Understanding Direct Purchase
Direct purchase is the act of acquiring raw materials and goods for production. These purchases are generally made in large quantities, acquired from a pool of suppliers at the best possible cost, quality and reliability. These purchases are made frequently and are necessary for key business practices, such as a baker acquiring flour to produce bread.
If direct purchase stops functioning or encounters problems, companies are no longer able to manufacture their product and create revenue.
Historically, direct procurement stems from manufacturing.
Importance of Direct Purchase
1. Cost management
In direct purchase, cost analysis — analysis conducted by the company of the expenses incurred by the supplier in delivering a product or service, to guide negotiations — is a much-used cost management practice
2. Inventory management
Inventory management is knowing what materials you have, where they’re stocked, and how much you’ll need. With direct purchase, to ensure a smooth production process and to prevent delays, materials need to be held in stock. Direct purchase can offer useful lessons in inventory management best practices.
3. Use of technology
Companies have begun to realize that upgrading direct purchase technologies can help to streamline processes, cut risks, maintain quality and trim costs. Nevertheless, many procurement teams continue to be bogged down by unwieldy systems that may be feature-rich but have non-intuitive user interfaces linked to the organization’s legacy ERP systems. Cumbersome processes negatively impact compliance and productivity.
4. Organizational setup
In most companies, direct costs are managed by centralized procurement and supply chain teams, with category managers focusing on specific areas of spend. Direct spend teams can look to their counterparts for valuable lessons in soft skills that are so essential for handling the large number of requirements, internal stakeholders and vendors, all of which make indirect procurement so complex.