Okay, welcome to Week 4, this is going to talk about the differences between direct and indirect materials and services. This is very important throughout the course, because because we'll give various examples. And while there are similarities between the two, there are also some major differences between the two. How you basically procure these type of items as well as work with your stakeholders. So let's get started with a question like we usually do. What's the difference between direct materials and indirect materials and services? And the second part is, can you give me some examples of each. Give you about 30 seconds to come back to me, and we'll go ahead and give you some examples. Okay, so let's first talk about direct materials, right? So these can be raw materials in packaging, semi-finished goods and finished goods. Try to give you some examples of that so you better understand. So let's go back to our toothpaste example. So raw materials would be things such as chemicals and flavors and abrasives. Packaging, we talked a little bit about, giving an example. Those would be the cartons, the tubes, the caps, probably the corrugated box that goes in there. Occasionally, people have semi-finished products, where they go to the outside, they buy a partially finished product, bring it in and they finalize it. One example, which you may not even think about, is that as you might recall during the last year or so, there's been a lot of tariffs on Chinese goods. So the Chinese people, to get around it, would go ahead and make a semi-finished product, ship it to. And that'll be a lower duty going in, or no duty going into another country, let's say Vietnam. And then they would turn around and finish and repackage it and send it to the United States to try to get out of the duty. Now that's kind of an unethical type of problem, but it does give you example. And other companies have other type of finished products, components that they buy. That they're better made on the outside and brought in. And of course finished goods, you say well, why would you do that? Well, sometimes you don't have the capacity in your plant, maybe got a new product introduction. You don't want to invest in plant and equipment. So you say let's try it with a contract manufacturer on the outside, see how it goes. And then if it goes well, we'll go ahead and build the manufacturing capacity in our plant. So these are all direct materials. They're generally in the cost of goods sold, all these three items. So that does affect the profitability as you reduce the cost of goods sold. It goes directly to the bottom line or can be used in other areas of the business. Indirect materials are basically anything that's not direct, right? So we've mentioned a couple of things here, maintenance, repair and operating items, very common in a manufacturing plant. Production support items, things like palettes and stretch wrap. You have services, you might have cafeteria services in a manufacturing plant. If you're in the business of building plants, you'd have capital equipment. It doesn't it doesn't go directly into the product. Many logistics and third-party logistics providers. At one time, I was the vice president of North and South American logistics for Mars. We bought all the transportation and all the warehousing in that particular job. One that's a huge one, particularly in consumer products, is advertising and promotion. So it's basically anything that doesn't go in the products. What makes indirects a little bit different is that generally, that is in somebody else's budget, and we'll come back and talk about that a little bit later. So let's take an example of a consumer products company. We'll just take a simple example here. So let's say in this particular consumer products company, they have about $6.4 billion. I can't tell you their name, but supposedly maybe the first initial's C and the last one's P, but I can't tell you who it is. So let's take a look. So here is the expenditures, the total expenditures for the company. And this doesn't include salaries or benefits or taxes. Basically, you can see here that the raw material and packaging and contract manufacturing is half. That surprises a lot of people when you show a chart like this. It may be different if you're in a bank or you're in another type of service business. But the indirects are just as big as the directs. So from 2004 to 2008, when I was a chief procurement officer for Colgate, we were doing pretty well on the direct side, and there were opportunities we could do better. But we really focused on the indirect spend, because we really only were procuring these things professionally about 15%. So we went after those, and between the directs and indirects during that time frame, we dropped about $1 billion to the business. So it's a big opportunity. So let's take a look at this indirect spend, which is what's in it, right? Not unusual in a consumer products company that marketing and sales are the largest. So in this big bucket here, you can see here almost $1 billion out of the $3.2 billion. You can see that that would be advertising and promotion and printed materials, anything to do. Consulting Services would be in marketing and sales. One you may not have thought about which is always big. And many times it's not a direct item, because you have to spread it across all the different things you make, is logistics. So you can see almost $700 million, so that's another large area. And then you can go around your circle and kind of let your eyes wander so to speak, but one would be MRO facilities is always big to support. So as you can see here, there's quite a few indirect opportunities here. And we're going to talk more about how we go after these opportunities, starting in the strategic sourcing and later on in supply or management. But I wanted you to understand the difference between directs and indirects. So in most companies, directs are the most common. This is where really procurement kind of sunk their teeth into procurement, where they were supporting manufacturing plants. And so this has been going for decades and years, very common to have procurement department those raw materials, or packaging or components or whatever you're doing. The indirects is a little more modern. We actually started them back in '85 when I was in Mars, but even in Colgate, we hadn't really scratched the surface, and this was 2004. So some companies are not as far along as others there. But indirects do have their own challenges, and the biggest one, as I said earlier, is basically that it really requires top management. Why, because those stakeholders that we're going to talk about in Week 5, they have their own budget. And sometimes they're not as sensitive to reducing costs. They're more interested in selling or marketing the products because that's what their job is. So we'll talk about how you engage those stakeholders next week. And the most important thing for directs, but even more important for indirects, is you've gotta have spend analytics. You gotta know where the money is being spent before you go talk to your stakeholders. So that's it for Week 4, and we'll look forward to seeing you next week.
