Last time we looked at exactly what Procurement is and also briefly, what Procurement Fraud is.
Today we will dig a little deeper and start looking at the different types of procurement.
All decisions to purchase, whether that purchase is in goods or services open you, the business owner up to fraud of one sort or another. This is because all purchasing decisions involve issues around delivery and handling marginal benefit and price fluctuations. One of the most important distinctions to make is the distinction between purchases with a ‘high’ risk fraud and those with a ‘low’ risk.
Larger manufacturing companies often use tools to analyze the economic and financial factors and implications that this produces as there are also two very different types of acquired goods and services and more often than not, procurement activities are split between these two depending of course, on the type of business that you are in. The first type is ‘direct production related procurement’ and the second one is therefore ‘non-production related procurement’. So now let’s have a look at what the main difference is between these two.
Direct procurement usually only happens in a manufacturing type of environment. It includes all the different parts or components of the finished product. This would be raw materials and components and parts. Direct procurement therefore affects the whole production process within the manufacturing arena.
Indirect procurement on the other hand, pertains to the operating expenses and operating resources. It’s the purchases that relate to the operational requirements of the company. Clearly this has a very wide and far reach, as this applies to all the goods and services. It is reflected in the standard office type supplies such as (but not limited to) stationery or regular office supplies to machines of a different caliber such as heavy equipment. It also applies to consulting type services such as legal or accounting services.
In both direct and indirect procurement, systems need to be implemented to ensure that purchases are made at the correct time, from the correct supplies and at the correct price.
Next time we will have a look at these processes in a little more depth.