The Differences Between Direct and Indirect Procurement and Sourcing
Over on Strategic Sourcing | Europe, Jean-Philippe Massin picks up on a European Leaders article that discusses the different leadership approaches that direct and indirect Spend Management approaches require. The cited article, penned by Nokia's VP of Indirect Procurement, Alf Noto, is a great short read.
I must say that a chuckled when reading the difference between "measuring savings" for direct versus indirect. Noto argues that measuring savings for direct materials is "easy". I would agree with this in most cases. However, the line between savings and cost avoidance can be challenging in volatile commodity markets where separating out raw material from value-added components is not always as simple as it sounds (in my view, anyone who tries doing this in metals processing areas such as heat treating and calls it easy is a masochist). But the part that really got me smiling was his comment that "measuring indirect = true lies" because the "saving[s] made by procurement is open to questions: how much will we buy in the future? What level of compliance should we assume?, [etc.]". In any event, do check out the piece. Noto's commentary is a quick 2-3 minute read that every procurement executive should look at.
- Jason Busch
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Re: "In indirect, however, each saving made by procurement is open to question. how much will we buy in the future? What level of compliance should we assume? It’s a one off purchase that we haven’t bought before, so what’s the baseline to measure the saving?"
Noto is working under the paradigm that the savings measurement model is owned solely by, and is the responsibility of, the procurement group. True spend management leaders recognize that the savings model must be a cross-functional one owned by procurement, finance and all stakeholder groups. So if procurement negotiates better contract pricing then it's up to finance and the stakeholder depts. to decide whether budgets are reduced (buy the same at the lower prices), stay the same (buy more at the lower price) or increase (buy a LOT more at the lower price).
As for compliance, again it has to be a cross-functionally developed and owned process. Procurement has the responsibility of involving staleholders up front in the sourcing & contracting process, but then - downstream - cost center managers and business unit heads have to make users accountable for buying off-contract.
As for the one-off purchase, that's always a challenge but I don't see it being specific to indirect - new products get designed all the time that require new purchased inputs. The best you can do is design for cost at the beginning then pursue & measure value engineering efforts over the life of the product.
- Do the same as for frame agreements for direct materials, ig count the saving when material has been delivered and invoice is at hand. Then you can compare to last time you bought same thing.
- Direct material is not just raw materials and components, can also be assemblies like printed circuit boards and the like. There the hard part is to differentiate between negotiated lower product price and reengineering impact.
I would also like to bring to the attention that it is not only the material/product price that counts - what about logistical costs, cost of different qualities versus warranty costs, OTD levels and impact and not to mention risk exposure.
We should not just count price variances and part cost reductions, but look at total revenue impact to corporation.