Indirect procurement: definition, categories and software
Indirect procurement covers all goods and services a company needs to run its operations but that do not become part of the end product: from spare parts and C-parts to IT, facility management, marketing and services.
This page explains the term, separates direct from indirect procurement, puts MRO, C-parts, tail spend and maverick buying in context, and shows what indirect procurement software has to deliver. Ovenca is such a software: catalog, requisition, approval and supplier portal in front of the ERP.
- Catalogs and punchout in one search
- Multi-level approvals
- SAP and non-SAP ERP
- On-premise or private cloud
What is indirect procurement?
Indirect procurement is the purchasing of all goods and services a company needs to operate but that do not go directly into its own products or into goods for resale. This includes spare parts and tools, office and IT equipment, cleaning and building services, marketing services, consulting, travel and much more.
Its counterpart is direct procurement: raw materials, components and semi-finished goods that are used in production or resold. Where the line runs depends on the business model. Packaging material is indirect demand for a machine builder and part of the product for a food manufacturer.
In cost accounting, indirect demand usually does not end up in direct material costs but on cost centers, that is, in overhead. This gives procurement a different job than in direct procurement: the individual material price matters less than a controlled ordering route for a very large number of very different requirements.
Indirect procurement at a glance
- Scope
- Goods and services for day-to-day operations that do not become part of the end product
- Also known as
- Indirect purchasing, indirect spend, non-production material (NPM) purchasing
- Typical categories
- MRO, C-parts, IT, facility management, office supplies, marketing, services, travel
- Requesters
- Potentially every department and every site, not just planning and production
- Cost assignment
- Cost center, order or project instead of a bill of materials
- Core task
- Channel many small requirements through negotiated suppliers, catalogs and clear approvals
Direct vs. indirect procurement
Both belong to procurement but follow different logic. Direct procurement is driven by production planning; indirect procurement arises from the needs of individual employees.
| Criterion | Direct procurement | Indirect procurement |
|---|---|---|
| Scope | Raw materials, components, semi-finished goods and goods for resale that become part of the end product | Goods and services for operations that do not become part of the end product |
| Demand trigger | Production planning, bill of materials and MRP | Individual employees and departments, often unplanned |
| Requesters | Few: materials planning, production, supply chain | Many: potentially every department at every site |
| Suppliers | A manageable number, long-term relationships, scheduling agreements | A very large number, from framework agreement partners to local tradespeople |
| Orders | Predictable, recurring, large quantities and values per transaction | Many individual transactions with a small order value |
| Master data | Material master, bill of materials and info record in the ERP | Often no material master; catalog item, material group or free text |
| Cost assignment | Direct material cost of the product | Overhead via cost center, order or project |
| Typical system support | ERP with MRP, contracts and scheduling agreements | Catalog, punchout and requisition with approval, upstream of the ERP |
| Main lever | Material price, security of supply, quality | Process cost, bundling, use of negotiated terms |
| Biggest risk | A supply failure stops production | Spend bypasses procurement, contracts and approvals |
Indirect procurement terms in brief
- MRO
- Short for maintenance, repair and operations. In procurement, MRO stands for all materials and services that keep plant and buildings operational: spare parts, tools, lubricants, maintenance services.
- C-parts
- Items of low unit value that are ordered in large numbers and great variety, such as screws, seals, gloves or office supplies. The term comes from ABC analysis: C-parts account for a small share of purchasing volume but a large share of ordering transactions.
- Tail spend
- The part of spend that is spread across a very large number of small orders and suppliers and is not actively managed by procurement. Tail spend is not a category in its own right; it describes the lower end of the spend distribution.
- Maverick buying
- Purchasing that bypasses procurement: departments order on their own, outside framework agreements and without the intended ordering and approval route. In indirect procurement it is the most common reason negotiated terms go unused.
- Indirect materials
- Materials that do not become part of the end product or are not attributed to it individually: operating supplies such as lubricants and cleaning agents, tools, spare parts, office supplies. Also referred to as overhead materials or non-production materials.
