Indirect and Direct Procurement: What’s the Difference?

What is the Difference Between Indirect and Direct Procurement?

Procurement’s importance as a key business process has increased significantly in recent times. Originally, procurement was started as a means to integrate purchasing into supply chain management during a time when most large companies were struggling to manage their operational costs.

In fact, the exact date of procurement’s ascendance can be dated to October 1983 when Peter Kraljic identified that purchasing must be a strategic implementation in an organization, rather than a simple tactic in their supply chain management process. Prior to this change, organizations had only considered procurement to be a sub-discipline of the supply management process.

Over time, the result is the development of two overlapping disciplines within procurement: indirect and direct procurement.

Direct Procurement

Direct procurement is the act of acquiring raw materials and goods for production. These purchases are generally done in large quantities, acquired from a pool of suppliers at the best possible cost, quality and reliability. These purchases are made frequently and are necessary for key business practices, such as a baker acquiring flour to produce bread.

If direct procurement stops functioning or encounters problems, companies are no longer able to manufacture their product and create revenue.

Historically, direct procurement stems from manufacturing.

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Indirect Procurement

Indirect procurement is the act of purchasing services or supplies required to keep the day to day business alive. One way of classifying indirect procurement is that it does not add to a business’s bottom line. This includes things such as repairing equipment, buying office supplies or acquiring services.

Without indirect procurement functions, businesses wouldn’t be able to operate in an effective fashion. Typically, indirect procurement includes somewhere from 15-27% of a company’s total revenue.

Regardless of whether the purchase is an example of direct or indirect procurement, the process of procuring an item to processing the final invoice is called Procure to Pay.

The Procure to Pay Cycle is a system that breaks down the entire procurement cycle from identifying suppliers to the final invoice payment. The term was coined by software developers as a way to identify the procedure which needed to be optimized. E-procurement software, such as Procurify can digitalize your procure to pay process, saving valuable time and money and making it easy for your organization and employees to obtain the goods and services needed to operate.

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12 responses to “Indirect and Direct Procurement: What’s the Difference?

    1. Thanks for notifying us, Shaunna. About the link you shared — the writer of the LinkedIn post plagiarized this blog post. The post you linked to was written in 2016 — we wrote ours in 2013.

      Most of the content on this blog is written by industry experts — some of whom work at Procurify. As you know, we’ve been working with professionals in Finance, Procurement, Purchasing, Supply Chain and Operations across the world. Our knowledge is essentially based on our correspondence with them, along with the lessons and insights we glean in alleviating their pain points.

      Is there something you would like us to write on, or research more thoroughly for you? We can always help.

  1. I fully understand the above description but in most software applications, the purchase order can be classified as being either direct charge or for a stocked item. A direct charge is immediately debited to the user’s budget upon receipt whereas a stocked item becomes part of the company’s assets.

    In my opinion, direct charge orders should be banished in total. A user can by any item from any supplier at any price, in other words: it is entirely open ended. All items should at least be coded and classified. If you don’t want the item as a stocked item, make the planning parameters L4L.

    Several instances have occurred where sub-standard or even safety-critical items were bought like this with the potential for causing damage, injury or even death. The entire configuration and deployment of the item is lost as the knowledge now resides with the end-user. It will be much better to have full life-cycle visibility as end-users often tend to rotate or leave, taking the knowledge with them.

    Petty cash falls into the same category: as long as I have a valid receipt and a signature, the purchase is valid. Decisions are often taken to buy with petty cash “because it is below the cost of an order”; such decisions are irrational.

    Much can be said to integrate the purchase of spare parts into the formal system, making the traceability of items so much easier and in the end: safer.

    1. Hey Jan,

      Thank you for the insightful comment.

      I especially agree with your last point on integrating the tracking of spare parts with the formal system. The focus for organizations should be to setup an internal system or process that can track all company spending so updated financial data is there when decisions need to be made. The challenge is balancing ease of use (reducing manual processes) with robust financial tracking.

  2. Hi Kenneth,we are a company producing water treatment equipment. whether the scope of install those equipment should be direct material sourcing or indirect sourcing?

    1. Hey Felix,

      Because your company is involved with producing water treatment equipment then anything directly related to the production of that equipment: your raw goods (plastics, rubbers, basically any parts) and any services you used to manufacture the equipment should be counted as direct purchasing.

      It’s a little bit confusing but the installation of your equipment should be treated as indirect spending because the install itself is not directly tied to your cost of goods.

  3. Hello Kenneth,

    I am surprised to find a link to online casinos within this otherwise very professional and interesting content:
    Direct Procurement
    Direct procurement is the act of acquiring raw materials and goods for production. These purchases are casino online generally done in large quantities
    Just thought I’d point it out in case you were hacked and not aware of it but that does seem strange..