What is Indirect Procurement?
Indirect Procurement is the process of procuring services or products required to run any business. To ensure that the business runs smoothly, one will need services or products continuously. The goods and services obtained through Indirect Procurement are not the ingredients of the finished goods or services that a business offers to its customers. These will not impact the profitability of the organization directly. It is more to do with inputs getting converted to the desired output effectively. For example; the procurement of an outside vendor for facility management of the office premises or furniture and stationery for the staff. The goods and services brought in through Indirect Procurement are for internal stakeholders’ consumption and not for external customers or vendors. Business houses are seen to have a spending range between 15-27% of their revenue on Indirect Procurement.
What is the difference between Direct and Indirect Procurement?
- It involves purchasing raw material and Goods that are used in the manufacturing of the finished products.
- This will have a direct impact on the bottom line of the business and helps organisations to create profits, drive performance and create competitive differentiation in the marketplace.
- Direct Procurement involves purchasing goods from suppliers at the best possible rates, quality, and price, hence; the procurement team needs to be relationship-oriented with the suppliers.
- This involves purchasing goods in bulk to achieve economies of scale.
- Wrongly managed direct procurement can lead to the halt in the manufacturing process of an organisation.
- It involves purchasing goods and services that are required for the smooth functioning of any business and aids in developing and maintaining various operations of the business.
- This does not have a direct impact on the profitability of any organisation.
- Indirect Procurement is all about getting the lowest possible rates as it involves managing expenses; the procurement decisions are more price sensitive.
- This involves identifying procurement sources that are cheapest.
- Wrongly managed Indirect procurement can lead to an increase in expenses and an increase in dissatisfaction of the internal stakeholders as it involves working with a more complex internal stakeholder environment.
What are the Skills and Strategies Involved with Indirect Procurement?
Indirect procurement usually deals with procuring goods from hundreds of categories, multiple suppliers, and category expertise across to procure at the lowest available cost. It involves catering to a much more complex environment of internal customers that are well informed and need the team’s support for procurement. Most of the internal stakeholders see truly little value in indirect procurement as an activity. Indirect Procurement also involves advising the internal stakeholders on their budget availability and spendings in an environment where they have little or no mandate on their spending budgets.
The key skills needed are as below:
- Expertise in a broad range of categories.
- Influencing and advisory skills.
- Identification, sourcing, appointing, negotiating, and managing suppliers.
- Cost management skills.
- Data mining and analysis skills.
- Update on changing technical and supplier environments.
Strategy: Like Direct Procurement, Indirect Procurement involves developing a cost-saving sourcing strategy. The organisation big enough to appoint a procurement team usually follow a system of “Procure to Pay“. This would require the procurement team to do the following:
- Create a detailed list of categories of products and services that they need to procure.
- Source, the various suppliers for each category in the list.
- Identify the best supplier for each category and negotiate the lowest possible rates.
- Decide upon the most preferred cycle for final invoice payment.
For smaller organisations who cannot afford to have an Internal Procurement team, partnering with a group purchasing organisation(GPO) would be the best solution. The group purchasing organisation offers small organisations the advantage of combined purchasing power and access to discount programs from top suppliers that otherwise is out of reach for them.