What is indirect procurement?

What does indirect procurement mean?

Indirect procurement is the process of buying the goods and services an organisation uses to operate, rather than the materials that go into what it sells. Typical examples are laptops and software, office cleaning, legal advice, marketing agencies, business travel and temporary staff. The money spent this way is called indirect spend.

The Chartered Institute of Procurement and Supply (CIPS) defines indirect procurement as the “procurement of goods or services that are not directly part of the final product or service”. Its glossary describes indirect spend as goods and services that help the organisation function but do not directly contribute to the end products or services it delivers.

A simple test works in most cases: if a customer would find the item inside the product, or the service is part of what the customer pays for, it is direct. Otherwise it is indirect. The paper in the printer of a bicycle factory is indirect; the steel tubes of the frames are direct.

What is the difference between direct and indirect procurement?

Direct procurement buys the raw materials, parts and services that go into the product or service the organisation delivers; indirect procurement buys everything else it needs to work. CIPS defines direct procurement as the “procurement of materials that form part of the finished good or service”. The difference changes who asks for the purchase, how it is planned and what can go wrong.

The line depends on the business, not on the item. Laptops are direct for a computer maker and indirect for a bank. For a consulting firm, subcontracted consultants placed with clients are direct, while its own office lease is indirect. Maintenance, repair and operating (MRO) supplies, such as spare parts, lubricants and safety equipment, are classed as indirect in most organisations even in a factory, because they keep the plant working without becoming part of the product.

Many large organisations run direct and indirect procurement in separate teams. The direct team sits close to operations and supply chain; the indirect team works with every department and with finance. How each step of the procurement process changes for the two is shown in the procurement process guide. The broader question of procurement vs purchasing is the subject of a separate guide in preparation.

What are the main indirect procurement categories?

Indirect spend is usually organised into a handful of categories, each managed by a buyer or category manager who knows that market. The names vary between organisations; the table shows a common split and the buying channel that often fits each part of it.

Temporary labour is often bought through a vendor management system, software built for contingent workers, explained in the vendor management system guide. Capital purchases, such as a new warehouse or a production machine, are usually handled as projects with their own approval rules, even when the procurement team treats them as indirect.

What does indirect spend look like in a real company?

The example below is a fictional manufacturer with €120 million of spend with suppliers in a year. Direct spend is €84 million with 180 suppliers. Indirect spend is €36 million, 30% of the money, but it is spread across 1,400 suppliers. The split between direct and indirect varies widely by sector; the pattern of many suppliers for less money is the common part.

Office and general supplies take less than 7% of indirect spend but almost half of the indirect suppliers. That long list of small suppliers is the tail; CIPS describes tail spend as the bottom 20% of spend, which usually accounts for 80% of suppliers. A catalogue and a purchasing card would remove most of those suppliers without a single tender. Tail spend management explains how to do it. Figures like these come from a spend analysis: without one, nobody knows that 655 suppliers sell office supplies to the company.

How does the indirect procurement process work?

The indirect procurement process starts with an employee’s need and ends with the supplier’s payment, through a channel chosen by value and category. A typical process flow runs as follows.

1. The employee states the need in one place, an intake form or an e-procurement request, rather than in an email to a supplier they know.
2. The request is routed to a channel: an item from a catalogue, a purchasing card for small amounts, a call-off from an existing contract, quotes from three suppliers, or a full tender for a large or new need.
3. The budget holder approves within the limits of the delegation of authority, and procurement checks the supplier and the price when the channel requires it.
4. A purchase order is sent to the supplier, so the commitment is recorded before the invoice arrives.
5. The requester confirms receipt of the goods, or acceptance of the service, in the system.
6. Accounts payable matches the invoice with the order and the receipt, then pays on the agreed terms.

Most control problems start at the first step. When an invoice arrives with no purchase order number, the purchase was made outside the process: the price was not checked, the supplier may not be approved, and the commitment was invisible to the budget. CIPS calls unauthorised spend, often with non-approved suppliers, maverick spend. The steps from requisition to payment are explained in the procure-to-pay guide, and the order itself in what is a purchase order.

