Procurement is the act of purchasing goods and services that will be converted to finished goods of a certain business. There are many procurement strategies to ensure that the company can spend the least amount possible for the production and operational requirements. Some companies aim to get quantity discounts through buying in large quantities from a single supplier. Other companies request bidders so that they can choose the best supplier available. Another best method is to monitor and control direct and indirect spending for the purchase of materials that are directly and indirectly related to production. This infographic provides the difference between direct and indirect spending.
1. Direct spending is the costs of products and services that are directly related to the production of the company’s finish goods that will be offered to the market. These are raw materials, machinery, contract services, hardware, etc. Why is it that monitoring these costs are easier? In every product that you make, you must get the cost per unit. For continuous processing, the total cost of production is divided into the number of units produced annually. By understanding, the cost per unit, you can tell whether you have exceeded your budget for direct costs or not. Moreover, because you can count the number of outputs produced, the cost of input can also be measured easily. Such is not the same for indirect spending.
2. Indirect costs are used to defray expenses for day to day activities. Office supplies, consultations, repairs, and even administrative expenses are part of indirect spending. When you use office supplies, you are not producing a product yet it is necessary to keep the operations efficient. Because indirect spending can’t be easily monitored, the company has a hard time tightening their budget for these expenses.
3. How can you ensure that these spendings are monitored properly? Procurement officers should be trained enough to lessen their expenses in the procurement of goods and services. You must also make procurement practices that are viable to your organization. In addition to that, ensuring a good relationship with your supplier is proven to help in having an efficient and effective supply chain especially for the raw materials that you need for production.
5. The company can also invest in technology that can track your procurement expenses whether it is direct or indirect. Installing enterprise resource planning strategies, or Systems Analysis Planning, the software can automatically assess your procurement conditions. Lastly, the company must set clear protocols for the request and purchase of goods and services.
6. An efficient organization knows when and which areas they can cut costs. Especially in an economy where inflation tends to be very high and economic stability is hard to find, you can’t get away with spending more than what was budgeted if you can’t monitor both spending patterns. Another strategy is to instill among your personnel that they must not use company assets and resources for their personal use because it will add up to office supplies cost that is often not monitored by the organization.
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