What is the difference between direct and indirect sourcing?

In procurement, sourcing is the process used to select suppliers and build contracts with them. This includes need identification, market research, vendor selection, negotiation, and assessment of supplier performance.

There are two kinds of goods and services an organization needs. One kind includes the goods and services that are directly related to the production of the end product. Sourcing of these is called direct sourcing. For example, a beverage manufacturer would use direct sourcing to obtain sugar that is mixed in the product.

In contrast, the second type of organizational needs encompasses goods and services that are non-essential to the product itself but can aid its production or facilitate the workforce. Sourcing of these is known as indirect sourcing. For example, the beverage manufacturer would use indirect sourcing to obtain a printer to print the labels. Note that the printer is non-essential to the beverage or its packaging.