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Direct and indirect procurement play different roles, but don’t work without each other. 

Procurement, or the method of purchasing goods, services, or other works from an external source, has played an increasingly important role within organizations. While what is acquired by a procurement team may vary depending on the organization, successful direct and indirect procurement management is essential to ensure businesses run smoothly. 

Below, we define direct and indirect procurement, provide examples, and explore their differences. 

Direct procurement, sometimes called direct sourcing or direct spend management, is the acquisition of raw materials, parts, or components used to create a product. These procurement purchases are usually made in large quantities and often purchased from reliable suppliers at the best possible cost and quality. 

Direct procurement typically involves manufacturing operations that turn raw materials into physical products for customers. As a result, these purchases are made often and are required for essential business functions.

Direct procurement is comprised of a series of related processes and teams spanning the entire product lifecycle. It includes internal and external stakeholders, such as logistics, procurement, engineering, accounts payable, and the key suppliers and vendors that make up the supply chain.

For manufacturers, the procurement process usually starts with the new product introduction (NPI) process. NPI involves product design, sourcing, quality, and launch and continues through production to the product’s end-of-life.

If direct procurement ceases operations or faces supply chain hurdles, companies can no longer manufacture a product and earn money. 

Direct procurement includes the purchase of machinery needed to manufacture a product, as well as any raw materials used. 

For example, a bakery may need to acquire the ingredients for bread, like flour, eggs, and yeast, but direct procurement also includes the purchase of ovens, baking trays, and refrigerators. 

Indirect procurement is the infrastructure of a business. It includes paying for supplies, services, and materials required to keep a business running on a daily basis. While indirect procurement purchases aren’t often reflected in a business’s net profit, without indirect procurement functions, a company wouldn’t be productive.

Direct procurement typically includes around 15-27% of a company’s total revenue. Therefore, a company’s key challenge is ensuring that indirect spend is being appropriately tracked and the procurement team is acquiring the best deals. This may include ensuring employees have access to pre-negotiated catalogs of goods and services from which they can shop on an as-needed basis.

Indirect procurement includes infrastructure costs such as staffing, office supplies, repairing and maintaining equipment, employee travel, or other related services. 

For a bakery, indirect procurement would include rent, utilities, oven repair, receipt paper, employee salaries, and advertising costs, for example.   

There are a few important distinctions between direct and indirect procurement. 

For example, direct procurement is the spend associated with propelling company profit and performance. While direct spend may boost a business’s bottom line, indirect spend is what’s keeping the business operating to its full potential on a daily basis. 

While they are both essential, there are key differences between direct and indirect procurement that may affect procurement strategy. 

Direct procurement teams should develop long-term, collaborative relationships with suppliers to drive quality and improve efficiencies over time.

Because indirect procurement teams are mainly concerned with managing company spending, they tend to have more of a transactional supplier relationship compared to direct procurement teams. Indirect procurement teams are more focused on the management and reduction of expenses.

Additionally, effective inventory management is key to direct procurement, so delays in the product are avoided. This is less critical to the indirect procurement process.

However, vendor management and supplier relationship management are still vital components of indirect procurement. For example, companies with multiple locations can often negotiate better deals when they centralize relationships with their vendors, consequently increasing cost savings.

Similarly, software companies without much direct spend can also decrease their overhead costs by building supplier relationships that boost indirect procurement activities.

Inventory management is essential to direct procurement to ensure customers receive their orders on time. A supplier running out of stock can trigger issues that cripple the entire supply chain.

On the other hand, stock management is typically less of a priority regarding indirect procurement. This does depend, however, on the type of business and its needs.

Because direct procurement significantly impacts a company’s revenue, direct spending is usually managed by a centralized procurement team.

This is another difference between direct and indirect procurement, as companies don’t often use the same method for indirect spending. While just as important, it is often decentralized with different spend categories and management assigned to various stakeholders throughout departments.

The direct procurement process is usually steady and trackable. Therefore, the essential inputs required to keep operations running must be planned and budgeted well in advance to avoid supply chain disruptions. Procurement professionals typically organize delivery schedules with key suppliers. 

In comparison, it can be difficult to calculate exact figures for indirect supplies and estimate demand for things like office supplies. Therefore, there’s less planning or budgeting for indirect procurement. 

As a result, indirect supplies are typically procured spontaneously when needed, as opposed to direct supplies, which are a scheduled part of the procurement process. 

Below are a few examples of direct and indirect procurement. 

Image Credit: Motortion Films / Shutterstock.com

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