- Purchase requisition
- A requester's internal request to procurement to buy a specific item or service, known in SAP environments as a BANF. In indirect procurement it is ideally created straight from a catalog shopping cart and then goes through approval.
Indirect procurement categories with examples
Each company defines for itself which categories count as indirect procurement. The following appear in most category structures. They differ mainly in how well they can be handled through catalogs.
| Category | Examples | Typical ordering route |
|---|---|---|
| MRO: maintenance, repair, operationsEverything that keeps plant, machinery and buildings operational. In industrial companies usually the category with the most items and suppliers. | Spare parts, tools, bearings, seals, lubricants, electrical supplies, maintenance services | Supplier catalogs and punchout shops of technical distributors; special parts via free text or form |
| C-parts and operating suppliesLow-value consumables ordered at high frequency. The effort per order weighs especially heavily here. | Screws, fasteners, packaging materials, cleaning agents, adhesives | Catalog with fixed prices; at the point of use sometimes the supplier's Kanban or vending solutions |
| Occupational safety and lab suppliesRequirements governed by occupational safety and quality management rules. What matters is that only approved items are ordered. | Personal protective equipment, workwear, lab consumables, chemicals in small quantities | Catalog with visibility restricted by department or site |
| IT and telecommunicationsHardware, software and services for workplaces and the data center. IT sets the standards; the business departments place the orders. | Laptops, monitors, accessories, software licenses, mobile contracts, cloud services | Catalog with approved standard configurations; licenses and projects via form with approval by IT |
| Facility managementOperation and upkeep of buildings and premises, mostly purchased as a service and often awarded per site. | Cleaning, security, building services, waste disposal, canteen, energy | Framework agreements; call-offs and additional services via requisition |
| Office and business equipmentThe classic catalog demand: standardized items, many requesters, small amounts. | Office supplies, furniture, printer consumables, catering, specialist literature | Catalog or punchout shop of the framework agreement supplier |
| Marketing and communicationsCreative and media services that rarely fit an item structure and are often commissioned directly by the department. | Agency services, print products, exhibition stands, promotional items, events | Promotional items and print via catalog; agency and project work via free text or form |
| Services and consultingServices paid for by effort, day rate or deliverable. Ordering and confirming performance are more demanding than for physical goods. | Management consulting, temporary staff, training, translation, engineering and inspection services | Framework agreements with call-offs; individual engagements via form with approval |
| Travel and fleetMobility costs with their own rules and usually their own systems. Organizationally they are often assigned to indirect procurement. | Flights, rail, hotels, rental cars, leased vehicles, fuel cards | Travel booking systems and leasing contracts; procurement negotiates the framework terms |
Why indirect procurement is hard to control
In direct procurement, production planning sets the pace. Indirect procurement has no such pacemaker. Six recurring problems follow from that.
Many requesters with no purchasing routine
Orders are placed by people whose actual job is something else: maintenance technicians, lab managers, assistants, project leads. They order rarely and know neither the framework agreements nor the material group codes. An ordering route that requires ERP skills gets bypassed.
Many suppliers, small order values
The volume is spread across a very large number of suppliers and individual transactions. Every order creates work for requisition, approval, purchase order, goods receipt and invoice verification, regardless of its value. For low-value items this effort quickly becomes disproportionate to the order value.
Maverick buying
Where the official route is too cumbersome, people order by phone, email, company credit card or in a web shop. Procurement only finds out when the invoice arrives. Negotiated prices go unused, and there is no purchase order to verify the invoice against.
Free text instead of master data
Most indirect requirements have no material master. Without a catalog they are requested as free text: no item number, an estimated price and inconsistent descriptions. Procurement has to rework every line, and reporting by category becomes unreliable.
Approvals outside the system
Who may order what up to which amount is defined, but is often handled by email or a signature on paper. That costs time and is hard to evidence in an audit.
Little visibility of spend
When orders run through several channels and lines are entered as free text, it is hard to say how much is spent with which supplier on which category. Without these figures there is no basis for bundling and negotiation.
