Direct vs. Indirect Procurement Strategies

Written by ConvergentIS | Aug 30, 2022 3:44:24 PM

For those looking at making major business transformations, procurement should be a key player in your strategy. In a recent study, Realizing the Power of Procurement by A.T. Kearney found that business leaders must rethink their traditional operating models favouring more in-depth procurement strategies to track spending. On the surface, this sounds simple. However, those who don't work directly with procurement might not realize that procurement is a broad set of processes involving direct and indirect procurement. While direct procurement is likely viewed as a priority, indirect procurement, when done correctly, can also help your business achieve cost savings and improve efficiency. As a lesser-known process, it can be challenging to create an indirect procurement strategy that accelerates your business transformation if you aren't in the procurement department. But it is possible.

To ensure each leader is equipped with the right knowledge to develop their indirect procurement strategy, we have outlined the key differences between the different types of procurement and a few tips to guide your process. Considering both these areas will help businesses assess the available tools on the market, such as SAP.

Direct Procurement vs. Indirect Procurement

While both terms share the word "procurement," indirect and direct procurement function separately. The only similarities between the two are the actions of sourcing and procurement.

Direct Procurement	Indirect Procurement
The purchasing and sourcing of any goods, materials or services directly related to the creation of your company’s core offering.	The purchasing and sourcing of any goods, materials or services required for the continued operation of your business, but not directly related to the creation of your company’s core offering.
Some examples may include labour if you are a construction company, food if you are a restaurant or product parts if you are a manufacturer.	Some examples include utilities, rent, office supplies, professional development or marketing activities.
Businesses can easily automate their direct procurement function with material requirements planning on their ERP system. With automated systems, vendors will receive purchase requirements without any human contact from your business. Automatic functions are deliberately set up, so policy controls are driven by large contract negotiations to ensure fair pricing on materials.	While indirect procurement is supported by ERP systems, businesses rarely automate these functions, completing each requisition individually instead. This is because it is almost impossible to completely automate indirect procurement since the bylaws and processes surrounding it are complicated and hard to understand.
In most cases, direct purchases are included as Cost of Goods Sold (COGS) on the income statement.	In most cases, indirect purchases are included as expense accounts on the general ledger (GL).

While indirect procurement might not sound like it is a make-or-break function for your business, it can be more essential than direct procurement to your organization's success. Without direct procurement, there may not be a product or service to offer. But without indirect procurement, there wouldn't be a business.

This means your company will require both direct and indirect procurement strategies to accelerate your business transformation. Creating a direct procurement strategy is likely something your business has done long ago to avoid the scrutiny of auditors who tend to only look at indirect procurement when entertainment and travel are on the line. However, there are more optimization opportunities in indirect procurement since automation is typically done in individual steps of the process.

Five Steps to Creating an Indirect Procurement Strategy

Creating your indirect procurement strategy starts with monitoring spending with the same attention to detail as you would for your direct supplies.

Have a centralized source of information that can be reviewed by Senior Managers. A single source of information allows appropriate tabs to be kept on employee spending. This includes having clear spend channels including strategic vendor management, purchasing cards and user requisitioning which are all opportunities to leverage materials requirements planning.
Avoid manual processes that create bottlenecks, such as having a single person or team input purchase requisitions or purchase orders at month end. By the time these expenses are inputted, it is likely too late to see what is being spent by each team.
Build stronger relationships with your team that is responsible for making procurement decisions. This is because each indirect category has different stakeholders involved, all of whom may resist changes to your procurement management system and will have insight into unique workflows within your business. Developing strong relationships with your team and those who will be using your solution is essential in order to streamline your indirect procurement process.
Leverage new technologies that have a heightened priority towards user experience. Doing so can help create a guided process that streamlines the purchasing process.
Identify tasks that are standard in the procurement process such as the creation of a purchase requisition. Leverage out-of-the-box solutions for these standard processes and only consider customizations when necessary.

By following these five steps your business will be well on the way to introducing significant cost savings into your overall business transformation. That said, in addition to applying these steps it is also essential that you understand each of the steps in the procurement process from the determination of the requirement (the completion of a purchase requisition) to the payment process.

Indirect Procurement Solutions in SAP

To begin searching for solutions, many customers are quick to look at SAP Ariba’s offerings, including the guided requisitioning tool. While this is an effective procurement solution for catalogue requisitioning, many customers have made the executive decision to keep all their requisitions in S/4HANA. In this case, SAP Fiori apps are used for a variety of indirect procurement functions including the creation and editing of purchase requisitions. Traditionally, entering a purchase requisition into SAP involved a series of tcodes existing customers might know as ME51N, ME52N and ME53N to create, change and display. This has since evolved into a set of SAP Fiori apps that can be launched by a mobile or desktop device.

Although these offerings are great standard solutions, they might not fit your business perfectly. After working closely with your procurement team, your business might decide a more guided process is necessary to improve user experience. For an optimized experience, the ConvergentIS simple guidance framework can help you determine what other options look like, including the use of partner apps like the ConvergentIS applications for procure-to-pay optimization.

A complete overview of this optimized process, including a step-by-step guide for your business to follow when considering solutions is linked below.

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