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One (Direct Procurement) Tool Fit for All

When considering indirect procurement departments, I often distinguish several tools used in parallel: sourcing, supplier management, contract management and procure-to-pay (P2P).

Now, this may be perfectly acceptable for the software providers, but much less so for the users and company.

Imagine the amount of effort for the administration of four separate tools, each different from the next — with their own supplier database and knowledge spread over multiple departments. The worst component of having four separate tools is there is no centralized flow, no process integration and different upgrades and training are required for each.

Besides the internal effort for procurement organizations, companies are paying four times the hosting and maintenance costs, as well as for hotline support and sales margin.

In this scenario, how could information gathered in one tool (e.g., supplier management) get into sourcing or contracting? How could the sourcing tool used to collect competitive quotes for hundreds or thousands of articles transform into an internal catalog? How could the evaluation result of a financial report of a not-so-stable supplier be notified in the contract management tool to then change the upfront payments? A company buying direct and indirect goods should use the same tool suite for various reasons, which is why one complete solution is so essential to the overall success of your procurement process.

Simply put, pure indirect procurement departments should use procurement software made for direct procurement!

Allow me to underline this statement with some arguments:

Production companies (direct) also buy a lot of indirect goods and services, and they should use the same tool for both areas, as they have suppliers delivering direct and indirect materials or services. If they were to split into two different tool suites, knowledge would be lost, and bundling and the management of risk assessment (of suppliers) becomes even harder to achieve.

The borders between indirect and direct purchasing continue to blur. For industries like automotive, manufacturing and aerospace, the ambiguity is evident. But what about tech companies like Google, Facebook and others? What about energy? This is otherwise a common indirect good. Or IT for Google — a necessity and essential.

Direct purchasing companies are in most cases more mature in practice and in process. Up to 50% or sometimes even more of their revenues are going to spend, and they are chasing every single cent each day. Direct companies like Daimler and others have acknowledged the significance of their purchasing function and have hired chief procurement officers, who can be responsible for $50 billion of spend per year or more.

Without the use of a sourcing, risk management or supplier management tool for decades, these volumes are in a worldwide supplier landscape with a variable number of production sites that are not manageable. In that competitive environment, all processes are streamlined and optimized, and so is the purchasing function. When using a direct purchasing software in a purely indirect space, the company and the users are receiving upgrades and updates that include best practices to stay on top of the technology.

Configuration and flexibility are critical. A technology suite has to be flexible enough that it is easy to use at the “beginner” level, while at the same time complex enough for companies that have been using strategic sourcing practices for 20 years. It is purely configuration that is best, for direct and in indirect purchasing. Maybe indirect sourcing will not use deep cost breakdown RFQs, 40 languages and multiple currencies, but this is only a matter of enabling or disabling certain functionality.

Companies new to procurement tools could begin in an easy-to-use environment and, after adopting user feedback, organizations can extend the functionalities on their own. Hence the features of the tool are directly related to the maturity of the user group; this could also be distinguished between sites, countries, user groups and the like.

In most countries, companies are struggling to find the best talent and are facing full employment in the economy, so the demand of the workforce is to use the best-in-class toolset and to have the most advanced processes in place. This should also be the self-image of every organization.

Rainer Machek is executive vice president at Synertrade