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How to optimize spend on direct procurement?

Direct procurement is a major spend area for businesses as it involves sourcing raw materials and goods for production. It is critical to the business as any delay or disruption in procurement affects the business operations and revenue. It is far more complex than indirect procurement given the number of multinational suppliers involved, longer lead times, and logistics management.

Collaborative agreements with multiple parties and negotiations are something that procurement managers have to constantly work on and control. Changes in material costs and services to a large extent dictate procurements costs. Companies should therefore have pricing strategies worked out to accommodate the volatile prices. For instance, confectionary producers rely on materials such as sugar and cocoa. Owing to weather conditions, the yield may be high or low and this will be reflected in the price of the commodity.

Alternatively, producers could directly purchase from cocoa farmers which would be beneficial for both the farmers and producers as there are no middlemen or suppliers involved. However, this procurement model may be suitable only for small producers as the supply would be limited.

Likewise for the services industries too, factors such as seasonal demand and availability of labour influence the prices.

Technology-enabled processes

Given its complex nature, direct procurement requires an advanced technology platform to manage core processes. This enables transparency, communication and control over planning. However, when organizations do not adopt automation, they risk continuous cycle of delays and inadequacies that affect the company’s bottom line and progress. Procurement managers should adopt strategic initiatives to fend off challenges and avoid mistakes in their procurement process.

Handling complexities

A procurement order design is usually structured and complex depending on the type of goods. Throughout the procurement order’s lifecycle, there will be data sharing between buyers and suppliers. This data is valuable for procurement professionals to fulfil legal and tax obligations. It also helps to know their stance among multiple parties which include internal departments such as treasury and external agencies such as financial institutions or tax authorities.

Setting up a collaborative and conducive environment

Flawed executions carry more weightage in direct procurement than indirect procurement. Also, process inefficiencies can upset the business operations and hurt revenues. Therefore factors such as supply chain movement, a healthy supplier base, and brand image constitute a significant portion of direct procurement management.

For efficiently managing the spend on directs, procurement managers have to focus on risk factors related to commodity price and supply chain. Contracts with suppliers may include terms on assuring supply continuity and agreement on pricing. While cost savings are crucial for procurement agreements, managers should prioritize steady supply so that operations are not disrupted. This helps to stay competitive in the volatile market environment.

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