Education — Vocabulary

Direct vs indirect procurement: why the split matters

Organizations that blur the line between direct and indirect spending create hidden duplication, fragmented contracts, and process mismatches that quietly erode margins and compound supply risk.

53%

Senior execs dissatisfied with indirect value

More than half of leaders see procurement falling short

22%

Estimated duplication of indirect spend

Like paying three times for the same service through different departments

Up to 25%

Savings from optimizing indirect procurement

Not by cutting spend, but by managing it with strategic discipline

Direct vs indirect — side by side

Common confusion

Treating all procurement as one process ignores the fundamental difference between spend that feeds production (direct) and spend that runs the business (indirect).

Siloed contracts + hidden duplication

Correct approach

Define the boundary explicitly, staff each function for its core challenge, and measure them differently — OTIF for direct, compliance for indirect.

Up to 25% savings without cutting budget

Five failure patterns when the line is blurred

Cost misclassification — Fleet and transportation sit on the boundary. When classification shifts between direct and indirect quarter to quarter, COGS becomes unreliable and margin comparisons break down.

Fragmented supplier leverage — Three departments buy overlapping tools from three different vendors at three different prices. Nobody has the consolidated volume to negotiate with any of them.

Supply risk from process mismatch — Applying relaxed indirect-style controls to production components creates quality and continuity risk. Direct procurement needs supplier audits and contingency planning that indirect processes skip.

Under-investment in indirect capability — When all procurement is modeled on supply-chain-centric direct, the unique demands of indirect are neglected. The real problem: nobody equipped the indirect team with stakeholder skills and visibility tools.

Risk

Maverick spend proliferates in indirect categories. Indirect procurement has smaller average supplier spends, more suppliers, and a more complex stakeholder environment than directs — making it the natural habitat for purchases made outside approved channels. The goods are real and the need is genuine, but the buying channels are harder to lock down than a bill of materials.

Jargon Decoder

Direct procurement Purchasing materials and components that go into the final product — raw materials, ingredients, packaging, production equipment.

Indirect procurement / GNFR Buying everything that runs the business but does not enter the product — IT software, marketing agencies, office supplies, consulting.

COGS Cost of Goods Sold — the direct costs of producing what a company sells. Direct procurement hits this line; indirect hits overhead.

Maverick spend Purchasing legitimate goods through unauthorized channels or unapproved suppliers — like buying office supplies on a personal card without going through procurement.

OTIF On Time In Full — a key metric for direct procurement that measures whether suppliers deliver the right quantity at the right time.

OpEx Operating Expenditure — day-to-day costs of running the business, where most indirect spend lands. Unlike COGS, it does not directly affect gross margins.

Sources: NelsonHall/Proxima FTSE 100 survey; UK House of Commons Public Accounts Committee (maverick spend definition); EY indirect procurement optimization study; Wikipedia (indirect procurement)

Rzzro

Procurement, quantified.