On this page
- Definitions
- Examples of each
- How they differ
- Managing direct procurement
- Managing indirect procurement
- Where the money usually hides
- Which tools fit which type
- Direct and indirect in real organizations
- How the two split spend in different industries
- What to do first
- A first 30 days plan for each type
- Common mistakes
- Frequently asked questions
Key takeaways
- Direct procurement covers materials and components that become part of the finished product.
- Indirect procurement covers goods and services used to operate the business, such as software, travel and facilities.
- Direct spend is planned and specified. Indirect spend is scattered and often bought by non-specialists.
- Service companies are almost entirely indirect buyers, which is where control usually slips.
- Treat direct spend for continuity and quality. Treat indirect spend for visibility and policy.
Walk through a bicycle factory and you can sort every purchase into two piles. The steel tubes, the tires and the chains go into the bikes. The cleaning contract, the forklift lease and the accounting software keep the factory running but never leave the building on a bike.
Those two piles are direct and indirect procurement. The difference sounds academic, yet it decides who should buy each item, how you protect against risk and what software helps.
Definitions
Direct procurement is the purchase of raw materials, components and packaging that become part of the finished product a company sells. Indirect procurement is the purchase of everything else the company needs to operate: goods and services that support the business but are not part of what it sells.
Ask: does this item or service appear in the product the customer receives? If yes, it is direct. If no, it is indirect.
Some companies use the terms production and non-production procurement for the same split. Others use goods for resale and goods not for resale in retail.
Examples of each
| Direct | Indirect |
|---|---|
| Steel, plastic resin, fabric | Office supplies and furniture |
| Electronic components, circuit boards | IT hardware and software subscriptions |
| Packaging used in the product | Marketing, advertising and events |
| Ingredients for a food product | Facilities, cleaning, security |
| Subcontracted manufacturing | Professional services: legal, audit, consulting |
| Parts a retailer resells | Travel, fleet, telecoms, utilities |
How they differ
| Dimension | Direct procurement | Indirect procurement |
|---|---|---|
| Link to revenue | Directly tied to production volume | Indirectly tied, often fixed or discretionary |
| Planning | Forecast-driven, scheduled | Ad hoc, driven by requests |
| Who buys | Specialist buyers and category managers | Everyone: managers, assistants, project leads |
| Supplier count | Fewer, closer, often long term | Many, often small and varied |
| Specifications | Detailed and technical | Often loose or described by the requester |
| Biggest risk | Supply interruption and quality failure | Hidden spend, duplicates and weak contracts |
| Typical systems | ERP, MRP, supplier portals | Purchase order tools, procure to pay, spend analytics |
Managing direct procurement
The point is continuity. A missing component stops production, and a flawed component creates returns. So direct procurement focuses on a handful of things.
- Supplier qualification. Audit quality systems and financial health before the first order.
- Long term agreements. Fixed prices or price formulas for 12 months or more, with volume commitments.
- Forecast sharing. Suppliers plan capacity better when you tell them what you expect.
- Dual sourcing for critical parts. One backup supplier costs something. A stopped line costs more.
- Quality metrics. Defect rate, on-time delivery in full, and corrective action response time.
Managing indirect procurement
The point is visibility. Indirect spend is spread across the business, so the first task is just to see it.
- Spend analysis. Group spend by supplier and category to find overlaps. See what is spend analysis.
- Preferred supplier lists. Make the approved choice the easy choice.
- Catalogs for repeat items. Pre-negotiated prices on common items, available in a few clicks.
- Clear policy and thresholds. Who can spend what without asking.
- Contract renewal tracking. Subscriptions and services renew silently if nobody watches.
The long tail of small indirect suppliers has its own playbook, covered in tail spend management.
A 150-person marketing agency spends on salaries, software, freelancers, office rent and travel. Everything outside payroll is indirect. The agency has 90 software subscriptions across teams, four of them for similar design tools. A spend review finds that consolidating those four into one saves about a quarter of that category's cost and removes three renewal dates. Figures are invented for illustration.
