Explain, with examples, the three different ways one can categorise procurement spend: direct vs indirect, capital expenditure vs operational expenditure and stock vs non-stock items. (25 points)

Explain, with examples, the three different ways one can categorise procurement spend: direct vs indirect, capital expenditure vs operational expenditure and stock vs non-stock items. (25 points)

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Answer: The knowledge to remember:

Essay Plan :

Remember to include examples for each of the six categories of spend. This is specifically asked for in the question so it’s important to include as many examples as you can. To do this you could take an example organisation such as a cake manufacturer and explain which of their purchases would fall into each category and why.

Introduction C explain why procurement categorises spend

-Direct C these are items that are incorporated into the final goods (the cakes) so would include raw materials such as flour, eggs, sugar etc

-Indirect C these are items that the company needs, but don’t go into the end product. For example, cleaning products and MRO supplies for the machines

-Capital Expenditure- these are large one-off purchases, such as buying a new piece of equipment such as a giant oven to cook the cakes.

-Operational Expenditure C these are purchases that are required to ensure the business can function day-to-day. They may include PPE for the workers in the factory and cleaning equipment

-Stock items C these are items procured in advance and held in inventory until they are needed. In a cake manufacturing factory this could be PPE for staff such as hairnets and gloves. The organisation will buy these in bulk and keep them in a stock cupboard, using these as and when they are required

-Non- stock items – items that are not stored and used right away. An example would be eggs- these will need to be put directly into the cakes as they would go off if bought in advance.

Conclusion C the categories are not mutually exclusive C an item can be direct and operational, or indirect and stock. Different companies may use different systems to classify items of spend.

Example Introduction and Conclusion Introduction

Procurement categorizes spend to efficiently manage resources and make strategic decisions. Three primary ways of categorizing procurement spend include distinguishing between direct and indirect spend, classifying expenditures as capital or operational, and categorizing items as stock or non- stock. These distinctions aid organizations in optimizing their procurement strategies for better resource allocation.

Conclusion:

In conclusion, categorizing procurement spend into direct vs. indirect, capital vs. operational, and stock vs. non-stock items is essential for strategic resource management. While these categories provide a structured framework, they are not mutually exclusive, as an item can fall into multiple categories. For example, an item may be both direct and operational or indirect and stock. The flexibility of these categories allows organizations to tailor their procurement strategies based on their specific needs, ensuring efficient resource allocation and effective supply chain management. Different companies may adopt varying categorization approaches depending on their industry, size, and operational requirements.

Tutor notes:

-Because you’ve got 6 categories of spend to talk about you’re only going to need 3-4 sentences for each. Providing you’ve said the category, explained what it is and given one example, you’ll absolutely fly through this type of question

-You could also mention that it is useful to use categories of spend as this helps with budgeting. Different categories may also have different processes to follow for procuring the item (this could form part of your introduction or conclusion).

This subject is LO 1.3.2 it’s quite spread out in the text book but the main info is on p.49

Note- different companies/ industries classify items of spend differently. Particularly packaging and salaries. Some say they’re direct costs and some say they’re indirect costs. Honestly, it’s a hotly debated subject and I don’t think there is a right or wrong. I’d just avoid those two examples if you can and stick to ones that aren’t as contentious like eggs and PPE.