Direct vs. indirect procurement: A comparison guide

Understanding the differences between direct and indirect procurement is key to building a solid procurement strategy. The main distinction is that direct procurement focuses on sourcing the components required to create your finished product, while indirect procurement involves acquiring the goods and services that support your everyday business operations.

You’ll need to manage direct and indirect procurement differently to optimize your overall procurement strategy. Striking the right balance leads to smarter spending, a stable supply chain, and a more efficient procure-to-pay process.

Below, we’ll compare direct vs. indirect procurement at a deeper level, explain their impact on profitability, cover the benefits and challenges of each, and share some real-world examples of how modern software can help you optimize your procurement process.

What is direct procurement?

Examples of direct procurement include:

• A marketing agency paying wages to staff writers and designers
• A construction company purchasing steel and concrete for a building project on their construction business credit card
• A robotics company purchasing processors and gears for its latest iteration of robotic products

The main objective in direct procurement is acquiring keystone goods and services for the creation of your final product or service. Your team accomplishes this by building and maintaining strong vendor relationships, strategically sourcing proper materials to ensure quality, or buying goods in bulk to save on the cost of goods sold (COGS).

What is indirect procurement?

Examples of indirect procurement are:

• Purchasing office supplies such as staplers, computers, desks, and chairs
• Utility expenses like heating, water, gas, and electricity for an office or production facility
• Bringing in consultants for team-building exercises or professional development programs

The core focus of indirect procurement is finding a good balance between business efficiency and operational costs. As a result, successful indirect procurement relies on clear approval processes and thorough expense tracking. These help control operating expenses (OpEx) by preventing wasteful spending on redundant tools and services.

Direct vs. indirect procurement: Key differences compared

‍The main difference between direct and indirect procurement is whether the goods or services you purchased directly contribute to creating your final product. If they do, that would be implementing a direct procurement strategy; if not, that’s indirect procurement.

Here’s a quick breakdown of their main differences:

Let’s consider an example. Two founders are launching a new digital marketing agency that creates fast, functional websites for clients. They start looking into the essential software they’ll need to build the business.

The type of software they purchase could be an example of either direct or indirect procurement:

• Direct procurement: The two founders need to procure the software they’ll use to design, build, and host their clients’ websites. Because these tools are essential to providing their core service, they’d go through the direct procurement process.
• Indirect procurement: The founders also know they need tools to communicate with each other remotely and track the progress of their ongoing projects. These tools would go through the indirect procurement process since they don’t directly go into the core service they’re selling.

It’s helpful to think about direct vs. indirect procurement in terms of whether the purchase directly contributes to revenue. If the purchase helps generate revenue through the creation of your product, it’s direct procurement. If the purchase enables or improves your business operations and efficiency but doesn’t contribute to revenue, it’s indirect procurement.

Direct and indirect procurement’s impact on profitability

It’s easy to look at your procurement process as an exercise in cost-cutting. While that’s definitely one goal, its impact extends beyond simple cost control measures. Both direct and indirect procurement decisions can influence your company’s overall profitability.

Direct procurement’s impact on profitability

• Cost control in production: Direct procurement focuses on acquiring materials and components that directly affect production costs. Strategic sourcing and effective supplier negotiation can lead to lower costs, which translates to better profit margins.
• Quality and supplier reliability: The quality of your materials has a major impact on your final product. Reliable vendors that supply high-quality materials improve your ultimate product, saving you money by reducing defects, returns, and warranty claims.
• Supply chain resilience: Building strong supplier relationships and diversifying your sourcing options ensures a stable supply chain. This helps you avoid production stoppages that can lead to lost sales and reputational damage.

Indirect procurement’s impact on profitability

• Operational efficiency: A strong indirect procurement process helps improve operations and reduce costs by effectively managing the purchase of non-core goods and services. More efficient spending leads to higher revenue and profits.
• Employee productivity: Investing in the best procurement software, and workspaces can boost productivity. Well-equipped employees work more efficiently, which improves output and profitability.
• Hidden costs and overspending: Poorly managed indirect procurement can lead to unnecessary expenses and maverick spending. Strong spend controls and clear visibility in this area help prevent wasteful spending and improve overall cost management.

