The 4 Types of Spend and How to Optimize Value


Dec 18, 2022 | Basic 101: Introduction to procurement



Stawan photo

Stawan

Dec 18, 20222 min read


Procurement is categorized into 4 types of spend: Direct (raw materials), Indirect (operational support), Services (consulting, legal), and Capital (long-term investments). These types of spend are managed by procurement teams in different organizations. Understanding these categories helps businesses make informed procurement decisions and get the best value for their money.


Procurement can be broadly categorized into different types of spend, depending on the nature of the goods or services being purchased. Some of the most common types of spend include: 

  • Direct SpendThis refers to the costs associated with raw materials, components, and finished goods that are used to create a final product. This type of spend is typically managed by the sourcing and procurement teams within a manufacturing or production organization. For example, a car manufacturer like Ford would have direct spend on steel, tires, and other raw materials used in the production of cars. According to the data, in 2019 Ford had a direct spend of $38 billion, which was about 60% of the company's total spend. 
  • Indirect Spend: This refers to the costs associated with goods and services that are used to support the day-to-day operations of a business, such as office supplies, facilities maintenance, and information technology services. Indirect spend is typically managed by the procurement teams within an organization. For example, a retail company like Walmart would have indirect spend on cleaning services, office supplies, and IT services. According to the data, in 2019 Walmart had an indirect spend of $13 billion, which was about 20% of the company's total spend. 
  • Services Spend: This refers to the costs associated with services such as consulting, legal services, and marketing. Services spend is typically managed by the procurement teams within an organization. For example, a financial services company like JPMorgan Chase would have services spend on consulting, legal services, and marketing. According to the data, in 2019 JPMorgan Chase had a services spend of $4 billion, which was about 6% of the company's total spend. 
  • Capital Spend: This refers to the costs associated with long-term investments such as new facilities, equipment, and technology. Capital spend is typically managed by the procurement teams within an organization. For example, a construction company like Bechtel would have capital spend on new equipment and facilities. According to the data, in 2019 Bechtel had a capital spend of $5 billion, which was about 8% of the company's total spend. 

FactWise Source-to-Pay optimizes direct materials spend across categories for global product manufacturing companies across industries. With special features for repeated, commoditized, and complex spend, we are focused on transforming your procurement organization via improved efficiency (up to 20%) and governance (up to 31%), and cost reduction (up to 25%) to drive bottom-line impact. We are committed to generating win-win outcomes for buyers and suppliers globally.  


About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


Comments(0)

Show all


No comments to show


Suggested Articles

logo  

FactWise

Privacy Policy

Terms & Conditions


©Copyright 2023. FactWise. All Rights Reserved.