In previous articles, we have often analyzed the general concept of B2B procurement, along with its tightly-knit aspects of purchasing, sourcing, and compliance. And while it is important to understand the facets that make up each integral stage of our strategic procurement operations, we should also acknowledge that there are different types of procurement altogether. Here, we’ll take a look at the two most common categories of procurement: Direct and Indirect.
Direct Procurement is what would first come to mind when we are considering any company or organization. This type of procurement involves the sourcing and acquisition of all the parts, components, and other raw materials needed for the intended principal products and services of the company.
These materials obtained through Direct Procurement are those that would appear in a product’s Bill of Material (BOM), a comprehensive document listing all raw materials, their method of assembly, and intended operation.
A localized example of Direct Procurement might be a Chicago pizzeria obtaining the materials it needs in order to make its staple product: their signature deep-dish pizza. Included in this list of raw materials might be flour, fresh tomatoes, mozzarella cheese, and an assortment of their favorite toppings.
Meanwhile, a global technology company such as Apple would have a very different list of items obtained through Direct Procurement, but still those used in its core products. For example, the BOM of Apple’s iPhones would include microprocessors, touchscreens, and lithium-ion batteries, among many other components.
Indirect Procurement is the acquisition of all raw materials needed for the normal operation of the business outside of its primary product and service offerings. This would include any items used in support and production of the company’s primary products, but not those included in the products themselves. These might be items such as support software, e-procurement software, or repair and maintenance equipment for the production lines.
Indirect Procurement also encompasses items used by HR and employees of the company. Again, specialized office software enters the picture. So too do items needed to clean and maintain the facilities, along with items as mundane as office supplies and furniture. If the company provides its employees a cafeteria, food and beverage might even be included in its Indirect Procurement costs and considerations.
While there might be some occasional overlap between these procurement methods, for the sake of accurate financials and record-keeping, chief procurement officers will usually distinguish between them.
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