Procurement Glossary & Terminologies

What is Direct procurement ?

The term “direct procurement,” also known as “direct spend” or “direct cost,” describes the acquisition of raw materials, finished goods, and services that directly assist in the manufacture of any commodities or services that the purchasing firm creates.

Understanding Direct Procurement

Direct procurement refers to locating and acquiring the commodities, services, and raw materials a corporation needs for its manufacturing process. To reduce spending, items are purchased in bulk from a select group of sellers.

Vendors must supply raw materials at reasonable costs and meet minimum order requirements, acceptable quality standards, and relevant industry norms. Contracts are signed after approval, and buying cycles are set up to guarantee prompt delivery of the goods.

Any breakdown in the direct procurement operation can impact the entire value chain for enterprises due to their lack of manufacturing products. This is one of the reasons procurement teams need access to software that enables them to perform their tasks efficiently.

Why is direct procurement so important?

Direct procurement influences many other parts of business management, such as inventory management, cost management, supplier relationship management, and internal communication. Direct procurement brings opportunities and problems in each area depending on how successfully a procurement team can manage it.

It’s common to think of a direct procurement strategy in terms of lowering risk and increasing efficiency. However, there are a lot more aspects to direct procurement. Organizations that can change their focus from cost-cutting to enhancing value, efficiency, and performance through direct procurement reap greater long-term rewards. It is necessary to divide direct procurement into three subcategories for this strategy.

1. Cost-driven direct procurement

Cost-driven direct procurement is designed exclusively for businesses that base their prices on the cost of creating each commodity or service. For instance, cost-driven direct procurement is frequently used by the food and construction industries.

2. Market-driven direct procurement

Market-driven direct procurement is used by businesses that price their products or services based on market pricing, such as the price their rivals charge. Any company with a slim profit margin and intense competition for its goods or services would employ this direct purchasing strategy.

3. Value-driven direct procurement

This pricing strategy is used by businesses that determine the value or benefit of their products and services for customers while also considering how procurement adds value to the business. For instance, software companies can use this procurement approach for pricing and direct purchase.

Direct procurement using a value-driven approach is a technique that can be applied in a variety of industries. Regardless of the process a procurement team chooses with direct procurement, sourcing automation and software can help a couple determine how much time, effort, and resources to devote to optimizing this spend area.