Indirect Procurement – What? How? Everything You Should Know In 2021
The concept of indirect procurement may seem basic to the seasoned procurement manager, but it is a concept that also needs studying and clarification. Because it is a term that is encountered often, there will be times when it is misunderstood.
For this article, you will learn about indirect procurement. You will learn the strategy behind the process, why it’s different from direct procurement, and how procurement managers can take advantage of it.
After reading this article, you should be a master of this procurement process with the tools and knowledge on how to apply the process successfully.
Is Indirect Procurement a Mystery?
Have you ever thought about why procurement managers are always focused and determined whenever the words indirect procurement come out from their mouths? Have you also wondered about its importance and what it does for the company? Are you also asking why we’re asking too many questions?
Well, this is simply just to gauge your attention; we know that talking about procurement can be a bit dull and repetitive, but as a professional procurement manager or specialist, you should always be attentive on topics that matter.
What is Indirect Procurement?
To put it simply, Indirect procurement is the act of buying or procuring materials or supplies to keep the daily operations of your business alive. One way of classifying this type of procurement is that it does not add to a business’s bottom line. This includes processes such as equipment repair, acquiring services, or buying office supplies.
The Difference with Direct Procurement
Direct procurement is the spending on goods and services that gives your company profit, performance, and competitive advantage. In simple terms, this is the procurement that most procurement managers are very familiar with. You acquire and source out supplies so you can gain an advantage over your competitors.
As for indirect procurement, as stated above, the company has to continue purchasing services or supplies to keep the company working. These purchases will not affect the company’s bottom line; its procurement process is just to keep the company afloat and not to give it the advantage it needs against its competitors.
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Best Examples of Direct Procurement VS Indirect Procurement
To help you, our dear readers, to identify the difference between direct and indirect procurement, we at Procurement Tactics have made this handy-dandy table so you can simply point out some of the most common examples of indirect and direct procurement.
Of course, if you need more help in becoming the best procurement manager, then you can simply check out our Negotiation Gamechanger certificate program. We’ll guide you through our best-kept secrets so you can gain an edge against your negotiation rivals.
Without further ado, here’s the table as promised:
|Direct Procurement Examples||Indirect Procurement Examples|
|Raw Materials||Office Furniture|
|Mechanical parts for manufactured goods||Maintenance costs|
|Ingredients for food products||Computers, printers, and other office hardware|
|Machinery, such as ovens, washing machines, etc||Gas, power, water, and other utilities|
|Contracted labor for construction services||Software bought and used by the organization|
|Marketing and advertising expenses|
|Training sessions, human resources costs|
|Workplace and facilities management|
The Indirect Procurement Strategy Debunked
Since indirect procurement is indeed important for a company to keep it afloat, then there should be an effective procurement strategy involved. The process will not only make sure that the supplies brought are of good quality but should also be bought at the best price and should also follow the standards established by the company.
Again, it is the procurement manager’s responsibility to draft, execute and follow the indirect procurement strategy. As such, a good strategy usually has the following metrics or standards:
- Automation – Again, e-procurement is key to achieving good procurement results. Process automation through e-procurement solutions is becoming more and more popular nowadays because it simplifies the entire procurement process. From gathering data to comparing vendors, a procurement strategy has never been easier. Of course, the said strategy should still have its human touch and it’s the job of the procurement manager to do that part.
- Innovation – Suppliers should also be involved in the procurement strategy as they are well-versed with innovation. Suppliers must work together with the internal procurement team to come up with innovations that will help the strategy as a whole.
- Value Creation – For the procurement manager, creating value for the stakeholders is still a top priority for the indirect procurement team.
- Cost Control – For a great strategy to work, there should be cost control. It will remain the main goal of the procurement team. This is probably the only area where both indirect and direct procurement meets in the middle. The methods used for achieving this are supplier negotiations, pooling of purchases, specification of adjustments, and even the change of suppliers.
- Responsible procurement – Finally, companies that deal with procurement must make it necessary to practice Corporate Social Responsibility or CSR. What this means is that the procurement team makes it a point to check their supplies whether their services or products are acquired thru ethical and responsible means. While it is not yet popular among huge companies, the idea is catching on rather quickly.
The Best Practices of Indirect Procurement
With the indirect procurement strategy debunked, it’s now time to explain the best practices that a procurement manager can use while using the procurement process.
These best practices should give the company’s procurement team the edge in following the practices and methods required in the procurement strategy. Some of the best practices to observe are as follows:
- 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.
- 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.
- 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.
- 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.
What is indirect procurement?
Indirect procurement is the process of buying/procuring supplies that are instrumental to the daily operations of the company.
How to do indirect procurement?
Like most procurement processes, indirect procurement requires data gathering and the sourcing of potential good suppliers.
How is indirect procurement different from normal procurement?
The latter is all about buying supplies for the growth of the company. The former, however, is all about buying supplies for the daily operations of the company.
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