Direct Spend

What is direct spend?

Direct spend, also known as direct procurement or direct purchasing, refers to expenses directly involved in the production of an organization’s products or services.

Unlike indirect spend, which includes non-production-related expenses like office supplies, utilities, and travel, direct spend typically includes the raw materials and services essential for manufacturing and/or delivering the organization’s core offerings.

Managing direct spend effectively is critical for optimizing production costs, ensuring product quality, and maintaining competitiveness in today’s global marketplace.

Components of direct spend.

Direct spend includes a wide range of expenses for the production or creation of an organization’s primary products or services — the cost of its goods and services (COGS)

Key components of direct spend include:

Raw materials: These are the items used to produce goods. They can include natural resources such as metals, minerals, and agricultural products, as well as synthetic materials and chemicals. Raw material costs directly impact COGS and the overall profitability of the organization.

Components: Components are the parts and pieces needed to assemble the final product. Components can range from electronic components and mechanical parts to specialized components specific to the organization’s industry or product line.

Manufacturing services: These services could include anything that supports manufacturing, including machining, fabrication, assembly, and testing.

Packaging and labeling: Packaging materials could include containers, boxes, bags, and wrappers, and labeling materials may include product labels, barcodes, and instructional inserts. Effective management of packaging and labeling expenses is crucial for ensuring product

Logistics and transportation: Logistics and transportation expenses include costs associated with transporting raw materials, components, and finished goods between suppliers, production facilities, warehouses, and distribution centers.

These expenses also include freight charges, shipping fees, customs duties, and transportation insurance.

Importance of direct spend management.

The effective management of direct spend is paramount for achieving key objectives, including:

Cost optimization.

For many companies, direct spend represents a significant portion of their total expenses.

By effectively managing direct spend, organizations can optimize costs, improve profit margins, and enhance overall cost competitiveness.

Strategic sourcing, supplier negotiation, and inventory management practices play a crucial role in controlling direct spend and minimizing production costs.

Quality control.

Direct spend impacts the quality of the organization’s products or services.

By selecting reliable suppliers, ensuring product consistency, and implementing QA processes, organizations can maintain high standards of quality, which leads to customer satisfaction.

Effective direct spend management helps lower the risk of product problems, recalls, and warranty claims. Those are all key to an organization’s brand integrity.

Supply chain resilience.

Direct spend management is essential to build a resilient and reliable supply chain. By diversifying suppliers, optimizing inventory levels, and implementing risk mitigation strategies, organizations minimize supply chain disruptions and maintain business continuity even in challenging environments.

Regulatory compliance.

Direct spend management is critical for ensuring compliance with regulatory requirements, industry standards, and ethical sourcing practices.

By monitoring supplier compliance, organizations can mitigate legal and reputational risks associated with non-compliance and unethical practices.

How Airbase helps with direct spend.

Mid-market to early enterprise organizations without complex inventory requirements can manage their direct spend through Airbase’s streamlined procurement processes, vendor management, real-time visibility, integration with ERPs, expense policy enforcement, and auditing capabilities. Some features that support direct spend management include:

Streamlined procurement process: Airbase streamlines procurement by centralizing intake and automating procurement workflows. Finance teams can easily create purchase requests, obtain approvals, and generate purchase orders, all directly within Airbase.

Stakeholder visibility: By automating the procurement workflow, Airbase ensures that all direct spend is properly authorized and tracked from requisition to payment. All relevant documents, including contracts, are routed to the correct stakeholder to ensure nothing is overlooked and an audit trail is automatically created.

Vendor insights: Airbase facilitates insights into spending patterns, supplier performance, and contract terms. Finance teams can leverage Airbase’s reporting features to identify opportunities for cost savings, negotiate favorable pricing and terms with suppliers, and consolidate purchases when possible.

Budget control: Airbase helps organizations to implement cost control measures to manage direct spend effectively. Finance teams can set budget limits, approval thresholds, and spending policies within Airbase to ensure budget compliance and prevent overspending. By enforcing approval workflows, Airbase helps organizations maintain control over direct spend and minimize the risk of unauthorized purchases.

Real-time visibility: Airbase creates real-time visibility into direct spend. Finance teams can monitor trends, track budget variances, and analyze purchasing patterns to identify opportunities for optimization. A
Airbase’s customizable reports enable stakeholders to gain actionable insights into direct spend, facilitating informed decision-making and strategic planning.

ERP integrations: Airbase integrates with many ERP platforms, ensuring data accuracy and consistency. This integration helps finance teams to reconcile direct spend transactions, allocate expenses to the appropriate cost centers, and generate accurate financial reports.

By synchronizing data between Airbase and the EPR, organizations can streamline the reconciliation process and gain a comprehensive view of their financial performance.

Expense policy enforcement: Airbase helps enforce expense policies and compliance requirements related to direct spend.

Finance teams can configure spending limits, category restrictions, and approval workflows within Airbase to ensure that purchases adhere to organizational policies. By enforcing expense policies, Airbase helps reduce the risk of non-compliance and unauthorized spending, safeguarding the organization’s financial integrity.