Direct vs. Indirect Procurement

Source: ESB Professional/Shutterstock.com

Summary

• Direct and indirect procurement account for all purchases within a business. 
• Direct procurement involves acquiring goods and services directly involved with your business’s core aspects (e.g., raw materials, ingredients and machinery).
• Indirect procurement sources supporting goods and services, such as office stationery, software and advertising. 
• They are unique functions that require individual strategies and resource utilization.

Procurement is a key area in business and crucial for an efficient supply chain and a productive work environment. Originally intended to integrate purchasing with supply chain management, procurement processes have been refined into two distinct types: direct and indirect procurement. 

While they often overlap, they must be treated as unique functions that use different purchasing strategies and inventory management techniques — understanding the difference between the two allows businesses to manage their supply chain and budget more efficiently. 

Effective procurement strategies can optimize cost-savings, time management and resource utilization, significantly impacting profitability.

Find Quality Custom Shipping Boxes at Air Sea Containers

What Is Direct Procurement?

Direct procurement is the process of purchasing raw materials, goods, supplies or services needed for production or that contribute directly to the core aspects of your business. Goods acquired from direct procurement form essential components of final products, so you must ensure you have reliable suppliers and effective inventory management systems in place. 

Direct procurement often involves frequent bulk purchasing. If there are issues with direct procurement, such as a shortage of raw materials or internal errors that lead to a missed order, a business may be unable to operate as normal. For example, if a textile company doesn’t secure adequate quantities of fabric, it cannot continue manufacturing apparel, linens and other textile-based products.

For product-based businesses, common examples of direct procurement include sourcing: 

• Raw materials
• Machinery, equipment or tools
• Parts and components for manufactured goods
• Items for resale
• Product packaging, such as shipping barrels or custom shipping boxes
• Ingredients for food products
• Subcontractors 

Service-based companies also use direct procurement for managing labor-related costs, such as wages, salaries or subcontracted services.

Source: ImageFlow/Shutterstock.com

What Is Indirect Procurement?

Indirect procurement refers to acquiring goods and services that support day-to-day business operations. As non-production goods, these items don’t directly impact the final products or services provided to customers. While they are still essential to a business, goods acquired through indirect procurement play a supporting role by facilitating administrative duties, generating sales and ensuring employees have the right tools for their job. 

Indirect procurement can involve a wide variety of purchases, with certain businesses requiring more indirect procurement than others. Examples of indirect procurement include: 

• Office supplies and stationery
• Workplace furniture
• Computers and office equipment, such as phones and printers
• Utilities
• Workplace maintenance and facility management 
• Travel expenses
• Employee training
• Advertising and marketing campaigns
• Consulting services
• Software costs

Air Sea Containers Provides UN-Rated Shipping Barrels and Hazmat Drums

Differences Between Direct and Indirect Procurement

Both types of procurement involve purchasing items to ensure your business runs smoothly. However, there are several key differences between them. 

• Inventory Management

Inventory management is crucial for direct procurement to ensure core ingredients, raw materials and products are kept in stock. For example, if you don’t have enough hazmat boxes in storage, you may be unable to meet international shipping standards, impacting distribution demands. 

You must be cognizant of factors that could disrupt the supply chain, cause supply shortages and impact pricing stability. This can help you minimize any knock-on effects that could interfere with product manufacturing and service offerings. 

Indirect procurement is typically based on demand and the nature of the business, so inventory management may be less of a priority. 

• Supplier Relationships

To ensure consistency, quality and efficiency in the long term, direct procurement managers or teams focus on developing strong professional relationships with suppliers. 

Those responsible for indirect procurement must adopt a more transactional focus, finding ways to reduce costs with each purchase. 

Source: Motortion Films/Shutterstock.com

• Organization Structure and Responsibilities

Procurement is a crucial aspect of any business. Often medium- to large-sized businesses have employees or teams dedicated to managing all aspects of the direct procurement process. 

Indirect spending responsibilities can often be divided among employees in different departments. 

• Use of Technology 

Many businesses use direct procurement technology to analyze expenditure risks, streamline purchasing processes, maintain product quality and reduce costs. Investing in eProcurement software like Procurify, Coupa or SAP Ariba can be a worthwhile investment that increases long-term profitability.

While large-scale organizations may use similar technologies to reduce indirect procurement costs, this isn’t as common for small- to medium-sized organizations. 

Find a Reliable Shipping Packaging Supplier with Air Sea Containers

Procurement is made easier by developing relationships with reliable suppliers. At Air Sea Containers, we provide a wide range of quality shipping packaging and supplies at competitive prices.

Browse our online catalog for our full range of packaging items such as custom boxes, shipping barrels, labels and placards, IBCs and 4GV boxes. Or, contact us via our online form for more information about our products.