How your business revenue depends on indirect procurement — Retail Technology Innovation Hub

Direct procurement needs no introduction as this term is commonly used in business, industries, and organisations.

However, there is another process known as indirect procurement, which significantly impacts the growth and functionality of a business. Compared to direct procurement, the indirect procuring process does not get the spotlight it deserves.

Giving inadequate importance to the indirect procuring process can cause a business to face several challenges in its operations. It is necessary to recognise the value of this procurement type and plan some strategies to manage its process efficiently.

In this article, we will shed some light on the effects of indirect procurement on any business. First, let’s acknowledge what indirect sourcing means and how it is different from direct procurement.

What is indirect procurement?

An indirect spend or procurement includes sourcing and purchasing products and services needed to operate, manage, and maintain a business and its activities. A good, highly skilled team is set up to manage this entire process of procurement.

On the other hand, direct spending or procurement refers to purchasing goods used to prepare and pack the items sold by the company. In both indirect and direct procurement, the purchase is made between the company and vendors. However, the difference lies in the use of goods purchased.

Let’s consider the example of a cosmetics company. The chemicals, dyes, and bottles purchased to make cosmetic products will fall under the term of direct procurement.

On the other hand, purchasing equipment and furniture used to produce and store cosmetics belong to indirect procurement.

Other than dealing with the goods produced, the professionals involved in indirect procurement will also deal with the investment made for marketing or advertising the cosmetic items.

Apart from the differences, indirect and direct procurement also share some similarities. Both generate revenue for the company and play a significant role in the quality of the output.

Now let us look at how the indirect acquisition or procurement process affects a business:

Controlled expenses

The purchase of goods and services related to indirect procurement makes up almost 80% of the company’s purchases. If you manage it carefully, you can increase your company’s overall profit gains.

Indirect procuring allows you to negotiate with the vendors regarding the costs of goods. You can convince them to provide discounts and introduce attractive packages.

You can also look for other competitive vendors to get the same goods at cost-effective rates. It allows you to choose goods of better quality, ultimately saving up on repair and maintenance costs.

Additionally, you have the opportunity to hire qualified professionals able to implement strategic plans that can improve sales and check and balance. In this way, indirect procurement boosts the productivity of a business to an appreciable extent.

Good brand reputation

Sourcing goods from the same vendors repetitively contributes to establishing good terms with them. Strong vendor relationships develop a good brand reputation in the market, bringing more sales to your business.

Securing a positive reputation also attracts other vendors to approach you and provide goods and services at relatively reasonable rates.

Also, when you have good relationships with vendors, there are fewer chances of fraud. Hence, the percentage of loss decreases, helping your business flourish.

Efficient spending management

The profit earned through indirect spending leads to good business revenue and allows you to focus on improving sales growth and output quality. With a stable investment backup, you can upgrade the quality of your products, increase their number, or purchase advanced equipment for faster yield.

You can also invest in a good management team that manages indirect procuring affairs more efficiently. The team will be highly skilled in making the right decisions to spend funds appropriately and change the vendors for solid reasons.

Stable finances

Indirect procurement, if managed professionally, saves money, which adds to the company’s total profit.

As a result, the finance department of the company gains stability. With stable finances, the business enjoys uninterrupted functionality and continues to advance on the path of progress. The vendors are also content as there is no delay in payments.

Likewise, the employees, rents, and utilities bear no unnecessary dues that could potentially hinder the production or affect the business continuity. Instead, the output becomes better and more efficient.

Thus, it would not be wrong to conclude that financing activities are also associated with indirect spending or procurement.

End note

The growth of a business depends on many factors, among which indirect procurement is often misunderstood or not given much attention. However, in reality, this business aspect can indirectly change the game by increasing the company’s revenue.

You can control the expenses of the company by arranging negotiations with vendors. The indirect procurement process can even improve the output gains and acquire a reputable identity in the world of brands.

It also involves hiring skilled professionals who will work for the company’s development. We hope this indirect procurement guide has answered your queries about how it impacts a business.