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Ways to Categorize Products in Procurement

Companies procure products and services for long term needs as well as day to day needs. Procured Goods and Services can be categorized in multiple ways and will require different treatment and strategies.

Direct vs Indirect Material

  • Direct Material is material used in producing the end product or service such as raw material used. Indirect material is not directly consumed in creating a product such as office supplies.
  • Direct material can be directly linked to each unit whereas indirect material cannot be directly linked.
  • Direct material is usually planned for purchasing and usually stocked (unless Just in time is used). Indirect material is usually not stocked and is directly consumed (There can be exceptions such as spares).
  • Direct material cost is part of direct cost whereas indirect material cost is part of overhead.
  • Direct material cost forms the major part of the organizational spend whereas indirect spend is lower as compared to direct material cost.
  • The volume of transactions for indirect material is very high although the value is very low.

Stock vs Non-stock material

  • Stock material are bought in bulk and inventoried for consumption over a period of time. Non stock material is bought as needed and consumed immediately.
  • Raw material is stocked unless JIT is used. Also if material is considered dangerous or critical, it is stocked.
  • A Material number is assigned to stock material. Material number is usually not assigned to non-stocked material (Material group or product category is usually used to buy these items).

Goods vs Services

Services spend forms the major parts of indirect spend of an organization. However, there are usually no strong procurement processes around services. This is primarily due to the complexity involved in dealing with Services. Services spend is done primarily thru maverick buying. Most organizations are looking at how to control the services buying and bring discipline to the complex process of services buying.


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