Indirect and Direct spend - are the right differentiators for most companies. From my experience coming from a global FMCG company and now Energy Network company the terms are more that appropriate and used in the business language every day. Importantly the terms are linked to the roles and accountabilities in the Strategic Procurement divisions.
Posted @ Apr 6, 2011 11:20:57 AM by Geoff Wells
Another interesting description of indirects is goods go in businesses, while the description for directs is goods go through businesses.
Posted @ Apr 6, 2011 11:22:29 AM by Qin Deng
I think it depends on the organization's culture. My buying experience was indirect (transportation and customs). I never felt I was a second class buyer. A dollar saved in indirect fell to the bottom line just like the dollar saved in direct. It wasn't uncommon for buyers to bounce back and forth between direct and indirect.
Posted @ Apr 6, 2011 1:55:47 PM by Steve Larson
An interesting question. I am really interested in following the answers from the procurement side.
Posted @ Apr 6, 2011 1:58:10 PM by David Altmann
"Addressable Spend" is a more relevant moniker. There is spend you can impact and spend you can't - such as taxes, financing, etc. Everything else is fair game and needs to be looked at holistically.
My direct supplier might have a division/subsidiary serving a sister organization of mine. To have silos around direct and indirect from a strategic perspective can be limiting.
Posted @ Apr 6, 2011 2:24:35 PM by Eric Nelson
From where I sit, the term 'indirect' is mostly used in manufacturing opposite 'direct' procurement. Here, direct is all that goes into the end product, indirect represents everything else.
Many service organizations don't make this distinction and simply speak of purchasing or corporate procurement.
Others who are unhappy with the potential for misinterpretation of 'indirect' prefer to refer to 'discretionary spend' which is the most comprehensive term I've come across to date, but it's not commonly used procurement lingo either...yet!
Posted @ Apr 6, 2011 4:06:49 PM by Carina Kuhl
I don't know that any of these terms are necessarily positive or negative in nature, they are simply terms that we apply to help us easily characterize spend. I believe it is very much a common practice to characterize spend which is not directly included in the cost of revenue as indirect and there is nothing wrong with that. I've seen further delineation of indirect where some may carve out IT or HR and Professional Service but essentially I think of indirect as anything in the General and Administrative section of the P&L.; The idea in the article to rename Procurement may have some merit but again to what end? Gaining more respect from management has more to to with a culture change than anything else. Fostering respect among the masses by great performance and pushing accomplishments upstream to make them more visible to leadership may do more for this goal than anything else. Renaming the function isn't going to do much towards attaining that goal.
Posted @ Apr 7, 2011 8:49:54 AM by Gerald Richerson
If you read Michael Porter's treatment of procurement in his value Chain model, it may shine some clarity on things. His distiction is between primary and support activities in the model. Neither one is more important than the other - the key factor is the extent to which they contribute to competitive advantage.
Posted @ Apr 7, 2011 8:52:55 AM by Hedley Rees
I have been part of teams that were titled Not For Resale or Indirect and the terminology never bothered me. I do agree, however, that the terminology reveals a perception on the part of the larger organization that a procurement or sourcing group is not suited to handle buying 'direct' or customer facing materials and services. Rather than changing the terminology to be less potentially negative, I think a better approach would be to step back and take a broader perspective.
Procurement is procurement regardless of what is being bought. We have long fought the battle to make sure services are seen as eligible for the same management and negotiation process as materials, and I think the time has come to do away with the distinction between direct and indirect spend.
Most procurement groups function on the premise that a standard process taken on by a combination of operations and procurement team members generates great value through strategy, objectivity, and technology. There is no reason (including the relative importance of suppliers) that this premise does not hold true across all categories of spend - direct included. I would guess that many companies are more likely to hire a consulting firm to manage their direct spend rather than to trust the experience and skill of their internal procurement function. Often this decision is based on category expertise that the consulting firm has (or claims to have). In truth, if a company is able to combine the category experience of their operations folks with the process expertise of their procurement team, the outcome may be even better because no one is going anywhere at the end of the project.
Thanks for a great question to chew on.
p.s. On the subject of terminology, I'd still rather be called 'indirect' than a 'buyer', but that's probably a discussion for another day!
Posted @ Apr 7, 2011 8:56:46 AM by Kelly Barner
Interesting question. It shows that Procurement still has a long way to go to be properly recognised for its contribution. I am aware of an organisation that had over a thousand people in Procurment spending €30Bn ish a year (65% of turnover). They did not have a procurement position on their main board, merely "initiatives".
