It is important for a procurement professional to know the distinction between direct and indirect spending in spending analysis.
One of my students asked about the difference between direct and indirect spending, so I thought I’d post my reply here so that others may benefit from the definitions, too.
Direct spending refers to the purchase of goods and services directly incorporated into a manufactured product. These are raw materials, subcontracted manufacturing services, components, hardware, and the like.
Indirect spending refers to the purchase of goods and services that are not directly incorporated into a manufactured product. These are computers, safety goggles, printed forms, office supplies and equipment, services, furniture, and the like.
I asked my students,
What type of activity does a procurement professional use for this direct and indirect spending distinction?
Mainly in spending analysis when preparing a cost savings and sourcing strategy.
A procurement professional may determine how much is spent on direct purchases and how much is spent on indirect purchases. They would then further classify the spending in each of those segments.
Direct spend may have classifications such as steel, hardware, plastics, or subcontracted labor.
Indirect spend may have classifications such as shop supplies, computer equipment, or services.
After each classification, the procurement professional can develop a cost savings and sourcing strategy for each category.
Do you need more information on how to analyze your spending (both direct and indirect spending), put together a savings strategy, conduct strategic sourcing, and save money for your organization?
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