Direct and indirect purchasing in a factory

How a manufacturer keeps direct materials and indirect purchases apart in its buying process and budgets, and where competitive bids fit in.

By Achekam · 11 October 2026 · 5 min read · For Manufacturing businesses in South Africa, Nigeria, Kenya

In a small factory, the same person often buys steel coil on Monday, toner cartridges on Tuesday and a forklift service on Wednesday. Each purchase goes through the same approval, lands in the same budget and is judged by the same question: was it cheap?

That works until it does not. The steel decides whether the order ships on time and what margin it makes. The toner does not. Treating them alike either slows down the purchases that do not matter or waves through the ones that do. This article explains the difference between direct and indirect purchasing, why most manufacturers run them as separate streams with separate budgets, and how competitive bidding fits into each.

Buying versus procurement

Investopedia draws a useful line between two words people use interchangeably. Purchasing is largely transactional: it focuses on price and immediate needs. Procurement is strategic, focused on long-term value and lasting supplier relationships, and purchasing is one part of it.

For a manufacturer, the distinction is practical. Ordering this month's resin is purchasing. Deciding which two resin suppliers the business will rely on for the next few years, on what terms and with what backup, is procurement. Both happen in the same factory; they need different people's attention.

The steps in between

Investopedia lists the steps of procurement as:

1. specifying requirements;
2. soliciting bids;
3. negotiating price and contract;
4. the purchase transaction; and
5. payment processing.

A factory that skips the first step, a clear specification, gets bids that cannot be compared. One that skips the third accepts list prices on its largest spend lines.

Direct and indirect: what goes where

Investopedia describes four basic types of procurement. Two of them sort spend by what it is for:

• Direct procurement covers goods or services used in production, such as raw materials.
• Indirect procurement covers operational needs, such as office supplies or marketing.

The other two, goods and services procurement, sort the same spend by its nature. A contract to heat-treat components is a direct service; a cleaning contract for the offices is an indirect one.

In a typical factory the split looks like this:

The boundary needs a written rule for the grey cases. Is the oil for the machines direct or indirect? Is protective clothing? Decide once, write it down and stick to it, so that the same item is not classified differently by different buyers.

Separate budgets, separate processes

Investopedia notes that companies generally have different budgets and processes for managing direct and indirect costs. There are good reasons for this.

Direct spend follows the production plan. Its budget moves with volume, and the right question is whether material cost per unit is under control. The process should be tight on specification and supplier quality, because a wrong part stops a line.

Indirect spend follows the calendar. Its budget is closer to fixed, and the right question is whether the department stayed within it. The process can be lighter, because a late order of copy paper stops nothing, but it still needs a second person's approval so that small purchases do not quietly add up.

Mixing them hides problems in both. A rise in raw material prices disappears inside a budget line that also holds stationery, and an overspend on consultants hides behind a busy production month. Setting up factory expense accounts shows how to keep the two apart in the chart of accounts.

Competitive bids and why the lowest may lose

According to Investopedia, competitive bids for goods generally require suppliers to state the per-unit price along with their shipping and delivery terms. In competitive bidding, the buyer chooses one or more suppliers based on cost and other factors, and the lowest bidder will not necessarily get the business.

For direct materials, "other factors" are often decisive. A cheaper supplier who delivers to Lagos in six weeks when production needs it in two is not cheaper. A lower unit price ex works, once delivery is added, may be higher than a competitor's delivered price. And a supplier whose material fails your incoming inspection costs you the rework as well as the price. For indirect purchases, price often does decide, and the bid process can be correspondingly simpler.

Running both streams through Achekam

Achekam's procurement screens apply the same controls to every purchase while letting the budgets show the two streams separately:

• Requisitions with a reason. Staff raise a requisition stating what is needed, why and the estimated cost. A person other than the requester approves or declines it. For direct materials, the "why" can cite the production order or bill of materials; for indirect purchases, the department's need.
• Quotations and a recorded choice. Supplier quotations are captured against the requisition and one is selected. Choosing a quotation that is not the cheapest needs a written reason, and that reason is kept. A quotation can also be disqualified with a reason, for example where the supplier failed an earlier quality check. This is the record of "cost and other factors" that competitive bidding calls for.
• Committed spend by account. Once purchase orders are approved, they count as committed spend against budgets per expense account and period. The screen shows budget, spent, committed and available, and flags any line that is over-committed without blocking the purchase. With direct and indirect spend on separate expense accounts, each stream's budget shows its own position.

For setting up the bill of materials that drives direct purchasing, see building an accurate bill of materials. For what happens when the goods and invoice arrive, see matching orders, deliveries and invoices.

A first step

Investopedia's explanation of procurement and purchasing sets out the types and steps in more detail. Take last quarter's purchases, sort them into direct and indirect using the table above, and see whether your budgets would have told you which stream drove the spend.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.