How software makes indirect procurement manageable
Indirect procurement software sits in front of the ERP: it gives requesters a simple ordering route and gives procurement control over assortment, suppliers and approvals. Ovenca covers these tasks with four components.
Catalog Shop: one ordering route for all requesters
The most effective answer to maverick buying is an ordering route that is easier than the workaround. The Catalog Shop is the internal purchasing portal for business departments.
- One search across all approved catalogs and punchout shops
- A shared cart for catalog, punchout and free-text lines
- SmartForms for requirements that are not available as catalog items
- The purchase requisition is created from the cart
Catalog Management: central control of assortment and terms
Procurement defines which items are visible to whom at which prices. That is how negotiated terms make it into the order.
- Import and validation of CSV and BMEcat catalogs
- Punchout connection of supplier shops via OCI and cXML
- Contract items and ERP material numbers in search
- Visibility of catalogs and products per organizational unit
Vendor Portal: suppliers maintain their own catalogs
With many suppliers, procurement cannot keep catalog data current on its own. In the Vendor Portal, maintenance lies with the supplier and approval with procurement.
- Catalog maintenance in the browser or via CSV and Excel import
- Data validation on intake
- Approval process with change log
- Onboarding with questionnaires, self-declarations and certificates
Approvals and ERP integration
Approval rules are configured once and apply to every requisition. The approved transaction goes to the ERP without being entered again.
- Multi-level approvals by value, cost center or category
- Budget limits per cost center, user or category
- Audit trail and reporting on search, orders and usage
- SAP ERP and S/4HANA as well as non-SAP systems via OCI, cXML or API
What Ovenca does not do
Ovenca is software, not a procurement service provider: taking over your indirect procurement as an outsourcing or BPO service is not part of our offering. Also not included are tenders and auctions, clause-level contract management, invoice receipt and payments; these steps run in the ERP or in specialized systems. Services can be requested through catalogs and SmartForms, but Ovenca does not offer specialized services procurement with service entry. Reporting covers orders, search queries and catalog usage; for more extensive spend analysis the data is exported.
Covered and uncovered functions: feature matrix on the SAP SRM replacement page
In use worldwide at LANXESS
“By integrating SAP contracts and material numbers into product search, we were able to increase the automation of our purchase-to-pay processes as intended. On the clearly structured administration level we control the release and availability of content, manage user permissions and obtain the transparency we want through meaningful reports.”
LANXESS, the Cologne-based specialty chemicals group, has worked with Onveda since 2014 and uses Ovenca worldwide as its eProcurement platform, connected to SAP. In use are Catalog Shop, Catalog Management, supplier management, approval processes, reporting and administration.
Selecting indirect procurement software: what matters
Providers for indirect procurement range from source-to-pay suites and specialized catalog and ordering platforms to marketplaces with their own assortment. These questions help make the offers comparable.
Adoption by requesters
- Do occasional requesters find what they need without training?
- Is there one search across all catalogs and punchout shops instead of a separate entry point per supplier?
- How are requirements captured that are not in a catalog?
- Can requesters see the status of their request and the current approver?
Catalogs and supplier connection
- Which formats are supported (BMEcat, CSV, Excel, OCI, cXML)?
- Can suppliers maintain their catalogs themselves, with review by procurement?
- Are suppliers charged network or transaction fees?
- Can you connect your own framework agreement suppliers, or is the assortment tied to a marketplace?
Approvals and compliance
- Can the approval matrix be mapped with value limits, cost centers and the four-eyes principle?
- Is every approval logged with user and timestamp?
- Can catalog visibility be restricted by legal entity, site or department?
- Can internal audit get read-only access?
ERP integration
- Are requisitions or purchase orders handed to the ERP without re-entry?
- Are cost centers, material groups and contracts taken over from the ERP?
- Can several ERP systems be connected, including non-SAP systems in subsidiaries?
- Does the integration work without modifying the ERP?
Operating model and data residency
- Is on-premise or private cloud available in addition to public cloud?
- In which country are data and backups stored?
- Who decides when updates are applied: the vendor or the customer?
