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Direct and indirect procurement call for different leadership approaches

Direct and indirect procurement call for different leadership approaches

Reports, Sourcing

Alf Noto is vice-president indirect sourcing at Nokia. He wrote a  great article  about  5 major differences between indirect/direct procurement . You can read it at  European Leaders Network. In a nutshell, let me summarize the differences raised by Alf Noto and leading to say that you need to develop different leadership competencies to manage those two spend-categories:

  • About creating a business advantage: [Direct = high potential | Indirect = low potential ] 

Direct procurement’s job is to source and manage suppliers who can both support the business’s need for supply chain integration; these considerations usually don’t trouble people working in indirect sourcing

  • About Preferred Suppliers: [Direct = A Must | Indirect = Nice to have] 

In indirect sourcing, increasing your company’s use of a preferred supplier is critical to success. In the direct environment no-one on the manufacturing line will buy a component from a nonpreferred supplier, while for many indirect categories everybody can use who they want.

  • About the Number of stakeholders: [Direct = Low | Indirect = High]

In direct procurement, you are usually working with relatively few stakeholders (design engineers, quality managers, production specialists) who are located in a few centres of activity. The opposite is the case for the business stakeholders who influence indirect expenditure.

  • About buyer-seller Power relationships: [Direct = Buyer is stronger | Indirect = Seller is stronger]

Big companies can build a position of significant power over many key direct suppliers. On the other hand, almost by definition, indirect suppliers are not restricted as to which industries they can supply, so it is only on rare occasions that a company can use its volume-buying-power to get a dominant position over an indirect supplier.

  • About Measuring savings: [Direct = Easy | Indirect = True lies ]
In the direct world, the focus is on cost of goods reduction. Every product has a bill of materials, and in most big companies this is held within an eRP system. If procurement reduces the price of something, the impact on profit and loss is very clear. In indirect, however, each saving made by procurement is open to questions:  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…?

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4 Comments

  1. Vanessa 22 August 2007

    Hello,

    I am writing my diploma thesis about supplier management for indirect materials. But I have a problem to find some literature about it.. Does anyone have already experience with this issue?

    Thanks a lot..

    Regards

    Reply
  2. jp.massin 22 August 2007

    Hi Vanessa,

    Schools are mainly focused on buying indirect goods and services. Have a look at this study : , benchmarking procurement practices in higher education

    Reply
  3. Prem 24 October 2008

    Hi,

    Can some one let me know more about IT procurement

    Reply
  4. Prem 24 October 2008

    IT procurement (Direct & Indirect)

    Reply

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