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Where the money usually hides
Direct spend gets attention because it is large per item and tied to production. Indirect spend is watched less, yet in many companies it is a large share of the total. In a service company it is nearly all of the controllable budget.
That asymmetry is why teams that clean up indirect spend often find savings quickly: duplicate tools, services nobody uses, rates that crept up at renewal, and purchases made outside agreed suppliers. Read maverick spend to see how that last one happens.
Which tools fit which type
- Direct procurement leans on ERP and planning systems, supplier portals and supplier quality management.
- Indirect procurement leans on purchase order and approval tools, catalogs and spend analytics.
- Many companies use both and need them to share supplier records.
If you are choosing a system for indirect buying, start with the procurement software category page and the eProcurement software page.
Direct and indirect in real organizations
The clean split in textbooks gets messy in practice. A few edge cases come up repeatedly.
- Packaging. Packaging that ships with the product is direct. Shipping boxes used only to move goods between your own sites are usually indirect.
- Contract labor. Workers on the production line are often treated as direct. Temporary office staff are indirect.
- Software. Software used to design or run the product, such as embedded firmware you license into your own device, can be direct. Your accounting system is indirect.
- Logistics. Freight on inbound materials is often counted with direct spend. Outbound delivery to customers may sit under sales costs.
Choose a rule, write it down and apply it consistently. The point of the split is to manage each type sensibly, not to settle arguments about labels.
How the two split spend in different industries
| Industry | Direct spend looks like | Indirect spend looks like |
|---|---|---|
| Manufacturing | Materials, components, subcontract machining | Facilities, IT, maintenance supplies, travel |
| Retail | Goods bought for resale | Store fixtures, marketing, logistics services |
| Software company | Mostly small: hosting costs tied to customers | Laptops, tools, recruiting, marketing, offices |
| Construction | Materials and subcontractors per project | Site vehicles, safety equipment, head office costs |
| Healthcare | Medical supplies and drugs used in treatment | Cleaning, catering, IT, administration |
What to do first
If you run a manufacturer, start by protecting supply of your top ten direct materials with a risk review. If you run a service business, start by listing every software subscription and every contractor and checking for overlap. Both exercises take less than a week and usually find something worth fixing.
A first 30 days plan for each type
If you buy mostly direct
- Week one: list your ten most important materials and, for each, the supplier, the share of supply and the lead time.
- Week two: mark any single-sourced item and any supplier located in one region. These are your risk points.
- Week three: check contracts for price terms, minimum volumes and quality clauses. Note renewal dates.
- Week four: pick one item and start qualifying a second supplier. You now have the beginning of a continuity plan.
If you buy mostly indirect
- Week one: export 12 months of payments and group them by supplier.
- Week two: group by category and count suppliers per category. Anything with more than five suppliers is worth a look.
- Week three: list subscriptions and recurring services with their renewal dates and owners.
- Week four: pick two categories with overlap and ask the owners whether one supplier could cover both.
Neither plan needs software. Both usually find money or risk within a month, which is the best argument for doing the second month.
Common mistakes
- Using one process for both. Production materials need specifications and qualification. A box of pens does not.
- Ignoring indirect spend because the items are small. Small items add up, and the contracts behind them are often large.
- Letting direct and indirect suppliers live in separate databases. The same company often appears in both and you lose negotiating leverage.
- Treating MRO as an afterthought. A missing part can idle a machine just as surely as a missing raw material.
Frequently asked questions
What is direct procurement?
It is buying the raw materials, components and packaging that become part of the product your company sells.
What is indirect procurement?
It is buying the goods and services a company needs to operate that do not become part of its product, such as software, facilities, travel and professional services.
Is MRO direct or indirect?
Maintenance, repair and operations supplies are indirect, because they support production without becoming part of the product.
Which is harder to manage, direct or indirect procurement?
They are hard in different ways. Direct is technical and tied to production risk. Indirect is scattered across many buyers and suppliers, so the difficulty is visibility and control.
Do service companies have direct procurement?
Mostly not. A pure service company usually has indirect spend only, unless it subcontracts work that it sells on to clients, which behaves like direct spend.