Introduction

Direct procurement or direct spend involves acquiring goods or raw materials that directly contribute to producing the goods you sell. Indirect procurement involves acquiring anything other than goods or raw materials that are directly involved in the production of your product. It is more about the operational side of the business, like IT services, office supplies, SAAS subscriptions, etc. 

In short,

Direct = What you sell.

Indirect = What you use.

What is direct procurement?

Direct procurement is a process of acquiring goods that are directly involved in your production process. For example, if you have a laptop manufacturing business, then purchasing chips or wires will be included in your direct procurement.

Tracked under:

The capital invested in direct procurement directly impacts COGS (Cost of Goods Sold) and the product quality. 

Characteristics

1- High-volume purchase

Direct procurement usually has large budgets. A large portion of capital in any business goes into purchasing goods that help them produce high-quality products. 

2- Product quality

A large budget is allocated for direct procurement mainly because of product quality. Businesses strive to get high-quality raw materials and products that help them produce finer finished goods. 

3- Supplier relationships

In direct procurement, companies look for suppliers with good reputations and feedback because the end goal is to build a long-term relationship. Therefore, the initial supplier selection process is thorough, and every small mark is calculated, so businesses don’t have to change suppliers in the mid-product cycle.

4- Often centralized production

Direct procurement is often centralized (all production is done under a single supervisor or team), where the procurement department makes the decisions regarding the production need, makes the product order POs, and gets approvals.

5- Directly impact the bottom line

The company’s end goal is to sell, generate revenue, and earn profits. Direct procurement is tracked under COGS, which also impacts a business’s bottom line. 

What is indirect procurement?

Indirect procurement is the process of acquiring goods that do not involve the production of goods a business sells. For example, an automobile manufacturing company may buy a SaaS product or IT supplies that are needed for the smooth running of everyday operations rather than the production process itself; these are counted under indirect procurement. 

Tracked under:

The capital invested in indirect procurement is tracked under operational expenses. 

Characteristics

1- Multiple suppliers:

In indirect procurement, there is a diverse supplier base. For IT services, there is one supplier; for repairs, there is another; and for maintenance, there are different ones. Therefore, a company has to deal with various vendors at the same time. 

2- Often decentralized purchasing:

Purchasing decisions are mostly decentralized and based on needs and requirements, unlike direct procurement, where centralized procurement teams make the decisions.

For example, if you need supplies for maintenance, the concerned department will express the need and make the purchase order separately.

3- Smaller, more frequent transactions

Unlike direct spending, where a high-volume transaction might be involved in getting production supplies, indirect procurement spend comprises several different transactions, likely going to different suppliers. 

4- Help businesses save money

As indirect procurement doesn’t impact the quality of finished goods, the cost spent here is flexible. If the company identifies that they could cut costs in any department where the operation won’t be affected, they can save costs by cutting the extra expenses. Most companies are saving costs on surplus stationery because of online shifts and note-taking using online free tools that are much more efficient and long-lasting. 

Source

Difference between direct and indirect procurement

Impact on business operations

How does the direct procurement impact business operations

Direct procurement impacts business profitability and the bottom line. 

• With the strategic selection of materials, the procurement team ensures there won’t be any compromise on product quality.
• With the strategic sourcing of raw materials, the procurement team ensures that the company can save costs that could be spent on other materials, which in turn produce better results.
• A direct procurement team can ensure that the supply chain is short and smooth by reducing disruptions, such as canceled supplier contracts, long lead times, and mass damage.
• The careful selection of material used in the production after the thorough supplier selection and research by the direct procurement team plays a major part in product innovation, either by introducing a new feature or by removing material that is not aligned with market demand. 

How does the indirect procurement impact business operations

Indirect procurement brings operational efficiency. Most companies might overlook the expense they spend on indirect procurement, but according to sources, it contributes to roughly 20-40% of total procurement spend. If done right, a business can;

• Manage and control operational expense.
• Help business continue their normal day-to-day operations.
• Save business extra spend with strategic planning on how much should go to which department.
• Improve workplace productivity by meeting office and employee needs and requirements.
• Help support administrative operations that might look small, but if not calculated, can disrupt the budget sheet.

