TL;DR:

• Direct procurement = what goes into your product. E.g., Tesla buying battery cells.

• Indirect procurement = what your company consumes itself. E.g., Tesla buying office chairs.

Every company has spending that falls into either the direct or indirect spend bucket. But what are those? And why do they matter?

Read on to find out.

What is direct procurement?

Direct procurement is the strategic sourcing of materials that become part of your core product. These components directly impact product quality and ultimately reach end customers.

In other words, companies engage in direct procurement every time they source materials and components that become part of the products they intend to sell to customers.

Direct procurement services focus on maintaining production continuity and product quality.

For example, at Tesla, direct purchasing would include buying car parts, lithium and cobalt for battery cells, and seats to be installed in the vehicle. These purchases involve direct sourcing because the parts flow directly into the core product that eventually reaches end-users.

What is indirect procurement?

Indirect procurement is the purchasing of materials and services that the business uses for day-to-day operations. It includes all the non-production purchases that keep the organization running, from office supplies and IT equipment to maintenance and marketing services.

Take Tesla as an example. An indirect purchase occurs when an office manager buys chairs, computers, soap, fire extinguishers, or pencils. These items are necessary for daily operations, but aren’t used to build the cars and will never reach the consumer.

Indirect procurement spans every department and location across the enterprise.

The differences between direct vs. indirect procurement

While both categories involve purchasing, they differ fundamentally in purpose, complexity, and management approach.

Here's how direct and indirect procurement compare across key dimensions:

Understanding these differences can help procurement teams apply specialized strategies and tools appropriate to each category.

Procurement challenges

Direct and indirect procurement each present unique challenges that can significantly impact business performance, product quality, and operational efficiency.

Common direct procurement challenges

Because production depends on materials purchased through direct procurement, even small disruptions can significantly impact output and margins.

Here are some of the most common challenges manufacturers encounter in the direct procurement process:

• Supply chain disruptions: Natural disasters, geopolitical conflicts, and supplier failures can halt production immediately. Many teams still lack the flexibility to respond when materials are delayed or unavailable.

• Quality control: Maintaining consistent standards across global suppliers is difficult. Defects often go unnoticed until materials arrive or enter production.

• Raw material price swings: Steel, lithium, and other commodities fluctuate sharply, throwing budgets off course and forcing constant renegotiations.

• Supplier relationships: Strong partnerships depend on transparency and collaboration, but traditional procurement workflows rarely support that level of cooperation.

• Regulatory compliance: Expanding ESG mandates, conflict mineral laws, and tariff requirements make it increasingly difficult to maintain compliance across global supply chains.

• Limited supply chain visibility: Many manufacturers know their direct suppliers but not the sub-tiers beneath them. This lack of insight allows small issues to escalate into major disruptions.

• Fragmented systems: Key data often lives in separate tools such as PLM, ERP, and email, leaving teams without a unified view when fast, informed decisions are needed.

Addressing these challenges calls for stronger supplier partnerships, better visibility, and digital tools that connect every stage of the supply chain.

Common challenges with indirect procurement

Indirect procurement keeps the business running. It covers the everyday goods and services that support operations, from IT equipment to maintenance supplies. So when departments act independently or treat it as an afterthought, costs rise and efficiency drops.

Here are the most frequent challenges faced by indirect procurement teams:

• Controlling maverick spending: Employees sometimes bypass approved channels to make quick purchases, leading to surprise invoices, lost discounts, and compliance issues that surface only during audits.

• Managing a decentralized supplier base: Indirect buying involves hundreds of suppliers across IT, facilities, and marketing. This spreads effort thin, creates inconsistent contracts, and limits bargaining power.

• Ensuring policy compliance: Without clear workflows and approvals, purchases easily violate company policies on suppliers, contracts, and spending limits.

• Lack of process standardization: When each department handles its own purchases, there’s no consistent system for approvals, sourcing, or enforcing best practices.

• Poor spend visibility: Indirect spend is scattered across small transactions in multiple systems, making it hard to see total costs or find savings opportunities.

• Manual and disconnected processes: Spreadsheets, emails, and paper forms slow everything down, forcing teams to chase approvals and patch together reports from fragmented data.

These indirect procurement challenges, when left unaddressed, can impact an organization's bottom line through missed savings opportunities, process inefficiencies, and compliance risks that strategic procurement transformation can recapture.

Strategies for direct and indirect procurement

Strong procurement strategies create real value across both production materials and everyday operational purchases. When managed well, sourcing stops being a back-office task and becomes a competitive advantage.

Direct materials procurement strategies

Direct materials form the backbone of any manufacturing business. Managing them well means balancing cost, quality, and supply reliability across thousands of components and global suppliers. Here’s how top-performing teams stay ahead:

Build long-term supplier partnerships

Develop collaborative relationships built on transparency, trust, and shared goals. Strategic partnerships secure priority access during shortages and enable early supplier input in product design, improving quality and innovation.

