Speaking of the traditional procurement paradigms, it is possible to categorize spending into two different categories, which include direct procurement and indirect procurement. Also referred to as direct cost and direct spend,” direct procurement refers to the process of obtaining the raw materials, services, and goods, which provides the prerequisite support to the production of the services and goods by the procurement company.
On the other hand, indirect procurement has become more popular as indirect cost and indirect spending. Indirect procurement is recognized as the process of obtaining goods and services that help in supporting, maintaining, and operating costs. Both kinds of procurement offer a helping hand in offering the prerequisite success to the business enterprise.
As you go through this article, you will be able to explore the different aspects of direct procurement:
What is direct procurement?
Direct procurement is regarded as the strategic sourcing process, which has become the latest buzzword in town. It includes buying services and goods directly from suppliers and manufacturers without the involvement of any intermediaries. Such a methodology is useful to the business enterprise in improving supply chain efficiency, decreasing costs, and establishing enhanced power over the buying process.
Examples of direct procurement
Examples of the direct procurement process in daily business include:
- Buying the mechanical components for the production equipment
- Raw material provision is necessary for the manufacturing of the finished goods.
- Installation and supply of the industrial machinery
- Subcontracting and outsourcing of the manpower and labor in the construction process
Importance of direct procurement
The process of direct procurement is vital to ensuring the success of the business organization and the products it offers. As the process becomes successful, it becomes effective in creating supply chain resilience. If you are willing to seek resilience, direct procurement assures that different product components are present at the proper quality, location, quantity, and rate.
In addition, this methodology ensures that the supplying enterprises are abiding by the company policy and exhibiting outstanding performance. The nature of this process is complicated at times, with regard to the components’ technical nature, end-to-end processes, global supply chains, and regional compliance and regulations.
How does the direct procurement process work?
The direct procurement process happens to be the procurement process, in which the buyer or the procurement entity solicits offers from different suppliers instead of involving any middlemen. The primary benefit of choosing the direct procurement process is that it helps enhance trust between the suppliers and the procurement entity. It is due to the fact that the supplier is aware that the procurement entity takes an extensive interest in purchasing the services and products and does not have any kind of hidden agenda.
Advantages of direct procurement
The primary benefit of the direct procurement process is that it is useful to businesses because it saves them an ample amount of money. It is due to the fact that the businesses will be able to avoid paying the fees and commissions to the intermediary. Besides this, such a process allows the business to negotiate better prices and terms with the suppliers, as they try to deal with them directly.
Another prerequisite benefit of the direct procurement process is that it is useful to businesses in improving the quality of their services and products. It is due to the fact that businesses will gain an understanding of their different needs once they try to deal with different suppliers directly. It is useful to monitor the performance of the supplier, thereby holding them responsible for different issues.
The direct procurement approach offers different opportunities for the business enterprise. It plays an integral role in decreasing the communication workload for the procurement department with a decrease in the total count of external parties.
Besides this, when the direct procurement process tries to deal with the supplier of either the goods or services, it assures constant quality consistency. It helps to assess contract performance as they try to deal with different suppliers with whom the enterprise has been doing business for a prolonged period.
Future of direct procurement
The future of this process is considered exciting. In addition, it is completely filled with a lot of potential. The possibilities for the direct procurement process are endless. It can improve supply chain management.
With the prerequisite processes and tools in place, direct procurement is a powerful tool that helps decrease costs. Besides this, it helps boost efficiency and improve quality through the different aspects of the supply chain.
When the process of direct procurement is used?
The direct procurement process occurs when the business organization invites the sole entity to supply different services and goods without being subjected to any kind of competitive process. Both private and public enterprises with procurement departments need competitive bidding before awarding contracts to different suppliers.
But there are different situations in which the direct procurement process seems like a good idea. The primary scenario refers to when, although bid invitations were sent, no bids appeared. The bids entering the market are good with regard to the capacity of different applicants to fulfill the contracts.
During the scenario, the business is required to reach out to the specific supplier and invite them to bid. It is common in highly specialized industries that an enterprise will serve an entire area on its own.
When the value of services and goods becomes low
In different cases, when the bidding process costs exceed the value of the services and goods in question, the direct procurement methodology is applicable. It might be the case that the expected differences between the various suppliers’ quotes become low. Hence, the competitive bidding process will not save the enterprise money. In either case, the direct procurement process occurs.
