Knowing what is indirect spend in procurement is just as critical as managing direct spend. Both are vital in determining your organization’s operational efficiency and profitability. However, not all spending is created equal.
Procurement professionals must navigate two distinct categories: direct and indirect spend. Each serves a unique purpose and requires tailored management strategies. Direct spend directly impacts production and product quality, while indirect spend supports daily operations and ensures the smooth functioning of your business.
Understanding the differences between these two categories is essential for optimizing procurement strategies and driving business growth. Whether you’re sourcing raw materials for production or purchasing office supplies to keep your operations running, recognizing how direct and indirect spend affects your bottom line is key to success.
In this blog, we’ll explore the differences, importance, and strategies for managing both types of spend effectively.
What is Direct Spend in Procurement?
Direct spend procurement focuses on acquiring tangible items and services to produce a company’s final products. This includes raw materials, manufacturing services, and other critical elements directly impacting production.
Direct Spend Categories
Here are some direct spend categories and examples:
- Raw Materials: These are the foundational inputs like metals, fabrics, and plastics used to manufacture your product. For example, steel is used for machinery or leather is used for furniture production.
- Contract Manufacturing: Companies often outsource part or all of their production process. For instance, a clothing brand might hire a factory to produce its garments.
- Testing Services: These include costs for external labs or facilities to test product quality, compliance, or safety, such as testing electronics for durability.
- Print Materials: Covers printed content such as instruction manuals, product labels, or packaging inserts, including design, translation, and printing.
- Equipment: Any machinery or tools directly used in production, such as a printing press for a publisher or sewing machines for a clothing manufacturer.
- Products to Resell: Includes items a business purchases to sell directly to customers, like retail stores buying finished goods from suppliers.
- Transportation: Costs associated with moving products, raw materials, or finished goods to warehouses, stores, or end customers. This includes freight or shipping services.
Now that we know about direct spend in procurement let us look at indirect spend in procurement.
What is Indirect Spend in Procurement?
Indirect spend covers goods and services that support operations but don’t create final products. This type of spend is essential for a company’s functionality and often accounts for up to 50% of total purchases.
To fully understand what is indirect spend in procurement, let’s explore common categories and examples.
Indirect Procurement Spend Categories and Examples
Here are some indirect procurement spend categories and examples –
- Facilities Management: Maintenance of office spaces, including cleaning, pest control, HVAC, and security systems.
- Marketing and Advertising: Services such as digital marketing, print ads, social media campaigns, and hiring PR or ad agencies.
- Consultants: Costs of hiring external consultants for expertise or project-specific guidance.
- Lab Supplies: Equipment and materials for labs in sectors like education, healthcare, or research.
- Technology: Includes computer equipment, software, IT services, and data management solutions.
- Utilities: Operational costs like electricity, internet, and telephone services.
- Office Supplies: Everyday items like pens, paper, and envelopes that are crucial but often overlooked.
- Maintenance, Repair, and Operations (MRO): Purchases for repairing and maintaining equipment to ensure smooth business operations.
- Transportation: Travel costs for employee visits to clients, factories, or business trips.
- Document Management and Print Services: File storage, secure shredding, and producing printed materials like brochures or manuals.
In the next section, we are going to take a detailed look at the differences between direct and indirect procurement.
Direct vs. Indirect Procurement: What are the Differences?
Here is a detailed review of the differences between direct and indirect procurement –
| Direct Procurement | Indirect Procurement | |
| Definition | Purchases tied directly to production (e.g., raw materials). | Purchases that support operations (e.g., office supplies). |
| Organizational Setup | Centralized, with specialized category managers. | Decentralized across various departments. |
| Supplier Management | Close relationships and joint planning with suppliers. | Fragmented, often with multiple suppliers for similar needs. |
| Cost Impact | Directly affects product costs and profitability. | Impacts operational expenses but not directly tied to product pricing. |
| Inventory Management | Requires precise forecasting and inventory control. | Less critical; focused on availability and convenience. |
| Performance Metrics | Measures tied to production efficiency and product quality. | Metrics focus on cost savings and supplier compliance. |
| Stakeholder Engagement | Collaborative with market experts in production. | Varies; stakeholders may lack procurement expertise. |
| Technology Utilization | Advanced tools for forecasting and supplier collaboration. | Tools focused on tracking and optimizing procurement processes. |
| Predictability | Highly predictable due to production schedules. | Less predictable; demand depends on operational needs. |
Organizational Setup
You typically manage direct procurement through a centralized team. Category managers specialize in specific product areas. They work closely with production and supply chain teams to ensure smooth operations.
