Let us start with the direct and indirect spend.
The origin of this classification comes from accounting. Above is a simple income statement. The main split of company expenses is into Cost of Goods Sold (COGS) and other expenses. Procurement adopted to this, so COGS spend became direct spend. Other expenses were defined as indirect spend.
Some define direct spend as all spend that goes straight into the Supply Chain. The indirect spend would be then all spending that supports the company’s day-to-day operations. No matter what way you use to separate the costs, make sure it is aligned with the accounting practices in your organization.
A basic definition would be that direct cost is every cost that can be directly attributed to the cost of a produced or sold item. In other words, if we can split the cost per individual piece of the final product, it is a direct cost. In the case of a trading company, this would be the cost of the purchased goods. In manufacturing, direct costs are the raw materials used for production. Of course, what exactly goes into direct cost depends on the nature of the business. Imagine an aluminium smelter, where electricity consumption represents up to a third of the total production cost. Or a manpower agency, with wages being the large majority of the total cost. On the other hand, rent in the case of retailers is rarely considered as a direct cost, even it represents a large portion of the total spend. The reason is that it is difficult to calculate the cost per a single item. Here it is important to apply common sense and not to overcomplicate things.
So, now you know what the Procurement Manager – directs is doing.
As we have seen, indirect spend covers a wide range of different and very specific products and services. Thus, large companies have sub-specialists, covering only one area of spend. We have marketing procurement, Maintenance, repair and Operations (MRO) procurement, company travel specialists, to name a few.
The career path of these two groups of procurement specialists is quite often very different. Direct material specialists usually stay in the same industry. They know the technology and all market players. Either they will change companies, move across the units within the group or move up.
Indirect specialists stay in their niche while moving across different industries. So, one day they buy marketing services for a car manufacturer, and the next day for a soda producer. They are Subject matter experts of the particular product or service and do not need to be involved in the core processes. Also, an indirect specialist moves more often into consulting and freelancing, allowing companies to outsource this non-core process completely.
Now a bit about managed and tail spends.
Managed spend is part of the total company spend that is actively managed by the procurement department. This means that the procurement department issues tenders, negotiate, and create the contract.
And tail or maverick spend is everything that other employees of the company buy. Now you may ask: wait a second, why should someone else buy things? It happens for many reasons. Sometimes it is very urgent and of small value. Or there is a small business unit far away and it is not workable to have local procurement teams. Some managers claim that they know best what they need. This is a dangerous one. In this case, the manager does not care about the cost, only to get what he wants.
Our job in procurement is, first of all, to figure out how large is the tail spend. Then we need to address it one by one and see what can be managed, and where it would increase cost and/or complexity. All with great care, as stakeholder ego is involved. All of a sudden, we are telling him that he cannot do something and someone “better” than him is going to do it. Communicate often and explain every move. Present it as a reduction of work for the stakeholder.
I hope this clarifies these very important aspects of procurement. And that it will help to understand the job position and job description when you apply for your next job.
