What is Indirect Procurement?: A Guide to the Essentials in Your Business Operations 

Indirect procurement plays a pivotal role in business operations, encompassing the acquisition of goods and services that, while not directly incorporated into final products, are essential for daily operations. 

By streamlining processes and using automation, businesses can enhance efficiency, reduce wasteful spending, and align procurement decisions with company objectives. 

Businesses that prioritize indirect procurement gain a competitive edge by fostering strategic supplier relationships and securing favorable contract terms. Organizations can better allocate resources, reduce operational risks, and maximize procurement ROI by implementing category management and spend analysis techniques. 

What is Indirect Procurement? 

Indirect procurement involves sourcing goods and services essential for daily operations but not directly used in production. Examples include office supplies, maintenance services, and software licenses. Unlike direct procurement, which focuses on raw materials, indirect procurement spans various categories critical for business continuity. 

A strong indirect procurement strategy helps control costs, optimize processes, and enhance supplier performance. However, challenges like maverick spending and limited spend visibility can lead to inefficiencies. Leveraging procurement software and supplier management tools improves oversight, enabling better cost control and supplier negotiations. 

Effective indirect procurement also ensures compliance with company policies and budgetary controls. By streamlining processes and using automation, businesses can enhance efficiency, reduce wasteful spending, and align procurement decisions with company objectives. 

Direct vs Indirect Procurement: What’s the Difference? 

Understanding the distinction between direct and indirect procurement is essential for developing an effective procurement strategy. 

Direct vs. Indirect Procurement 

Direct procurement involves acquiring raw materials and components that are directly used in the production of goods or services. For example, a construction company purchasing steel beams for building structures engages in direct procurement. Here, The focus is securing quality materials at favorable terms to ensure the production process runs smoothly. 

In contrast, indirect procurement involves obtaining goods and services that support the organization’s internal operations. This includes items like office supplies, facilities management, and consulting services. While these purchases don’t directly contribute to the final product, they are crucial for maintaining efficient business operations. 

How does direct procurement work? 

Direct procurement involves a strategic approach to sourcing materials that are integral to the production process. Procurement teams collaborate closely with key suppliers to establish long-term relationships, negotiate favorable contract terms, and ensure timely delivery of quality materials. Effective inventory management and supplier performance monitoring are critical components of direct procurement to maintain production schedules and control costs. 

How does indirect procurement work? 

Indirect procurement encompasses a broader range of categories and often involves multiple stakeholders across various business units. The process includes identifying needs, evaluating potential suppliers, negotiating contracts, and managing vendor relationships. Due to its diverse nature, indirect procurement requires a comprehensive strategy to control spending, reduce maverick spending, and identify cost-saving opportunities. 

Indirect procurement strategies 

To optimize indirect procurement processes, organizations can implement several key strategies: 

1. Track spending 

Maintaining visibility into indirect spending is essential for identifying wasteful spending and uncovering cost-saving opportunities. Implementing procurement software can help monitor expenses across different categories and departments, enabling better budgetary controls and financial health. 

2. Be strategic with your sourcing 

When developing your strategy for indirect procurement, you will need to analyze your spend categories. This involves consolidating the supplier base and negotiating long-term contracts to achieve volume discounts. Strategic sourcing enhances operational efficiency and strengthens supplier relationships, leading to more favorable terms and improved supplier performance. 

3. Use technology to stay informed 

Leveraging procurement tools and software licenses can streamline the entire process, from purchase requests to accounts payable. Automation reduces manual processes, improves compliance rates, and provides real-time data for informed procurement decisions. 

4. Build relationships internally 

Effective management of indirect procurement requires collaboration across business units. Engaging internal customers in the procurement process ensures that indirect purchases align with company policies, operational costs are controlled, and procurement activities support overall business objectives. 

Examples of Indirect Procurement 

Indirect procurement covers various categories, including:  

• Office Supplies: Items such as stationery, computers, and furniture necessary for daily operations.  

• Facilities Management: Services like cleaning, security, and maintenance that ensure a safe and functional work environment.  

• Professional Services: Engagements with consultants, auditors, and legal advisors that provide specialized expertise.  

• Marketing Services: Advertising services, public relations, and promotional activities that support business growth.  

• Software Licenses: Subscriptions and licenses for software tools that aid in various business functions, including customer relationship management and inventory management. 

Common Challenges with Indirect Procurement 

Managing indirect procurement presents several challenges that can impact operational efficiency and cost control:  

1. No Indirect Procurement Policy: Without a clear policy, organizations may experience inconsistent procurement practices, leading to rogue spending and a lack of control over spending. 

2. Poor Spend Visibility: Limited insight into indirect procurement spending hampers the ability to identify cost-saving opportunities and assess the organization’s financial health. 

3. Maverick Spend: Unauthorized purchases outside established procurement processes can result in wasteful spending and disrupt supplier relationships. 

4. Inadequate Spend Analytics: Without robust analytics, procurement teams struggle to evaluate procurement KPIs, monitor supplier performance, and make informed procurement decisions. 

5. Lack of Procurement KPIs: The absence of key performance indicators makes it difficult to measure the effectiveness of indirect procurement activities and implement improvements. 

Rohirrim AI Can Take Your Indirect Procurement Strategy to the Next Level 

Addressing the complexities of indirect procurement requires advanced solutions that enhance efficiency and accuracy. Rohirrim offers RohanProcure, a generative AI platform designed to streamline the drafting of acquisition documents, automate repetitive updates, and improve coordination and approval workflows. By leveraging RohanProcure, organizations can achieve faster time to first draft, reduced overhead costs, and increased output with the same headcount. 

Contact Rohirrim today to learn how RohanProcure can transform your indirect procurement processes and drive significant cost savings. 

FAQ 

What is the meaning of indirect procurement? 

Indirect procurement refers to the sourcing of goods and services that support a company’s daily operations but do not directly contribute to the production of end products, such as office supplies, maintenance services, and software licenses. 

What is the difference between direct procurement and indirect procurement in SAP? 

In SAP, direct procurement involves acquiring raw materials or components used in manufacturing, often linked to production planning. In contrast, indirect procurement focuses on purchasing non-production-related goods and services, typically managed through modules like SAP Ariba or SAP SRM for supplier collaboration and cost control. 

What is an example of an indirect procurement cost? 

An example of an indirect procurement cost is expenses related to facilities management, such as janitorial services, security services, or office utilities, which support business operations but are not part of the final product. 

What is the difference between direct and indirect acquisition? 

Direct acquisition involves purchasing essential materials and components directly used in production or service delivery. Indirect acquisition refers to procuring supporting goods and services that aid business operations but are not included in the final output. 

What are the KPIs for indirect procurement? 

Key performance indicators (KPIs) for indirect procurement include cost savings, supplier performance, compliance rate, maverick spending reduction, procurement cycle time, and spend under management, all of which help measure procurement efficiency and effectiveness. 

Farah van Caloen

Director of Marketing