Technology Systems: SAP and Oracle Approaches

Both SAP MM and Oracle Fusion have distinct processes for managing these procurement types, tailored to their systems’ functionalities.

Direct Procurement in SAP MM

What it does:

Buys materials directly used to make your product. For example, If you’re a car company, this is buying steel, tires, or engines.

How it works in SAP MM:

1. SAP plans for you:

SAP’s MRP (Material Requirement Planning) automatically calculates how much raw material you need based on production schedules.

Imagine: SAP says, “You need 500 screws next week to build 100 bikes.”

1. Ordering:

You create a Purchase Requisition (ME51N) → turns into a Purchase Order (ME21N).

Why? To tell the supplier, “Send us 500 screws!”

1. Receiving & Paying:

When screws arrive, you log them into inventory with Goods Receipt (MIGO).

Finally, you check the supplier’s invoice matches the order using Invoice Verification (MIRO).

Why it matters:

If SAP’s planning is wrong, production stops. For example: Running out of steel = no cars get made.

Indirect Procurement in SAP MM

What it does:

Buys things needed to run the business (not for making products). For example: Office chairs, printer ink, or IT support services.

How it works in SAP MM:

1. Someone requests something:

The IT department says, “We need 10 new laptops.”

1. Assign costs:

You link the request to a cost center (like “IT Department Budget”). Why? To track who’s spending money and where.

1. Ordering:

Create a Purchase Order (ME21N), just like direct procurement.

But: You might use non-stock materials (items not stored in inventory, like software licenses).

1. Receiving & Paying:

Mark laptops as “delivered” with Goods Receipt (MIGO).

Approve the invoice with MIRO. 

Key Differences 

Purpose:

• Direct = Make products.

• Indirect = Run the business.

Planning:

• Direct = SAP automatically plans (MRP).

• Indirect = Employees manually request (no MRP).

Tracking:

• Direct = Tied to production orders.

• Indirect = Tied to cost centers (e.g., Marketing, IT).

Materials:

• Direct = Stock items (stored in inventory).

• Indirect = Non-stock items (e.g., services, office supplies).

In short

Direct Procurement:
Factory Needs → SAP Plans → Order Materials → Make Products

Indirect Procurement:
Employee Asks → Assign Budget → Order Supplies → Keep Office Running

Direct Procurement in Oracle Fusion

What it does:

Buys materials directly used to manufacture your product (e.g., cement for construction, microchips for electronics).

How it works:

1. Oracle Fusion connects the dots:

Direct procurement is tightly linked to supply chain and manufacturing modules. For example, If your factory needs 1,000 bolts to build machinery, Oracle Fusion automatically syncs with production schedules to order the right amount.

1. Handles tricky situations:

Supports complex scenarios like rush orders, bulk discounts, or changing supplier terms.

Imagine: A supplier raises prices, but Oracle Fusion helps renegotiate contracts or find alternatives.

1. Teamwork with suppliers:

Uses tools like Supplier Collaboration Portals to share forecasts, track deliveries, and manage contracts. Why? To avoid delays (e.g., “Hey Supplier, we need 10% more steel next month!”).

Indirect Procurement in Oracle Fusion

What it does:

Buys stuff to keep the business running (e.g., laptops, consulting services, office furniture).

How it works:

1. Employees order what they need

Uses self-service portals (like an Amazon-like catalog) where teams can request items.

For example: Marketing needs 5 new monitors → They browse the catalog, add to cart, and submit.

1. Approvals & control:=

Requests go through automated workflows (e.g., manager approval for big spends). Why? To stop overspending (e.g., “Why does Sales need a $10,000 espresso machine?”).

1. Track spending 

Oracle Fusion’s analytics dashboards show where money is going (e.g., IT spends 40% on software licenses). 

For example: Spotting that HR overspends on temp agencies → Renegotiate 

Key Differences 

Purpose:

Direct = Build products.

Indirect = Run the office.

Who’s involved:

Direct = Supply chain teams & suppliers.

