What Is Direct Spend in Procurement?
Direct spend in procurement refers to goods and services directly related to making products or serving end customers.
Common examples of direct spend include:
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Raw materials (steel, plastics, chemicals)
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Components and parts
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Hardware and equipment used in production
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Services integral to core business operations
What Is Indirect Spend in Procurement?
Indirect spend encompasses goods and services that support business operations but are not directly tied to product manufacturing or core service delivery.
While indirect spend doesn't appear in the final product, it enables companies to maintain and develop their operations effectively.
Common examples of indirect spend include:
Besides the different nature of goods and services in these spend categories, they also have different spend management practices. In this article, we'll address the key differences.
Main Differences in Managing Direct and Indirect Spend
The management approaches for these two spend categories vary significantly across multiple dimensions, from organizational design to technology requirements.
Organizational Setup
According to Gartner, organizations that simplify sourcing and procurement processes are 42% more likely to succeed in transformation initiatives.
Direct Spend Management: Direct spend is typically managed by a centralized procurement team with category managers who specialize in specific areas of goods and materials. This centralized approach enables:
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Deep supplier market expertise
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Consistent negotiation strategies
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Streamlined communication with production teams
Indirect Spend Management: Indirect spend management is often distributed across the organization, with various departments handling their own purchasing needs.
Centralizing indirect spend and establishing frame agreements can improve efficiency, enhance compliance, and generate cost savings. Organizations considering restructuring should evaluate whether a centralized, decentralized, or center-led procurement model best fits their needs.
Centralized, decentralized, or center-led procurement: Which model best fits your needs?
Stakeholder Management
Procurement can learn a lot by asking questions and collaborating with its stakeholders and industry peers.
Stakeholders in direct procurement are frequently market experts with extensive knowledge of:
McKinsey estimates that organizations can reduce indirect costs by 10–25% through improved procurement practices and supplier management.
Sourcing and contracting in direct procurement are collaborative processes where stakeholders provide valuable technical input that shapes supplier selection and contract terms.
Indirect procurement stakeholders come from diverse backgrounds and have varying levels of supply-market knowledge. Procurement teams should:
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Avoid underestimating stakeholder expertise
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Provide guidance and support where needed
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Recognize that some stakeholders (particularly those with agency backgrounds) may have strong vendor preferences
Requirements
Direct spend often has detailed specifications. There are industry standards and established service levels. Indirect spend typically has diverse requirements generated by many stakeholders across different functions.
Multiple preferred vendors may suit the local needs and service requirements. The service level agreements are often customized for each customer based on their needs and industry requirements.
Link contract data with your spend to get more value!
Supplier Management Approaches
Because direct spending directly impacts production schedules, business continuity, and product quality, procurement teams should:
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Build close, collaborative supplier relationships
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Implement joint forecasting processes
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Invest in long-term partnership development
Indirect spend often involves multiple suppliers providing similar services. Key focus areas include:
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Supplier consolidation to reduce complexity
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Spend management and visibility
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Buyer education on purchase policies
Some areas of indirect spend are strategic, have long relationships, and have a high impact on business development. Such categories should not be neglected but managed systematically to maximize relationship value for both parties.
Both categories should segment their suppliers and focus their efforts on key and strategic suppliers. In direct procurement, volume and bottleneck suppliers may be just as critical for the business.
Both categories benefit from supplier segmentation, focusing efforts on key and strategic suppliers. In direct procurement, volume and bottleneck suppliers may be equally critical for business continuity.
Performance Metrics and Development
Investing in relationship building and performance management reveals efficiency and quality improvement opportunities across both spend categories.
Direct Spend Performance Metrics:
Indirect Spend Performance Metrics:
Visit this Complete List of Procurement KPIs for steering performance!
Forecasting and Inventory Management
Direct procurement needs are well known and driven by customer demand, whereas indirect spend needs depend on many circumstances. For direct, having the right amount of goods and materials in stock is critical to prevent delays and enable a smooth production process.
Indirect spend is often generated by a challenge or a problem, and there is less inventory management involved. Indirect categories can learn inventory and demand management from direct categories.
Improving demand forecasting and establishing two-way communication with suppliers can enhance user experience and reduce off-contract purchasing.
Technology Requirements for Indirect and Direct Spend
Both direct and indirect spend benefit from spend analytics solutions that provide visibility into spending patterns and identify cost savings opportunities.
Direct spend technologies focus on demand planning, purchase order automation, warehouse level optimization, material forecasting, and delivery performance. Such technologies support more accurate operations planning and budgeting. Materials forecasting is critical for predicting your business's future profitability.
Indirect spend technologies often emphasize consolidating suppliers, simplifying purchase processes for non-procurement users, and securing compliance. Enabling intuitive user experience supports user adoption. Corporate systems should be as easy to use as eCommerce solutions people are accustomed to using.
Frequently Asked Questions (FAQs)
What is the main difference between direct and indirect spend?
Direct spend includes goods and services that become part of the final product or core service delivery (raw materials, components, production services). Indirect spend supports business operations but isn't incorporated into products (office supplies, IT services, marketing, facilities management).
Which spend category typically represents more of a company's total procurement?
In manufacturing organizations, direct spend typically accounts for the larger share of total procurement expenditure, though this varies by industry and business model.
Should indirect spend be centralized or decentralized?
The optimal approach depends on organizational size, complexity, and strategic priorities. Centralizing indirect spend can improve efficiency, compliance, and cost savings through frame agreements. However, some organizations benefit from a center-led model that balances central oversight with local flexibility.
How do supplier relationships differ between direct and indirect procurement?
Direct procurement typically involves fewer, deeper supplier relationships with joint forecasting and long-term partnerships due to the impact on production. Indirect procurement often involves more suppliers, with focus on consolidation and compliance, though strategic indirect categories warrant similar relationship investment.
What technologies support direct vs. indirect spend management?
Direct spend technologies emphasize demand planning, materials forecasting, and production integration. Indirect spend technologies focus on user-friendly purchasing interfaces, supplier consolidation, and compliance management. Both benefit from spend analytics platforms that provide visibility and identify savings opportunities.
How can indirect procurement learn from direct procurement practices?
Indirect procurement can adopt direct procurement's approaches to demand forecasting, supplier relationship management, and inventory planning. Improving two-way supplier communication and implementing systematic category management can enhance indirect procurement outcomes.
