Direct and indirect purchases: management differences

Direct and indirect purchases: management differences

Direct purchases are purchases of goods (materials or raw materials) which are directly involved in the production of the main company’s products.

Direct purchases require participation of many departments in the process. It is important to control the continuity of supplies, the quality of materials and their costs. It is also necessary to analyze the product demand and based on it how to purchase the needed quantity of goods.

Indirect purchases are not related to production, they are rather intended to support the business functioning. They include equipment repair, software setting up, purchase of stationery, public utilities and others.

Because direct purchases are the bulk of the company's total costs, they are a priority among the company's managers. Indirect purchases are often taking as a by-product of the main business processes. Because of their cost is relatively small the need to manage them effectively is often ignored.

However, researches show that 41% of the income increase goes to cover the cost of indirect purchases, and effective management of them allows you to save 25% of current costs.

1. Identify the stakeholders.

The approval by all participants in the overall strategy of optimizing indirect procurement avoid many barriers to implementation.

2. Classify spendings.

Create the catalog for indirect purchases with such classifiers as quantity, category, supplier, etc., adjusting it for your business.

3. Identify savings possibility.

Such opportunities can’t be identified and implemented immediately. It’s necessary to  perform data analysis to determine the main goals of saving and coordinate them with all participants.

4. Develop long-term and short-term plans.

You can not implement all initiatives in a short period and simultaneously. Therefore, it is necessary to define strategic goals and on their basis to develop short-term plans. Only such approach to the indirect purchases optimization will ensure its implementation.

5. Create the controlling system.

An important stage is the analysis of savings. To understand the sources of savings you can build an effective economic strategy.

Investments in the indirect costs management system will be repaid in the nearest future.

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