Direct Sourcing – Everything a Procurement Professional Should Know

Direct Procurement VS Indirect Procurement – What is the Difference?

Since we’ve established that direct sourcing is the same as direct procurement, it’s time to set it apart from its other form, which is indirect procurement

Now for the nitty-gritty of details. Indirect procurement is the process of buying supplies or services so that a company can operate on a regular basis. If this particular company doesn’t procure supplies on a regular basis, the company will not function at all. Think of car companies and businesses that cater to very specific products that need to be ordered. If you’re about to build a car but you’ve run out of tires, there is no way that you’d be able to make one, right?

Direct procurement or direct sourcing works the other way around. Companies procure supplies in order to keep the company growing. Sometimes, companies also go for direct product sourcing if they need to buy equipment that will improve or upgrade a company’s ability to create new products or provide new services. As such, direct sole sourcing is more common with most companies nowadays.

What are the Best Examples of Direct and Indirect Procurement?

To help our dear procurement managers distinguish the difference between direct and indirect procurement, we’ve come up with these examples:

Tips for Managing Direct and Indirect Spend

1. Inventory management

Inventory management keeps track of the type and quantity of materials a company has in stock and what products need to be replenished throughout the year. 

Having strong inventory management takes a proactive approach to managing direct spending by ensuring that the company has enough supply to run its operation. 

On the other hand, indirect spending in inventory management is more reactive in execution. 

Supplies are only ordered when necessary. Also, regular assessment of indirect spending can help companies determine when and what the minimum level of supplies is needed. 

2. Centralized e-procurement solutions

Professionals in indirect spending frequently work with and receive requests from non-procurement teams. Thus, implementing an intuitive e-procurement solution will be beneficial for employees who usually need to outsource goods and services in their role. 

For direct spending, using an e-procurement solution optimizes supply chain logistics and communications, while lowering the risks of human error. 

3. Effective cost management

Direct procurement professionals commonly use strategies like should-cost analysis to negotiate supplier pricing in cost management. This strategy estimates the final pricing of the supplier by estimating the total costs the supplier needs to spend to make or deliver the final products. 

For indirect procurement professionals, they prefer starting each new budgeting period from scratch. In this strategy, every dollar counts and each expense needs to be reevaluated and justified for the next fiscal period to be approved. 

Thus, this strategy eliminates redundancy in spending and prevents companies from wasting their budget on expenses that do not contribute to the growth of the company.

The Best Practices of Direct Procurement

One of the best things about both direct and indirect procurement is that anything positive that you do with one process will also remain with the other. In short, the best practices that you do for indirect procurement should also be the same as direct procurement!

As such, here are some of the best practices that can guarantee success when you deal with direct procurement:

1. Invest only in the Best Technology

What this means is investing in the right automated software for your procurement strategy. This is already a given since, with every procurement strategy, good software is a must. Make sure that the tool you are investing in is working, has a good interface, and is full of features that cross over to other procurement functions, such as sourcing and data analysis.

2. Developing a Strategic Sourcing Plan

Strategic sourcing works well with indirect procurement. It allows the procurement team to find the best possible suppliers while following the company’s goals. You can have a look at our article for Strategic Sourcing here. Otherwise, we can give you more information about it through our Negotiation Gamechanger course.

3. Partnering with a Group Purchasing Organization

Since indirect procurement deals with buying supplies that are meant to keep the company in working condition, then partnering up with a group purchasing organization is ideal. GPOs can help you balance your expenses and it reduces supplier risk. The move also saves you time and money.

4. Proactive Change Management

Since this procurement strategy demands people who know exactly what they are doing, if you ever need to change some of the members of your team, then it is always a good idea to do so. Training new members can also help and there is certainly a rising boom for procurement analysts and procurement managers nowadays. Also, choosing your software vendor is a part of this process. If you found a good software vendor for all the automated software needed for the procurement process then you are certainly lucky.