What is the difference between direct and indirect procurement?
Short answer
Direct procurement buys what goes into the product or service an organisation sells; indirect procurement buys everything else it needs to run, from IT and cleaning to travel.
Key takeaways
- The test is the purpose of the purchase, not the item: if it becomes part of what the customer buys, it is direct; if it keeps the organisation running, it is indirect.
- The same item can fall on either side. Laptops are direct for a computer maker and indirect for a bank; cloud hosting is direct for a software company that sells a hosted service.
- Direct procurement follows the production plan, with few qualified suppliers and the risk of stopping the line. Indirect procurement follows thousands of individual requests, with many suppliers and the risk of spend outside contracts.
- Grey areas such as maintenance spares, packaging, freight and production machines need one written decision each, applied the same way in every report.
- Accounting uses “indirect” in a different sense: under IAS 2, indirect production materials are part of the cost of inventory. Keep the procurement split and the accounting split as two separate fields.
What is the difference between direct and indirect procurement?
The difference between direct and indirect procurement is the purpose of what is bought. Direct procurement buys the materials, parts and services that become part of the product or service the organisation sells. Indirect procurement buys the goods and services the organisation uses to run itself: IT, facilities, professional services, marketing, travel and supplies.
The Chartered Institute of Procurement and Supply (CIPS) puts it in two lines. Direct procurement is the “procurement of materials that form part of the finished good or service”. Indirect procurement is the “procurement of goods or services that are not directly part of the final product or service”. CIPS uses the same split for spend: direct spend goes “directly into a product being manufactured or into the services being delivered”, indirect spend helps the organisation function.
A simple question decides most cases: would the customer find this item in the product, or pay for this service as part of what they buy? In a bicycle factory, the steel tubes, wheels and boxes are direct. The office paper, the accountant’s fees and the forklift repairs are indirect. What indirect procurement covers in full, its categories, process and measures, is explained in what is indirect procurement.
How do direct and indirect procurement compare side by side?
Direct and indirect procurement differ in almost every part of the work: who asks for the purchase, how demand is known, how many suppliers there are, what can go wrong and which system holds the order. The table compares the two point by point.
| Point | Direct procurement | Indirect procurement |
|---|---|---|
| Purpose | Inputs to the product or service sold | Goods and services the organisation uses to operate |
| Typical purchases | Raw materials, components, packaging, subcontracted production, services resold to clients | IT, software, facilities, cleaning, legal and audit, marketing, travel, temporary staff, office supplies |
| Who asks for it | Production planning, from forecasts and bills of materials | Employees in every department, one request at a time |
| How demand is known | Planned and repeated; scheduled releases against long agreements | Irregular; often known only when the request or the invoice arrives |
| Suppliers | Fewer, qualified for quality and capacity, often hard to replace | Many, often small or local, easier to replace |
| Contracts | Long supply agreements with prices, volumes, quality and delivery terms | Framework agreements, catalogues, one-off quotes, card purchases |
| Main risk | A late or faulty part stops production or a client service | Money spent outside contracts, with suppliers nobody checked |
| Usual system | ERP materials planning, supplier scheduling, quality records | E-procurement catalogues, purchasing cards, procure-to-pay workflows |
| Typical measures | Price per unit, on-time delivery, defect rate, supply continuity | Spend under management, contract and purchase order compliance, cycle time |
| Usual accounting | Inventory, then cost of goods sold or cost of the service delivered | Mostly operating expenses; capital expenditure for assets such as equipment and vehicles |
Direct procurement is planned around the product and judged on supply; indirect procurement is spread across the organisation and judged on control.
Money and effort are not split the same way. In a manufacturer, direct spend often carries most of the money with a few hundred suppliers, while indirect spend creates most of the requests, suppliers and invoices. A fictional manufacturer with this split is worked through in what is indirect procurement. In a bank, an insurer or a public body, almost all spend can be indirect, because the service sold is made mostly by staff.
What are examples of direct and indirect procurement?
