Procurement is the overarching act of obtaining goods or services and covers a wide process of payment. Underneath the larger procurement umbrella is direct and indirect spending. These two veins of cash flow, when clearly defined and strategized, can work together to ensure your operations are running as efficiently as possible. However, as similar these two spend categories may sound, they serve very separate and distinct roles. According to Michael Wilson, Vice President of Marketing for AFFLINK, "while these terms both refer to the procurement of goods and services, that's about as much as they have in common."
Indirect spend refers to the purchasing of goods and services that are not directly incorporated into a product being manufactured. Without indirect procurement functions, businesses wouldn’t be able to operate in an effective fashion. Typically, indirect procurement includes somewhere from 15-27% of a company’s total revenue and thus requires a good amount of attention and analysis in the procurement process.
If your company produces pipelines, the indirect costs would be what it takes for your business to operate. The cleaning supplies, chairs for the offices, pens, and pencils, hardhats, etc. would be included in this bucket.
The challenges of indirect spending are a smaller average spend, lower relational capacity, and analytic roadblocks. Purchasing volume, while consistent for some companies, are typically smaller, resulting in a disadvantage in the negotiation process with vendors. Maintaining boundaries and negotiating with vendors can be time-consuming and cumbersome, eating away at internal resources, making the capturing of data on indirect spend difficult.
Direct spend refers to the purchases of goods and services that are directly incorporated into a product being manufactured. Typically done in bulk to reduce overall cost, these purchases are frequently made and are necessary for essential business practices. If direct procurement ceased or was mismanaged, the company would no longer be able to manufacture their product to create revenue.
To continue with the pipeline company, the direct costs would include the steel, hardware, plastics, subcontracted labor, etc. This would be the materials needed to produce the good or service your company provides.
The challenge of direct spending is a limited purchasing power. Collective purchasing power can lower your direct spend significantly but is hard to come by for individual small to mid-sized, sometimes even large companies.
Strategize Your Spend
The good news is, for the challenges posed in direct and indirect spend, there is a procurement solution. Spend strategy can and should be in place for each company. A procurement professional should develop a cost savings and sourcing strategy for each category too. This system is called the Procure to Pay Cycle and can break down the entire procurement cycle from identifying suppliers to the final invoice payment. However, not every company has the resources for an elaborate procurement department.
If you do not have an internal procurement team, partnering with a group purchasing organization (GPO) can help you save money on both your direct and indirect spend by offering strategic solutions from our in-house procurement experts. Joining a GPO like UNA Purchasing Solutions will not only grant you access to discount programs with today’s top suppliers in direct and indirect spend, we partner with you to provide cutting edge strategy for savings and procurement development. Uniting with a GPO grants you access to a combined purchasing power of billions, allowing you discounts otherwise not available and freeing up your direct spend budget.
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