Improving supplier on time delivery performance can have many benefits including improved inventory levels, production efficiency, labor utilization, quality to name a few.

In the world of supply chain, most of the attention is typically on the direct materials that go into the final product. While direct materials clearly essential, indirect products can be just as essential to an organization and having an effective indirect sourcing strategy can be the difference between delivering substantial value to an organization or taking on unmitigated risks.

What is Direct Material Procurement? UpdatedMay 27, 2025 Supplier Management Direct material procurement refers to the process of purchasing products that are directly used in the production of goods. These materials are fundamental to the manufacturing process and directly influence the quality and cost of the final product. Examples include chassis, windows, and wheels for automotive parts, fabrics for clothing, or electronic components for gadgets. Choosing the right suppliers and software systems for sourcing direct materials is critical in developing the value proposition of the final end-product.  It is not simply about getting the lowest price, but rather the best overall value.  Assessing overall best value requires first identifying what the customer needs.  Is it a premium offering with the highest precision components and materials?  Or is it a mass-market product with a bigger focus on providing an economical price?  Does the customer also need the product in a specific time-sensitive window?  Or is the schedule more flexible?  All of these must be carefully considered and evaluated as getting any of these decisions wrong will result in dissatisfied customers.  Consequently, effective direct material sourcing in manufacturing is vital to obtaining the right mix of quality, cost, and delivery.  This includes partnering with the right suppliers and implementing the right procurement software solutions.  Procurement software should enable an organization to easily track all material spend including build status tracking for inbound material planning & scheduling. What is the difference between Direct & Indirect Procurement? Direct procurement refers to all the components and raw materials that are used to make an end-product.  These materials make up the cost of goods sold (COGS) and have strict quality control requirements due to their direct impact on the final product.  Examples of direct spend include: Engine parts for an auto-manufacturer Fabric for an apparel maker Wood for a furniture maker Electronic parts for a computer manufacturer Concrete & bricks for construction In contrast, indirect procurement refers to the spend that is necessary to build the product, but are not traceable to a specific product unit and are not present in the end-product.   Examples of indirect spend include: Tooling and factory equipment Consumable items such as drill bits, machine oil, cleaning agents Utilities & building maintenance costs Personal Protective Equipment IT Services What are some of the best practices of direct material procurement? Strong Supplier Relationships: Building & fostering long-term partnerships with reliable suppliers is a cornerstone of a direct procurement strategy.  It is also important to consider the trade-offs between having many suppliers versus having a few suppliers for each spend category.  The balance comes with ensuring that there is adequate competition and not an overreliance on one vendor along with also consolidating enough spend to achieve sufficient bargaining power.  Consolidating spend can help drive better contract negotiations to obtain preferential pricing, service & delivery options.  It also helps incentivize collaborative innovation between partners. Quality Control & Supplier Audits: Direct components and materials will directly impact the quality of the end-product.  Subsequently, this requires strict process controls to ensure quality standards are met.  Regular supplier audits are commonplace and are used to determine general approvals to conduct business along with subsequent approvals for a supplier to conduct specific processes or handle certain work.  The goal is to ensure that there is oversight at the supplier to ensure all the supplier’s personnel are trained to the requisite level of competence in the given process. Supply Chain Transparency: Having visibility into the activities of suppliers will help ensure that the right materials and quantities are delivered on-time to the master schedule and requirements plan.  This means suppliers need to provide regular status updates on purchase orders.  This can confirm that requirements are proceeding according to schedule or provide advance notification when goods are tracking late to schedule.  Advance notification of late materials can help organizations devise workarounds to mitigate the impact of late components – typically by changing up the manufacturing order of operations to put the need date for the late part further out in the process.  Apart from order tracking, supply chain transparency can help with future capacity and demand planning as organizations can more efficiently allocate volumes.  This can help prevent scenarios where suppliers take on too much volume and end up behind on schedule in the first place. Continuous Improvement: Along with close supplier partnerships, continuous improvement and collaborative innovation can deliver considerable value for direct material supply chains.  Supplier and buyer alike can provide innovative ideas to improve processes that produce products at a lower cost and higher quality.  This enhanced process knowledge can give the buyer & supplier partnership a competitive edge in the marketplace. Technology: Tying together all of this is the technology that enables organizations to partner and collaborate in an efficient way.  Utilizing a direct procurement system can streamline the entire procure-to-pay process through the initial requisition to contracting, order status tracking, receiving, and invoicing.  Cloud-based direct procurement software platforms will also provide reporting & analytics to identify trends & insights and monitor supplier performance. What do Direct Procurement Purchase Orders look like? Purchase orders for direct materials need to have several things specified: Payment & discount terms: The purchase contract should specify when payment is due upon receipt of the goods and if there is any discount for paying early. Typically, net 30, net 60, or net 90 terms are used, but these are ultimately negotiated between buyer and seller. Delivery location & shipping terms: The purchase order should specify where the supplier should deliver the goods and who is responsible for the goods in transit. FOB Origin terms mean the buyer pays for shipping and is responsible for transit liability.  FOB destination terms mean the supplier pays for shipping and is responsible for transit liability. Item part number and description: For an item that is built to a buyer’s drawing or specification, the item part number and/or description should call out the relevant drawing document that the supplier is required to build the goods against.