Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, etc.
In what type of activity does a procurement professional use this direct vs. indirect distinction?
Mainly in spend analysis when preparing a cost savings and sourcing strategy.
For example, a procurement professional may determine how much is spent on direct purchases and how much is spent on indirect purchases. Then, the procurement professional would further classify the spend in each of those segments. Direct spend may have classifications such as steel, hardware, plastics, subcontracted labor, etc. Indirect spend may have classifications such as shop supplies, computer equipment, janitorial services, etc. Then, for one, several, or all of those classifications, the procurement professional would develop a cost savings and sourcing strategy for each category.
Do you need more information on how to analyze your spend (both direct and indirect), put together a savings strategy, conduct strategic sourcing, and save money for your organization?
Direct and indirect procurement are both critical to businesses. However, they are very different functions that require very different approaches and tools. Understanding the similarities and differences between the two will ultimately help you plan the roadmap for successful supply chain and spend management strategies.
Direct procurement — or direct spend, or direct cost — involves the procurement of goods, materials and services directly related to the production of goods and/or services that a business is offering. Indirect spend refers to expenses incurred for materials, services and maintenance required to operate the business. Both are equally essential to the running of a company, and one cannot exist without the other. But while both teams essentially procure, their approaches and responses are dramatically different.
Procurement is a complex business function, nuanced from organization to organization, and unconsciously tied to many facets of a company's corporate structure.
Revenue, cost, and production are direct results from procurement actions.
Without the sourcing and purchasing of goods, materials and/or services, there wouldn't be a business. These are the actions — undervalued as they may be — that insert the key in the ignition and start the engine of a well-oiled business, internally and externally.
As all business functions, procurement possesses segmentations that must work together, while remaining completely stand-alone: such as Indirect Procurement and Direct Procurement.
These two subsidiaries of the overall procurement function have been split apart in definition and assignment, and for obvious reason. Indirect and Direct Procurement function with complete autonomy from each other, and have little to do with each other, besides the root of the functions: sourcing and purchasing.