Direct procurement and indirect procurement are two areas in operational procurement and in supply chain management . They differ in terms of specific product categories and organizational structure. This results in different specific challenges for those responsible.

This area deals with the strategic procurement of products that are directly incorporated into the end product. This includes preliminary components and raw materials, but also packaging materials or production machinery. In large procurement departments, there are specific areas for individual purchased goods, e.g. Technical procurement for technical equipment and components.

Direct procurement is characterized by highly formalized processes, strategic supplier and quality management and long-term contracts. The procurement volumes are usually larger than in indirect procurement and the quality requirements are particularly high. Cost control is also one of the key tasks. This is because procurement costs have a direct impact on the final price of the company’s own product.

Which products does indirect procurement cover?

Indirect procurement includes products and services that ensure the smooth running of the business (indirect materials). These include, for example, hardware and software, office supplies, insurance and tradesman services, but also advertising material or external consultants.

In contrast to direct procurement, indirect procurement is characterized by many small orders and decentralized supplier management. Procurement processes are often not standardized or not very standardized, and the determination of requirements is decentralized. Effective cost control is often lacking.

While direct procurement is often well structured and strategically planned, indirect procurement is often the opposite. Inconsistent data, decentralized procurement processes and a lack of transparency: the challenges are complex and have a significant impact on cost efficiency. Let’s take a closer look at the six most important difficulties:

Individual departments often work with different systems and databases that are generally not networked with each other. For indirect procurement in particular, this means that no reliable statements can be made about spending behavior or the efficiency of ordering processes. Synergies between different departments, e.g. in the form of bundled orders or better delivery conditions, remain unrecognized.

Maverick buying is when employees independently order indirect materials outside of the formal procurement processes. This involves deliberately or through ignorance bypassing decision-making processes and often procurement from the wrong suppliers or at higher prices. The consequences are missed discounts, reduced negotiating power with partners, uncontrollable costs and compliance risks. Maverick buying occurs systematically in many companies and sometimes accounts for 40 percent of total indirect procurement.

Diverse challenges in indirect procurement

Cumbersome approval processes, unclear responsibilities and organizational problems can easily lead to even simple procurements taking weeks. Especially when individual departments have developed their own processes, historically grown structures quickly become an obstacle to efficient indirect procurement.

A lack of transparency is another core problem of indirect procurement. The causes are manifold and can reinforce each other: decentralized procurement, various incompatible systems or incomplete documentation. As a result, those responsible do not know where the greatest potential for savings and optimization lies. Suppliers and risks cannot be evaluated.

Unclear approval processes lead to frustrated employees and inefficient processes. Particularly when procurement indirect materials, the specialist departments are often unaware of the intended processes. Requests end up with the wrong employees without it being clear who really has to make the final decision. Or important stakeholders are not involved. This is a particular problem with time-critical procurements.

The most serious challenge in indirect procurement is the lack of cost controlling. Decentralized processes make it difficult to record the necessary metrics and KPIs. This makes it almost impossible to control and plan expenditure and optimization potential and problem areas remain undetected. Indirect procurement can only react instead of working with foresight.

As we can see, the challenges in indirect procurement are manifold. The first step towards systematic optimization is the consistent integration of existing systems into a central procurement tool:

  • Standardized, transparent processes simplify complex workflows and avoid duplicate structures or time-consuming approval processes.

  • A self-service portal with preconfigured product views and a selection of available suppliers reduces maverick buying and gives your employees quick access to relevant information.

  • Effective cost controlling uncovers potential savings and also enables strategic supplier management when procurement indirect materials.

Cost controlling is also crucial in indirect procurement

Before you get started and begin to set up cost and process controlling for your indirect procurement, you need to think about your KPIs. Depending on your goal, different metrics are important and should be given special consideration. We present the most important KPIs below. Basically, you can differentiate between process efficiency metrics and financial performance indicators

  • Procurement Cycle Time: This key figure measures the total duration of a purchase from the request to the order release. A short cycle time indicates efficient processes. Typical target values are 5-15 working days. If your Procurement Cycle Time is greater than 15, you should definitely review your processes.

  • Supplier Lead Time: The time between order and delivery is also critical in indirect procurement. This key figure helps you to evaluate your suppliers and plan your inventory.

  • Compliance Rate: This metric shows the percentage of purchases that are processed through the intended procurement processes. You should aim for a high compliance rate to save costs and minimize risks. A target value of 85 percent is often specified.

  • Maverick Buying Rate: The Maverick Buying Rate is to a certain extent the counterpart to the Compliance Rate. It shows what proportion of purchases of indirect materials are made outside the formal processes.

  • Avoided Costs: With this key figure, you can make a statement about how much was saved compared to the planned budget, e.g. by bundling orders or negotiating prices.

  • Cost per Invoice: The internal processing costs per invoice provide information about the operational efficiency of your payment processes. Automated processes allow you to reduce these costs considerably.

  • Spend under Management: This figure indicates what proportion of the total spend is actively controlled by the procurement department. The higher the value, the greater the control over spending.

Traditionally fragmented indirect procurement can be significantly optimized by modern cloud technologies such as the no-code platform SeaTable. Digital solutions offer a wide range of options for breaking down data silos, creating transparency and optimizing processes. By centralizing all relevant data and collaborating in real time, you gain a complete picture of your suppliers, contracts, budgets and spend.

With SeaTable’s free digital template , you can quickly create a procurement system tailored to your needs to simplify your processes and reduce your efforts. With the integrated forms and the gallery view, you can create a product catalog with supplier selection and order form in just a few clicks, allowing departments to easily report requirements and place orders. Integrated notifications and automated workflows ensure an efficient, fast approval process.

Integrated statistics modules and reporting dashboards provide you with real-time insights into spending trends and supplier performance. You can also easily store various files and documents directly in one central location, whether they are images, contracts, presentations or other files. Seamless integrations with existing ERP systems via APIs ensure a consistent data flow, making SeaTable the central interface for your digital indirect procurement.

The challenge in every company is to procure indirect materials efficiently and cost-effectively. On the one hand, consumables such as pens, coffee beans and printer paper must be reordered in good time before they are used up. Other items are ordered separately and on request. Even small changes to internal processes can lead to significant increases in efficiency. The key to optimized procurement of indirect materials lies in a central database tool in which all relevant information from the individual departments is bundled. This creates transparency and clarity about the processes, reduces the maverick buying rate and increases your spend under management. By having access to current values at all times, you can create meaningful, reliable reports and analyses and identify problems and optimization potential more quickly. With SeaTable, you have a powerful tool at your side that can provide you with excellent support in this and many other processes.

FAQ - Indirect procurement #

What does indirect procurement mean?

Direct and indirect procurement are two sub-areas of procurement in companies. Indirect procurement is often organized decentrally. Unlike direct procurement, indirect procurement is about procuring goods and services that are necessary for day-to-day operations, from copy paper to IT security software.

What are indirect materials?

Indirect materials are consumable products and resources that are necessary for the day-to-day operation of a company without flowing directly into the end product. Typical indirect materials are office supplies, machine tools, energy, cleaning agents or health and safety materials. The purchase of indirect materials is referred to as indirect procurement or indirect procurement.

What does maverick buying mean?

Maverick buying, or maverick spend, refers to a procurement practice where teams or departments bypass internal procurement procedures. As a control metric for indirect procurement, a high maverick buying rate indicates a need to optimize internal communication and approval processes. Maverick buying must be distinguished from tail spend. Here, departments are explicitly allowed to order smaller quantities from selected retailers without the involvement of Procurement.

TAGS: Procurement & Logistics