Direct Procurement
If there’s one figure that probably hangs over your head as a startup director, it’s that 90% of startups will fail. While this figure is scary, it should encourage you to work smarter to ensure that your startup is among the 10% that succeeds.
One thing that will help you survive the dreaded failure bracket is having an effective procurement strategy to help you acquire the materials you need to continue operating.
Procurement, with the integration of effective procurement software, should stand as a top priority, given that an issue within your supply chain has the potential to significantly impede your business. In fact, without access to the appropriate raw materials, your company would be unable to manufacture the innovative products that grant you a competitive edge in the market.
But what is the best way to go about your procurement? One option that you should consider is direct procurement. Here's everything you need to know about this procurement approach.
What is Direct Procurement?
Direct procurement involves purchasing raw materials that a business can’t run without. These materials are necessary for a company to perform its core activities. Most of the materials acquired using direct procurement are included in the final product.
For example, if your business is building robotics, some direct materials you may need include electric motors, wiring, and printed circuit boards. Without these materials, you wouldn’t be able to build your product, or in other words, your production process would come to a halt.
In direct procurement, a company purchases the necessary raw materials in large quantities. The goal is to get a discount for buying in bulk while maintaining quality. For your robotics startup, you can purchase direct materials like electric motors in bulk from a manufacturer to ensure you get a discount.
How Does Direct Procurement Differ From Indirect Procurement?
The main difference between the two approaches is that direct procurement is essential for production, while indirect procurement is only necessary for the business to operate.
On the one hand, direct procurement requires you to spend on materials and services that directly impact production and your startup’s bottom line. On the other hand, indirect procurement involves spending on activities and materials that aren’t part of the final product. These materials are necessary for the business to operate but don’t contribute directly to your business’s profits.
For example, if you’re running a direct mail marketing campaign, some of the indirect materials you may need to purchase include envelopes, stamps, and paper. While these materials are necessary to support your operations, they do not affect your production process.
What are the Benefits of Direct Procurement?
There are several benefits that direct procurement can offer your business. These include:
Assured Availability of Essential Raw Materials
Direct procurement ensures you always have the raw materials necessary to continue production. This stability is crucial to maintaining a consistent workflow since direct materials are essential to your business. This stability is also good for morale as employees won’t have to worry about production coming to a screeching halt because of missing direct material.
Saving Money
Direct procurement can help you save money in the long run. As mentioned earlier, it allows you to purchase raw materials in bulk at a discounted rate.
This is opposed to purchasing direct materials as you need them, which can be more expensive. You can reinvest the savings from direct procurement back into the business to help it grow.
Better Relationships with Suppliers
When you purchase direct materials in bulk, you become a valuable customer for the supplier. This relationship can give you some negotiating power down the line if there are any issues with direct materials. For example, if there is a problem with the material, you may be able to get a replacement faster than other customers.
Furthermore, your procurement team will be more inclined to form long-term relationships with suppliers since you're focused on enhancing efficiency. As a result, they are more likely to spend more time forging and managing collaborative relationships with vendors.
This is unlike in indirect procurement, where direct spending is unnecessary. An indirect procurement team will be more interested in managing your company’s expenditures than negotiating contracts with suppliers.
Better Inventory Management
You must prioritize effective inventory management in direct procurement to avoid running out of stock. If you have no stock, production delays will affect your entire supply chain. The effects of supply chain disruption will trickle down and impact your bottom line.
A good practice that can help you avoid stock outages is strategic sourcing. Strategic sourcing is the continuous evaluation of your sourcing activities to identify opportunities to save money.
This information can help you create a sourcing strategy to direct your team on where and how to source direct materials. Strategic sourcing aims to get the best value for your money while ensuring that you have a consistent supply of direct materials.
Overview of the Direct Procurement Process Stages
- Needs Identification: Determine the specific materials or goods required for production.
- Supplier Selection: Identify and evaluate potential suppliers based on reliability and cost.
- Negotiation: Agree on pricing, terms, and conditions with selected suppliers.
- Order Placement: Issue purchase orders to confirm the agreement.
- Delivery and Quality Inspection: Receive and inspect goods for quality and compliance.
Key Challenges in Direct Procurement
1. Supply Chain Disruptions
Supply chain disruptions are a significant challenge in direct procurement, as they can lead to production delays, increased costs, and missed deadlines. These disruptions can result from various factors, including natural disasters, geopolitical issues, or supplier failures, and require effective risk management strategies to minimize their impact.
2. Regulatory Compliance
Direct procurement often involves navigating complex regulatory requirements, which can vary across regions and industries. Non-compliance with these regulations can lead to legal penalties, delays, and reputational damage, making it essential for businesses to stay informed and adhere to local and international laws.
3. Supplier Risk Management
Supplier reliability is crucial in direct procurement, as any disruption or failure in the supply chain can affect production schedules. Managing supplier risk by assessing their financial stability, production capacity, and ability to meet deadlines is vital for maintaining a smooth and efficient procurement process.
