Direct vs Indirect Procurement
Understand how procurement spend is categorized, what separates direct from indirect purchasing, and why the distinction shapes your sourcing strategy.
Course Overview
Every purchase a company makes falls into one of two categories: direct (materials and services that go into the product) or indirect (everything else that keeps the business running). Understanding this split is foundational — the sourcing strategies, supplier relationships, and risk profiles are fundamentally different for each.
Duration
30–40 minutes
Level
Beginner
Lessons
4 lessons
What you'll learn:
- The definition of direct and indirect procurement
- How spend categorization drives sourcing strategy
- Key differences in risk, relationships, and governance
- Common examples of each category across industries
- When and how to apply direct sourcing approaches
- How modern platforms handle both categories
What Is Direct Procurement?
Figure 1: Direct vs indirect procurement — how every business purchase falls into one of two fundamental categories
Direct procurement covers goods and services that are directly incorporated into a company's products or delivered services — the inputs your customers ultimately pay for. For a manufacturer, this means raw materials, sub-components, and contract manufacturing. For a software company, it might include licensed third-party code, cloud infrastructure costs, or outsourced development work that ships in the product.
Examples of direct procurement by industry:
- Manufacturing: Steel, semiconductors, plastic pellets, contract assembly
- Food & Beverage: Raw ingredients, packaging materials, co-manufacturers
- Pharmaceuticals: Active pharmaceutical ingredients (APIs), excipients, contract labs
- Software / SaaS: Cloud infrastructure, licensed APIs, white-label components
- Retail: Finished goods purchased for resale, private-label merchandise
Because direct spend is tightly linked to revenue and product quality, disruptions here have immediate customer-facing consequences. A shortage of a critical component halts production. A quality failure in a raw material triggers a recall. This is why direct procurement typically commands more strategic attention and tighter supplier integration than indirect.
Characteristics of Direct Spend
Revenue-linked
Directly impacts cost of goods sold (COGS) and product margin.
Volume-sensitive
Purchased quantities are driven by production forecasts and demand planning.
Quality-critical
Specifications are precise; deviations affect end-product quality.
Supply continuity risk
Shortages or supplier failures can halt production lines.
Longer supplier relationships
Strategic suppliers require deeper integration (EDI, VMI, JIT).
Engineering involvement
Specifications are often set by R&D or engineering, not just procurement.
What Is Indirect Procurement?
Indirect procurement covers everything a business buys to operate that does not directly become part of the product. It's sometimes called MRO (maintenance, repair, and operations), overhead spend, or G&A (general and administrative) spend.
Common indirect spend categories:
• IT hardware, software, and SaaS subscriptions
• Office supplies and facilities management
• Professional services (legal, consulting, audit)
• Marketing, advertising, and events
• Travel and expense
• HR services (recruiting, training, benefits)
• Utilities, telecoms, and fleet
• Maintenance, repair, and operations (MRO)
Indirect spend is often fragmented across many departments and suppliers, making visibility and control a persistent challenge. A CFO might discover that the business has 400 active SaaS subscriptions across teams — many redundant, few strategically managed.
The “tail spend” problem: In most organizations, 80% of suppliers account for only 20% of spend. This tail — hundreds of small, unmanaged suppliers — is almost entirely indirect. Rationalizing it through preferred suppliers and catalogs is one of the fastest ways to reduce procurement overhead.
Key Differences: Strategy, Risk, and Governance
The direct/indirect divide isn't just a labeling exercise — it shapes how procurement teams should structure their work.
| Dimension | Direct Procurement | Indirect Procurement |
|---|---|---|
| Strategic priority | High — tied to COGS and product quality | Medium — tied to operating efficiency |
| Sourcing frequency | Ongoing / continuous replenishment | Project-based or periodic refresh |
| Supplier relationships | Deep, long-term strategic partnerships | Transactional to preferred vendor programs |
| Risk profile | Supply continuity, quality, geo-political | Maverick spend, contract leakage, compliance |
| Key metrics | Lead time, defect rate, on-time delivery, COGS | Spend under management, cost avoidance, compliance rate |
| Buyer expertise | Engineering, supply chain, manufacturing | Category knowledge, negotiation, vendor management |
| Buying channel | PO-based, EDI, consignment, VMI | Catalog, guided buying, spot buy, p-card |
| Sourcing events | RFQ for price competition, long-term contracts | RFP for complex services, blanket POs |
Organizational Ownership
In large enterprises, direct and indirect procurement are often managed by separate teams with different reporting lines. Direct procurement may report into supply chain or operations. Indirect typically reports into finance or a shared services center. In mid-market companies, a single procurement team handles both — and the tension between the two is a constant prioritization challenge.
Applying Sourcing Strategy by Category
The Kraljic Matrix — the most widely used tool in strategic sourcing — segments spend by supply risk and profit impact. Direct materials almost always fall in the “Strategic” or “Bottleneck” quadrants. Indirect spend is more commonly “Leverage” or “Non-critical.”
Bottleneck
High risk, low spend. Secure supply. Often niche direct materials.
Strategic
High risk, high spend. Partner deeply. Core direct materials.
Non-critical
Low risk, low spend. Automate. Most tail indirect spend.
Leverage
Low risk, high spend. Compete aggressively. Much indirect spend.
↑ Profit Impact | Supply Risk →
Practical Sourcing Decisions
High-spend direct material from a sole-source supplier
Develop a second source, negotiate long-term supply agreements, build inventory buffers.
Commodity direct material (e.g., bulk steel, standard fasteners)
Run competitive RFQs, use reverse auctions, aggregate volume across sites.
Fragmented indirect spend (e.g., SaaS tools bought by each team)
Rationalize to preferred vendors, implement a catalog, enforce PO policy.
High-value indirect service (e.g., enterprise software contract renewal)
Run a full RFP, benchmark against market, negotiate on multi-year terms.
What's Next
Now that you understand how spend is categorized, explore how direct materials are sourced in practice.
See Direct and Indirect Sourcing in Action
Nvelop handles both direct and indirect sourcing events in a single platform — RFQs, RFPs, supplier scorecards, and contracts.