Even strong businesses benefit from continuous process improvement projects. As workplace technology continues to evolve and the global supply chain remains in flux, your procurement department will need to continually assess its practices and create stronger ways of doing business.
You can accomplish this by garnering feedback from your teams, identifying and removing knowledge gaps, and giving your employees the resources that help them collaborate. According to IBM Sterling’s supply chain lead Alex Zhong:
“The COVID-19 pandemic pressed this need even further, as supply chains around the world were disrupted. Those companies that weathered the storm were more likely to have C-suite procurement and supply chain professionals working together.”
With that in mind, it’s time to make your procurement teams strong enough to handle COVID-19 turbulence and ongoing supply chain struggles. In this article, we’ll discuss how to do that by making your direct and indirect procurement teams more cohesive.
It’s Time to Remove the Barrier Between Direct vs. Indirect Procurement
For the past several years, companies have increasingly focused on the value of removing silos in the workplace. The fewer barriers there are, the better teams can communicate to solve company-wide problems, reduce repetitive work, and create better (and more cost-effective) processes.
However, the silo-busting focus hasn’t always reached procurement departments, and that can force your company to create excess costs and wasteful practices. Instead of maintaining a traditional structure of direct procurement versus indirect procurement teams, it’s time to move your organization toward a more cohesive organization.
- What is direct procurement? It’s the direct spend on raw materials or any goods and services that organizations need to produce goods and services. These purchases are what the customer ultimately receives.
- What is indirect procurement? This purchasing category is everything else a business needs to stay running. It’s made up of office technology, administrative costs, and everything customers don’t see.
But because the two teams have very different tasks, cohesively bringing them together can be tricky.
Start the process by making sure both teams are equally valued and acknowledged. Then, create opportunities for the two teams to communicate and align their processes, such as collaborating to source new strategic suppliers and discussing preferred procurement platforms so both teams can use the same tools whenever possible.
While the two teams may need to stay two distinct teams, that doesn’t mean they should operate independently of each other. They might even share a department head or supervisor who can monitor spend and activity across both groups.
Balancing Direct and Indirect Procurement Teams
You and your organization already know that silos and communication problems are detrimental to any organization. They cause delays, they negatively affect customer service, and they bog down profits. But why should balancing direct and indirect procurement teams be such a priority?
Simply put, each team manages responsibilities that are crucial to the day-to-day functioning and the long-term success of your organization. Without one or the other, your procurement process will falter, ultimately impacting your organization’s performance.
Without Direct Procurement
When there are no supplies for the goods and services you provide to your customers, the production engine of your business stalls. Without a properly operating direct procurement team, your company quickly suffers from these two vulnerabilities:
No Product, No Sales
If your company produces manufactured goods or tangible products, you need raw materials and a supply chain you can rely on. But without the work of your direct procurement team, you won’t have any products to sell. Direct procurement teams are ultimately responsible for sourcing raw materials that become end products purchased by your customers.
Diminished Supplier Relationships
Suppliers are looking for consistent relationships that they can rely on for consistent cash flow; in turn, they reward consistent customers with reliable shipments, favorable terms, and even pricing discounts and other perks. Good relationships keep costs down for both parties. But if your direct procurement team can’t operate on the right level, you’re at risk of:
- Losing a personal connection with your supplier contact
- Not fulfilling your contract obligations, such as order volumes, invoicing deadlines, and more
- Failing to renew (or renegotiate) your contracts
All of this will worsen your relationship, potentially causing a premature end to the relationship or tumultuous communications that leave no one happy. Along with cohesive communication, we recommend using procurement automation to strengthen your processes.
Without Indirect Procurement
Don’t be fooled into thinking indirect procurement is so behind the scenes that it won’t slow down your business. Non-customer-facing purchases minimize company-wide costs, ensure the administrative functions keep operating smoothly, and allow for organizational growth.
Remember: indirect procurement is a broad category that includes everything from your invoicing SaaS subscription to machinery maintenance costs. When you don’t maintain strong indirect procurement processes, your organization may face:
Poor Manufacturing Processes
If your organization handles any element of machining, manufacturing, assembly, or packaging, this impacts your company. Maintenance, Repair, and Operations (MRO) costs can make up 10% of your company budget and include all the services, parts, and safety gear that keeps your operation running. Interruptions here will lead to severe costs in the future in the form of machinery breakdowns, failed inspections, and unscheduled downtime.
Slow or incomplete indirect procurement also impacts your company’s technology. In today’s markets, having up-to-date programs, licenses, and computers is essential for your office staff, marketers, and customer support teams.
Your manufacturing facilities also need modern technology to boost automation, add complex capabilities to your repertoire, and have in-depth analytics in real-time for every facet of production. Thus, maintaining beneficial relationships with office suppliers, industrial machinery vendors, and software companies is essential.
Strike a Productive Balance
Your company can’t operate effectively without streamlined and robust procurement practices in both direct and indirect spend categories. Restructuring your approach to procurement will ensure that both teams are communicating and have access to the resources they need to keep your company operational.
To get there, you need clear insight into:
- The health of your existing supplier relationships
- Challenges that both teams face
- Miscommunications or misalignment between the two teams
- Processes, tools, and technologies your procurement team needs to succeed
Partner With Acquis Consulting for Smoother Direct and Indirect Procurement
At Acquis Consulting, we specialize in helping companies gain greater insight into their direct and indirect procurement processes. Our team can help you identify ways to strengthen supplier relationships, give both teams the recognition and independent capabilities they need, and ensure your executive team always has its finger on the pulse of procurement. Contact us today to start assessing your company’s procurement style.