October 13, 2022
Explainer

A guide to indirect procurement: What it is and how it differs from direct procurement

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Businesses of all sizes require a variety of services and products to run smoothly—from raw materials for manufacturing to office supplies like phones and laptops. You can procure these essential products and services through direct, services, or indirect procurement. 

Understanding the differences between these procurement types will help you optimize your indirect procurement processes, create a healthy financial culture at work, and reduce costs. 

What is indirect procurement?

Indirect procurement is the process of sourcing and purchasing goods and services that ensure a company’s daily operations run smoothly. In contrast to direct procurement, indirect procurement does not deal with goods and services directly related to manufacturing a product.

Recently, indirect procurement has become important due to the rise of SaaS tools and services. As companies sell more virtual goods, optimizing indirect procurement processes is more important than ever.

Some examples of indirect procurement

Here are some examples of materials sourced via indirect procurement:

  1. Commercial space: Companies need factories, offices, and business properties to function smoothly.
  2. Utilities: Commercial properties require water and electricity for equipment to work and the business to function.
  3. Office supplies: Employees need laptops, phones, printers, and stationery to efficiently do their jobs.
  4. Travel solutions: Employees may need to travel to business meetings, conventions, and training.
  5. Tool subscriptions: Many companies rely on SaaS subscriptions to products like Slack or Asana to maintain prompt communication and organize tasks.
  6. Maintenance services: Timely equipment repairs are essential when a company relies on that equipment to create their product or service.
  7. Security products and services: Safety equipment like cameras and ID scanners ensure company premises stay secure and employees receive a safe working environment.

Indirect procurement spending benchmarks

A business’s indirect procurement costs vary according to its size and industry. An online business selling SaaS products, for example, may spend a much larger percentage of revenue on indirect procurement than a furniture manufacturing company. 

A 2017 study by Dryden Group estimated companies spend between 15 to 27 percent on indirect procurement. However, this number has changed significantly. McKinsey and Company reckons indirect procurement costs have increased seven percent annually since 2011.

Minimizing these indirect costs is essential for a business’ success. Typically, companies source and procure these products and services at a much higher frequency than direct supplies. As a result, they give these purchases less thought, leading to spending inefficiencies.

Direct versus indirect procurement

Direct procurement is the sourcing and purchasing of supplies that are directly tied to producing a company’s goods and services, while indirect procurement deals with all other purchases. Here are some examples of raw materials that direct procurement teams deal with:

  1. Wood: Used by the construction industry to build homes
  2. Food: Used by food retailers to create their products
  3. Industrial machinery: Used to manufacture finished goods in various industries such as automotive machinery and engineering
  4. Textiles: Used by the fashion industry to manufacture clothes and related products

Differences between direct and indirect procurement

Here are the differences between direct and indirect procurement:

Direct versus indirect procurement examples

Here are some examples and key differences between direct and indirect procurement within specific business sectors:

  • Construction: Direct procurement includes sourcing material such as wood, concrete, bricks, nails, and other building materials used to build the homes the company is paid for. Indirect procurement includes sourcing materials and services like building equipment repairs, worker training, and equipment storage. These are necessary for the business to run smoothly but don’t contribute directly to the finished product’s manufacturing.
  • Bakeries and confectionery: Direct procurement includes sourcing raw food products like sugar, flour, eggs, and ovens or mixers used during the baking process. These goods are directly responsible for creating the finished products sold to customers. Indirect procurement expenses include purchasing the retail space, paying electricity and water bills, buying security cameras, and procuring point-of-sale (POS) devices that are needed to run the business. These products are essential, but do not contribute directly to the manufacturing process.
  • Electronics manufacturer: Direct procurement expenses include purchasing microchips, hard drives, screens, and other electronic components used to build the finished goods. Indirect procurement expenses include factory rent, office equipment like tables and chairs, security cameras, and ID scanners that prevent theft or loss. These products and services ensure a safe and comfortable working environment, helping companies attract top-notch talent.

What is services procurement?

Services procurement is the sourcing and purchasing of services from suppliers in fields where the business may not have any expertise.

Unlike material procurement, which is the category most direct and indirect procurement purchases fall under, services procurement does not include sourcing any physical products or materials.

Examples of services procurement for many small businesses include: 

  • Human resource management for recruitment and onboarding
  • Legal services
  • Financial guidance from accounting, investment, or consulting firms, and accounting software for small businesses 
  • Public relations services for marketing and public image campaigns
  • Call centers to manage customer support lines

How to increase indirect procurement efficiency

Your business must adhere to meticulous planning, monitoring, and oversight procedures when managing indirect procurement functions. These workflows reveal and prevent unnecessary spending. 

Here are some highly effective strategies to improve your indirect procurement management.

Track your procurement team’s maverick spending

Unlike direct procurement, indirect procurement spending can be tricky to track since there are several products and services your business may require to function properly. For instance, tracking toiletry purchases, broken light bulbs, or new computer cables can be challenging.

