Direct and indirect procurement are two sides of the same coin. And while you might lean towards emphasizing direct over indirect, we’re here to show you that placing equal importance on the two can benefit your procurement operations.

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Key Points

• What Is Indirect Procurement?
• What Is Direct Procurement?
• Direct vs. Indirect Procurement
• Strategies & Best Practices
• Next Steps

What Is Indirect Procurement?

Indirect procurement is the process of acquiring goods, services and materials that support your daily operations but don’t directly contribute to products or services you sell.

Essentially, it covers everything that doesn’t contribute to your end product or service that you still need to keep your business running.

Examples:

• Rent or property/building ownership payments
• Cleaning supplies, toilet paper and hand soap
• Facility and asset maintenance
• Building utilities
• Office coffee and snacks
• Office supplies
• Travel expenses
• Human resources
• Professional services
• Marketing
• Software
• Hardware

Think of it this way — you need to procure proper facility and maintenance management services to keep your building and assets operating efficiently. It’s a necessary expense that doesn’t directly contribute to your end product or service.

For another example, look at your HR processes that involve procuring or retaining employees, such as recruitment and talent management. They both play vital roles in staffing your operations but don’t directly supply the customer with a product, service or material.

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What Is Direct Procurement?

Direct procurement is the process of acquiring goods and materials that will reach consumers, either as is or after processing. You generally deal less with services when it comes to direct procurement than with indirect.

Direct procurement looks different depending on the industry you’re in. For example, retail outlets largely need to procure finished products. Construction, on the other hand, focuses more on materials. Food and beverage companies, like restaurants, need both.

Examples:

• Retail: Clothing, grocery and department stores all aggregate ready-to-sell products from various suppliers. They purchase the products in bulk and sell them as is. They may need materials as well. For example, a grocery store with a bakery needs ingredients to make finished products.
• Construction: Construction primarily focuses on procuring materials, such as cement, wood, plaster and more, to build the final product for customers.
• Restaurant: Restaurants generally seek out a healthy mix of materials and ready-to-sell products for their direct procurement needs. For example, they need ingredients (materials) to create dishes, but they also need to stock products like ready-made beverages or, in some cases, food.

Traditionally, companies place higher precedence on direct procurement needs, as the procured goods and services contribute directly to revenue.

Direct vs. Indirect Procurement

What you use the procured goods for is the core distinguishing factor between direct and indirect procurement. As mentioned above, direct focuses on goods and services that reach your customers, while indirect is for your daily operations outside of end products.

Let’s break down the differences further:

Direct Procurement	Indirect Procurement
Contributes to your final product or service, impacting your revenue	Contributes to daily operations that don’t impact the goods or services you sell
Is essential and high priority	Is non-essential and low priority
Accounts for the majority of your company’s costs	Accounts for a lower percentage of your costs
Involves low-frequency, bulk purchases	Involves high-frequency, low-quantity purchases

These differences are a general rule of thumb. Your company is unique, so chances are, your procurement needs may vary.

Honestly, some of the distinguishing characteristics of indirect procurement are out of date and could be costing you more — like treating them as low-priority, high-frequency and low-quantity purchases. But we’ll discuss strategy in the next section.

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Strategies & Best Practices

When it comes to procurement strategies, you can apply most best practices to either direct or indirect operations. Even if a best practice is more useful to one, you’ll find it’s still applicable to the other.

With that in mind, we’ll cover strategies as a broad, overarching list that covers both procurement types. For quick reference, here’s our list of best practices that we’ll delve deeper into below:

• Implement Procurement Software
  • Increase Spend Visibility
  • Centralize Data
• Source Strategically
• Hide Your Budget & Timeline
• Bring in Finance & Accounting Departments
• Partner With a GPO
• Manage Talent Proactively
• Refine Practices

Implement Procurement Software

Implementing the right procurement software can be extremely advantageous in terms of spend visibility, data management and overall purchasing practices.

While centralizing data and increasing spend visibility are best practices in and of themselves, software can make achieving those goals much simpler.

Additionally, procurement systems generally integrate with other systems you use for your supply chain management processes. In some cases, they may even directly offer capabilities that assist with tasks outside procurement.

Software can improve your procurement processes in plenty of ways, but let’s focus on how it can help you centralize data and increase spend visibility to optimize your direct and indirect procurement strategies.

Centralize Data

With the right solution, you can centralize your data for every procurement stage, from sourcing to purchasing to receiving.
You’ll have an at-a-glance view of previously procured goods and services, including quantities, costs and suppliers, helping you make quick decisions about future purchases or monitor your open orders.

Procurement solutions like Tradogram let you create an item database so you can quickly access goods you regularly purchase along with details about them. If you plan to start purchasing something new, you can add that to your database for later use as well.

