There's been a great myth sweeping across the world of procurement. It's come about as procurement technology has grown widespread and companies are vying for customers to sign onto their solutions. The myth takes the form of an eraser, scrubbing away the lines between direct and indirect procurement.
Usually, eliminating boundaries is a good thing. In supply chain we often talk about silos and why barriers are a problem. However, in the case of direct vs. indirect procurement, muddling the distinction can actually be dangerous. That's because direct and indirect procurement are wholly different beasts. They require different approaches and different technologies.
The myth that direct and indirect procurement can be handled in the same way has germinated as procurement technology has exploded. Look around and you'll see a cornucopia of software that claim to automate procurement. The language they use is of the mythological sort – they speak abstractly of procurement, vendors, bidding, and cost cutting. The truth is, nearly all of these solutions focus on indirect procurement. They are unequipped to handle direct procurement.
But direct procurement is where the opportunity lies. And it's a huge, untapped opportunity for automation, cost savings, and efficiency.
Direct procurement is extremely important and extremely strategic. It has a definitive impact on revenue, profitability, and business growth. Consider this: direct goods account for greater than 80% of the total materials sourced by a company. Those goods are also critical to the bottom line. For instance, choosing the right vendor for an indirect good such as paper doesn't carry the same stakes as choosing the right vendor for the engines that go into your airplanes.
So while indirect procurement software can get away with focusing solely on cost and developing bidding systems that maximize the lowest price, automating direct procurement has many more critical considerations. Reliability, quality, fulfillment capability, compliance, labor and environmental standards, IP protections, and security, all factor into direct procurement automation. If you want to tackle direct procurement and tap into its huge efficiency opportunity, you need software that considers all these factors, not just cost.
Which is why, until now, there hasn't been many successful examples of direct procurement automation. It's a vastly complex problem that requires a holistic approach to the entire procurement process. Companies need to factor in the entire supply chain, with all the processes and partners involved, in order to truly find ways to drive efficiency by cutting costs, fostering collaboration, and increasing reliability.
The reward for investing in a technology platform designed specifically for direct procurement is engagement. All stakeholders, including vendors/suppliers, can benefit and raise their own and each other's value through a common technology platform. Suppliers get value by having easy access to buyers and capital, and can connect and interoperate with new customers. For buyers, since direct procurement is of high strategic value, tight engagement with suppliers insures against risk if something goes wrong.
For example, a supplier of a key part receives an order for thousands of items but does not have cash on-hand to begin the order. Whereas a traditional procurement executive will focus on squeezing out cost or extending payment terms as late as possible, the direct procurement strategy in this situation has to focus on eliminating risk. In this case, ensuring the supplier has capital it needs at reasonable rates, can ensure goods are produced and delivered without delay.
The great myth propagating through the world of procurement is that all procurement is alike, no matter what you're sourcing. But that's a fatal belief. Technology has to be built strategically in order to be effective. Otherwise, no matter what the myth promises, you'll never actually be able to fuel the engines of healthy business growth.