{"id":3494,"date":"2021-02-23T16:21:06","date_gmt":"2021-02-23T21:21:06","guid":{"rendered":"https:\/\/www.certitrek.com\/nlpa\/2016\/02\/23\/direct-procurement-examples\/"},"modified":"2023-11-30T11:09:01","modified_gmt":"2023-11-30T15:09:01","slug":"direct-procurement-examples","status":"publish","type":"post","link":"https:\/\/www.certitrek.com\/nlpa\/blog\/direct-procurement-examples\/","title":{"rendered":"Direct Procurement Examples"},"content":{"rendered":"

Direct procurement refers to the process of purchasing goods and services directly from suppliers, without the use of intermediaries.<\/p>\n

In the article, ‘Direct Procurement: Different Types Defined<\/a>‘, I contrasted \u201cmarket-driven direct procurement\u201d with \u201ccost-driven direct procurement.\u201d\u00a0 Allow me to give examples of each.<\/p>\n

Let\u2019s take the example of a bottle of ketchup.\u00a0 A bottle of ketchup lists eight ingredients.<\/p>\n

Each of those ingredients is likely subject to its own market forces.\u00a0 And each major ketchup manufacturer is part of a huge food industry conglomerate that purchases many ingredients for many different product lines.\u00a0 So it is likely that each has different agreements in place with suppliers of those ingredients and pays different prices.<\/p>\n

But the ketchup market is a mature one.\u00a0 The consumer expects to pay a certain price for a certain size bottle of ketchup.\u00a0 If one manufacturer charged $4.99 for a 16-ounce bottle of ketchup and another charged $1.99, which one would get most of the business?<\/p>\n

High fructose corn syrup is an ingredient in ketchup.\u00a0 If one manufacturer paid $0.50 more for its high fructose corn syrup than the other manufacturer, that doesn\u2019t mean that the consumer would be willing to pay $0.50 more per bottle for that ketchup.\u00a0 The manufacturer with the higher cost of ingredients would have smaller profits.<\/p>\n

The ketchup manufacturer\u2019s purchase of high fructose corn syrup would be an example of market-driven direct procurement.<\/p>\n

In contrast, let\u2019s consider painting services.\u00a0 Generally, when a consumer wants their home painted, they will get quotes from one or more painting contractors.\u00a0 Painting contractors are often small businesses.\u00a0 When their labor is booked, their supply is finite.\u00a0 They may turn down jobs, quote a start date weeks into the future, or even charge high rates so that their limited resources are reserved for only the most profitable jobs.<\/p>\n

When a painting contractor quotes a job, they\u2019ll estimate the amount of material and number of labor hours and add a healthy profit on top of those costs.\u00a0 There isn\u2019t much of a standard-size paint job.\u00a0 Pricing is generally private and different for each job.\u00a0 The price depends on what their costs are.\u00a0 The purchase of the materials for a paint job would be an example of cost-driven direct procurement.<\/p>\n

If the paint for a job costs $18.99 and it would require three hours of labor at $45 an hour, the cost to the consumer would be $153.99.\u00a0 If the price for paint doubled and the painting contractor had to quote a near-identical job, the contractor would quote $172.98.\u00a0 The inflated cost of paint is passed onto the consumer, and profits are pretty much unaffected.<\/p>\n

Though both examples are examples of direct procurement, hopefully, it is now clear that not all direct procurement activities are equally critical. \u00a0These examples help illustrate the different factors that influence direct procurement and how they can impact the final cost and profit margins of a product or service.<\/p>\n

Become a member of one of the world\u2019s largest procurement associations today.<\/a><\/p>\n

Recommended Reading<\/p>\n