Clients and results

Boy Scouts of America Logo
Hilton Logo
Oregon State Police Logo
Toshiba Logo
HCA Healthcare Logo
Allegis Group Logo
More Customers

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with PLANERGY.

King Ocean Logo

Cristian Maradiaga

King Ocean

Download a free copy of "Indirect Spend Guide", to learn:

  • Where the best opportunities for savings are in indirect spend.
  • How to gain visibility and control of your indirect spend.
  • How to report and analyze indirect spend to identify savings opportunities.
  • How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Direct Vs Indirect Procurement: What’s the Difference?

Direct Vs Indirect Procurement

Procurement is a complex operation encompassing integrated strategies to deliver optimal purchasing value while providing raw materials and services to run the organization. Direct and indirect purchasing can be considered subsidiaries of the procurement process; separate but related functions that work together within the company protocols and budget. From a practical perspective, the two processes are only marginally related aside from the same end result, sourcing and purchasing.

Direct procurement

Direct procurement is the acquisition of the raw materials used in the company business. For a home builder, this means wood, nails, concrete and other basics for building houses. For a retail store, it is goods to be sold, and for a restaurant, raw food items.

Businesses that sell any kind of tangible goods to consumers or to other businesses rely on direct procurement to create revenue. Exceptions include businesses such as software services where the end product is intangible and no raw materials are used in production.

Procurement processes are frequently centered on wringing the best value from sourcing direct materials, minimizing risk, and fostering long-term relationships with trusted suppliers. Efficient raw material sourcing is widely understood to hold the keys to bigger profit margins and competitive advantage.

The consumer experience, and by extension the company reputation is dependent on direct procurement. It determines the quality and availability of the finished product, and influences the way the company is perceived by consumers. Brands rarely rise above the quality of their raw materials and sourcing protocols.

Retail and manufacturing businesses are dependent on direct procurement to generate revenue and profits.

Most businesses spend a great deal of effort on maximizing direct purchasing, while indirect is more difficult to track and often overlooked.

Indirect procurement

Even software companies cannot escape the need for indirect procurement. Put simply, indirect costs are internal or administrative spend; everything a company needs to operate that will not be sold to consumers.

Examples of indirect purchasing include:

  • Facilities – Offices, distribution hubs, manufacturing plants.
  • Building utilities and expenses – Water, power, and maintenance.
  • Technology – Computers, software, telephony, manufacturing machines, and any other technology purchases necessary to create the product.
  • Office supplies – Coffee, toilet paper, pens, paper clips, and all the miscellaneous items humans need in order to function.
  • HR functions – Recruitment, training, and development of new employees.
  • Marketing – Ad spend, social media, PR, industry shows.
  • Travel expenses – Executive spend, meeting and conference expenses, remote employee expenses.
  • Outsourced services – Security guards, accounting firms, phone banks, IT and any other services the company does not handle internally.

Indirect procurement is an area of potential cost savings often overlooked. Proper tracking requires a similar centralized structure to direct purchasing. Even large companies can fall short and lose control of spending when departments have independent budgets and spend protocols.

Maximizing supply chain management to meet administrative needs can be sourced and negotiated much in the same way raw materials are handled, leveraging company-wide requirements to secure lower bulk prices and better service. Preferred suppliers can be identified and nurtured for better communication. Suppliers familiar with company spend patterns can better recommend sales and deals to meet upcoming needs, and advise the optimal times to buy to take full advantage of seasonal or end-of-year pricing.

There are challenges to cost analysis for indirect purchasing. Indirect spend includes intangible goods with no specifications aside from designated cost or perceived value. For example, when a company hires a motivational speaker to address a company meeting, the cost they are willing to pay depends wholly on perceived value the speaker is expected to deliver to the organization.

When dealing with indirect goods and services, budget goals may vary by team or project. Procurement strategy for one project may focus on reducing hours, while another project may need to address exorbitant travel costs.

Indirect spend management may require both cost avoidance strategy and spend reduction.

The practical way to deal with direct and indirect procurement is through an automated system capable of tracking every detail. With standardized procurement protocols established and efficient processes in place to avoid bottlenecks and delays, decision-makers can concentrate on cost avoidance and value-added practices. When laid out from an advantage perspective, stakeholders will see the inherent value to the company bottom line.

What’s your goal today?

1. Use PLANERGY to manage purchasing and accounts payable

We’ve helped save billions of dollars for our clients through better spend management, process automation in purchasing and finance, and reducing financial risks. To discover how we can help grow your business:

2. Download our guide “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your indirect spend. You’ll also be subscribed to our email newsletter and notified about new articles or if have something interesting to share.

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

Business is Our Business

Stay up-to-date with news sent straight to your inbox

Sign up with your email to receive updates from our blog

This website uses cookies

We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners who may combine it with other information that you’ve provided to them or that they’ve collected from your use of their services.

Read our privacy statement here.