Purchasing Chemicals: Direct, Indirect, or Hybrid
Read Time: 4-minutes
Having worked in both distribution and manufacturing, there are of course two primary ways materials get to end users – directly or indirectly.
Today I wanted to go into a little more detail on the pros and cons of each, and how a hybrid approach gives you the best of both worlds. By the end you’ll hopefully know which approach can bring you the most value and stability in your supply chain.
But firstly, why is it even important, and isn’t it obvious?
For anyone purchasing chemical raw materials or ingredients, we are always looking for the most cost-effective, reliable, and efficient method. We gain things going direct to source but lose things too.
The mistake comes from not knowing what we are giving up in favour of a direct or indirect route, the impacts not only just to cost, but also to control, and flexibility.
Key takeaways
What You Gain with Direct
What You Gain with Indirect
What You Lose with Each
Finding Balance with Hybrid
"Don’t put all your eggs in one basket"
– Proverb
What You Gain With Direct
Not to completely state the obvious, but direct sourcing means working directly with manufacturers, bypassing any intermediaries.
It provides clear advantages:
Cost Efficiency: by removing the middlemen, you often (but not always) reduce the overall cost of your materials, as you’re not paying any additional mark-up.
Transparency and Control: direct communication allows for a clearer view of quality standards, production timelines, and delivery, which can be valuable in managing important materials or strict timelines. It also helps with any product development/usage issues, and handling them quickly.
Stronger Relationships: building a direct relationship with a supplier can lead to priority treatment in times of scarcity or when special requests arise.
Direct sourcing works best if your team has the time, resources, and expertise to manage supplier relationships, quality control, and logistics independently. However, it does mean bearing all the responsibility if issues arise.
What You Gain with Indirect
At the risk of stating the obvious (again), indirect sourcing means working through distributors, agents, third parties, rather than dealing directly with suppliers. It to offers its own unique benefits:
Simplified Management: intermediaries take on much of the communication, quality checks, and logistics, reducing your operational burden.
Flexibility and Range: distributors often have multiple suppliers, giving you access to a wider range of products and enabling quicker switches if one supplier faces delays or shortages. They are often more agile, and less rigid with MOQs and packaging etc.
Risk Mitigation: if a supplier has an issue, intermediaries often have contingency plans in place, helping keep your supply chain intact.
Indirect sourcing is especially helpful for businesses without dedicated procurement teams or those focused on maintaining flexibility. However, this approach often involves higher purchase costs due to distributor fees, and you may lose some visibility into the production process.
What You Lose with Each
Choosing only one approach has its downsides:
Direct Only: While you save on costs, you assume more responsibility for logistics, quality control, and communication. If the supplier has a delay, you’ll bear the full impact. You are also generally losing access to more relevant and local market information, perhaps there is less flexibility in order sizes, lead-times etc.
Indirect Only: You may benefit from flexibility and reduced management, but you lose some control, especially if you’re sourcing high-stakes materials. Distributor fees may add up, affecting your budget in the long run.
Finding Balance with Hybrid
A hybrid approach (or multi sourcing) offers flexibility by combining direct and indirect sourcing. You could source a percentage directly, and the rest indirectly. That way you have access to just in time deliveries indirectly if you have issues from a direct source. Or you could source critical materials directly to ensure quality and control, while using intermediaries for less essential supplies, giving you flexibility without sacrificing control.
A hybrid approach can be particularly effective for businesses with varied sourcing needs, allowing you to build strong relationships with key suppliers while retaining the flexibility of a distributor’s network. This strategy can help balance cost savings with operational resilience, offering a middle ground between the strengths of direct and indirect methods.
——
So, there you have it.
Your choice between direct, indirect, or hybrid sourcing is a strategic decision that impacts your business’s cost structure, flexibility, and resilience.
Take the time to evaluate each approach based on your specific needs and capabilities. By aligning your strategy with your business goals, you’ll optimise your supply chain and gain a stronger foundation for future growth.
——
Thanks for reading, and see you next week.
Want to subscribe - click here.
——
Whenever you’re ready, there are 3 ways I can help you:
Take the CLEAN Scorecard - test your supply chain. In less than 3-minutes you’ll receive a free personalised report detailing areas where you are strong or weak, and ways you can improve.
Book a 15-minute introductory call to see if we would be right to work together.
Want a taste of the CLEAN Framework? Take a look at this example company dashboard.