Why is indirect procurement hard to control?

Indirect procurement is hard to control because the buying decisions are spread across the organisation and the data that would show them is poor. The common challenges are the same in companies and public bodies.

• Many requesters: hundreds of employees buy occasionally, do not know the rules and pick the supplier they used last time.
• Many small suppliers: each one needs onboarding, bank details and tax checks, and the cost of that work is high compared with what is bought.
• Services are hard to specify: a cleaning or consulting contract describes outcomes and hours, so price comparison and acceptance need more care than for goods.
• Budget holders feel ownership: marketing chooses its agency, IT chooses its software, and procurement is asked to join after the choice is made.
• Weak data: invoices are coded to general ledger accounts such as “other services”, so the category and the real supplier are hard to see without cleaning.
• Savings are hard to prove: a lower day rate means little if the number of consulting days doubles, so demand matters as much as price.

What does an indirect procurement strategy look like?

An indirect procurement strategy decides, for each category, how demand is shaped, which suppliers are used and through which channel employees buy. It is written per category, because the right answer for IT hardware is not the right answer for legal services. The category management guide shows how a category plan is built; for indirect spend, the strategies that save money usually combine five levers.

Demand management

Reduce or standardise what is bought: fewer laptop models, a travel policy with class of travel by flight length, approval for any new consulting assignment. Often the largest saving in indirect spend.

Supplier consolidation

Move the 655 office supply suppliers of the worked example to two or three under contract, so volume buys a better price and fewer suppliers need managing.

Contracts and frameworks

Agree prices and terms once, then let departments order from them. A framework agreement sets terms for future orders; each order under it is a call-off.

Easy channels

Catalogues, guided buying and purchasing cards make the approved route the fastest route. US federal rules make the purchase card the preferred method for micro-purchases (FAR 13.201(b)).

Competition at the right level

Quotes for medium purchases, a full RFP for large ones. How to run a request for quotation is in what is an RFQ, and the request for proposal in the RFP guide.

Global indirect procurement adds one more decision: which categories are bought centrally for all countries, such as software and travel, and which stay local, such as cleaning and catering. A central contract helps only if local teams can actually order from it in their language and currency.

What are indirect procurement best practices?

• Start from a spend analysis of indirect spend by category and supplier, refreshed on a fixed schedule, so that every decision rests on the same figures.
• Give each indirect category an owner who agrees the strategy with the main budget holders, before the next contract is signed.
• Make one front door for requests, so every need is seen before a supplier is chosen.
• Match the channel to value and risk: catalogue or card below a threshold, quotes in the middle, a tender above it, written in the procurement policy.
• Apply “no PO, no pay” once the channels work: accounts payable returns invoices without a purchase order number, with defined exceptions such as utilities.
• Keep the supplier list short and checked: onboard new suppliers only when no contracted supplier can meet the need.
• Report spend under management and compliance to budget holders every month, not only savings to the finance director once a year.

A short indirect procurement policy holds these rules: thresholds, channels, who may approve what, and the exceptions. A guide to writing a procurement policy is in preparation.

Which KPIs measure indirect procurement?

Indirect procurement KPIs measure control first, then cost. The table gives the common ones with their formula and a value from the worked example where one applies.

A full guide to procurement KPIs and how to build a dashboard is in preparation.

Which software supports indirect procurement?

Indirect procurement runs mostly in procure-to-pay and e-procurement software: intake forms, catalogues and punchout to supplier websites, approval workflows, purchase orders, receipts and invoice matching. Spend analysis tools show where the money goes, and sourcing tools run the quotes and tenders. How to choose the downstream tools is explained in procure-to-pay software, and what e-procurement covers in what is e-procurement.

Artificial intelligence in indirect procurement is used mostly where volume is high and value is low: classifying invoice lines into categories, routing a free-text request to the right channel, and collecting quotes for small purchases. Each output still needs a person accountable for it. The AI in procurement guide shows how to test these features. A guide to choosing indirect procurement software is in preparation.