For indirect procurement, management is often decentralized. Departments like IT, HR, or facilities handle their own purchasing. Centralizing indirect procurement can help you increase efficiency and reduce costs.
Supplier Management
In direct procurement, you build long-term relationships with suppliers. You collaborate with them on planning, forecasting, and ensuring high-quality materials. Indirect procurement often involves many suppliers.
This can lead to fragmented relationships. Consolidating suppliers and enforcing policies can make your indirect procurement more efficient.
Cost and Inventory Management
You need strict cost control and inventory management for direct procurement. It directly affects production costs and timelines. Use advanced tools to forecast demand and manage inventory. For indirect procurement, focus on reducing operational expenses. Inventory management here is less critical but still requires attention.
Performance Metrics
Track production efficiency, product quality, and supplier performance for direct procurement. Metrics like on-time delivery and defect rates help you measure success. For indirect procurement, focus on cost savings, contract compliance, and service levels. These metrics reflect how well you manage operational efficiency.
Stakeholder Management
In direct procurement, you work with stakeholders who have deep expertise in product specifications and supplier markets. Collaboration is key to making informed decisions. For indirect procurement, stakeholders often have diverse backgrounds. You may need to guide them to ensure effective purchasing decisions.
Technology Utilization
Use advanced tools in direct procurement to forecast demand, manage suppliers, and optimize inventory. For indirect procurement, rely on platforms to streamline purchasing and monitor supplier performance. Technology can also help you enforce compliance across departments.
Predictability and Demand Management
Direct procurement is predictable because it follows production schedules and forecasts. You can plan ahead with confidence. Indirect procurement is less predictable. Demand often depends on operational needs and changes in departmental priorities. Be prepared to adapt.
Let us see how akirolabs can help with both direct and indirect spend in procurement.
Also Read: Understanding Direct vs Indirect Procurement: Basic Differences and Strategies
How Can akirolabs Help With Direct and Indirect Spend in Procurement?
Managing both direct and indirect spend effectively is key to optimizing your procurement strategy. With akirolabs, you gain the tools to handle both types of spend strategically, ensuring alignment with your business goals. Here’s how we and our platform help you take control:
Centralize your spend management: Use a unified platform to develop and manage procurement strategies for both direct spend (e.g., raw materials) and indirect spend (e.g., office supplies).
Leverage strategic scenario modeling: Evaluate options to secure supply chain resilience for direct spend and create adaptive strategies for decentralized indirect spend.
Use AI-driven insights: Access data-driven recommendations tailored to procurement objectives, optimizing supplier relationships for direct spend and improving ROI for indirect spend.
Collaborate across teams: Align departmental needs with organizational goals by fostering real-time collaboration among stakeholders.
Monitor and track performance: Set KPIs for both direct and indirect spend, ensuring measurable results and alignment with broader business objectives.
With akirolabs, you can turn your procurement efforts into a strategic driver of efficiency and value, ensuring both direct and indirect spend contribute to your long-term success.
Conclusion
Understanding the differences between direct and indirect spend helps you create better strategies for your business. Direct spend affects your production and product quality, so it needs careful management and strong supplier relationships.
Indirect spend supports your daily operations and requires a broader focus on managing suppliers and controlling costs. By identifying the challenges and opportunities in each type of spend, you can make smarter decisions and improve your procurement processes.
Want to take your procurement strategy to the next level? akirolabs can help.