We still have to educate the senior movers and shakers. until we do that we won't move forward
Posted @ Apr 7, 2011 8:58:20 AM by Ken Gill
Posted @ Apr 7, 2011 9:21:16 AM by Graham Liddell
In my opinion, the word indirect when referring to a commodity should not be treated as less important than a direct commodity, nor do I think the name should be changed. It is standard language in the procurement industry. Direct commodities are those that are monitored in an inventory control system, as they are what make up the final product. Indirect commodities are not necessarily inventoried, but are not less important in manufacturing the final product. Since I come from a solid dosage manufacturing pharmaceutical background, I can illustrate what my former company considered direct and indirect commodities. Direct commodities would be the active pharmaceutical ingredient (API), excipient, capsule shell, bottle, closure, rayon, dessicant, label, and insert/outsert, which are all inventory items, and which comprise the final product before shipping. Indirect commodities would be everything else purchased - lab supplies (including chemicals and reagents used to test the product), safety supplies, office supplies, equipment, uniforms, disposable garments, printed material (other than labels and inserts/outserts), etc. - all of which are necessary towards manufacturing the final product. Although lead times and delivery dates are controlled through an inventory control system for direct commodities, indirect commodities also need to be monitored informally for lead times and delivery dates, as failure to receive these items on time could lead to production delays. This could affect the delivery dates of the direct commodities, as companies want to receive and pay for materials only when they require them.
Posted @ Apr 7, 2011 9:42:13 AM by Jeanne Rezek
There are a lot of interesting comments above. In many ways this is the tip of the iceberg of a broader discussion about how the procurement function brands itself. The story above about the recognition that is given to sales over procurement is sadly all too common in my experience. I think that it is pretty ground breaking for procurement person to be even in the running for overachiever of the year.
There is an issue here of the internal marketing of procurement functions. Whilst we are a task orientated profession and would often like to be judged on what we do, ultimately we are actually judged on the perception of what has been done, which is influenced by the context and hence how we market ourselves.
The initial catalyst for the article was to make the point that indirect, goods not for resale, non-core are all negatives. Using them is to allow us to define our selves in relation to something else, and with a possibly implicit implication that indirects is less important. The opportunity is to define ourselves in a positive sense of what we do and what we actually bring to the organisation, and I think negative terms do not do that justice.
With no indirect procurement, the business is back to making a vast array of goods and services itself. This is equivalent to going back to a Victorian approach to business operation. Indirects also are critical to most businesses day to day operation - no IT or no electricity means no business nowadays, and there are many other illustrations.
I believe that the decision to rename indirects is actually a decision to define what we are, what we contribute and to send a confident message to the wider business. This is about marketing of procurement internally, and helping the business recognise the importance of suppliers, and the effective sourcing and management of those suppliers, is critical to the success of nearly every business. I am not sure that we spend enough time marketing ourselves internally to make sure that our actions and contribution is recognised. That most businesses serially underinvest in procurement suggests to me that there is still much to do to get full appreciation!
And 'confident' is the key word. At its heart, I would like to see us as a more confident profession making the case for what we do, and getting the according recognition.
Do you think, as a profession, Procurement 'Markets' itself well (in front of the internal business)?
If NO, what could (and should) we do better?
Posted @ Apr 7, 2011 11:03:18 AM by Guy Strafford
The profile will only raise when the profession understands where it sits in the value chain. Then the world of business schools may take notice. I've mentioned this previously - i think Prof Michael Porter gives us the perfect model - he even isolates procurement out as a discrete set of activities.
What needs to go in hand with that is how his linkages concept contribute to competitive advantage - we need to link with primary and other support activites to move competitive advantage in the right direction. We have been too inwardly focussed to date. My view, anyway!
Posted @ Apr 7, 2011 12:06:10 PM by Hedley Rees
Unfortunately the value procurement can add – and has added in the past - is not celebrated enough and therefore not recognised as well as our counter parts (sales) successes.
Every organisation I have worked for celebrated sales success on a regular basis – it was too said to ‘motivate’ the people… Let me ask you this, how many organisations celebrate their procurement success?
As mentioned – I have never worked in an environment where procurement received the same attention as sales did. I have worked for a blue-chip organisation in Ireland and was lucky enough to be awarded runner-up for overachiever of the year, the winner was – it goes without saying – a sales person.
I am proud to say that, I was the first buyer ever to be nominated and I didn’t expected that at all.
What needs to happen that that changes? First – it needs to be understood that every pound/ dollar/ euro or whatever it is saved, is a pound increased profit. Secondly, we need to get away from the thinking that procurement is only about money.
