A guide to indirect procurement: What it is and how it differs from direct procurement
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Sourcing and procurement are essential functions in any growing small business. Both tasks are closely related, which might cause you to think they're the same. Understanding the differences between sourcing and procurement will help you create more efficient processes in your organization.
What is sourcing?
Sourcing is the process of finding a supplier of goods and services. This is an essential part of your purchase process. Most companies source via a tender or RFP process that invites potential suppliers to submit bids for their services.
The following factors play a role in every company's sourcing decisions:
- Supplier quality: Is the supplier a good fit for the organization?
- Margin impact: Are the supplier's services or products priced appropriately?
- Payment terms: How accommodating is the vendor's credit policy?
Why is sourcing so important?
Sourcing is essential to ensuring your supply chain stays on schedule. A strong sourcing strategy also ensures that you acquire the goods you need at a fair price. Not only does this enable you to deliver high-quality products to your customers, but it also ensures that you’re doing so with profit margins that can sustain your company.
5 different sourcing models
You can implement different sourcing models depending on your organization's goals.
- Low cost: Prioritizes vendors offering services and goods at the lowest prices.
- High volume: Choose vendors with long track records that offer high volume discounts.
- Preferred lists: Classify vendors based on their ability to offer value-added services.
- Shared/internal services: This model is preferred by larger companies. One department acts as a supplier to another, leading to internal sourcing.
- Equity: A company acquires another to mitigate supplier risk and sources products from it exclusively.
Note that you can combine these models as part of a broader strategic sourcing strategy. For instance, you can adopt the low-cost model for non-critical parts and a preferred list for essential supplies.
4 tips for creating a strategic sourcing processes
Given its critical position in your supply chain, you should strive to create an efficient sourcing process. Here are a few tips to help you achieve this goal:
- Review your process regularly: Over time, errors and inefficiencies creep in. Review your process periodically to keep it fresh.
- Communicate: Communicate transparently with your vendors to set expectations. This way, no one will be in the dark about performance standards.
- Automate: Automate as many tasks in the sourcing process as possible. Use top-notch vendor management systems to do this.
- Focus on relationship building: Build the best relationship possible with your suppliers. They'll stand by you when times are tough, and you'll experience minimal disruption.
What is procurement?
Procurement is a critical supply chain process where your company sources, orders, and tracks important raw materials or services. Sourcing is a sub-process within material procurement.
Since the procurement function has many moving parts, it is more complex than sourcing. It involves everything from issuing a purchase order (PO), evaluating vendor sustainability, contract management, evaluating and RFQ, to cost management. In short, procurement management is a critical supply chain task in every company.
What are the objectives of procurement?
Procurement defines a set of processes that reflect your company's goals and vision. A good procurement strategy ensures optimal resource use while striking a balance between supply quality and costs. This balance can be achieved with a procurement team that uses data to create a competitive advantage.
Vendor risk management also plays a key role in efficient procurement and broader supply chain management. This process defines a set of best practices to ensure you receive the products and services you need, at the right time and for the right price.
5 types of procurement strategies
As with sourcing, you can choose between several procurement strategies depending on your business priorities. Here are the most popular strategies that procurement departments at small businesses follow.
- Cost minimization: Cost minimization in procurement aligns with overall cost reduction processes. Companies prioritize cost reduction while maintaining a threshold for vendor performance. For example, process automation via procurement software providers can deliver huge cost savings.
- Risk minimization: This strategy reduces exposure to unforeseen events or disruptions. For instance, a company might opt to source from multiple vendors and use varied logistics channels to receive goods, even if it increases costs.
- Relationship-based: This strategy builds healthy, long-term supplier relationships. It prioritizes a cultural fit above price. For instance, a company will scrutinize its vendors' sourcing practices more.
- Vendor nurturing: In this strategy, a company invests and nurtures a vendor's capabilities. For example, a vendor that supplies a rare or tough-to-source product might receive investment from their clients to boost production.
- Total Quality Management (TQM): This strategy focuses on all functions within an organization, beyond procurement. A company will optimize all processes within procurement, such as logistics handling, supplier relationship management, to invoicing.
Again, you can choose to implement a mixture of these processes within your organization after vetting your needs.
