Why is it important to know the difference between direct spend and indirect spend?
Managing both requires different skillsets and tools. We often tell our customers that direct spend, or direct materials procurement, is about supplier management and performance. But, indirect spend is about managing buyer’s spending behavior.
Direct Spend refers to the money that goes into raw materials and goods, or COGS (Cost of Goods Sold) to create the product.
Indirect Spend is the ‘back office’ purchases for the operations of the business. For example, chairs or whiteboard markers for the office.
To put it simply, direct spend impacts your customer.
A lack of parts or supplies can shut down your business. Issues in your direct spend procurement can cause stock outages, drive up labor costs, hinder business goals, and impact customers. Real-world examples of this include the recent global descaling of Ford plants or KFC ‘s chicken shortage in the UK last year.
Problems with indirect spend play out differently though. Production is rarely stopped due to incomplete or unreceived purchases. The fact is, you can’t afford to have issues in your direct spend procurement because it impacts your customers and your ability to stay in business.
There are unique problems inherent to direct spend procurement that don’t appear in indirect spend. Understanding the difference between the two types of procurement can help you prioritize the items that should be top of mind in running your business.
Direct Spend vs. Indirect Spend
- Refers to the purchase of any good & services used to create the product
- Issues directly impact production and customers
- Focuses on changing supplier behavior to meet more commitments
- Accustomed to managing changes to POs
- Impacts day-to-day needs for operating the business
- Issues only impact the business internally
- Focuses on changing buyer’s spending behavior within an organization
- Not accustomed to large volumes of changes to POs
Unlike indirect spend, direct spend systems are designed for managing changes to POs. Because even the smallest unacknowledged change can prevent the customer from receiving their order. Cloud-based, direct spend solutions like SourceDay are built to manage change. Our platform is designed to help buyers and suppliers work collaboratively using real-time information to grow their businesses.