One of my students asked about the difference between direct and indirect spend, so I thought I'd post my reply here so that others may benefit from the definitions, too...
Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, etc.
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Charles Dominick, SPSM
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Next Level Purchasing, Inc.
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15 comments:
Thank you for this clarification... I was looking for a concise definition and your post fit the bill!
Quick clarification - does procurement of items used in the delivery of a service count as direct procurement? e.g: corrugated boxes used for offsite document storage services.
My opinion is that if the boxes are specifically billed to the customer then, yes, it would be direct procurement. For example, if the customer gets billed for 500 boxes at $2 each, then it would be direct.
If the boxes are simply factored into the overhead percentage that gets added to the direct cost, then I would consider the boxes to be indirect procurement.
I work as an analyst for a company that manufactures drives. i am tasked to further categorize our indirect spend into 5 major category. Can you suggest what are these categories?
Which categories you use depends on your own company needs. Many companies start with the UNSPSC. You may want to also check out the proprietary "Think RFP" categorization methodology taught in our online class "Savings Strategy Development." Read more at http://www.NextLevelPurchasing.com/sourcing-strategy.html
Thanks for taking the time to help those of us with questions. Here's another one for you. In a retail company that sells rather than manufactures goods, what would the direct spend be?
The terms "direct spend" and "indirect spend" are most commonly used in manufacturing. However, a parallel can be made in retail. "Direct spend" may refer to what is spent on the items being resold. On retail company's income statements, this is reflected in the "cost of goods sold." Indirect spend, as it is in manufacturing, refers to the spending on goods and services that are not sold, but purchased to support the operations of the company.
I hope that this helps.
Thanks Charles for giving such a clear difference between Direct And Indirect Spend.....
Hi Charles, thanks for your clarification on the direct Vs indirect spend. In the Indirect spend space, any quick reference/website which gives the category and subcategory. For example, category is HR and sub-categories are Training, recruitment, Benefits etc
A "standard" categorization scheme that people use is the UNSPSC. There are some problems with the UNSPSC from a procurement perspective and those problems and a solution is covered in the Next Level Purchasing online class "Savings Strategy Development." From a finance perspective, expense categorization is covered in the Next Level Purchasing online class "Finance For Strategic Procurement, Part I." More info on those classes can be found at http://www.NextLevelPurchasing.com.
Hi
I would be interested in your comments on direct and indirect spend in relation to hospital consumables such as implants and the ancillaries required to implant them, the dressing, needles and syringes. I would view the printing and stationery requirements to be indirect spend.
Cheers
Jack
Hi Jack,
In the hospital environments I am familiar with, they consider "clinical" items - everything used to treat patients - to be equivalent to their direct spend and everything else ("non-clinical") to be their indirect spend. Therefore, your categorization approach is consistent with what I've observed.
Hello Charles, can you please advise on the Direct and Indirect spend in the procurement of FM products and services?
By "FM," do you mean Facilities Maintenance?
If so, what type of company do you work for as that would affect how I answer the question.
Guys, very interesting discussion. I wonder how you would split direct and indirect in an Electricity Generation company. Our core business is to generate electricity. What is direct spend?
M.
I would address this as we did in the airline industry. As an airline, we considered all labor, goods, and services associated with acquiring and maintaining the airplanes to be our direct spend. In electricity generation, I would probably consider all labor, goods, and services associated with acquiring and maintaining your electricity generation equipment to be your direct spend.
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