All purchases in the organization are divided into Direct (Commodity or Production) and Indirect. The dedicated procurement function primarily covers the perimeter of Direct spend, and not all organizations have a dedicated Indirect procurement function.
A procurement department is considered developed if it manages a perimeter of 70-80% of total spend - these are main purchases with strategic suppliers. Cases where 100% of spend actually passes through the procurement department is extremely rare. More often, small or specific purchases from a large number of suppliers are delegated to employees from other departments (production, IT, accounting, ...). Such purchases are also called “purchase tails”, but they can form 20-30% of total spend.
With this scheme of work with these purchases:
- the price is at least 10-15% higher, since the task of saving is not a priority and the employees are not qualified as buyers (see article);
- resources are diverted to non-core tasks;
- a large volume of purchases is made on a prepaid basis or in cash;
- there is an uncontrolled increase in the number of suppliers, and they are often duplicated;
- the volume of administration of suppliers, contracts and closing documents increases;
- abuses are inevitable.