{"id":7284,"date":"2025-05-21T02:53:19","date_gmt":"2025-05-21T02:53:19","guid":{"rendered":"https:\/\/sblog.seebiz.com\/blog\/?p=7284"},"modified":"2025-05-21T02:53:19","modified_gmt":"2025-05-21T02:53:19","slug":"direct-vs-indirect-procurement","status":"publish","type":"post","link":"https:\/\/sblog.seebiz.com\/blog\/direct-vs-indirect-procurement\/","title":{"rendered":"Direct vs Indirect Procurement: What is the difference, and how to do it right"},"content":{"rendered":"

Introduction<\/span><\/h1>\n

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.\u00a0<\/span><\/p>\n

In short,<\/span><\/p>\n

Direct = <\/span>What you sell<\/b>.<\/span><\/p>\n

Indirect = <\/span>What you use<\/b>.<\/span><\/p>\n

What is direct procurement?<\/span><\/h2>\n

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.<\/span><\/p>\n

Tracked under:<\/span><\/h3>\n

The capital invested in direct procurement directly impacts <\/span>COGS<\/b> (Cost of Goods Sold) and the product quality.\u00a0<\/span><\/p>\n

Characteristics<\/span><\/h3>\n

1- High-volume purchase<\/b><\/p>\n

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.\u00a0<\/span><\/p>\n

2- Product quality<\/b><\/p>\n

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.\u00a0<\/span><\/p>\n

3- Supplier relationships<\/b><\/p>\n

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.<\/span><\/p>\n

4- Often centralized production<\/b><\/p>\n

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.<\/span><\/p>\n

5- Directly impact the bottom line<\/b><\/p>\n

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.\u00a0<\/span><\/p>\n

What is indirect procurement?<\/span><\/h2>\n

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.\u00a0<\/span><\/p>\n

Tracked under:<\/span><\/h3>\n

The capital invested in indirect procurement is tracked under <\/span>operational expenses.\u00a0<\/b><\/p>\n

Characteristics<\/span><\/h3>\n

1- Multiple suppliers:<\/b><\/p>\n

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.\u00a0<\/span><\/b><\/p>\n

2- Often decentralized purchasing:<\/b><\/p>\n

Purchasing decisions are mostly decentralized and based on needs and requirements, unlike direct procurement, where centralized procurement teams make the decisions.<\/span><\/p>\n

For example, if you need supplies for maintenance, the concerned department will express the need and make the purchase order separately.<\/span><\/p>\n

 <\/p>\n

3- Smaller, more frequent transactions<\/b><\/p>\n

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.\u00a0<\/span><\/p>\n

 <\/p>\n

4- Help businesses save money<\/b><\/p>\n

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.\u00a0<\/span><\/p>\n

\"direct<\/p>\n

Source<\/span><\/a><\/p>\n

Difference between direct and indirect procurement<\/span><\/h2>\n

 <\/p>\n\n\n\n\n\n\n\n\n
Aspect<\/b><\/td>\nDirect Procurement<\/b><\/td>\nIndirect Procurement<\/b><\/td>\n<\/tr>\n
Purpose<\/b><\/td>\nCore production materials<\/span><\/td>\nSupports operations (e.g., IT, utilities)<\/span><\/td>\n<\/tr>\n
Supplier Relationships<\/b><\/td>\nLong-term, strategic partnerships<\/span><\/td>\nTransactional, short-term contracts<\/span><\/td>\n<\/tr>\n
Budget Planning<\/b><\/td>\nTied to production forecasts<\/span><\/td>\nAd-hoc, department-specific<\/span><\/td>\n<\/tr>\n
Risk<\/b><\/td>\nSupply chain disruptions halt production<\/span><\/td>\nOverspending, maverick buying<\/span><\/td>\n<\/tr>\n
Tech Tools<\/b><\/td>\nSAP MRP, Oracle SCM<\/span><\/td>\nSAP Ariba, Oracle Procurement Cloud<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Impact on business operations<\/span><\/h2>\n

How does the direct procurement impact business operations<\/span><\/h3>\n

Direct procurement impacts business profitability and the bottom line.\u00a0<\/span><\/p>\n