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Do you know the difference between direct procurement and indirect procurement?

In small companies there is most of the time one person responsible for the procurement. The bigger the company gets, the bigger the procurement department. Multinational corporations have most of the time a whole department for the procurement. There are multiple people responsible for the company’s procurement. For a company’s CEO and CFO this department is veryimportant because this department is responsible for all the expenses of the company. The CFO of a company always tries to minimize the company’s costs as much as possible. To understand how they do it, it’s important to know more about procurement. The procurement can be split in two parts: Direct procurement and indirect procurement. We will explain the differences between those two. 

Direct procurement 

Direct procurement consists the procurement of goods, services and raw materials which contribute directly to the company’s core business. In case of Heineken, for the production of beer goods like hop are necessary. Too less hop can temporally stop the production of beer. Heineken doesn’t produce hop itself. The have contracts with different suppliers. The suppliers of hop are therefore very important for Heineken. Before a contract is signed, Heineken starts a tendering process. During this process Heineken search for the best supplier withthe best products, for the best prices. The contracts with these suppliers are most of the time long lasting contracts with the best conditions and terms. 

Indirect procurement 

The opposite of direct procurement is indirect procurement. Indirect procurementis less important for the company. It’s the procurement of goods, materials and services which are not directly influence the core business of the company. In case of Heineken office supplies are a good example of indirect procurement. Office supplies won’t harm your core business, but are necessary for the employees to do their job. That‘s why the procurement of indirect goods is not that high on the company’sagenda.. Most of the time there won’t be a tendering process and after one order, the companydoes not do any business again.  

Outsource the indirect procurement 

Because indirect procurement is not that high on a company’s agenda, a lot of companies, especially multinational corporations, choose to outsource the indirect procurement. The company can save a lot of money with it. Instead of all those single invoices from different suppliers with each their own payment terms,the company will receive only one total invoice every month. Because of this the supplier base will be reduced extremely. Sometimes up to even 80%. This will unburden the finance and procurement departments. And this can save the company up to 21% on internal costs. 

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