The Difference Between Direct VS Indirect Procurement

September 14, 2022
Alok Suman
Procurement Management

Procurement is one of the key business processes organizations use to source and obtain the products/services they require to run business operations.

The process includes several related activities, such as managing contracts, hiring suppliers, and negotiating prices to get the best possible product at the best value. 

Based on the kind of business model a business has, supply chain teams have a choice to go with either of the two approaches to procure the materials required for their daily functioning. These are called direct and indirect procurement. 

While the concepts of direct and indirect procurement can seem easy to those who are part of the industry, the finer details can be difficult to grasp. 

In this post, we will cover what direct and indirect procurement processes are, what are the technical differences between the two types of spend, and how low-code automation using Hubler can enable a faster procurement process.

What is Direct Procurement?

Direct procurement in any organization is a core business process. It involves purchasing products or services that are needed to produce value for customers and, therefore, generate revenue for the business.

Also known as direct spend management or direct sourcing, direct procurement management is the end-to-end process that organizations follow to manage the procurement of direct materials, parts, or components that are used to make a finished product.

In simple words, it is the process of acquiring resources that go into building the actual product/service that the business offers.

For instance, direct procurement for a smartphone manufacturing company would mean getting resources such as processors, parts, chips, screens, etc., that are linked directly to the making of the product.

The Process of Direct Procurement

The process of direct procurement in any business involves purchasing raw materials and other services from chosen suppliers or vendors to operate the business. 

An organization with a proper direct procurement function mostly has a team assigned to work in collaboration with chosen supplier or vendor to supply them with the required material.

The internal procurement team here manages the inventory of all the materials, works on the gaps identified, and accordingly builds communication with the suppliers/vendors to supply the material required.

What is Indirect Procurement?

As the name suggests, indirect procurement refers to the process of purchasing services or products that are essential for day-to-day business operations but don’t necessarily provide value directly to either customers or business revenue.

Put simply, indirect procurement is the process of acquiring resources for the business that support its ongoing existence.

For instance, an organization that deals with making smartphone apps would hardly require any resources by way of direct procurement but may still require several resources through indirect procurement, such as software, office supplies, systems, etc.

The Process of Indirect Procurement

Unlike the misconception that indirect procurement is not a necessary or directly-related function in the revenue generation of business, it is an equally important aspect of the business' supply chain and plays a critical role in its continued functioning. 

An efficient indirect procurement process allows businesses to purchase items used in running their normal operations daily. This process is usually decentralized and carried out by a dedicated department, where each team is responsible for managing resources for their supplies per the specific demand. 

Direct vs. Indirect Procurement: Key Differences

Difference Direct procurement Indirect procurement
What is the purpose? The purpose of direct procurement is to get essential items or services for the business that support the creation of a final/ finished product. The purpose of indirect procurement is to obtain products or services for the business that support various day-to-day business functions.
Priority The priority here is building supplier relationships. Direct procurement teams ensure you invest a lot of time, effort, and energy into building and maintaining robust relationships with suppliers. The priority in indirect procurement is saving money. The key focus is on spend management and not necessarily on supplier collaboration benefits. The relationship with suppliers in indirect procurement is transactional, with the main focus being competitive costs.
What is the model of spending? The spending model here is centralized, which translates to planned spending based on specific customer needs. Indirect procurement uses a decentralized, flexible spending model based on business operations.
Examples Examples of direct procurement include labor, raw materials, and mechanical components. Examples of indirect procurement include software, product licenses, office supplies, and facilities management.
What does it deal with? Direct procurement primarily deals with consistent or required business purchases. Indirect procurement, on the contrary, deals with spontaneous business purchases.
The pattern of inventory management Direct procurement typically involves an efficient, predictive approach to purchasing. The procurement team managing a direct purchase system ensures to update their inventory so that the required components are always available when due. In the case of indirect procurement, materials are acquired or ordered only when there is a demand for them. While this method can eliminate redundancies in some cases, it can also result in production delays due to the unavailability of raw materials needed for the production function.

Examples of Direct Procurement vs. Indirect Procurement

Direct Procurement Examples 

As mentioned earlier, direct procurement or spending is all the purchase of goods and services directly involved in the manufacturing of a product.

Often, the direct spend is incorporated into a business’ expenses and accounted for beforehand. So, these are mostly the expected costs and can often work in sync with purchasing supplies in bulk.

When it comes to the examples of direct procurement, it varies depending on the industry or final product being produced. But in most cases, the items purchased through direct procurement include:

  • Raw materials or other mechanical components needed for the production of a finished product
  • Hardware, plastics
  • Subcontracted manufacturing items that are sourced directly from a warehouse for resale 
  • Manual labor
  • Supply and installation of industrial machinery

In short, any purchased material goods that are used to create a product fall under the category of direct spend.

Indirect Procurement Examples

Indirect procurement includes the purchases that support a business. Examples of these include:

  • IT services
  • Marketing services such as printed forms and materials for the business 
  • Office equipment, furniture, and other supplies 
  • Professional services 
  • Capital expenditure
  • Facilities
  • Travel management services
  • Purchase of MRO (maintenance, repair, and operation) consumables that the business uses during the manufacturing process and to maintain plant operations and equipment maintenance parts
  • Freight and logistics
  • Fees or spending for external consultants and services
  • Fees for purchasing and maintaining business hardware (computers, phones) and software (computer programs and storage systems)

In Conclusion

Direct and indirect procurement are both important for running a business successfully. However, what is important to understand is that they are quite different from each other and require distinct approaches and tools to manage them efficiently. 

Understanding the differences as well as the similarities between the two processes will ultimately help you plan the future of a powerful supply chain and hassle-free spend management strategies.

How You Can Use Hubler for Your Procurement Function

If you wish to build a successful procurement strategy and propel your organization in a competitive landscape, one of the first things you need to do is automate your procurement process. 

The best way to begin your procurement automation journey is with a robust no-code platform such as Hubler that helps you create the right automation software for building and implementing your strategy. It is a one-stop solution to streamline your complex procurement process. 

Hubler can automate your end-to-end procurement system process, thus freeing you from various time-consuming and repetitive manual processes. Our Procure to Pay system is a well-designed and straightforward platform to help you create an optimized purchase order cycle process for your business.

Right from purchase order requests and budgeting to RFPs and POs, Hubler allows you to manage everything efficiently using one single solution. Further, Hubler can also integrate with your existing database easily and give you a complete view of your overall procurement process. 

If you wish to stay competitive in the market by automating your procurement process, start by using Hubler. Try a free demo today.

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