management is the end-to-end process that organizations follow to manage the procurement of direct materials, parts, or components that are used to make a finished product.
In simple words, it is the process of acquiring resources that go into building the actual product/service that the business offers.
For instance, direct procurement for a smartphone manufacturing company would mean getting resources such as processors, parts, chips, screens, etc., that are linked directly to the making of the product.
The process of direct procurement in any business involves purchasing raw materials and other services from chosen suppliers or vendors to operate the business.
An organization with a proper direct procurement function mostly has a team assigned to work in collaboration with chosen supplier or vendor to supply them with the required material.
The internal procurement team here manages the inventory of all the materials, works on the gaps identified, and accordingly builds communication with the suppliers/vendors to supply the material required.
As the name suggests, indirect procurement refers to the process of purchasing services or products that are essential for day-to-day business operations but don’t necessarily provide value directly to either customers or business revenue.
Put simply, indirect procurement is the process of acquiring resources for the business that support its ongoing existence.
For instance, an organization that deals with making smartphone apps would hardly require any resources by way of direct procurement but may still require several resources through indirect procurement, such as software, office supplies, systems, etc.
Unlike the misconception that indirect procurement is not a necessary or directly-related function in the revenue generation of business, it is an equally important aspect of the business' supply chain and plays a critical role in its continued functioning.
An efficient indirect procurement process allows businesses to purchase items used in running their normal operations daily. This process is usually decentralized and carried out by a dedicated department, where each team is responsible for managing resources for their supplies per the specific demand.
As mentioned earlier, direct procurement or spending is all the purchase of goods and services directly involved in the manufacturing of a product.
Often, the direct spend is incorporated into a business’ expenses and accounted for beforehand. So, these are mostly the expected costs and can often work in sync with purchasing supplies in bulk.
When it comes to the examples of direct procurement, it varies depending on the industry or final product being produced. But in most cases, the items purchased through direct procurement include:
In short, any purchased material goods that are used to create a product fall under the category of direct spend.
Indirect procurement includes the purchases that support a business. Examples of these include:
Direct and indirect procurement are both important for running a business successfully. However, what is important to understand is that they are quite different from each other and require distinct approaches and tools to manage them efficiently.
Understanding the differences as well as the similarities between the two processes will ultimately help you plan the future of a powerful supply chain and hassle-free spend management strategies.
If you wish to build a successful procurement strategy and propel your organization in a competitive landscape, one of the first things you need to do is automate your procurement process.
The best way to begin your procurement automation journey is with a robust no-code platform such as Hubler that helps you create the right automation software for building and implementing your strategy. It is a one-stop solution to streamline your complex procurement process.
Hubler can automate your end-to-end procurement system process, thus freeing you from various time-consuming and repetitive manual processes. Our Procure to Pay system is a well-designed and straightforward platform to help you create an optimized purchase order cycle process for your business.
Right from purchase order requests and budgeting to RFPs and POs, Hubler allows you to manage everything efficiently using one single solution. Further, Hubler can also integrate with your existing database easily and give you a complete view of your overall procurement process.
If you wish to stay competitive in the market by automating your procurement process, start by using Hubler. Try a free demo today.