Written by Marijn Overvest | Reviewed by Sjoed Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Direct and Indirect Procurement: Know the Difference

There are two fundamental approaches that organizations use to secure the resources and materials necessary for their operations: direct and indirect procurement. 

In this article, we’ll dive into the specifics of these procurement strategies, shedding light on what they entail and why they are vital for businesses that rely on delivering products and services to end customers.

What is Direct Procurement?

Direct procurement, in simple terms, is all about getting the stuff you absolutely can’t do without in your main business operations. We’re talking about the nitty-gritty materials and services that not only keep your daily activities running but also shape what you eventually offer to your customers. It’s like the essential building blocks of your organization.

Think of it this way: direct procurement covers everything from the basic raw materials needed for manufacturing your product to the crucial components that go into assembling it. It even includes those specialized services that directly contribute to creating the final product you provide to your customers. So, it’s pretty much everything that’s at the heart of what your business does.

Examples of Direct Procurement

Let’s discuss some real-life scenarios of direct procurement:

• A cook buying fresh ingredients to whip up those mouthwatering dishes in a small restaurant
• A tech company manufacturing the latest smartphone, directly procuring components like processors, screens, batteries, and casings
• A furniture workshop ordering wood, upholstery, and hardware to create stylish home pieces

Note: direct procurement is often a star player in industries where raw materials are transformed into tangible products.

What is Indirect Procurement?

Indirect procurement, sometimes referred to as indirect spend, focuses on obtaining items and services that play a supporting role in a business’s day-to-day operations. These indirect supplies include office supplies, stationery, decorations, and more.

Although indirect supplies certainly hold their importance within your organization, they don’t have a direct impact on the final products or services that reach your customers. Instead, their role is more like a behind-the-scenes support system, ensuring that the process of transforming raw materials into finished goods operates seamlessly.

Examples of Indirect Procurement

Here are some examples of indirect procurement items.

• Software licenses for tools like Microsoft Office or Adobe Creative Cloud
• Employee training programs or online courses such as the Sustainable Procurement Course and Strategic Procurement Leadership Program 
• Flights, hotels, and transportation for business travels
• Running ad campaigns or hiring marketing agencies for promotion

Note: Indirect procurement is especially prominent in digital fields where services and intangible goods are prevalent, rather than physical, tangible products.

Here are the other areas where you can observe the contrast between indirect and direct procurement.

1. In Customer-Vendor Relationships

• Direct Procurement

Direct procurement is all about getting the essential stuff that forms the foundation of what your business offers to customers. In simple terms, without these supplies, nothing can function. So, it’s crucial to establish strong, long-lasting relationships with your suppliers to ensure a reliable supply chain. This involves managing vendors, setting up contracts, and determining minimum order quantities. 

These relationships are like a safety net, providing security for both you and your suppliers. Creating a strategic sourcing plan can help improve these buyer-vendor relationships.

• Indirect Procurement

Now, let’s talk about indirect procurement. This deals with supplies that, while helpful for your business operations, aren’t at the core of what you do. As a result, indirect procurement doesn’t get as much attention as direct procurement. With indirect procurement, you can have a shortlist of vendors and use their services as needed. If they don’t meet your expectations, you have plenty of other options and can even delay acquiring these supplies.

Direct procurement, being critical, leads to deeper, more dependable vendor relationships. In contrast, managing indirect vendors often requires minimal effort to keep their services available for the long term. This is because indirect supplies are numerous and often relatively insignificant, making it not worthwhile to enter into contracts and agreements.

2. In Spend Management

• Direct Procurement

Businesses usually maintain a well-defined budget for direct procurement. It’s relatively easy to keep tabs on expenses for raw materials because these purchases tend to be repetitive and come from the same suppliers consistently. This predictability allows businesses to set accurate budgets for these essential materials. Plus, understanding their direct procurement spending helps businesses plan realistic profit goals since they need to ensure their production expenses align with their sales revenue.