One way to keep track of expenses is by using a prepaid credit card for your business’ indirect procurement purchases. This allows you to assign a budget to each card while actively managing and monitoring how much each department or cardholder is spending.

An electronic spend management platform helps you track your spending in advance by offering real-time expense reports and smart spending predictions. The result is full visibility into your spending and expenses. You’ll also prevent common indirect procurement issues such as duplicate SaaS subscriptions or shadow IT.

Practice strategic sourcing

Strategic sourcing requires you to carefully consider every part of your supply chain. Start by assessing your suppliers and quantifying their impact on your bottom line. You can create a central repository of approved tools and resources to minimize unapproved spending on SaaS tools and other indirect expenses. 

Here are a few processes you can execute as part of a strategic indirect procurement program: 

  • Identifying new suppliers for existing procurement needs.
  • Carrying out broad market research to compare your expenses on certain products to competitor purchase prices.
  • Evaluating several suppliers thoroughly before awarding contracts related to indirect procurement.
  • Creating a list of tools and purchases currently in use and examining whether any of these need replacing.

Leverage technology

Use electronic tools to track your spending and create central repositories to help your employees figure out approved spending categories. You can also use analytics tools and market research platforms to research trends, unearth cost savings, and give yourself a competitive advantage over less technologically-inclined competitors. 

You can also use technology to automate large portions of your indirect procurement process and tracking. For instance you can automate:

How to slash indirect procurement costs with Ramp

Indirect spending and the procurement strategies connected to it consume a sizable chunk of every business’s revenue. From contract negotiation to vendor management, here’s how Ramp can satisfy your business needs and maintain control over your indirect procurement costs.

Vendor management

Supply chain management is vital to any business’s procurement operations. Ramp helps you track all your vendors, subscriptions, and contracts from one user-friendly dashboard. 

Ramp will also find you the best price for the products or services you purchase from each of your vendors. Thanks to constant cost analysis in the background, you no longer have to look for the best-priced vendors yourself.

Contract negotiation

Contract management and negotiation is an essential part of any business’s financial planning and analysis process. 

Ramp makes this process more efficient by benchmarking all your contracts against thousands of other customers. On the basis of these potential savings, Ramp can offer you access to the professional services of a savings expert to negotiate contract prices with your vendors on your behalf.

Centralize procurement

Having an accurate report of your business’s procurement spending, whether direct or indirect, will reveal significant savings opportunities. Ramp offers its clients real-time reporting of everything their business spends on a single, easy-to-navigate dashboard. 

Ramp also provides AI-powered insights into these expenses, like identifying duplicate subscriptions and orders. You can also choose to receive alerts regarding unusual increases in certain spending categories and get to the bottom of spending inefficiencies.

Unlimited corporate cards

Corporate cards are a great way to keep track of your indirect procurement expenses. Ramp offers its clients unlimited physical and virtual corporate cards with no additional fees. 

On top of that, Ramp gives you a matchless level of control over employee card spending through category management. Whether restricting spending to a specific vendor or blocking certain spend categories entirely, Ramp simplifies and automates expense management.

Invoice processing

Invoice processing is one of the most time-consuming steps in indirect and direct procurement management. Ramp helps you bypass the long hours required to log every invoice and receipt. Instead, it extracts all necessary data from vendor invoices such as names, line items, payment amounts, and payment details with 99% accuracy. 

Thanks to invoice processing automation, you can upload and forward invoice emails to relevant departments to process hundreds of invoices in just a few seconds.

Both direct and indirect procurement play vital roles in the success of any company, regardless of its size. Taking a closer look at the tools available to perfect your indirect procurement process is a great first step towards ensuring cost effectiveness and reliable access to the products your business needs to run.  

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FAQs
What are examples of indirect procurement?

Indirect procurement refers to sourcing and purchasing products and services that don’t directly contribute to product manufacturing. Some examples of materials sourced through indirect procurement are: 

  • Commercial space like factories, offices, and other business facilities
  • Utilities like water and electricity 
  • Office supplies like laptops, printers, and stationery
  • Travel solutions for business meetings, conventions, and training
  • Tool subscriptions to SaaS products like Slack or Asana 
  • Maintenance and equipment repairs 
  • Security equipment

What are examples of direct procurement?

Direct procurement is sourcing the raw materials and equipment involved in manufacturing a company’s finished product or service. Some examples include:

  • Wood for construction companies paid to build homes
  • Food for restaurants and retailers selling edible products
  • Industrial machinery necessary to manufacture products like cars and electronics
  • Textiles used to produce clothes or fashion accessories 

What are examples of service procurement?

Services procurement is the sourcing of services your business does not have the expertise to provide. These include:

  • Human resource management
  • Legal aid
  • Financial oversight from accounting, investment, or consulting firms
  • Call centers to manage customer support lines

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