Examples of direct and indirect procurement depend on what the organisation sells. The same purchase moves from one side to the other when the business changes. The table gives common examples by type of organisation; each one may classify its own grey areas differently.
| Organisation | Direct procurement | Indirect procurement |
|---|---|---|
| Car parts maker | Steel, plastic resin, electronic components, packaging for shipped parts | Machine spare parts, safety equipment, IT, cleaning, audit |
| Food producer | Flour, sugar, milk, flavourings, printed packaging | Laboratory consumables, uniforms, canteen services, marketing agency |
| Retailer | Goods bought for resale, shop-ready packaging | Store fittings, energy, security services, point-of-sale software |
| Hospital | Medicines, implants, medical consumables used on patients | Cleaning, catering for staff, IT, building maintenance, legal advice |
| Software company selling a hosted service | Cloud hosting that runs the service, third-party software built into the product | Laptops, office rent, recruitment agencies, travel |
| Consulting firm | Subcontracted consultants placed with clients | Its own office lease, training, software licences, travel not billed to clients |
| Construction contractor | Concrete, steel, subcontracted works on the client’s site | Head-office IT, vehicle leases, insurance, accounting software |
Ask what the customer pays for: whatever goes into it is direct, whatever keeps the organisation running is indirect.
Two examples show how the same item changes side. A laptop bought by a computer maker to resell under its own brand is direct; the same laptop given to a bank employee is indirect. Cloud hosting is indirect for a law firm that stores its files online, and direct for a software company whose product runs on it, because the customer’s service stops if the hosting fails.
Which purchases are hard to classify as direct or indirect?
Some purchases sit between direct and indirect procurement. They support the product without becoming part of it, or they become part of it only in some cases. Each organisation decides them once, writes the decision down and applies it the same way in every report.
- Maintenance, repair and operating supplies (MRO)
- Spare parts, lubricants, tools and safety equipment keep the plant running but do not enter the product. CIPS describes indirect supplies as those “not incorporated in the finished product but which keep the business and factory operating”, so most organisations class MRO as indirect. Some manufacturers give it to the direct team, because a missing spare part can stop a line. How to analyse it is explained in MRO spend analysis.
- Packaging
- Packaging that reaches the customer, such as the printed box or the bottle, is usually direct. Pallets, stretch film and cartons used only inside the warehouse are often indirect.
- Freight and logistics
- Inbound transport of raw materials is often treated as direct, because it is part of the cost of bringing materials to the plant. Courier services for documents, or staff travel, are indirect. Outbound delivery to customers varies by company.
- Production machines and tooling
- A new production line is capital expenditure, often bought by engineering as a project. Tooling made for one part, such as a mould, is often managed with the direct supplier of that part.
- Services
- A service is direct when it is part of what the client pays for, such as subcontracted work delivered to a client. It is indirect when the organisation uses it itself, such as audit, cleaning or IT support.
- Temporary staff
- Agency workers on the production line are often treated with the direct cost of production; agency staff in the finance office are indirect. Many organisations manage both in one contingent labour category and tag the cost centre.
Accounting uses the word “indirect” in another sense. Under the international standard on inventories, IAS 2, the cost of a manufactured product includes the costs of purchase and the costs of conversion. Conversion includes “a systematic allocation of fixed and variable production overheads”, and IAS 2 names “indirect materials and indirect labour” as examples of variable production overheads. So factory consumables that procurement calls indirect can still end up in the accounting cost of the product. Keep two fields in your data: the procurement class, direct or indirect, and the accounting account. Mixing them makes reports disagree.
Why does the difference between direct and indirect procurement matter?
The difference matters because the two kinds of buying need different teams, processes, contracts and software. Running indirect purchases like production materials makes everyday buying slow; running production materials like office supplies puts supply at risk.
- Teams. Many large organisations have a direct team that sits close to operations and supply chain, and an indirect team that works with every department and with finance.
- Process. Direct orders are often created by the planning system from forecasts and stock levels. Indirect orders start with a person’s request and an approval, as shown in the procurement process.
- Supplier work. Direct suppliers are qualified and audited for quality before the first order, as explained in supplier quality management. Indirect suppliers are checked mostly for risk, price and compliance.
- Analysis. Direct spend is analysed by part number, against bills of materials and production plans, as described in direct spend analysis. Indirect spend is analysed by category and supplier, starting from invoices.
- Software. Direct buying runs mostly in the ERP. Indirect buying runs in catalogues, purchasing cards and procure-to-pay workflows; how to choose tools for it is covered in indirect procurement software.
