Direct procurement needs no introduction as this term is commonly used in business, industries and organizations.
However, there is another process known as indirect procurement, which greatly affects the growth and viability of a business. Compared to direct procurement, the indirect procurement process has not received due attention.
Giving insufficient importance to the indirect procurement process can cause a business to face several challenges in its operations. Realizing the value of this type of procurement, it is necessary to plan some strategies to manage the process effectively.
In this article we will shed some light on the effects of indirect procurement on any business. First, let’s know what indirect sourcing means and how it differs from direct procurement.
What is indirect procurement?
Indirect spending or procurement involves finding and purchasing products and services needed to operate, manage, and maintain a business and its operations. A good, highly skilled team has been put in place to manage this entire procurement process.
On the other hand, direct cost or procurement refers to the purchase of materials used to prepare and package goods sold by the company. In both indirect and direct procurement, the purchase is made between the company and the sellers. However, the difference is in the use of the purchased items.
Let’s take a cosmetics company as an example. Chemicals, dyes and bottles purchased for the manufacture of cosmetic products fall under the direct procurement contract.
On the other hand, the purchase of goods and furniture used for the production and storage of cosmetic products are included in the indirect purchase.
Indirect procurement professionals consider the investment in marketing or promotion of cosmetic products beyond dealing with the products themselves.
Apart from the differences, both indirect and direct procurements have some similarities. Both generate revenue for the company and play a significant role in the quality of the output.
Now let’s take a look at how the indirect buying or buying process can affect a business:
Controlled expenses
Procurement of goods and services related to indirect procurement accounts for 80 percent of the company’s purchases. If managed carefully, you can increase your company’s overall profits.
Indirect purchasing allows you to negotiate with suppliers regarding the cost of goods. You can convince them to offer discounts and promote attractive packages.
You can also search other competing sellers to find similar items at a lower price. It allows you to choose better quality materials, ultimately saving maintenance and repair costs.
Additionally, you have the opportunity to hire qualified professionals who can implement strategic plans that improve sales and improve checks and balances. In this way, indirect procurement can dramatically increase business productivity.
Good brand name
Sourcing goods from similar suppliers often contributes to building a good relationship with them. Strong supplier relationships develop a good reputation in the market, which brings more sales to your business.
Having a good reputation attracts other sellers to approach you and offer goods and services at a relatively low price.
Also, when you have a good relationship with suppliers, chances of fraud are less. Hence, the loss percentage will be reduced, which will help your business to flourish.
Effective cost management
Profits from indirect costs bring good business income and allow you to focus on improving sales and product quality. With a stable investment backup, you can improve the quality of your products, increase their quantity, or purchase advanced equipment for faster production.
You can also invest in a good management team that can effectively handle indirect procurement issues. The team will be highly skilled in making the right decisions to spend money wisely and change suppliers with solid reasons.
Stable finances
If indirect procurement is handled professionally, it will save money which will increase the overall profit of the company.
Due to this, the financial department of the company gets stability. With stable finances, the business enjoys uninterrupted activities and continues to go on the path of growth. The suppliers are also satisfied with the absence of payment delays.
Similarly, the employees, rents and utilities are not burdened with unnecessary charges that could hinder the production or harm the continuity of the business. Instead, the result will be better and more effective.
Therefore, it would not be wrong to conclude that financial operations are related to indirect expenditure or procurement.
A final note
Business growth depends on many factors, among which indirect procurement is often misrepresented or not given much attention. But, in reality, this aspect of the business can indirectly change the game by increasing the company’s revenue.
You can control the company’s costs by negotiating with suppliers. The indirect buying process can improve results and gain reputation in the world of brands.
It also involves hiring skilled professionals who work for the development of the company. We hope we’ve answered your questions about how this indirect buying guide affects business.
