The materials are directly required to produce a finished product are called direct materials e.g., personal computer, hard drive etc.Direct materials are required to be available in the right place, right quantity and the right time. Direct materials are related to cost of goods, whereas an an indirect material does not determine cost directly.Indirect materials do not delay production normally.Based on the focus on value/cost and critical nature , there are many indirect materials which are categorized under general items.Direct materials can be further categorized under bulk purchase, critical and strategic items.
There are some materials, which are used for the production of products. But, some materials and services are used as a support of the main production process. Although, the whole procurement process should consolidate orders to take advantage of economies of scale and quantity discounts.
After completion of supplier selection, contact making, product design etc., a buyer-supplier engages in a transaction, which is called procurement. After buyer places the order a supply chain must be ready to do this if the required materials not made in a factory. The process culminates in receiving the finished goods by buyer
paying for the order.
Direct and Indirect materials:
There are direct and indirect materials. Both are required to procure. We can think about apparel manufacturers who need to buy fabric, accessories etc. for the production of apparels. But sometimes need to buy a personal computer, hard drive etc. also. The materials are directly required to produce a finished apparel are called direct materials and personal computer, hard drive etc. are categorized as indirect materials.
Supplier manufacturer relationship:
Direct materials are required to be available in the right place, right quantity and the right time. So that supply and demand are matched in the supply chain. The procurement process needs to design to facilitate production plan and desired level of inventory for on time delivery. The procurement process should be visible to manufacturer and supplier and any mismatch should be alerted well ahead. Thus, the focus of the whole process is to reduce inventory to match product supply and customer demand well. SAP MM helps the manufacturer to track the process.
Direct vs. Indirect Materials:
-Direct materials are related to cost of goods, whereas an an indirect material does not determine cost directly.
-And the delay in receiving materials will cause a delay in production. But indirect materials do not delay production normally.
-A Number of transactions are low in case of direct materials. But, for the indirect material, no. of transactions may be high.
Design Collaboration helps procurement areas:
If the Deign collaboration of a procurement department in a manufacturing company is good and proactive enough, they work closely with other working areas and with third party suppliers also, this helps to derive considerable material benefit. Thus , the overall return on investment increases through cost reduction, quality improvement, and decreased time to market. The Design responsibility goes to suppliers. Manufacturing and logistics principles should be followed well.
Other categories of procurement:
However, based on the focus on value/cost and critical nature , there are many indirect materials which are categorized under general items. In this case, acquisition/transaction cost should be lower. Direct materials can be further categorized under bulk purchase, critical and strategic items. Under bulk purchase items, there are the bulk packaging and bulk chemical items etc. For these items service and performance under different dimensions are important. Critical items are found with long lead time and the main objective of procurement is availability, rather than cost. For strategic items, the buyer-supplier relation is long term. Lifetime cost/value is
important for this category.
When we procure in a firm, we need to acknowledge above mentioned things for a sustainable procurement process. Also, we should think about society and environment to make our supply chain green.
Weele, Arjan J. van (2010). Purchasing and Supply Chain Management: Analysis, Strategy, Planning and Practice (5th ed.). Andover: Cengage Learning. ISBN 978-1-4080-1896-5.
Lewis, M.A. and Roehrich, J.K. (2009), Contracts, relationships and integration: Towards a model of the procurement of complex performance. International Journal of Procurement Management, 2(2):125–142.