Manufacturing firms are concerned with two facets of purchasing: indirect and direct procurement.
Direct procurement involves acquiring raw materials or components produced by other organizations for intent of creating finished products with those resources. For instance, an automotive company may source spark plugs from a firm that specializes in making vehicle electronics.
In contrast, indirect procurement is the practice of purchasing services, supplies or products to support day-to-day business operations. This includes acquiring everything from paper clips to enterprise software. While buying paper clips is a task best undertaken by individual departments, obtaining an application for an entire business' marketing team, for example, is a responsibility of centralized procurement groups.
Which practice receives priority?
Neither indirect nor direct procurement should be prioritized over the other. However, the way in which professionals approach these two responsibilities must be different. In the case of indirect procurement, those responsible for purchasing new assets must deduce how they will contribute to the company's functionality.
For manufacturers, it's easy to get caught up in the direct method - purchasing quality materials at a price that will allow them to turn a profit and establishing relationships with suppliers that exercise sustainability and social cognizance. However, failing to pay attention to what sales, human resources, IT and other departments are using to conduct their jobs will cause production operations to suffer.
Scrutinizing the performance of the 'upstairs factory'
William Heitman, a contributor to IndustryWeek, referred to HR, marketing and other such departments in manufacturing firms as "upstairs factories." He acknowledged the actual production facilities as customers of these back-end operations.
"[Upstairs factories] make 'products' that optimize the downstairs factory and the business overall," wrote Heitman. "Astonishingly, however, companies run their upstairs factories as if the principles of continuous improvement they apply relentlessly downstairs don't apply upstairs."
Basically, Heitman maintained that factories are often the subject of intense scrutiny. Managers of these facilities are often criticized if even minor inefficiencies go unacknowledged - everybody's looking for a better way to build widgets.
No metrics to glean insights
Heitman noted one multibillion-dollar production firm that monitors cycle time and error rates throughout each of its factories. In contrast, it doesn't employ any method of measuring the effectiveness of its sales operations. As a result, receiving, booking and processing orders takes 20 percent longer than producing and delivering products.
Performance metrics may seem inapplicable to procurement, but they can provide spend management analysts and other professionals with insights regarding how assets (software, products, etc.) are helping their "upstairs factories" perform. For instance, a statistic regarding sales lead conversions may signify redundancies in a customer relationship management program.
Which facets of the 'upstairs factory' need revising?
Heitman focused a lot on how well the financial department operates. For instance, some professionals working in these teams may create reports for people who request them, but either give files names that mean nothing to their co-workers or simply fail to share them.
With this kind of approach in mind, Heitman recommended several "downstairs factory" practices that can help financial departments operate more efficiently:
- As opposed to conducting financial reports on an ad-hoc basis, Heitman advised employing a demand management strategy, which would reduce workflow waste by 15 percent.
- Instead of storing reports on individual desktops, it will benefit finance teams immensely if they use a cloud infrastructure to hold those documents.
- To measure efficiencies, professionals should devise a metric that not only identifies the exact cost of creating a financial report but also assesses why expenses are so high or low.
Ultimately, taking these measures will give procurement officers an accurate perception of what financial departments require in order to perform their jobs at a level that is monetarily acceptable.