Direct vs Indirect Procurement in Metals: A Practical Guide

In supply chain management, the distinction between direct and indirect procurement seems straightforward on paper. Yet, for metal buyers, steel mills, and heavy industrial operations, the line can be quite fuzzy.

Consider a single purchase order for refractories or graphite electrodes. Depending on which mill you ask, this same line item might land in the direct raw materials queue or deep within the indirect maintenance, repair, and operations (MRO) budget. Failing to establish a clear distinction between these categories is a costly mistake that directly impacts operational efficiency.

Below is the definitive guide to navigating direct vs indirect procurement, tailored specifically for the complexities of raw material-intensive industries.

Direct procurement refers to the sourcing of raw materials, components, and physical inputs that enter the finished product or are consumed directly in the manufacturing process, directly driving the Cost of Goods Sold (COGS).

Indirect procurement covers the purchasing of goods, services, and operational supplies (such as IT, maintenance, and facility management) required to maintain day-to-day business operations but do not enter the final product, affecting Operating Expenses (OPEX).

At its core, direct procurement refers to the sourcing of materials, components, or physical inputs used directly in a company’s manufacturing process or final products. In a standard manufacturing environment, these are the items found strictly on the Bill of Materials (BOM).

However, in raw material-intensive sectors—such as steelmaking, foundries, mining, and battery manufacturing—defining direct procurement solely by what physically remains in the finished product is too rigid. Instead, direct procurement must be defined as any material or input that directly drives production volumes, heavily shapes the Cost of Goods Sold (COGS), and is essential for physical output.

In a metals business, direct spend follows the chemistry and metallurgy. Whatever the recipe calls for, procurement must deliver on specification, on time, and at a competitive price against highly volatile global markets.

• Primary Raw Materials: Iron ore, ferrous and non-ferrous scrap, alumina, concentrates, pig iron, direct reduced iron (DRI), and hot briquetted iron (HBI)
• Ferroalloys and Alloying Elements: Ferrochrome, ferrosilicon, ferromanganese, nickel, molybdenum, vanadium, and niobium
• Base and Minor Metals: Copper, zinc, aluminium, tin, and specialised minor metals required for complex alloy books
• Battery Raw Materials: Lithium, cobalt, nickel, and synthetic graphite used in advanced energy storage production

Indirect procurement is the sourcing of goods, services, and operational supplies that support day-to-day business operations but do not become part of the finished physical product. Rather than driving COGS, indirect spend is treated as an Operating Expense (OPEX).

While direct procurement influences margin via raw material costs, indirect procurement supports overall profitability by maximising operational efficiency, preventing plant downtime, and maintaining corporate compliance. If administrative or IT systems fail, the plant’s productivity is bottlenecked; if site security or PPE is unavailable, operations must halt for safety compliance.

• Maintenance, Repair, and Operations (MRO): Spare bearings, hydraulic valves, replacement motors, and general plant consumables.
• Contracted Site Services: Scaffolding, industrial cleaning, specialised equipment maintenance, and facility security.
• Logistics (Non-Production): Freight for office equipment, warehousing for non-production goods, and internal administrative transport.
• Information Technology: Software-as-a-Service (SaaS) subscriptions, enterprise hardware, back-office IT services, and ERP integrations.
• Corporate & Administrative Support: Office supplies, marketing and advertising, professional consulting, travel and expenses, and real estate management.

Across the entire metals and mining value chain—from steel and aluminium production to battery materials and industrial minerals—direct materials dominate the cost base to a degree few other industries match. Whether sourcing iron ore, lithium, or critical production inputs like refractories, these direct categories make up the large majority of total production costs. Consequently, for any industrial operation, direct procurement remains the primary lever for protecting margins and maximising EBITDA, as raw material and energy prices heavily shape the bottom line.

Successive editions of the Deloitte Global CPO Survey rank cost reduction and risk mitigation as top priorities for procurement leaders, and in a metals business, both priorities sit almost entirely in direct spend.

