Chapter 2. The Fundamentals of Procurement

Traditionally, procurement has been broken down into two major categories: indirect and direct. In general terms, indirect procurement describes all of the day-to-day necessities of the workplace—staplers, paper, furniture, laptop computers, pencils, travel services—those things that tend to be of low value per item, but are usually bought in high volumes. In the typical company, indirect procurement accounts for 60% to 80% of all purchasing transactions.

Direct materials, obviously then, are those involved in the manufacturing supply chain that are directly related to the production of finished goods. These materials tend to be purchased in large volumes, and depending on the level of sophistication of a company’s forecasting and planning capacity, are, at least to purchasing specialists, fairly predictable in name, if not in exact amounts. Purchasing officers in aluminum manufacturing companies know they need to procure certain quantities of bauxite and aluminum at certain times during the manufacturing process. High-technology manufacturers know that they will require microchips, wiring, and other components. Procurement of direct goods, then, is of concern only to manufacturing, distribution, or retail companies—those that create, assemble, or move large numbers or amounts of finished or perishable goods. Because of their predictability and high volume, procurement of direct materials accounts for far fewer purchasing transactions (between 20% and 40% in manufacturing companies), but can account for up to 60% of a manufacturing firm’s total procurement expenditure.^[1]