Business organizations deal with the procurement of goods and services on a regular basis. How businesses go about procuring these goods and services can have a significant impact on their bottom line. One way to reduce high procurement costs is to understand the difference between direct spending and indirect spending.
Direct spending refers to the purchase of any goods and services that are directly related to the making of your company’s products. These goods can include raw materials, components, hardware, and subcontracted manufacturing services. These items are generally worked into a budget and are purchased in large quantities at pre-negotiated prices.
On the other hand, indirect spending is focused on the day-to-day needs for operating the business. This can include office supplies, consultations, repairs of any equipment, as well as any fees that need to be paid for disposing of waste or recycling. These types of purchases are made when there is a need and aren’t generally subject to negotiation for pricing.
One of the differences between indirect and direct spending is how they are monitored. Since supplies under the direct spending category impact production, those purchases are heavily monitored, while indirect spending is very difficult to monitor. This practice becomes a problem when indirect spending spirals out of control.
For many organizations, between 20 and 50 percent of all operating costs fall under the indirect spending category. Indirect spending costs can often hurt a company’s bottom line because there is less control over what is being paid for and which businesses those products are being bought from. This means that employees who are making these types of purchases may not be paying attention to where they can shop to save money.
However, procurement professionals and procurement software can help cut costs by tracking purchases and setting up protocols for purchasing. Once they identify where money is being wasted, they can develop saving and sourcing strategies for both direct and indirect spending, so needed supplies and services can be purchased without breaking the bank.
While your employees’ direct and indirect spending may not seem like a big deal, as time goes on, the amount of money your company loses can add up. Taking control of how your business handles direct and indirect spending can save your business money in the long run, freeing you up to use that money for other important projects.
There are many costs associated with the production of goods and services. You may have known about direct and indirect costs. Costs that are directly related to products such as raw materials and labor are called direct spending but other costs that are not directly related such as your overhead costs are called indirect spending. It is easy to monitor direct spending but such importance should also be given to indirect costs. Why? This infographic will tell you.