The table below shows some other key differences at a glance:

Failing to draw a clear line between direct and indirect spend can be a costly mistake that directly impacts a company’s bottom line. When a critical production input is misclassified as an indirect MRO item, several structural risks emerge:

• Weaker Pricing Discipline: Misclassified items are often purchased using standard MRO catalogue frameworks rather than dynamic, index-linked formula bidding. This leads to paying premium list prices for volatile commodities.
• Inappropriate Approval Hierarchies: High-value production consumables can route through standard department budget approvals rather than under the strict oversight of commercial procurement leaders, leading to budget leakage.
• Distorted Margin Reporting: Placing direct-style production costs into indirect OPEX accounts obscures the true Cost of Goods Sold (COGS), leading to incorrect product pricing and inaccurate inventory valuations.
• Missed Negotiation Leverage: When multiple plants buy critical items independently through decentralised MRO budgets, they miss the opportunity to consolidate volume into a single, strategic raw-materials tender.
• Supply Chain Vulnerability: Indirect procurement systems lack the deep risk tracking, KYC, and safety-stock controls required for materials that can stop a melt shop within hours.

The operational differences between direct and indirect procurement extend directly into how suppliers are managed.

Direct procurement requires highly strategic, mid- to long-term relationships with a carefully vetted, qualified group of suppliers. Because a failure in scrap or alloying element quality can ruin an entire batch of steel, buyers conduct extensive audits and KYC checks. This is why leading producers like Outokumpu treat raw material suppliers as critical partners in their value chain.

Indirect procurement relies on a transactional, highly distributed network of suppliers. The goal here is consolidation, reducing the sheer number of vendors to lower transaction costs and streamline administrative workflows. Maverick (off-process) spend is notoriously difficult to track in highly decentralised indirect procurement. While direct procurement is not immune to off-contract buying, it is subject to far tighter inventory and quality controls.

Regulation is widening the gap between direct and indirect procurement, and CBAM is the clearest example for metals. The EU Carbon Border Adjustment Mechanism moved from its reporting-only transitional phase into the definitive regime on 1 January 2026. Importers of iron, steel, and aluminium goods into the EU must now be authorised CBAM declarants.

Under the 2025 Omnibus simplification (Regulation (EU) 2025/2083), a threshold of 50 tonnes net mass per importer per year exempts most small importers while keeping the large majority of embedded emissions in scope. Certificate sales open on 1 February 2027, priced on the quarterly average EU ETS allowance auction price for 2026 emissions and the weekly average from 2027 onwards, and the first annual CBAM declaration, covering 2026 imports, is due by 30 September 2027.

Because carbon costs now directly impact product pricing, direct procurement teams must collect precise Scope 3 emissions data and origin certificates at the transaction level. Indirect procurement, by contrast, faces only standard corporate ESG reporting without these heavy, transaction-by-transaction tariff penalties.

Generic e-procurement platforms are built for catalogue buying. Buyers can pick an item, route an approval, and raise a purchase order, but direct raw material procurement does not work that way. Rather than focusing on broad, generic administrative automation, raw material-intensive procurement requires technology designed as a category-specific enabler.

Attempting a “one-size-fits-all” approach by repurposing indirect procurement software for direct raw materials typically fails, resulting in immense sunk costs and a low return on investment for a spend category that controls 50% to 70% of your total cost base.

While more than half of the companies in the metals and mining sector still rely on manual offline methods, supply chain digitalisation may help to unlock 30-50% in productivity improvements and to significantly reduce costs.

That is why Metalshub is built purposefully for the metals and mining industry, not adapted from generic sourcing platforms. The Procurement Solution handles the parts of direct raw material buying that generic tools cannot:

• Offer Normalisation: Unlike simple bid comparison tools, specialised technology must normalise raw material offers across currencies, CIF vs. DDP terms, chemical deviations, and logistical costs. Using Metalshub’s Normalisation feature ensures buyers make precise, apples-to-apples commercial decisions to confidently manage volatile markets.
• Index-Linked Sourcing: Sourcing agreements must seamlessly integrate and automate contracts tied to external pricing indices like the LME. This is crucial for robust Contract Management and accurate forecasting.
• Vetted Counterparty Networks: Access to pre-vetted, KYC-compliant suppliers dramatically reduces operational and supplier failure risk, protecting plant resilience and maintaining active Inventory Management without stopping the melt shop.
• Actionable Intelligence: Advanced Data & Analytics are required to monitor raw material cost curves, historical transaction-based pricing, and supplier compliance metrics

By replacing manual spreadsheets with a structured digital workflow, Metalshub enables buyers to:

• Access a global network of over 3,000 pre-vetted, KYC-checked suppliers
• Collect and track Scope 3 emissions and origin data at the individual transaction level, securing CBAM compliance
• Achieve an average of 2.3% cost savings on direct materials while discovering new vetted suppliers