One of my students asked about the difference between direct and indirect spend, so I thought I’d post my reply here so that others may benefit from the definitions, too…
Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, etc.
In what type of activity does a procurement professional use this direct vs. indirect distinction?
Mainly in spend analysis when preparing a cost savings and sourcing strategy.
For example, a procurement professional may determine how much is spent on direct purchases and how much is spent on indirect purchases. Then, the procurement professional would further classify the spend in each of those segments. Direct spend may have classifications such as steel, hardware, plastics, subcontracted labor, etc. Indirect spend may have classifications such as shop supplies, computer equipment, janitorial services, etc. Then, for one, several, or all of those classifications, the procurement professional would develop a cost savings and sourcing strategy for each category.
Do you need more information on how to analyze your spend (both direct and indirect), put together a savings strategy, conduct strategic sourcing, and save money for your organization?