Mastering the Balance: Understanding and Managing Direct vs. Indirect Procurement in Manufacturing

Indirect procurement refers to sourcing materials that are necessary for the functioning of your business but are not directly incorporated into the final product you’re creating. Direct procurement thus refers to sourced materials and components that are ultimately assembled into the sold product.

In the intricate world of manufacturing, acquiring the necessary goods and services is a complex endeavor that goes far beyond simply placing orders. Procurement, the function responsible for these acquisitions, plays a pivotal role in controlling costs, ensuring quality, and maintaining supply chain stability. While the focus often falls on the raw materials and components that make up the final product, manufacturers must effectively manage two distinct types of spending: direct and indirect procurement. Understanding the differences, challenges, and strategic approaches for each is crucial for optimizing overall business performance.

What is Indirect Procurement?

Indirect procurement refers to the purchasing of goods and services that are essential for a company's operations but are not directly incorporated into the final product. Think of these as the supporting cast members in your manufacturing play. While they don't appear on the main stage (the product), the show can't go on without them.

Examples of indirect procurement in manufacturing include:

• Maintenance, Repair, and Operations (MRO) supplies: Lubricants, spare parts for machinery, tools, cleaning supplies.
• Office supplies and furniture: Paper, pens, desks, chairs.
• Utilities: Electricity, gas, water.
• Consulting and professional services: Legal, accounting, marketing, IT support.
• Travel and entertainment: Flights, hotels, meals for business trips.
• Software and subscriptions: ERP systems, design software licenses, and tools to support the procurement process itself

Managing indirect procurement often involves a high volume of transactions for relatively low-value items. The focus tends to be on streamlining processes, reducing transaction costs, and managing a diverse base of suppliers for various categories.

What is Direct Procurement?

In contrast, direct procurement, also known as direct spend, involves purchasing the raw materials, components, and subassemblies that are directly integrated into a company’s products. This is where the physical production line's needs are met. Without effective direct procurement, the assembly line would cease operation, and the company couldn't produce its finished goods.

Examples of direct procurement include:

• Raw materials like steel, aluminum, plastics, or chemicals.
• Component parts such as fasteners, electronic components, or specialized sub-assemblies.
• Packaging materials that are part of the final product delivered to the customer.

Direct procurement typically follows a multi-step process: identifying requirements, selecting suppliers, negotiating terms, placing orders, and monitoring performance. The key outputs are purchase orders, goods receipts, and invoice payments related to product inputs.

Direct vs. Indirect: Key Differences and Challenges

While both are vital to a manufacturing business, direct and indirect procurement differ significantly in scope, complexity, and strategic focus.

Managing direct procurement involves navigating complex technical specifications, ensuring quality standards, and mitigating risks related to critical supply chain inputs. Data management in direct procurement often centers around engineering drawings, bills of materials (BOMs), and detailed part-specific information.

Indirect procurement, while potentially less impactful per item on the final product, presents challenges in managing a vast array of suppliers and categories, controlling spend across the organization, and ensuring compliance for numerous, often smaller, transactions.

Why Managing Both Effectively Matters

Optimizing both direct and indirect procurement is not an either/or proposition; both contribute to a company's financial health and operational efficiency. Effective management leads to significant benefits:

• Cost Reduction: Strategic approaches in both areas can uncover savings opportunities.
• Improved Efficiency: Streamlining processes reduces manual effort and speeds up cycles.
• Risk Mitigation: Diversifying suppliers and ensuring compliance reduces vulnerabilities.
• Better Supplier Relationships: Developing strategic partnerships, whether for critical direct materials or essential indirect services, fosters reliability and potential innovation.

Ultimately, a holistic view of procurement ensures that the entire organization is operating smoothly and cost-effectively.

CADDi for Indirect Procurement

CADDi is focused mostly on direct procurement. Direct procurement typically uses part drawings or 3D CAD objects, the backbone of CADDi’s data management. However, CADDi does also indirectly help when it comes to indirect procurement – no pun intended.

‍

CADDi and CADDi Quote can reduce procurement costs significantly. Our customers have reported savings of 8% as a direct result of using CADDi. CADDi’s data surfacing and analysis lead to consolidation and optimization of suppliers, plus a more cost-effective design strategy via VAVE.

‍

Although these savings are likely concentrated in the direct procurement bucket, the supplier consolidation strategies can carry over to overlapping indirect suppliers. The positive ROI of CADDi can relax budget constraints across both direct and indirect functions.

‍

Want to see how CADDi can revolutionize your procurement process? Explore our interactive product tour or book a personalized demo.

‍