Indirect = Employees across departments (HR, IT, Facilities).

Complexity:

Direct = Dynamic purchasing (e.g., adjusting orders for factory delays).

Indirect = Simplified workflows (e.g., “Click, approve, done!”).

Tools:

Direct = Supplier portals, contract management.

Indirect = Self-service catalogs, spend analytics.

Challenges that direct vs indirect procurement might face

Direct procurement challenges

1- Supply chain disruption

Direct procurement is directly responsible for maintaining the supply chain and the production process. A small disruption in contract, lead time, product damage, PO creation, or anything that halts the normal production flow can significantly impact the procurement process. 

2- Quality control

Another challenge direct procurement might face is ensuring the products you receive are of high quality. Most businesses with global suppliers face problems with quality control as they don’t have teams available to check every batch before it reaches the warehouse. Therefore, a single quality issue can delay the whole cycle, as businesses have to maintain their reputation and can’t compromise on quality. 

3- Price fluctuations

The price of raw materials and goods might fluctuate every few months or over the course of a year, depending on the country’s economic stability. In this case, any unannounced rise in price can have a drastic impact on the company’s financial health, as it can disrupt the normal production flow. 

4- Inventory management:

Inventory management in direct procurement is crucial because the procurement team must balance demand to prevent stockouts and overstocking. Overstocking can disrupt cash flow due to unsold inventory sitting in the warehouse, while stockouts can impact the business’s bottom line. Therefore, without strategic inventory management, a business can’t survive. According to Supply Chain Dive, poor inventory tracking impacts 62% of business finances. Consequently, up to 17% of small businesses and a significant portion of large enterprises invest in inventory management software to protect their finances. 

Indirect procurement challenges

1- Maverick spending across departments

Maverick spending is an extra burden on the company due to spending outside the company’s official purchasing process. For example, a purchase was made using a company credit card but was never reported to the finance department. These extra spending are hard to track and can be a greater challenge for the business and indirect procurement.

2- Supplier proliferation and management

Due to multiple suppliers, it can sometimes be hard to track expenses. Different departments perform multiple transactions on multiple dates. If these are not done under some order or using a tool or system, a large gap might appear on the budget sheet.

3- Lack of visibility into total indirect spend

In indirect procurement, multiple departments are involved. Without a system in place, there may be a lack of visibility into total spending. For example, a team member may buy a subscription personally that is later added to the expense sheet, but there is no history related to that spending. When these minor issues go onto the sheet, they create inconvenience and confusion. 

4- Difficulty measuring ROI on indirect purchases

Again, multiple purchases are challenging to track without a system or a tool, which makes it even harder for the department to track ROI. 

Best practices

1- Centralized procurement process

A company must have a centralized procurement process, whether direct or indirect. Use tools that make it easy for the departments to track and record any expense or purchase related to procurement.

2- Standardized purchasing practices

If departments want to purchase anything related to production or operations, there must be a protocol and a standardized practice. When all the departments follow a standardized procedure, the company can easily track all the transactions. 

What do we do next?

Well, now you have the idea of direct vs. indirect procurement. The next step is to choose the procurement strategies that best align with your business, invest in software (if not already), implement standardized practices and a centralized procurement process, and, if possible, follow the just-in-time inventory method to prevent overstocking. 

Procurement takes up a large chunk of your capital, so strategic planning is important to cut extra expenses and improve capital investment. 

FAQs

What is the difference between direct and indirect procurement?

Direct procurement or direct spend involves acquiring goods or raw materials that directly contribute to producing the goods you sell. Indirect procurement involves acquiring anything other than goods or raw materials that are directly involved in the production of your product. It is more about the operational side of the business, like IT services, office supplies, SAAS subscriptions, etc. 

What is an example of indirect procurement?

Any purchase that doesn’t directly contribute to the production process falls under indirect procurement. For example, a company purchases office supplies, invests in software to manage human resources, etc.

What is an example of direct procurement?

Any purchase that directly contributes to the production process falls under direct procurement. For example, a clothing brand purchases thread to produce the clothing.