July 05, 2019

Indirect vs Direct Procurement - who cares?

by Procurement Trends, Source-to-Pay, Sourcing, E-procurement

Procurement in the Nordics is an interesting space for a vendor like OpusCapita. Especially when you understand our DNA which is heavily influenced by our roots in the DACH procurement market. Sure, sure, we acquired a procurement leader in that space (jCatalog) but after 3 years, our cultures have meshed and our strengths are nicely complementary. But what has this to do with the difference between indirect and direct procurement - excellent question, thank you for asking.

Indirect vs Direct Procurement

I was always quite comfortable with indirect and direct spend being separated. Separated in practice and separated in my view of the who, how and why of it all. Direct procurement feeds manufacturing and indirect is pens and pencils, business cards and mobile phones, etc. Possibly many of you (reading this blog) already have your mind made up. Perhaps, you know what I’m about to say, but as the nature of blogs are to be both cathartic and educational, I feel confident the conversation is worth having. 

Two months ago I was speaking to the Head of Sourcing for a Swedish based service company. I was preparing him for his role as a panelist in one of our events and wanted to know what he thought was interesting and then find the middle ground between that and what we thought was interesting (within the procurement space). I know this company manages a lot of MRO spend (materials, repair and operations) with our solutions and thinking that was a hot topic, I suggested he might be interested to challenge the indirect vs direct question. Obviously, I felt MRO procurement, though technically indirect, was so intense and complicated a process that it made sense to me that he could challenge all those people out there who think direct is where the real rubber meets the road. Well, he didn’t! In fact, he spent a few minutes ranting about the fact that in his opinion, indirect vs direct were outdated concepts and meaningless. Now, I clearly wasn’t in a position to challenge him then and there but it did get me thinking. 

'Meaningless terms' he said. I think I only partially agree. The challenge is that for an organization that does heavy manufacturing (of which there are only a few in the Nordics), direct procurement is absolutely a thing. For those companies (the ABBs, Kones and Wärtiläs), direct procurement is fundamentally important and disproportionately important compared to indirect. Indirect may still be in excess of a 100 million but it’s negligible in comparison. Contrast that perspective with all the rest of the organizations in the Nordics and you’ve got all kinds of VERY large companies who also spend tens or hundreds of millions on 'indirect' spend - those organizations don’t see the distinction as meaningful. Why? Because the goals are the same or similar - AND - the challenges are the same or similar. 

Let’s take one example: Maersk. No one would say Maersk (35 Billion USD in revenue in 2017) is small. 88,000 employees operating across 130 countries, managing shipping, transportation and logistics on a literally global scale. Wow, must be intense to be in their purchasing department. Keeping those tankers going, ensuring all of the equipment, vehicles, etc always running must require a boatload (pun intended) of suppliers, products and services. This procurement can’t be any less challenging than that required by the big manufacturers. In fact, it may even be harder due to the lack of predictability of MRO (I know, maintenance in a perfect world is perfectly managed with OEM, IoT and AI combining to ensure nothing ever breaks down) and the typical disconnect between maintenance, inventory, asset and purchasing systems/people. 

So if you are the head of sourcing at Maersk, do you give a darn for indirect vs direct? Unlikely. However, that same person probably still wouldn’t care where the pens and pencils, mobile phones and business cards come from. Perhaps, the key is that the terms just don’t fit as well as we might like. Perhaps we need to start talking about strategic vs non-strategic purchasing. That would encourage us to ignore the perception that indirect spend is all pens and pencils and rather give us the opportunity to recognize what’s important without labels (especially when they become meaningless). 

From now on, I’ll start using strategic vs non-strategic and you are free to adopt my nomenclator. Thanks for reading this far, I think we achieved something today, even if it was only semantic.

If you are interested in how OpusCapita supports strategic and non-strategic spend, you should download the OpusCapita Source-to-Pay brochure. It covers the full portfolio and gives you an idea how our approach may differ from others.

If MRO is your thing, I’d definitely steer you straight to the MRO eBook and/or the MRO Fact Sheet

 

Rowan Lemley

Rowan Lemley


Rowan has more than 10 years of experience in the purchase-to-pay arena. During this time, he has managed the go-to-market for a diverse set of portfolios including Accounts Payable Automation, B2B Networks, Financing Services, eProcurement and Product Information Management.

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