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Direct vs Indirect Procurement: What’s the Difference?

In recent years, procurement has become a key business function in many organizations. In this blog, we explain the difference between direct and indirect procurement.

In recent years, procurement has become a key business function in many organizations. Without procurement, many organizations would not be able to operate. But what exactly is procurement? Procurement involves making sure that all goods and services required for business purposes are properly acquired. This could be anything from raw materials to office supplies to advertising. 

Over time, two overlapping disciplines have emerged within procurement: indirect and direct procurement.

In this blog, we explain the difference between direct and indirect procurement. But first, let’s clarify the roles that direct procurement and indirect procurement play within an organization.

What is direct procurement?

Direct procurement involves acquiring the raw materials, parts, or components that are used to create a product. These are the materials that often end up in the final product for customers. These purchases are generally made 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.

Direct procurement is often related to manufacturing operations where raw materials are turned into physical products.

What is indirect procurement?

Indirect procurement involves purchasing goods and services, supplies, and materials that are  required to keep the day-to-day business running. One way of classifying indirect procurement is that it doesn’t add to a business’s bottom line. Indirect procurement may include purchases such as repairing equipment, buying office supplies, maintenance, travel, or other services.

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

Indirect procurement strategies

Managing indirect procurement can be challenging. It requires careful planning and monitoring. Here are some strategies to help you manage indirect procurement.

1. Track spending

Often times, indirect procurement spending isn’t tracked the same way as as direct procurement. Individuals or departments are often given a budget to work with and can purchase what they want when they need it. However, it’s a good idea to keep an eye on employee spending so finance and accounting teams know exactly what teams are spending money on.

2. Be strategic with your sourcing

Assess your suppliers and entire supply chain and look for opportunities for savings. Build relationships and collaborate with your vendors to rework your supply base if needed so everyone can get the benefits of the savings.

3. Use technology to stay informed

There are many technologies and tools that organizations can use to gain insight and visibility into their procurement process and operations. These technologies include data analytics software, automation technology, and market research tools.

4. Build relationships internally

There are often many departments involved in indirect procurement to some extent, whether it’s purchasing office supplies, setting up advertising budgets, or reconciling invoices. It’s important that everyone is on the same page when it comes to company spending and indirect procurement so you can better predict future needs and shifts.  

Indirect procurement categories

Did you know that indirect procurement categories can make up about 40 percent of a company’s total spend? It’s also harder to draw a direct connection between indirect spending and the company’s profitability. 

These are some of the most common indirect procurement categories:

  • Human resources (ie. training, hiring, professional development, etc.)
  • Marketing
  • Utilities (ie. water, electricity, gas, and rent)
  • Office supplies (ie. office furniture, stationery, cleaning supplies, etc.)
  • Travel
  • IT/Technology purchases (ie. computer hardware and software)

Direct vs indirect procurement: what are the differences between the two?

Direct procurement is spending on services, goods, and materials that drive profit, performance, and competitive advantage. Whereas indirect procurement is expenditure on the maintenance, goods, and services needed for day-to-day operations, which do not directly contribute to a company’s bottom line.

While both of these functions ultimately follow the procure-to-pay cycle (see below), there are a handful of key differences between direct and indirect procurement that affect how they are managed internally.

Managing supplier relationships

To drive quality and improve efficiencies over time, direct procurement teams tend to foster long-term, collaborative relationships with their suppliers. Hence, more time is spent on developing and managing supplier relationships. 

Indirect procurement teams are predominantly focused on managing company spending, hence they tend to have more of a transactional relationship with suppliers than their direct procurement counterparts. Thus, their focus is more on managing and reducing expenditure.

It’s important to note that vendor management can still benefit companies with indirect procurement requirements. Hotels and companies with multiple locations can often negotiate better deals and discounts when they centralize relationships with their vendors, thus reducing their overall expenditure.

Similarly, software companies with little to no need for direct procurement (e.g. purchasing of raw materials, transportation costs, etc) can also reduce their overhead costs with strategic vendor management of suppliers that support indirect procurement activities.

Managing inventory

To avoid delays, effective inventory management is critical to direct procurement. If a supplier runs out of stock, it can cause problems for the entire supply chain (and have devastating consequences for a company’s bottom line).

Typically, inventory management is less of a priority for indirect procurement teams. However, this will always depend on the nature and needs of the company.

Organizational structure

Because direct procurement has a “make or break” impact on a company’s revenue, it’s typical for direct spending to be managed by a dedicated, centralized procurement team.

Companies don’t typically take the same approach for indirect spending, which tends to be a decentralized function haphazardly delegated to a variety of stakeholders across multiple departments.

Examples of direct procurement vs indirect procurement

Here are some real-world examples of direct procurement and indirect procurement.

Direct procurement:

  • Raw materials
  • Machinery and manufacturing equipment and parts
  • Ingredients for food products
  • Subcontracted labor

Indirect procurement:

  • Maintenance and repairs to manufacturing or office equipment
  • Utilities (gas, electric, water)
  • Office furniture, stationery, and other office supplies
  • Employee management and development costs (training sessions, human resources costs)
  • Consultants and professional services (speakers, advisers, coaches, consultants)
  • Computer hardware and software 
  • Workplace and facilities management (toilet paper, cleaning supplies)
  • Marketing costs

This isn’t an exhaustive list. As always, a company’s business model and the services and products it sells will determine its involvement with direct and indirect procurement. 

Direct and indirect procurement, and spend management

Direct and indirect procurement are both part of an organization’s overall spend management strategy. Both of these types of procurement impact the organization’s financials in different ways.  Direct procurement has a direct impact on an organization’s bottom line whereas indirect procurement doesn’t. Therefore, it’s important to track all company spending, whether it’s direct or indirect procurement. 

Spend management software like Procurify can digitize 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. 

Editor's note
Original publish date: 25 Sept 2013
Original author: Kenneth Loi

We've since updated and republished this blog post with new content.

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15 responses to “Direct vs Indirect Procurement: What’s the Difference?

  1. Seems like you both said almost identical things, curious as to where you got your information so that I can possibly read more details?

    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.

  2. 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.

  3. 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.

  4. 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..