Direct Procurement: Different Types Defined
Is The Term “Direct Procurement” Too Broad?
PurchTips Edition #345 Click here for the printer-friendly version
Often, procurement is divided into two categories: direct procurement and indirect procurement. I think that there should be three categories: market-driven direct procurement, cost-driven direct procurement, and indirect procurement. Let’s begin the discussion by reviewing the difference between direct and indirect procurement.
Direct procurement relates to purchases of goods and services that become part of what your organization sells to its external customers. Examples of direct procurement include purchases of mechanical parts for manufactured goods, ingredients for food products, and subcontracted labor for construction services.
Indirect procurement relates to purchases of goods and services that do not become part of what your organization sells to its external customers. Instead, these goods and services support your organization’s ability to operate. Examples of indirect procurement include purchases of computers for procurement staff, janitorial services for corporate headquarters, and office supplies for administrative assistants.
Now, for more specifically defining types of direct procurement…When the price of what your organization sells to its external customers is based primarily on the cost of making the product or performing the service, then I believe the procurement of direct goods and services should be called “cost-driven direct procurement.” When the price of what your organization sells to its external customers is based primarily on what competing products or services are being sold for, then I believe that the procurement of direct goods and services should be called “market-driven direct procurement.”
Market-driven direct procurement is perhaps the most strategic type of procurement there is. Do a good job at it, and your organization is positioned to have a competitive advantage, grow its market share, and boost its profits. Do a poor job at it, and your organization could fail to achieve the minimum profit margin necessary to remain in a market. Critical stuff!
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