Indirect versus direct procurement – our readers point out the paradoxes

Last week we talked about whether the Indirect / Direct classification had any relevance to a large number of industries, following my colleague Jason Busch's remarks about how 'Indirect' spend was becoming more important. We pointed out that for industries such as banking it is hard to identify exactly what 'direct' categories might be.  This drew a number of interesting comments from readers.

Ian Heptinstall chipped in with this.

How about the Oil & Gas sector? Whilst important, the “raw materials” part takes very little of the procurement team resource – usually long-term licences from state governments. The very large procurement teams buy mostly indirects (MRO & projects), and services are usually the largest part of the external spend.

To which Bitter and Twisted responded;

But what that means is that direct/indirect is an unhelpful dichotomy. If ‘expensive specialised oil extraction equipment’ and ‘office janitorial services’ are both ‘indirect’ then the term has no use.

Then Dan said something that reflects just how my thought process has been going.

I’m still astonished that people still talk about direct and indirect in a world where Kraljic’s matrix is such a basic part of the profession and ‘indirect’ items can be a higher risk – and therefore more important – than some ‘direct’ items.

Our readers, as usual, have their fingers on the pulse of leading edge, state of the art, good practice thinking! For a number of reasons, the whole classification of Direct / Indirect is, in our view, increasingly irrelevant to procurement thinking and delivery, and can even be dangerous to the development of good practice.

Now before the organisers of ProcureCon Indirect panic too much, it can be a useful shorthand to describe a number of spend categories that share some (but frankly not many) characteristics. But other than that, it has little or no value we can see for procurement. It is an outdated distinction, really going back to the days when most businesses were manufacturing in nature, and it doesn’t tell us anything about how we need to approach different spend areas.

We’re going to come back to this issue in more detail once we’re through the Easter holiday period, so all our readers who are away don’t miss this important debate.  We’ll get into why the classification doesn’t work, and also more importantly ask – if not direct / Indirect, how should we classify what we buy?

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First Voice

  1. RJ:

    It strikes me that the most useful distinctions are often industry-specific and/or that a business might benefit from several ways of slicing the supply markets in which it operates. Direct/indirect is still valid for much of the manufacturing sector, goods for resale/not for resale is an essential distinction in the retail sector and upstream/downstream drives some fundamentally different approaches in oil & gas, for example. But a simple goods/services or opex/capex distinction can be equally valid for driving different supply market or cost management strategies. A good topic for discussion but I can’t see how there’s going to be a single “right” answer to this one. A key challenge for any organisation is how it facilitates the identification, communication and implementation of good practices and market information across teams sharing any form of potential synergy (if you’ll excuse the management speak).

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