The Problem Statement
It is time to change course. Indirect procurement has been treated as a stepchild for too many years. Whilst many companies invested in new procurement platforms, the indirect procurement area has always been kept separate from the mainstream core business and their processes. When company refer to procure to pay or now source to pay, then they meant the direct side. However, significant synergies can be achieved by cross using the approach, platforms for methods across the two areas of procurement.
Direct versus Indirect Procurement
Direct procurement covers all material to make sellable product, and indirect procurement covers all materials or services used to support an enterprise. However, the method of procurement is not at all that dissimilar, both sides should use a purchase order to trigger the purchase, spend analytics based in spend categories can be applied to both direct and indirect goods or services, supply methods such as VMI or using a RFx process to select suppliers can also be applied to both direct and indirect procurement. In some cases, techniques such as supplier self-registration, developed of the indirect procurement side, can be applied without changes to the direct procurement side. Below is a depiction of all direct and indirect procurement activities across an enterprise.
Technology platform such as Ariba, Zycus, Coupa and GEP have developed capabilities across the entire source to pay process whilst standard ERP systems are lagging behind in key areas of the source to onboard process. ERP system providers have traditional focused on the core procure to pay process, neglecting capability such as vendor management or contract management. It is time to merge direct and indirect procurement technology.
Source to Pay Process instead of just Procure to Pay Process?
The procurement process must be tackled holistically. Both direct and indirect procurement represents a significant spend of any organization. Understand maverick spend in indirect or analyzing raw material spend in direct to rationalize the supply base requires sound spend analysis. Hence, as shown above, direct and indirect should use the same process and tools as part of the initial source to pay process.
All analytics, strategy, selection or onboarding is useless unless the core procure to pay process is used to execute and control the procurement activities and metrics are put in place and tracked to manage compliance. User or vendor onboarding and monitoring of how spend is executed in the procure to pay process is essential to reign in on maverick or local spend.
Merging of Process and Technologies but understanding the differences of direct and indirect
Merging direct and indirect also means understanding the differences. A purchase requisition is generated very differently for indirect and direct, however, the conversion of a purchase requisition to a purchase order through an approval hierarchy are very similar. Indirect spend and the consumption thereof is also more difficult to control due to the distributed nature of consuming indirect goods.
Another area of differences is the goods receipt process. Whilst the direct side is very organized through the goods receipts at the warehouse or factory level, the receipt of office goods in the headquarter or the receipt of services is a different matter. IoT technology, however, and cloud based receipt processes can help to integrate the control the receipt process even on the indirect side, this enabling to better control the quality and invoicing process.