Direct Spend vs. Indirect Spend: Understanding the difference




DIRECT SPEND

Direct spend is an expense that is directly related to an enterprise’s production. It is the acquisition of raw materials and services used for an enterprise’s own production of goods, materials and services. It is what gives them a competitive advantage over their competitors and is therefore heavily dictated by the enterprise’s procurement strategy.

That is why enterprises invest in finding the right suppliers and are willing to pay a higher price for quality products. Strategic sourcing requires continuous monitoring to ensure compliance, minimise risk, and make sure that suppliers follow the enterprise’s quality guidelines. That is why direct procurement is centralised in the organisation with a key focus of management of sustainable supply chains and supplier relations.

INDIRECT SPEND

Indirect spend, also called long-tail spend, is an expense not related to production. It basically involves everything else - from facility management to software to office furniture to marketing. Long-tail spend is what makes the enterprise go around on a daily basis. This typically means a broader range of employees are allowed to make purchases on behalf of the business, it is not centralized procurement. So, it requires a lot of administration to simply manage the often thousands of long-tail suppliers and the tens of thousands of invoices that follow. Tail spending puts a lot of pressure on procurement professionals and accounts payable teams, especially since many businesses struggle to manage maverick spend from employees. That is why automation is key with supply chain management- to make it as easy administratively as possible for both employees, procurement teams and finance.

A SPEND CURVE FOR AN ENTERPRISE

Direct spend typically makes up around 80% of an enterprise’s spend. But it only accounts for 20% of transactions. This is why spend per supplier is high, while the number of suppliers and transactions are low.




Indirect spend typically accounts for just 20% of an enterprise’s spend. But it accounts for 80% of an enterprise’s transactions. This is why so many enterprises struggle to manage the high number of suppliers and invoices - especially the further you move down to the bottom line. Transaction costs are high for long-tail expenses since the spend is low per transaction compared to strategic sourcing, so it is important for businesses to find new savings opportunities for the indirect purchase of goods and services.