A common problem shows the cost of a wrong split. A food producer reports packaging film as indirect in one plant and as direct in another. The head office compares the two plants and sees one spending far more on “indirect” than the other. The difference is only a coding choice, but a savings target is set on it. One written rule for each grey area avoids this.
How do you classify purchases as direct or indirect? A worked example
To classify a purchase, ask what it is for, then apply the organisation’s written rule for grey areas. The example is a fictional bakery group that sells bread and cakes to supermarkets. Its procurement team takes ten lines from last month’s purchase orders and classifies each one.
| Purchase | Class | Reason |
|---|---|---|
| Wheat flour, 200 tonnes | Direct | Becomes part of the bread |
| Printed bags for sliced bread | Direct | Reaches the customer with the product |
| Refrigerated transport of butter to the plant | Direct (written rule) | Inbound freight of a raw material, classed with the material |
| Stretch film for pallets in the warehouse | Indirect (written rule) | Used inside the warehouse; does not reach the shopper |
| Spare conveyor belt for the oven line | Indirect (MRO) | Keeps the line running; does not enter the product |
| Hairnets and gloves for bakers | Indirect | Hygiene supplies, not part of the bread |
| Laboratory tests of flour samples | Indirect | A service the company uses itself to check quality |
| Agency bakers for the night shift | Indirect, tagged to production | Contingent labour category; cost centre shows the production line |
| New oven, €1.2 million | Indirect (capital project) | An asset bought by engineering; capital expenditure |
| Accounting software subscription | Indirect | Used to run the business |
Three of the ten lines are direct; the written rules on freight, film and labour keep the split stable from month to month.
- List the purchase categories in your category tree, from raw materials to office supplies.
- Mark each category direct or indirect with the question: does it become part of what the customer pays for?
- List the grey areas you find, such as MRO, packaging, freight, machines and temporary staff, and write one rule for each.
- Store the class as a field on the category, so that every purchase order and invoice line inherits it.
- Check the split each quarter: look for the same supplier or item coded differently in two entities, and correct the rule or the data.
Classifying spend this way is part of a wider exercise, explained in spend analysis: collect the data, clean it, classify it and read it. A clear direct and indirect split is one of the first fields that analysis needs.
Should you improve direct or indirect procurement first?
It depends on where the risk and the waste are. In a manufacturer with unstable supply, direct procurement comes first, because a missing part stops revenue. Where most invoices arrive without a purchase order and many suppliers are used once, indirect procurement comes first, because control is missing.
Three figures help decide: the share of spend that is direct, the number of active suppliers on each side, and the share of invoices with a purchase order raised before the invoice. If indirect has many more suppliers and a low purchase order rate, start there; the practices are set out in indirect procurement best practices. If direct suppliers miss deliveries or quality, start with supplier qualification and long agreements.
Questions
Is direct procurement the same as direct spend?
They describe one subject from two sides. Direct spend is the money spent on materials and services that go into the product or service sold. Direct procurement is the work of buying them: planning, choosing and qualifying suppliers, agreeing contracts, ordering and following deliveries.
Do public bodies have direct procurement?
The terms come from manufacturing, but the CIPS definition covers services too. A public body that contracts out a service delivered to citizens, such as waste collection or school meals, buys something that forms part of the service it provides. Its IT, offices and consultants are indirect. Many public bodies simply use categories instead of the direct and indirect labels.
Is packaging direct or indirect procurement?
Packaging that reaches the customer with the product, such as a printed box, bottle or label, is usually direct. Packaging used only to move goods inside the warehouse, such as pallets and stretch film, is often indirect. Write one rule and apply it in every plant.
Is logistics direct or indirect procurement?
Inbound freight for raw materials is often classed with the materials as direct. Courier services, staff travel and removals are indirect. Outbound delivery to customers varies: some companies treat it as part of what the customer pays for, others as a selling cost. Decide once and record the rule.
Who manages direct and indirect procurement?
In large organisations, usually two teams. Direct buyers report into supply chain or operations and work with planning, quality and engineering. Indirect category managers cover IT, facilities, services, marketing and travel and work with budget holders and finance. Smaller organisations often have one team that handles both.
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