It is NOT Direct or Indirect — It is Strategic and Complexity!

Now that we’ve set the record straight on sourcing, it’s not a suite, it’s just sourcing; and optimization, it’s not optimization, it’s strategic sourcing; it’s time to set the record straight on another rampant misconception perpetuated by vendors who make their living off of the ignorance they perpetuate.

It is not direct or indirect — it is strategy and complexity.

The right way to source a category has absolutely nothing to do with whether it is a direct category for your organization or an indirect category for your business. Nor does it have anything to do with whether or not it is a category regularly sourced by your GPO or whether or not the GPO has it under contract.

First of all, as we elucidated in our most recent paper on “Complex Sourcing: Are You Ready“, even the categories that were traditionally seen as the simplest indirect categories are sometimes actually among the most complex “direct” categories that the organization possesses!

Secondly, what is indirect for your organization is direct for another organization, and a supplier in particular. Calling it indirect only masks the fact that, at some point in the supply chain it is a complex direct category and if your supplier, or GPO, is not approaching it correctly, a significant amount of money is being left on the table.

While there are some that would very much like to forget that before the introduction of e-Negotiation (e-RFx and e-Auctions), a number of “indirect” categories used to cost organizations millions — such as tires in automotive, lights in aviation and printer ink in back offices everywhere — this is not the right thing to do. We have to remember that these organizations never understood how much these “secondary” categories were really costing them and that, sometimes, 100% profit margins were the norm, because they often did not have the ability to go out to market like we do today.

Thirdly, while a product organization might see services as indirect as such a category would be labelled as non-core, and, similarly, while a service (or financial) organization might see a product category as indirect as it too would be labelled non-core, if such service, or product, is essential for the organization to deliver the product, or services, the organization profits on to the end consumer, how can such a service, or product, really be non-core?

For example, if successfully selling that next generation cellphone requires augmenting the supplier’s design team with a new design team that can enhance usability above the competitor’s product without sacrificing a low-price point or quality, that is a critical service and should not be treated as a secondary outsourced indirect category. Similarly, if delivery of your big data analytics services requires a specific high-end laptop configuration that can not be easily met by all providers, and a sub-par configuration would result in delays or service degradations, this is not a category that can be thrown over the wall to a GPO either.

In other words, direct or indirect has no correlation to the complexity of a category or its strategic importance to the business and, thus, should not be used to determine the appropriate sourcing strategy. The right way to initially classify a category is to use a basic measure that that captures its strategic importance and its complexity and any category with a measure that exceeds a certain threshold must be strategically sourced. The rest can be sourced using simple spot-buys or other traditional methods provided that they are not too complex, or too strategic in someone’s view, for these traditional methods.