If you opt for a system with invoice processing capabilities, your financial team can access invoices, auto-generated based on purchase orders, directly from the system, reducing the chance of a paper invoice falling through the cracks — figuratively and literally!

And, with centralized data, you’ll find increased spend visibility. So let’s take a look at how.

Increase Spend Visibility

With your procurement information digitally stored in one system, you can auto-populate dashboard views and auto-generate reports. Think of the possibilities — for example, no more complex Excel spreadsheets for a detailed view of your procurement operations.

Systems like Workday Spend Management let you drill down into specific cost categories for insights into micro levels, such as spending on indirect vs. direct procurement, or look at a macro overview of your total spending.

Either way, procurement software can increase spend visibility so you can make smarter decisions regarding direct and indirect procurement and cut down on maverick spend.

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Source Strategically

Strategic sourcing is vital to minimizing procurement costs while ensuring you have high-quality goods and services to provide the best possible end product to your customers.

While they go hand in hand, there are some key differences between sourcing and procurement. Think of it this way — before you can procure goods and services, you need to source the suppliers you want to provide them.

You can’t really have one without the other, so a solid procurement strategy, whether direct or indirect, relies on a sturdy sourcing foundation.

With that in mind, here are some tips for sourcing strategically:

• Balance Costs & Quality: The line between finding the best deal and sacrificing quality to cut costs can be thin. You have to decide what level of quality you’re comfortable with and the costs you’re willing to pay.
• Evaluate Suppliers: If you haven’t recently, go back and evaluate supplier relations with your current vendors. Are they reliable? Are they offering the best price for the quality of goods or services? Are you willing to keep paying more to maintain a trusted relationship?
• Shop Around: Don’t be afraid to shop around for suppliers. If you have industry contacts, reach out to them to see which vendors they rely on. Take quotes to other purveyors to see if they’re willing to match prices.

Hide Your Budget & Timeline

Hiding your budget and timeline is especially important while working with a new supplier. It may not be necessary while dealing with a vendor you already have a trusted relationship with — at least as long as they’re sticking to your original agreements.

When approaching a new supplier for your procurement needs, however, keep your cards close to your chest. Make them quote you a price and timeframe before you mention anything about what you’re willing to pay or when you need goods.

This strategy puts the onus on the supplier to provide a fair price and timeframe to try and entice you to work with them. It also gives you bargaining power. Chances are they won’t quote you the lowest price they’re willing to go with, so you may be able to lower it.

Bring in Finance & Accounting Departments

You’re going to have to loop in your finance and accounting team(s) one way or another — either with physical receipts or through software access. As far as best practices go, though, software has the advantage.

If you use procurement software to store receipts or even automatically convert invoices to receipts, your accounting team can get the jump on recording costs, analyzing spend and generating reports.

Better yet, you can look for a platform that offers native accounting capabilities or integrates with your existing accounting software. Look for API access or capabilities to auto-populate your accounting system with procurement spending.

Partner With a GPO

Partnering with a group purchasing organization (GPO) is a great way for organizations — especially smaller ones with minimal procurement needs — to get bulk procurement discounts without sitting on excess inventory.

GPOs usually contract suppliers to secure discounted rates on certain products or materials. They then partner with companies who need said products and materials to meet minimum order requirements for the discounted rate.

A partnership with a GPO can help you reduce spend on the items you already procure and open the proverbial door to new procurement opportunities that would otherwise be unfeasible.

Manage Talent Proactively

Talent management is as important to successful indirect and direct procurement strategies as choosing the right suppliers to work with. In fact, your employees are the ones who’ll be scouting the best suppliers to work with.

Taking proactive steps to foster well-being and employee satisfaction with your existing workforce and improve recruitment processes can lead to long-term cost savings. A strong procurement team can put the other strategies into action for you and find the best cost-to-quality ratios for your procurement needs.

Refine Practices

Industry standards, costs of goods and services, supplier reliability, demand — they all fluctuate. Just because a procurement strategy worked in the past doesn’t mean it’ll continue to be your best course of action.

It’s not enough to just reevaluate your suppliers. You need to evaluate and refine your overall procurement strategies regularly as well.

For example, let’s say you’ve been working with a GPO from the early days when you didn’t have the demand to meet bulk discount requirements. But, since then, you’ve expanded your operations significantly and could meet the minimums on your own.

In that case, it may be time to consider moving away from your partnership with the GPO and start reaping bulk discount benefits on a larger scale, strictly within your organization.

All said and done, business is fluid, so your strategies should be too.

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Next Steps

Whether you’re trying to optimize your direct or indirect procurement strategy, the best practices primarily look the same. The question is, do you need a new platform to facilitate these actions and take your procurement processes to new heights?

If the answer’s yes, consider checking out our free comparison report. It lets you create custom comparisons of the leading procurement solutions so you can find your perfect match.

How do your direct and indirect procurement processes differ, if at all? Let us know about your effective strategies below!