Today I'm going to talk in this blog about two types of procurement: direct procurement and indirect procurement. Let's understand the difference between these.

Any organization or manufacturing industry will have teams specialized in both indirect and direct procurement. For example, a car company that manufactures a car, a flight, or a ship will have both indirect and direct procurement teams.

Direct Procurement

Direct procurement is what they do with spending on raw materials to create an end product, like a car, flight ships, anything the spends on these raw materials, like in the car companies, glass, metal, steel, rubber, you know these pens are called direct spam.

And based on this direct spending, they can determine what the end product cost is that they can sell in the market; however, they cannot make the end product unless they buy the raw materials.

Indirect Procurement

Similarly, they also have indirect procurement spans because they need to run their business to make sure the company is up and running. They will have the back-end team like finance, recruitment, IT, marketing, etc. The spending these departments will do is called indirect expense. 

Direct Procurement VS. Indirect Procurement

Still, the manufacturing industries will have more spending on direct spending. The revenue is dependent on this profit and loss, so it comes to corporate companies like software developers or website builders.

To build software or a software product, you need to have the raw material right. They don't need to spend on raw materials to create software. 

So here they will be spending more on indirect expenditures. That's called indirect procurement. So here they will have a very special team who will do indirect procurement, be it facilities, IT recruitment team, or marketing team. Since they are software-based companies, they need to make sure that their employees always have the right connectivity to the internet or the right laptop food, snacks, pantry items, travel arrangements, training, etc. All these teams will have individual budgets, so any spending done by these teams is called "indirect procurement spans".

For example, the IT team will buy laptops, services, network items, whatever related to technology is an indirect span, as the recruitment team's spending on purchasing licenses for their hiring websites, like now carrying LinkedIn, etc. Then training employee expenditures are recruitment expenditures again. This is also called indirect expenditures.

Conclusion

The marketing team spends on ads, TV shows, banners, etc. Similarly, the travel team spends on flight tickets, hotel stays, and remote employee expenditures, then come to facilities like I said, food, snacks, etc. So this is called indirect procurement.

For indirect procurement to have better visibility on the spending, you should have a better tracking system. If you fail to track single expenditures done by these teams, each team will create a huge difference between the budget and what they allocated, so that is very important for them.

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