- Does sign-in fit your existing identity management (single sign-on)?
Scope and cost
- Are you looking for software or for a service that runs indirect procurement for you (outsourcing, BPO)?
- Which categories should run through the platform and which stay in their own systems, such as travel?
- Is the license model tiered by users, transactions or functional scope?
- Is there a reference of comparable size and system landscape?
Questions and answers on indirect procurement
Indirect procurement is the purchasing of all goods and services a company needs to operate but that do not become part of the end product. Typical examples are spare parts, tools, office supplies, IT equipment, cleaning, marketing services and consulting. Indirect purchasing is used with the same meaning.
Direct procurement buys raw materials, components and goods for resale that go into the product; demand follows from production planning. Indirect procurement buys everything that keeps the business running; demand arises with individual employees in all departments. Direct procurement means few suppliers and large, predictable quantities; indirect procurement means many suppliers and many small orders.
MRO stands for maintenance, repair and operations. In procurement, MRO refers to the materials and services used to maintain and operate plant, machinery and buildings: spare parts, tools, lubricants, electrical supplies and maintenance services. MRO is a category of indirect procurement. In aviation, the O also stands for overhaul.
Indirect materials are materials that do not become part of the end product or are not attributed to it individually. They include operating supplies such as lubricants and cleaning agents, tools, spare parts, safety equipment and office supplies. In cost accounting they are treated as overhead materials; the term non-production materials is also common.
Common categories are MRO, C-parts and operating supplies, occupational safety and lab supplies, IT and telecommunications, facility management, office and business equipment, marketing, services and consulting, and travel and fleet. Each company sets the exact boundaries in its own category structure.
Tail spend is the part of spend that is spread across a very large number of small orders and suppliers and is not actively managed by procurement. It arises mostly in indirect procurement. It can be reduced by moving recurring requirements into catalogs and bundling them with fewer suppliers.
C-parts management is the organization of purchasing for low-value items ordered at high frequency, such as screws, seals or work gloves. The aim is to reduce the effort per order: through catalogs with fixed prices, few suppliers and simplified approvals. Physical replenishment solutions such as Kanban racks or vending machines come from the respective C-parts supplier; eProcurement software handles the ordering process.
By making the official ordering route easier than the workaround. In practice that means a catalog in which requesters quickly find the approved items, a defined route for requirements outside the catalog, and approvals that do not hold things up. In addition, there needs to be a clear rule that invoices without a purchase order are the exception.
It gives requesters catalogs and punchout shops in one interface, creates a purchase requisition from the cart, routes it for approval according to stored rules and hands the approved transaction to the ERP. Suppliers maintain their catalog data through a portal. Procurement controls assortment, visibility and approval paths and receives reports on orders and usage.
No. Ovenca is eProcurement software with which your procurement team manages indirect demand itself. We do not offer the outsourcing of indirect procurement to a service provider (business process outsourcing, BPO). Your suppliers, framework agreements and terms remain in your hands.
Ovenca connects to SAP ERP and S/4HANA via OCI punchout, cXML or API. Microsoft Dynamics, Oracle, Infor and proprietary ERP systems are connected the same way. The platform runs on-premise, in a private cloud in the EU, or in a hybrid setup.
Services can be requested and approved through catalog items, free text and SmartForms. Ovenca's focus is on physical goods; specialized services procurement with service entry is not included and stays in the ERP or in a system intended for it.
Related pages
The Ovenca components in detail, the process behind them and help with the business case.
Catalog Shop
The internal purchasing portal: search, cart and purchase requisition for requesters.
Catalog Management
Import and validate supplier catalogs and link them to contracts.
Vendor Portal
Suppliers maintain catalogs and evidence themselves, with approval by procurement.
Source-to-pay
The overall process from supplier search to payment and the role the catalog plays in it.
Benefits of digital procurement
What digitalizing procurement delivers.
ROI calculator
Work through the business case for eProcurement with your own figures.
Related pages
Assess Ovenca for your indirect procurement
In a call we go through your categories, ordering routes and ERP and tell you openly what Ovenca covers and what it does not.