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What’s the difference between Direct and Indirect Procurement? Why should you care as a sales person?
As a seller, it’s important to know your “procurement onions”! One of the key things to understand is the difference between Direct and Indirect Procurement people. The headline is:
- Direct Procurement: They buy everything that their customers use/consume. For example, fruit if you’re a retailer
- Indirect Procurement: They buy all the stuff that their customers don’t use/consume. For example, marketing services, IT, buildings’ infrastructure, etc.
“McKinsey calculates that globally, indirect spend is growing around 7% per year”. When indirect procurement costs rise, net margins fall. Historically, when the going gets tough, direct procurement are very good/creative at lowering direct costs. However, indirect procurement is often the poor cousin. It typically suffers from under-investment in people and technology.
This guide to Direct vs Indirect Procurement is intended to help you and your team to understand the intricacies and differences between them. You need to know this because:
- Your preparation for negotiating with procurement needs to include an understanding of their role.
- If you’re negotiating with an indirect procurement person, and they’ve just moved from direct procurement, they’ll be formidable negotiators.
- To build empathy, understand who you’re dealing with.
What Is Direct Procurement?
Direct procurement involves spending on goods, services, and materials. This is the stuff that their customers use/consume. They’re at the heart of driving performance, profit and competitive advantage. Companies often regard this type of spending as critical as every $ saved is a $ to the bottom line. And if you’re a big retailer, that’s a LOT of $s!
Examples Of Direct Procurement:
- Machinery – Things such as picking and packing machinery, machines to convert raw materials into finished goods, and trucks to deliver items.
- Raw Materials – Products that will be used to create a final product that the business can sell. For example, things such as raw meat, vegetables, steel, oil, etc.
- Subcontracted Labour – If the workforce isn’t large enough to complete a specific job (often seasonal), companies subcontractors/temp-labour. They can also be necessary where specialist skills are required.
- Products For Resale – Even products which haven’t been manufactured by a business, but are bought for resale, are classed as direct spend procurement.
Why Direct Spend Procurement Is Important
The importance of Direct Spend Procurement doesn’t just start and end with the amount of money that is spent on specific goods and services.
This type of spending is critical as it usually involves goods that will eventually make their way to a customer. Spending money on high quality goods and materials is obviously vital when dealing with an end customer. Utilising direct spend on these high quality goods and services is essential when trying to build a brand. Making significant cost savings within direct spend procurement isn’t always the objective. Cost cutting initiatives need to also ensure that goods and service quality levels are maintained.
What Is Indirect Procurement?
While it’s true that the majority of a business’ spending is usually direct procurement, indirect procurement has a key role to play.
Indirect Procurement includes things such as marketing, IT, buildings infrastructure, insurances, recruitment, etc. Items within an indirect spend category are equally as important as those within a direct spend, as they keep the business running day-to-day and support growth.
Examples Of Indirect Procurement:
- IT Support – Vital to the running of the business and supporting growth. Deep, specialist, technical knowledge is required to negotiate these types of contracts.
- Insurance – Often overlooked as an important category – but when you need it, critical to business survival.
- Office Supplies – Again, this contributes to the day to day running of a business. Clearly isn’t classed as essential when it comes to producing a product for an end user.
Why Indirect Spend Procurement Is Important
Although indirect spending can sometimes seem like an expense that businesses should try to minimise, it’s essential to surviving and thriving.
Reducing indirect spending too much can affect not only the running of the business but can also affect staff morale and standard of the working environment. Remember that the end customer isn’t the only person that should be considered when trying to manage both direct and indirect spend.
Why does all this matter to you as a seller?
Because, if you’re dealing with big, enterprise companies, you’re bound to meet procurement at some point. Don’t bury your head in the sand and don’t avoid them. Understand their objectives and roles in order to negotiate better deals with them.
As an ex-procurement director, here’s a simple tip: Stop selling and start negotiating when you meet procurement!
How to prepare in advance of meeting them
Whether you’re meeting direct or indirect procurement, here are some tips to get the most out of your meeting/negotiation:
- Look at their LinkedIn profile. How long have they been in procurement? What kinds of goods/services have they bought?
- Plan your negotiation strategy thoroughly. They’ll have done their homework.
- Hone your negotiation skills
- Have a strong BATNA
- Start out with the intention to “grow the size of pie”, not simply carving up a “fixed pie”
Hopefully this guide has highlighted:
- The differences between direct and indirect procurement
- Why it matters to you as a seller
- How to prepare before meeting them
Read our other guides for more support and ways to engage with procurement.
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