Are you looking over your shoulder and wondering if anyone is watching you type “what’s the difference between direct and indirect spend” into Google? Don’t worry, we’ll pass the answer to you and make sure no one’s looking.
To help answer this question, imagine what the purchasing for a fictional car manufacturer called Spaceman Automobiles looks like. It’s way ahead of its time. But back to the difference between direct and indirect spend.
To make all those cars, Spaceman Auto needs a lot of materials. Direct spend is all the purchases of goods and services directly involved in the manufacturing of a product. In this case, that means everything from the bolts to the timing belts are part of direct spend as well as the direct raw materials, like the aluminum they use to make the car frame. All that is part of direct spend.
Of course, to make and sell its cars, Spaceman Automobiles needs a whole ecosystem of supporting teams, from IT to brand marketing. And that’s what indirect spend is: it relates to every purchase not directly related to the manufacturing of the product. So think, IT support, office supplies (thanks, Dunder Mifflin), cafeteria supplies, garden services, etc.
How does this affect procurement activities?
With direct spend, procurement has traditionally spent its energy building and maintaining relationships with their company’s suppliers. So the direct procurement team at Spaceman Autos is very involved in building healthy long-term relationships with its suppliers. While with indirect spend, their focus is on managing spend more than it is on managing relationships: it’s much more about controlling costs than it is building relationships.
As you’d imagine, direct procurement deals with physical products, and physical products need to be kept in stock. So the direct procurement team has to account for a healthy inventory management strategy, whereas indirect procurement is entirely structured by demand. With indirect procurement, purchases are only made when they’re needed, limiting the need for inventory management.
In the past, many companies relied on a centralized direct procurement team and a decentralized indirect procurement strategy. However, the decentralized strategy can lead to murky approvals and confusing reports, while a centralized procurement team can lead to too specialized processing that leads to confusion in the company as a whole.
To solve both problems, companies can upgrade to new systems that take advantage of modern technology to create a more intuitive user experience for the whole company and make all purchasing and approvals transparent and easy to analyze.
Want to learn more about the whole procure-to-pay process? Get your copy of our Ultimate Guide to Procure-to-Pay Success: Your key to buying better and saving more.
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