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How To Use Automation Software to Manage Direct and Indirect Procurement More Efficiently
Whatever the industry your company operates within, it relies on procurement to a certain extent. No company is entirely self-sufficient, and purchasing plays a key role in keeping a business running.
For some companies, though, procurement is particularly important. It’s a core part of the business. In any sort of production or manufacturing company, for example, procurement handles the process of acquiring goods to make the company’s products. Similarly, in the hospitality and food service industries, procuring goods required to serve customers is an essential part of doing business. In both cases, procurement also manages purchases like office equipment and supplies to support business functions.
In companies like these, it can be helpful to divide procurement into direct and indirect categories. Direct procurement refers to purchases that become part of a company’s end products or services, while indirect procurement involves purchasing that supports the company’s operations. They’re both important to keep a business running but often require different approaches. You can manage both more effectively using business process automation (BPA) software.
Understanding Direct vs. Indirect Purchases
Direct procurement involves purchasing items that are directly involved in the core aspects of your business. It includes items like raw materials for manufacturing, ingredients for food processing, and components used to perform services (e.g. soap for bathrooms in a hotel, spark plugs for small engine repair). These core supplies are essential to keeping a company running because they directly impact the final product or service the company offers.
Indirect procurement refers to anything the company needs to buy that isn’t part of its end product or service. This includes items like toilet paper for the office bathroom, office computers and chairs, or utility payments. These types of purchases are still essential, but they’re often seen as less of a priority. It’s not nearly as critical if, for example, replacement printer ink doesn’t arrive on time as if a critical manufacturing component is delayed.
Depending on your industry, direct vs. indirect costs might not be a useful category for procurement. But if your company does rely heavily on direct procurement (as in any manufacturing or production company), then your company can benefit from using different approaches to manage the two categories.
Managing Direct Purchases
With direct purchases, it’s vital to your company’s success that you have a stable supply chain and reliable suppliers. Direct procurement involves purchasing materials, components, and supplies that are part of your company’s core products or services. Plumbers need plumbing components, tire manufacturers need rubber, and food production companies require raw ingredients. Without those sorts of essential materials, your company can’t do its job.
Since direct procurement is so vital to the success of a company, typically the procurement department focuses on getting these products at a good price from reliable suppliers. Your company might have contracts with the suppliers. Often, orders for these components are large and your company might negotiate bulk discounts or place orders on a regular schedule.
Managing Indirect Purchases
For indirect purchases, the process is often less streamlined or centralized than with direct procurement. This partly depends on what category of purchases you’re looking at. Rent, utilities, and software subscriptions qualify as indirect purchases, but expenses like that happen on regular schedules and are easy to budget for. They don’t change very often.
Other types of indirect purchases, like office supplies, happen more sporadically. In some cases, the procurement department doesn’t manage this sort of spend directly. In others, procurement might have policies in place for how employees should handle indirect spend, but the policies aren’t regularly enforced. It’s easier for issues like running out of items, overstock of items, and maverick spending to arise with indirect purchases.
Despite not directly impacting the final product or services of a company, indirect procurement is still important to a company’s success. When managing indirect procurement, it’s important to find ways to streamline procurement so employees can order the items they need while also keeping this type of spend under the management of the procurement department. Some types of indirect spend (like software licenses) can involve long-term supplier relationships, while others (like office furniture) involve one-time purchases.
The Role of BPA Software
Business process automation software makes the procurement process more efficient and easier to control, even when you’re managing different types of purchases. NextProcess’s procurement module is highly customizable, and you can configure it to manage all different types of expenses in the way that best fits your company.
Supplier Management
Supplier management features built into the software make managing short or long-term supplier relationships simple. You can easily track supplier information, manage contracts and related documents, and sort suppliers into categories. If you pair procurement software with accounts payable automation (AP) software, you’ll have even more control over the whole procure-to-pay process. The procurement data captured by the software and the always-on-time payments enabled by AP automation can support your company when you’re negotiating for early payment or bulk order discounts.
Punch Out and Item Catalogs
One of the big challenges with implementing a new procurement system is making sure employees use the procurement software for all their purchases. Employees are more likely to use a system that makes purchasing easy for them. Your procurement department can set up an item catalog and punch-out catalog with pre-approved items from approved suppliers. These features make it very easy for employees to log in to the software and purchase items, while also automatically enforcing company policies regarding both direct and indirect procurement.
Collect More Accurate Data
Implementing BPA software makes data collection easier. The software automatically tracks all data related to procurement and organizes it into a searchable database. You can easily run reports, look up specific information, and see data trends. Having complete, accurate, and timely data makes it easier for your company to analyze spend, make budgets for different categories of purchases, and plan strategically.
Easy Implementation
You can reap the benefits of BPA procurement software easily by working with a Software-as-a-Service (SaaS) supplier like NextProcess. Our web-based software platform is easy to implement and easy for employees to learn how to use. Contact us today to learn more or set up a free software demo so you can see first-hand how our procurement module can help your company manage direct and indirect procurement more efficiently.