Procurement plays an important role in protecting the organisation against fraud, ensuring the CSR role is taken serious and to build up a brand image etc.
In regards to your question – I guess the answer is yes and no – depends on where you sit and what the involved spend for the relevant organisation is. Some organisations have a higher indirect spend then direct spend.
I like to see it this way: Direct and indirect are both important parts of procurement and some organisations use the term only to channel internal communication and focus, a bit like from IT to ICT.
I am a strong believer that there needs to be a differentiation but the focus must be the same. Remember procurements ultimate goal is to serve the customer/ internal client and maximise the VFM (value for money) the organisation achieves.
Posted @ Apr 7, 2011 3:55:14 PM by Marc Chapman
I have used the term Corporate Supplies to describe Indirects, which in my opinion reflects in a better manner the nature and importance of these groups of items and services.
Posted @ Apr 7, 2011 6:37:41 PM by Howard Smith
Indirect spend relates to the goods and services not directly related to the manufacturing process within a manufacturing facility. If one wants to add more respect to the Procurement Markets, Why call Suppliers, "Vendors"? Vendors sell Hot Dogs. If we want to have a professional conversation with a "Vendor" it's on a street corner. Let's call the companies we want to negotiate contracts with "Suppliers". Yes SAP needs to change its verbiage in this respect too.
Posted @ Apr 8, 2011 8:55:40 AM by Cheryl Overmeyer
Wow, from renaming indirect spend to the image of procurement professionals. This discussion is getting interesting.
Indirect Spend: It really doesn’t matter to me what it is called, I perceive it as the greatest opportunity for savings within a company. Indirect spend is generally perceived as a necessary evil and probably is not getting the attention that it needs. Take a really good look at your indirect spend. You will most likely find some of the following: High priced entrenched vendors that are in place because it is easier for the buyer to call them then source a new one, Service contracts that were either negotiated badly or not at all, evergreen contracts from satellite offices with yearly price increases, fragmented spend that can be easily consolidated Etc. The opportunities are endless!
Image of Procurement Professionals: I hate to say it but if you believe that you have a poor image, you probably do. Whose fault is that?
Take a lesson from the sales people. Sales and marketing people will be the first to tell you how great their latest conquest was, how much sales are up, how much money they brought in Etc. Good for them. It is in their nature to do so.
If you want to get recognition like the sales and marketing people, become a salesman. In fact you already are. If you are like me we spend countless hours selling our companies to prospective vendors and almost as much time selling the vendors to our internal clients. You should be spending some time selling yourself.
I do it all the time. I will tell anyone who asks exactly what my department does and what it means to them. I carry a copy of my annual savings report with me at all times and put it out there for all to see. I will go over it, in detail, if someone is interested and explain to them how we could help them reduce spend. I tell the sales people how we increase their profits by reducing their overhead costs by (what else?), reducing indirect spend. Put your savings into perspective. One million dollars in savings at a 20% profit margin is equal to 5 million in sales.
Make what you do exciting, get a buzz going. We occasionally invite internal stake holders to our reverse auctions. (Do this only when you know there will be a lot of vendor participation). Shut the door, get the crowd going and get a little loud. When someone asks you what was going on in there it’s time to whip out your savings report.
Posted @ Apr 11, 2011 9:09:13 AM by Eric Hemmalin
Eric raises an excellent point. I had one employment experience in an Indirect Purchasing environment and what I found was, the majority of human resources within the Purchasing group tended to get allocated to bigger bang type purchases - those requiring higher management approval. But I could not help but think given the sheer volume of Indirect transactions that we missed good opportunities for cost savings by not devoting more time and resources to the smaller dollar, repeat purchases.
With respect to the sales aspect of our roles within the organization, Eric is spot on. I have never been in an organization where I was not challenged to prove my credibility and value to internal customers. Sometimes this education process took weeks, more often months, but I know I made an impact when internal customers, my requisitioners and often times end users, came to me for advice on how to handle a first time buy, or what suppliers to solicit for quotes. Personally, I do not see how our value to the stakeholder and much broader organization diminishes when we function in an Indirect vs. Direct Purchasing role, and it really lies with us to ensure that no one anywhere in the organization perpetuates that misconception.
Posted @ Apr 11, 2011 9:11:16 AM by Robert J. Vannelli Jr.
Bravo Eric.....let your actions speak for themselves! Look at your current Purchasing or Supply Chain organization...it should be an exciting, energetic, dynamic department! If not, then the perception of being indirect is reality.
Posted @ Apr 11, 2011 9:14:52 AM by Jim Phillips