Avoiding different kinds of compatibility issues
As the business needs extra suppliers after the delivery, they should opt to source from either of the same suppliers to get rid of compatibility problems. Once the given specific hardware manufacturer supplies 90 percent of the hardware of the business enterprise, it is viewed as the product to stick to the organization to avoid discontinuity owing to the incompatibility.
The staff is used to working with products from a specific brand. A shift is essential to get familiarized with the latest software or hardware, which will result in different quality inconsistencies.
Different situations occur when the urgency of the need indicates that no time is included in the competitive bidding process. For instance, as the business enterprise tries to enhance the production of specific products during the ongoing war, there are chances of a direct procurement process by the government to remove the shortage of food, drugs, weapons, and military clothing.
Natural calamities like cyclones lead to significant disruptions and damage, which result in a surge in demand for specific suppliers, which the local authorities need to acquire within a specific period.
Repeating or ongoing services
During the direct procurement process, the business enterprise earns rewards for the constant use of the services provided by the specific business enterprise. It is known to be predominantly common in the insurance sector. The primary contract award is subject to the competitive bidding process. Once time passes, it becomes challenging to undergo the complex bidding process as the latest supplier will improve the offering to reward loyalty. However, such an approach relies on different internal procurement government rules for each enterprise.
Intellectual property protection
During the direct procurement innovation process, the business approaches the company and requests a method of product development to solve a specific issue. As the supplying company tries to develop the prerequisite prototype, there will be chances to create the product to secure different IP rights. Different research institutes try to win these contracts as they are tapped to resolve a specific issue.
Proper management of different processes
With the sourcing of goods from the supplier directly, a number of measures are put in place to secure the business enterprise from maverick spending. In the first place, the business enterprise needs to have comprehensive goods and services on hand, which are procured directly from the supplier.
It removes the ambush to determine the procurement of a specific product. Besides this, there needs to be a detailed procurement of different processes. It is inclusive of the use of the proper document and its retention for future review.
Certain situations occur that emphasize the hand of the business enterprise in direct procurement. The acquisitions are considered to be the result of insolvency, liquidations, legal forfeitures, and forced sales. As the property is ready for sale in a certain auction, the given procurement party is allowing it to seek participation in the auction.
Best practices for direct procurement
Now, we will tell you about the different direct procurement practices:
Creation of the procurement management frameworks
Before describing different inefficiencies in the procurement process, it is important to establish a stronger and more efficient procurement management framework. In the absence of a procurement management framework in place, it is important to take a step back and find the function of the sourcing functions in the business.
The direct procurement management framework needs to establish different guidelines to approve and monitor the purchase requests, the performance of the 3-way match, quality assurance, record keeping, payment, and involvement.
Engaging the suppliers
The creation of a solid and strong relationship with the suppliers is essential for the success of the business enterprise. The necessary routine maintenance and product delivery are regarded as crucial components to conducting business strategically. It is important to have improved insights from suppliers.
Hence, you should make sure to monitor the performance and evaluate the relationships. With the enhanced performance of the vendor, it is possible to engage the same in a meaningful manner, which assures that the business needs are completely met.
If a specific procurement area is overlooked, you cannot manage the latest inventory effectively. Controlling the expenditure and maintaining the bottom line to manage the intake and stock happens to be a major challenge.
Keeping an optimal inventory is considered a wonderful practice in procurement. Planning the purchase quantities to reduce waste and deliver on customer expectations is recognized as a balancing game.
If the procurement process is not effective, it is going to cost you around $1.5 billion annually. The efficiencies are going to save you valuable time and money. Thus, it provides sufficient time for you to focus on the potential customers. Owing to this, customer satisfaction will increase. Owing to the enhanced efficiency level resulting in an improved return on investment, it is important to automate the direct procurement process.
With the availability of strategic technologies and customizable applications, the business will be able to automate different systems. Automation helps to reduce repetitive operational processes, thereby providing more time for the employees to contribute to the growth of the business enterprise.
The direct procurement process is composed of the related processes series, which spans the entire product lifecycle. Moreover, it is inclusive of the external and internal stakeholders, like those from engineering, procurement, accounts payable, logistics, the supply chain management team, and the suppliers, creating the supply chain.