When someone mentions “Procurement”, the act of placing orders for the required goods and supplies to business comes to mind. As a function of business, procurement is one of the most crucial functions, which is also perceived as more of a supporting back-room function as compared to a strategic one. And, many perceptions have to do with the fact that most of us consider ourselves as “experts” in the procurement of goods, being able to handle pretty ease our weekly shopping and scouring the top class deals for electronic products from a plethora of online marketplaces. However, the role of Procurement in the modern organization requires to be addressed in a different from our personal experience.

Direct Procurement

In production and manufacturing organizations, the task of procuring raw materials often rests on a dedicated department of “supply chains”, “materials” or the like. The procurement of raw materials and direct services for the production of final goods is a tightly controlled process, driven by product design and sales orders. In a bicycle assembly, one needs to purchase two tires, a bicycle, two wheels, a chain, a seat, etc. It is also said that if one hundred bicycles were to be sold or produced, then there should be two hundred tires, two hundred wheels, and so on. The sizes of tires, wheels, seats and most other components are known and specified in great detail. In this aspect of direct procurement, the procurement of direct goods is well integrated and controlled with the overall business process.

Indirect Procurement

If the organization is non-manufacturing, the concept of procurement is less well known as the definition of indirect materials is pretty unclear. Take the instance of a retail bank; Printed forms used to open new deposit accounts can’t be considered as a direct material as not all clients visiting the bank will be needed to fill such form. Similarly, the prime mover used to haul a container from the port to a client site can’t be considered as a direct product, since the prime mover is only a promoter for the provided services. However, printed forms and prime movers need to be purchased for operations of service. Similarly, there are many other products and services that need to be served and delivered to customers. Goods and services purchased by a service organization are often referred to as “everything under the sun”. This is the dilemma of non-manufacturing firms, and it is understandable that the practice of actively managing the purchase of indirect goods and services is less developed than in these organizations.

Professional Procurement

The business practices development for indirect procurement began in the late 1990s. Many national and major corporations faced development and rising costs. Some corporations were faced with a situation that their commercial acquisitions (and mergers) were not delivering anticipated synergies that improved overall profitability. In order to stem and control run-way and often unknown costs, most of these corporations set up procurement functions dedicated to realizing and identifying cost benefits from economies of scale and were successful. Not only major corporations are embarking on their journey, but many non-profit and public organizations have also adopted procurement as a business function. And the benefits of managing procurement as a strategic function are substantial. A good procurement outsourcing company can help you in understanding they’re different and you should choose these companies to get the best procurement solutions.