Direct vs. Indirect Procurement: What’s the Difference?
Procurement is a core business process used by organizations to source and obtain the products and services it needs to run. The procurement process includes related activities such as managing contracts and negotiating prices in order to obtain the best product at the best value.
Within the broader procurement process, there are two procurement categories: direct and indirect. Below we’ll cover the differences between direct and indirect procurement, the value that these two types of procurement bring to a business, and how low-code automation enables a faster, more accurate, and less time-consuming procurement process.
What is direct procurement?
Direct procurement is a core business process. Direct procurement deals with the purchasing of products or services that are required to produce value for customers and, as a result, generate revenue.
What is indirect procurement?
Indirect procurement is the purchasing of services or products essential for day-to-day business operations but which don’t necessarily provide a direct value to customers or generate revenue.
Examples of direct and indirect procurement
Direct procurement involves core supplies, whereas indirect procurement handles operational costs. Because of this difference, examples of indirect and direct procurement vary based on the following qualities:
- Rigid vs. flexible: Does the purchased item need to come from a specific supplier every time? Or can the items be purchased from various suppliers based on what’s more cost-efficient?
- Required vs. supporting: Is what’s being sourced essential or non-essential to a finished product?
Below are a few examples of direct and indirect procurement.
Direct procurement: Essential for finished products
Examples of direct procurement vary depending on the industry or final product being produced, but typically items obtained through direct procurement include:
- Raw materials or mechanical components required for the production of a finished product
- Items sourced directly from a warehouse for resale
- Manual labor
Indirect procurement: Support for day-to-day operations
Indirect procurement has to do with purchases that support a business, including:
- Office supplies and equipment
- IT services
- Marketing services and materials
- Capital expenditure
- Professional Services
- Travel management services
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Indirect vs. direct procurement: What’s the difference?
What distinguishes direct from indirect procurement is the purpose behind the purchase. This can be broken down into three factors: what’s being sourced, why is it being sourced, and how the sourced item(s) will be used.
Indirect procurements indirectly affect a business but are still essential to running business processes. Direct procurements directly affect a business because the product procured goes toward a final or finished product.
Another difference between these two categories is that direct procurement deals with consistent or required business purchases, and indirect procurement deals with spontaneous or more fluid business purchases.
Below is a breakdown of the key differences between direct and indirect procurement:
|Type||Direct Procurement||Indirect Procurement|
|Purpose||Essential items or services that support the creation of a final or finished product||Products or services that support day-to-day business functions|
|Spending model||Centralized, planned spending based on customer needs||Decentralized, flexible spending based on business operations|
|Priority||Priority is building supplier relationships||Priority is saving money|
|Examples||Raw materials, labor, mechanical components||Office supplies, software, product licenses, facilities management|
Challenges affecting direct and indirect procurement
While indirect and direct procurement categories have their differences, they do share similar challenges, including:
Direct procurement is much more focused on building lasting, reliable relationships, whereas indirect procurement deals with more short-term relationships due to the impact of costs, budgets, and/or urgency.
Despite this slight difference, managing and maintaining positive supplier relationships is important for both procurement categories and is why a structured process that streamlines communication and improves collaboration is essential.
Keeping up with inventory is a key aspect of ensuring that your business is running without any pauses, hard stops, or incurred costs. Depending on the item(s), not knowing what’s available could lead to big issues — especially if it’s something critical like an equipment repair or a mechanical component.
No matter how big or small a budget is, finding ways to keep costs down is always a goal that companies aim for. However, without access to information like payment history, contract and discount terms, or procurement process results, it can become difficult to find opportunities to reduce costs.
Another thing these direct and indirect procurement challenges have in common? They all stem from gaps that can be easily patched with a procurement automation platform.
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4 ways low-code automation solves procurement challenges
Low-code business process automation provides direct and indirect procurement teams with the full visibility needed to maintain supplier relationships, manage inventory, and identify opportunities to improve sourcing and reduce costs. Here’s how:
- Low-code means no technical or coding knowledge is required to quickly scale procurement solutions. This means procurement managers can build a structured process that promotes transparency.
- Integrate your existing software to centralize communication, information, and updates to reduce friction between procurement teams and internal clients.
- Eliminate manual, repetitive tasks with customizable process automations to get back time better spent on strategic sourcing.
- Gain insights from your process with dashboards and reports that pull from real-time process data. With access to your procurement data, identify opportunities to cut down costs, better forecast expenses, keep up with inventory needs.
Low-code automation streamlines and standardizes procurement processes, reduces risk, and enables procurement teams to rapidly identify cost-saving opportunities, and keep up with customer needs.