Look beyond purchase price

Looking beyond purchase price means pricing the real drivers of value like resilience, response speed, and quality. Focus on the total cost of ownership instead of the unit price. Include acquisition, transport, operating, and end-of-life costs to understand the full financial impact of each component.

For example, Toyota Motor Corporation has long-term, trust-based relationships with its suppliers, enabling them to problem-solve together, improve capability, and recover more quickly when disruptions occur. This creates far more value than squeezing for unit cost alone.

Diversify suppliers to reduce risk

Avoid overreliance on a single source or region. Regularly assess suppliers for financial health, geographic exposure, and operational importance to minimize disruption risk.

Centralize Bill of Materials data

Consolidate Bill of Materials (BOM) information across products to uncover cost drivers and sourcing opportunities. Tools like LightSource give procurement teams real-time visibility into part costs and alternatives, replacing slow spreadsheet analysis.

Enforce consistent quality standards

Integrate quality control into every stage of procurement. Standardized specifications, supplier audits, and ongoing performance tracking ensure materials meet production requirements.

Indirect procurement strategies

Indirect procurement manages non-production spending, meaning everything that keeps the business running but doesn’t go into the product. The goal is control, visibility, and efficiency without slowing teams down.

Consolidate vendors

Reduce the number of suppliers to capture volume discounts and simplify administration. Preferred vendor programs help standardize pricing, quality, and ordering.

Digitize and automate workflows

Adopt e-procurement tools that make compliance simple. Modern systems centralize catalogs of approved suppliers, automate requisitions and approvals, and give real-time visibility into total spend.

Prevent unauthorized purchases

Establish clear policies, approval workflows, and training so every transaction follows defined rules. Use monitoring tools to flag purchases made outside approved channels.

Manage tail spend

High-volume, low-value purchases often go unmanaged. Automating small transactions and consolidating them under preferred suppliers can cut costs and reduce administrative load.

Use category-based strategies

Treat indirect categories differently based on their risk and importance. Automate simple, recurring buys like office supplies while applying strategic sourcing to complex services such as marketing or IT.

Unified Procurement Capabilities

Direct and indirect procurement share one goal: improving visibility, control, and collaboration across the business. A few shared capabilities make that possible.

Eliminate silos

Bring procurement, engineering, finance, and operations together early. Shared planning prevents last-minute surprises and aligns cost, quality, and delivery priorities.

Connect systems

Unify procurement data with ERP, PLM, and finance tools. Platforms like LightSource automatically standardize quotes and BOM data, giving teams a complete view of costs and supplier performance.

Treat contracts as living tools

Approach contracts as strategic assets, not static documents. Clear objectives, solid market research, and balanced risk-sharing turn supplier agreements into long-term value drivers.

How Digital Tools Transform Direct and Indirect Procurement

Digital tools solve real pain points in both direct and indirect procurement. These tools improve visibility, automate approvals, connect data across ERP, PLM, and finance, and surface clear spend and supplier insights.

Want to know how you can upgrade your direct procurement process? Book a personalized demo.

Frequently Asked Questions about Direct and Indirect Procurement

What's the biggest difference between direct and indirect procurement?

Direct procurement focuses on materials that become part of your finished product (like raw materials and components), while indirect procurement covers everything your business uses internally (office supplies, software, professional services). The key difference is that direct materials directly impact your production capacity and product quality.

Which is more important, direct or indirect procurement?

Both are essential but serve different purposes. Direct procurement typically represents 60-80% of spend in manufacturing companies and directly impacts product margins and quality. Indirect procurement, while often smaller in individual transaction size, can represent 20-40% of total spend and significantly impacts operational efficiency. Successful companies optimize both areas with strategies tailored to each category's unique requirements.

How do digital tools differ for direct vs. indirect procurement?

Direct procurement tools focus on Bill of Materials management, engineering change orders, and supplier quality integration tied to ERP systems. Indirect procurement platforms emphasize catalog management, approval workflows, and policy compliance. Advanced platforms like LightSource offer unified capabilities that address both direct materials sourcing and indirect spend management through AI-native architecture.

Can the same team manage both direct and indirect procurement?

While smaller companies may have consolidated teams, most mid-to-large enterprises separate these functions. Direct procurement requires deep technical expertise in specific materials and production processes, while indirect procurement demands broad category knowledge across diverse business needs. The skill sets, supplier relationships, and performance metrics differ significantly between the two areas.

How does supplier management differ between direct and indirect procurement?

Direct procurement builds deep partnerships with fewer, specialized suppliers who provide critical materials requiring extensive quality verification and collaboration. Indirect procurement typically manages a larger number of vendors across diverse categories with less intense individual relationships. Direct suppliers often participate in product development, while indirect suppliers deliver standardized goods and services with less customization.