Common challenges in direct and indirect procurement

Issues with visibility, coordination, and inconsistent processes are all common challenges no matter the type of procurement you’re engaged in. But due to their nature, direct and indirect procurement also present some unique problems:

Challenges in direct procurement

• Supplier risk management: Working with suppliers of any caliber creates risk for your business, including delivery timing, product quality, and access to inventory to produce your products reliably. Regular supplier due diligence and financial health reviews can help mitigate risk.
• Cross-team coordination: Direct procurement is complex and involves many team members across departments. To reduce information loss between teams, it’s important that all stakeholders involved are well-trained, understand best practices, and have access to the right communication networks.
• Lack of visibility: Working with multiple suppliers creates a huge amount of data and paperwork. Key information or approvals can get bottlenecked, leading to delays and miscommunications. Centralized procurement software like Ramp gives all parties full visibility into the end-to-end direct procurement process.

Challenges in indirect procurement

• Maverick spending: There tends to be fewer stakeholders in the indirect procurement process, which can lead to a lot of ad hoc spending. Setting up centralized roles or teams to manage indirect spending across your company can help here since the requests are always processed by the same individuals.
• Purchase order overload: Because indirect spending can be done in variable batches that add up quickly, managing purchase records can get unwieldy. Use enterprise-wide purchase orders (POs) rather than small batches to provide more context for indirect procurement. This helps your finance team streamline the reconciliation process.
• Inconsistent processes: Each department has its own needs and goals, which often leads to disjointed indirect procurement processes. Use spend analytics to track indirect spending at the department level and use it when training stakeholders. This equips each department with similar processes and procedures.

Real-world examples of procurement

One of the best solutions to common procurement challenges is dedicated software to help you manage the process. Here are some real examples of how Ramp helped improve procurement processes for real businesses:

How Ramp helped Viking Well Service centralize their POs

‍Viking Well Service, an oil and gas company in Ohio, had multiple high-cost indirect purchases every month. These could be for parts, repairs, or back office software—all necessary to keep the business operational.

However, their indirect procurement process wasn’t clear. “People were just going out and buying what they needed, and they would have a purchase order number,” said Senior Controller Chris Lowdermilk. This impacted the finance team’s efficiency and led to issues around transparency.

Viking chose Ramp to improve its processes and increase visibility. Implementing Ramp’s procurement software led to:

• All POs and invoices in a unified platform for better visibility and spend tracking
• Time savings of 2–3 days per week on PO review and invoice processing
• Faster month-end close process completed up to 8 days sooner

These time savings have enabled Chris and his team to focus on more strategic initiatives that will pay dividends for the business in the long run.

How Precision Neuroscience slashed manual data entry with Ramp

Precision Neuroscience faced inefficient procurement processes that relied heavily on manual data entry. Brian Lautenbach, the financial controller for the NYC-based medtech company, explained, “Every day, I had to log in to various platforms to do data entry and data sync. It was a very clunky process, and one of my biggest pain points.”

Brian and his team partnered with Ramp to deploy a unified solution for procurement that slashed manual tasks and improved efficiency:

• 50% faster procurement process thanks to Ramp’s OCR technology
• Consolidated 4 platforms down to 1, improving end user experience and cutting costs
• Time savings of 1–2 days on month-end close

This boost in efficiency has helped Brian’s team spend more time on higher-value projects, including an ERP implementation. “Thanks to Ramp, we’ve been able to focus less on AP, credit card, coding, and data entry, and more on system setup and configuration that can position us for long-term success,” he said.

Streamline direct and indirect procurement with Ramp

To recap, the distinction between direct vs. indirect procurement comes down to how vital it is to the creation of your product or service. Direct procurement involves purchases that directly support your product or service, while indirect procurement relates to purchases that are necessary for ongoing business operations.

Without a tight handle on both, though, you run the risk of wasting time and money on disjointed, opaque processes. That’s where the right tool makes all the difference.

Ramp’s procurement software can streamline your procurement process across the board, from automating bill processes to incorporating multi-level payment approvals for better control and financial decision-making. See why customers like Viking Well Service and Precision Neuroscience are saving time and money with Ramp.