Opinion: A tale of two sourcing strategies - Direct and indirect procurement call for different leadership approaches

One of the most contentious opinions held by some procurement specialists is that category knowledge isn’t necessary for effective managers. In other words, if you are skilled at using the right sourcing processes, you can buy anything.

This might be true for a buyer or sourcing manager, but an effective CPO in a complex business must understand the difference between buying direct and indirect goods and services. If you try to simply copy leadership practices from one job to the next you are likely to fail.

There are major differences between direct and indirect goods and services and they have implications for procurement leadership. First the obvious one, direct goods end up in products. This means that part of direct procurement’s job is to source and manage suppliers who can both support the business’s need for supply chain integration (for example, lean manufacturing and distribution) and support the product creation process. With a few exceptions (perhaps some marketing services and capital equipment purchases) these considerations usually don’t trouble people working in indirect sourcing.

Compliance management is the difference most commonly quoted between direct and indirect procurement. 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 – and often does – use who they want.

However, the differences do not end there. Let’s consider working with business stakeholders. 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.

Indirect procurement has to manage many more stakeholders, with variable degrees of competence and a wider geographical distribution. in some cases, it is difficult to find a business stakeholder. If you look at travel, procurement often has to manufacture a stakeholder group to represent business views.

Supply market structure and influence is another big difference. 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 buying power to get what it wants. In addition, structurally speaking, very few supply markets for indirect goods and services are global. When you are buying services, even if you do have suppliers with global reach, the quality of service can vary tremendously.

If you think about these stakeholder and supply market challenges, the consequence for procurement leadership is that you must emphasise the development of different competencies in direct and indirect sourcing teams. Also, while it might be feasible to structure direct procurement in a global and centralised model, indirect procurement needs to be structured to distribute capable sourcing people physically close to both important regional and local supply markets and stakeholder groups.

Finally let’s get dirty and talk about money. Measuring savings is another major difference. 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 question. 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 what’s the baseline to measure the saving?

Then when you’ve figured all that out, the impact isn’t usually on profit and loss but business overheads, so the debate switches to “where did the money go?” Get the management of savings reporting wrong and your department’s credibility evaporates.

At Nokia we have a clear view on the differences between direct and indirect. We don’t have a CPO covering both groups and the leaders of each group report to a different member of the executive. However, if you are a CPO with responsibility for both areas of expenditure, the good news is that you can still be successful – as long as you recognise and act on the differences.

Alf Noto is vice-president indirect sourcing, Nokia