What is Direct Spend?
Direct spend refers to the purchases of goods and services that are directly incorporated into a product being manufactured/services being provided. This is the spend you incurred for the completion of your obligation to a company.
Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
What is Indirect Spend?
Indirect spend refers to purchases of goods and services that support your company’s business operations and cannot be attributed to a specific customer. This is your spending with diverse suppliers that were not related directly to the fulfillment of any specific contract. How is indirect spend allocated to your customer? Indirect spending is allocated to your customer based on the percentage of your total revenue that your customer represents.
For example, if your total sales in a quarter are $1,000,000, your sales to your customer are $200,000, 20% ($200,000/$1,000,000) of your diversity spend will be allocated to your customer.