9 steps for creating a robust procurement strategy
Here are the steps to create an efficient procurement strategy:
- Evaluate your current process: Review existing procurement spending via a spend analysis. Find gaps in the process.
- Define business goals: What are your company's long-term goals? Quantify them. Also, note any qualitative goals. For instance, establishing better supplier and customer relationships.
- Identify market opportunities: Research the current market landscape to spot potential gaps and opportunities related to procurement. Are some goods in demand? Are there cheaper substitutes?
- Get stakeholder buy-in: Review the outcome of previous steps with all stakeholders to receive buy-in. Without key stakeholder support, your procurement strategy will fall apart quickly.
- Define procurement policies: Define your procurement goals and craft policies that will help you achieve them. Consider transforming existing policies instead of creating new ones from scratch.
- Define procurement metrics: Create data-driven KPIs to measure your progress towards procurement goals. Some examples include supplier defect rates, PO cycle times, on-time deliveries, and vendor ratings that take several KPIs into account.
- Choose the right software: Automate clerical tasks in your procurement workflows by choosing a software platform. You'll leave more time for value-added work.
- Train: Train your employees in your new processes until they get it right. You'll deal with inertia in this step, but communicate the importance of your new process at all times.
- Execute and monitor: Put your strategy into action and monitor your processes. Refine the ones that need adjustment, and you'll create a process that helps you achieve your goals.
How to slash indirect procurement costs with Ramp
Indirect spending represents a sizable chunk of every business’s revenue. From contract negotiation to vendor management, here’s how Ramp can satisfy your business needs and maintain control over your indirect procurement costs.
A single source of truth
Supply chain management is vital to any business’s procurement operations. Ramp Vendor Management gives you a single, holistic view of all vendors and contracts, making it easier to analyze your spend and discover new insights.
Ramp also gives you the insights you need to make more confident buying decisions. Our Price Intelligence feature automatically extracts your contract details and benchmarks the price, providing you instant visibility into what other businesses are paying for the same software.
Getting the best price on software
Contract management and negotiation is an essential part of any business’s financial planning and analysis process. Ramp’s Price Intelligence feature makes this process more efficient by benchmarking all your contracts against thousands of other customers.
Price Intelligence is available on multiple SKUs per software with costs broken down per-user, which makes it easier to negotiate with vendors. With data contributed by your peers, you can make more confident buying and renewal decisions with a unique level of insights in your back pocket.
Unlimited corporate cards
Corporate cards are a great way to keep track of your indirect procurement expenses. Ramp offers its clients unlimited physical and virtual corporate cards with no additional fees.
On top of that, Ramp gives you a matchless level of control over employee card spending through category management. Whether restricting spending to a specific vendor or blocking certain spend categories entirely, Ramp simplifies and automates expense management.
Invoice processing is one of the most time-consuming steps in indirect and direct procurement management. Ramp helps you bypass the long hours required to log every invoice and receipt. Instead, it extracts all necessary data from vendor invoices such as names, line items, payment amounts, and payment details with 99% accuracy.
Thanks to invoice processing automation, you can upload and forward invoice emails to relevant departments to process hundreds of invoices in just a few seconds.
Both direct and indirect procurement play vital roles in the success of any company, regardless of its size. Taking a closer look at the tools available to perfect your indirect procurement process is a great first step towards ensuring cost effectiveness and reliable access to the products your business needs to run.
Indirect procurement refers to sourcing and purchasing products and services that don’t directly contribute to product manufacturing. Some examples of materials sourced through indirect procurement are:
- Commercial space like factories, offices, and other business facilities
- Utilities like water and electricity
- Office supplies like laptops, printers, and stationery
- Travel solutions for business meetings, conventions, and training
- Tool subscriptions to SaaS products like Slack or Asana
- Maintenance and equipment repairs
- Security equipment
Direct procurement is sourcing the raw materials and equipment involved in manufacturing a company’s finished product or service. Some examples include:
- Wood for construction companies paid to build homes
- Food for restaurants and retailers selling edible products
- Industrial machinery necessary to manufacture products like cars and electronics
- Textiles used to produce clothes or fashion accessories
Services procurement is the sourcing of services your business does not have the expertise to provide. These include:
- Human resource management
- Legal aid
- Financial oversight from accounting, investment, or consulting firms
- Call centers to manage customer support lines