Direct vs indirect procurement: What’s the difference?

Procurement — the processes of purchasing and managing the supplies you need to operate — is fundamental for business growth. Whether you’re processing invoices, outsourcing labor, or buying office furniture, you’re practicing one of two forms of procurement: direct or indirect.

And while both types of procurement are crucial to your daily operations, it’s important to understand their definitions, differences, and benefits — as well as examples of each — to figure out how to best use them in your organization. By practicing direct and indirect procurement well, you’ll be able to improve relationships with suppliers (especially cost-effective, reliable, and high-quality ones), improve profitability, and increase overall cash flow.

Here’s a look at direct vs indirect procurement.

Overview of direct procurement

Direct procurement involves the goods you order from suppliers frequently (primarily in larger quantities) that are necessary to make your product or perform a service — like concrete if you’re a contractor or brushes and rollers if you’re an industrial painter. Basically, direct procurement is the process you need to follow to get the raw goods, materials, and services you use to ultimately make money.

On top of directly boosting revenue, effective direct procurement practices help you

  • Develop and nurture relationships with longtime suppliers so you can avoid switching to new, more expensive ones
  • Improve supply chain resilience, so you can avoid or quickly recover from supply chain disruptions (like a change in consumer expectations or material shortages)
  • Audit product quality, safety, and compliance standards
  • Streamline workflows to create more effective, productive processes
  • Provide end-to-end visibility for both internal and external supply chain partners

Overview of indirect procurement

Indirect procurement, on the other hand, refers to purchasing the goods and services you need to run your business but not necessarily to make your product — like office supplies, computers, airline tickets, and software subscriptions. While these purchases are important and vital to your everyday operations, they aren’t used directly to create your product.

However, indirect procurement does contribute to your business processes by allowing you to

  • Get products to market faster and more efficiently
  • Consolidate purchases through both simplified recordkeeping and bulk discount options
  • Automate processes to help you reduce both manual labor costs and human error
  • Expedite onboarding processes
  • Meet employees’ needs by providing the proper tools and resources to get work done efficiently

The differences between direct vs indirect procurement

While both direct and indirect procurement are important for business (and can’t exist without each other), they differ in their overall approach and function. Consider, as an example, your organization’s sales and marketing teams. They both have the same goals — to generate leads and make money — but they reach those goals differently.

There are three main areas where indirect and direct procurement differ.

1. Supplier relationships

Though both direct and indirect procurement rely on vendors for goods and services, direct procurement places more emphasis on developing and maintaining long-term relationships with vendors. Direct procurement relies more on strong vendor relationships to provide the materials necessary to make products.

In contrast, indirect procurement encourages a more transactional relationship with vendors, since indirect supplies are less essential to directly generating revenue (and there’s more vendor options to choose from). Your business can easily go elsewhere if the price or quality changes.

2. Spending

One of the primary differences between direct vs indirect procurement is how businesses budget for them. On one hand, direct procurement is critical to your bottom line, and your organization needs to plan and budget its costs well in advance to avoid supply chain delays, enhance efficiency, and keep operations running smoothly.

When budgeting for indirect procurement, on the other hand, most companies are less strict about who manages the spending and how because those materials have less impact on the long-term success of your business. Typically, multiple managers across several departments handle spending on a case-by-case basis.

3. Inventory management

The process of planning, acquiring, storing, and tracking inventory is tied more to direct procurement. Because direct procurement supplies are more expensive and critical to your business than indirect ones, tracking and managing them helps you better

  • Establish and maintain high quality and compliance standards
  • Prepare for (or completely avoid) delays in case of a supply chain breakdown
  • Understand market trends, so you can avoid either an oversupply or an undersupply of goods

Automate procurement processes with Jotform

As important as direct and indirect procurement are for your business and workflow management, digitizing your processes is even more advantageous.

With software like online form builder Jotform, you can manage both your direct and indirect procurement processes from one centralized platform. It’s easy to use, fully customizable, and completely code-free, helping you create professional, powerful forms, purchase requests, sales agreements, and contracts in mere minutes.

With thousands of templates to work from, Jotform makes it easy to create relationships with new vendors (thanks to supplier registration and vendor contact form templates), as well as maintain current supplier relationships (with product purchase order form and terms and conditions templates), budget accordingly (with pricing request templates), and manage inventory (with receiving checklist and inspection form templates).

Having a strong understanding of direct vs indirect procurement can help you reduce supplier risk, lower costs, share purchasing responsibilities, and identify waste and inefficiencies company-wide.

Now that you have a greater appreciation of what each kind of procurement brings to the table and how you can digitize them, you’re better equipped to manage both effectively.

Photo by cottonbro studio

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