What Is Indirect Procurement?
What Is Indirect Procurement?
Indirect procurement alludes to money spent on anything other than purchasing materials involved in the direct manufacturing of goods.
All the money spent to keep the manufacturing operations running falls under indirect procurement. Simply put, indirect procurement involves the cost of items used to maintain the day-to-day operations in a manufacturing setup.
These items can include:
- Office equipment and supplies
- Rent for facilities
- Software licenses
- Outsourced services (accounting, HR, and IT)
- Marketing services
- Travel expenses
Indirect purchases don't exert any direct input into the final product you deliver to customers. However, they play a critical role in ensuring the process of turning direct suppliers into finished products goes smoothly.
Indirect procurement accounts for 15 – 27% of a company's total revenue. And the total operational impact it can have on a company—either positively or negatively—can be significant.
Yet, many organizations pay the most attention to direct procurement, with indirect procurement consistently taking the back seat. This is a big mistake because indirect procurement is critical to cost-effective operations and profitability.
Indirect Procurement vs. Direct Procurement: What's the Difference?
The difference between direct and indirect procurement is in the function they address.
While direct procurement focuses on securing the key suppliers that form part of the final product, indirect procurement deals in the supply of incidental goods. With direct procurement, you're buying items needed to manufacture the goods sold to consumers.
Indirect procurement, on the other hand, enables a company to function effectively.
With indirect purchases, you're spending on things that will facilitate the manufacture of the goods sold to the customer. Unlike direct procurement, these items don't become a part of the final product.
Want to learn more? Check out our procurement guide.