• Indirect Procurement

In contrast, businesses may not give as much attention to tracking their budget for indirect procurement. Monitoring spending on everyday items can be trickier compared to bulk or regular purchases. Furthermore, many indirect procurement transactions are impromptu. Various individuals within the company, such as employees or department heads, may make these purchases as the need arises, often involving minor or low-cost items. 

Instead of establishing a strict budget and closely monitoring it, businesses often create a general budget for indirect procurement and keep a loose track of their spending on these miscellaneous materials.

3. In Inventory Management

• Direct Procurement

When it comes to indirect procurement materials, you typically don’t require an elaborate inventory management plan. Since these items support your everyday business operations rather than being at the core of your production, it’s often unnecessary to create a comprehensive inventory management strategy to monitor their usage. 

For instance, instead of setting up a formal system to track your office supply inventory, you can assign department managers the responsibility of overseeing and ordering supplies needed for their respective departments.

• Indirect Procurement

On the flip side, inventory management plays a more critical role in direct procurement. Your direct procurement deals with the raw materials essential for producing your products and services, which you then offer to your customers. Therefore, closely monitoring your direct procurement inventory is crucial to ensure you always have the necessary materials for production. 

Many businesses develop strategic plans to manage their direct procurement inventory effectively. These plans involve tracking material consumption, setting budgets, arranging storage facilities for inventory, and implementing a systematic approach to ordering additional materials. Effective inventory management is essential to meet the production demands necessary for your business operations.

Best Practices of Direct and Indirect Procurement

Let’s explore some valuable practices that can empower procurement managers throughout the purchasing process. Here are some key practices, more like insider tips, to remember:

1. Opt for Quality Technology

Utilizing the right automated procurement software is crucial. It should be tailored to your specific procurement strategy, whether it’s direct or indirect procurement. This software can streamline the entire procurement process, from requisition to purchase order generation and supplier management.

The software must also be effective in meeting your procurement needs. It should facilitate transparency, compliance, and process optimization. It should be able to adapt to your evolving procurement strategy.

You must also consider user-friendliness. Procurement teams from various backgrounds should be able to use the software without extensive training, which can save time and resources.

Lastly, it should be able to communicate with sourcing, data analysis, and supplier management tools to create a cohesive and efficient procurement ecosystem.

2. Craft a Strategic Sourcing Plan

This practice is particularly effective for indirect procurement. It involves a systematic and data-driven approach to supplier selection. This ensures that your team is not only getting the best prices but also aligning with the company’s broader objectives, such as sustainability, diversity, or risk mitigation.

Strategic sourcing involves evaluating potential suppliers based on criteria such as cost, quality, reliability, and alignment with corporate goals. This helps in making informed supplier decisions.

3. Collaborate with Group Purchasing Organizations (GPOs)

GPOs can help in reducing costs by leveraging their collective buying power. They negotiate bulk deals with suppliers that can lead to significant savings for your organization.

They often have expertise in supplier due diligence and can help in reducing supplier-related risks. And by relying on GPOs, you can save both time and money that would otherwise be spent on individual supplier negotiations.

4. Embrace Proactive Change Management

Given the evolving nature of procurement, training new team members is important. Along with it is the continuous skill development for existing team members to keep up with industry best practices and technology changes.

The choice of a software vendor plays a pivotal role in the success of procurement teams. A vendor that provides excellent support, training, and ongoing assistance can make the transition to automated procurement smoother and more effective.

Change management should focus on making the team adaptable to new technologies and processes. This includes addressing concerns, providing clear communication, and ensuring that employees understand the benefits of the changes.

Conclusion

Understanding the dynamics of direct and indirect procurement is essential for businesses aiming to operate efficiently and effectively. Direct procurement deals with the critical supplies that form the core of your business operations, directly impacting the quality of your products and services. It involves strategic sourcing, deep vendor relationships, and precise budgeting to ensure a smooth production process.

On the other hand, indirect procurement focuses on the supportive supplies that keep daily business functions running smoothly, even though they don’t directly influence the final product. Managing indirect procurement is often less formal, with less emphasis on budget tracking and vendor relationships.

So, whichever procurement strategy you choose, a well-rounded understanding of both is key to thriving in the world of business.