What Is Direct Spend? Understanding Its Role in Supplier Diversity Programs

Direct spend refers to the procurement dollars a company uses to buy goods or services that are directly tied to its core production or operations, suppliers that feed into what the business sells. Understanding direct spend is critical for effective supplier-diversity programs because it frames where and how organizations can meaningfully engage diverse suppliers. 

What Is Direct Spend in Procurement? 

Direct spend is the portion of procurement expenditure that goes toward materials, components, goods or services that are incorporated into a company’s final product or service offering.  

Direct Spend vs Indirect Spend 

• Direct spend: materials or components used in manufacturing the core product or service.  
• Indirect spend: goods or services that support operations (like office supplies, IT services) but do not end up in the final product. 

Example comparison: 

Why Direct Spend Matters 

• It tends to represent a large portion of total cost of goods sold (COGS) and thus impacts margins. 
• It involves deeper supplier relationships and supply-chain risk (if components delay, production halts). 
• Because of its size and strategic importance, direct spend is a prime lever for supplier-diversity efforts (integrating diverse suppliers into the core value chain). 

What Is Supplier Diversity?

Supplier diversity is a business strategy that proactively includes diverse owned and operated businesses (for example, minority-owned, women-owned, veteran-owned, LGBTQ+-owned, disability-owned businesses) in the procurement process. 

Why It Matters 

• It fosters economic equity, local job creation and innovation. 
• It enhances reputation, ties into ESG (Environmental, Social, Governance) frameworks and supports broader DE&I strategies. 

Common Metrics 

• Percent of total procurement spend allocated to diverse suppliers.  
• Number of active diverse suppliers, retention of those suppliers, economic impact of the spend. 

The Role of Direct Spend in Supplier Diversity Programs

Direct spend plays a foundational role in supplier-diversity programs because engaging diverse suppliers in your core procurement means you are integrating diversity into your value-chain, not just on the fringes. This delivers greater economic impact, higher visibility and stronger accountability for diversity goals. 

Why Focusing on Direct Spend Strengthens Supplier Diversity 

• High impact: When diverse suppliers are used in direct spend, their contribution is core to the business, not peripheral. 
• Visibility and control: Direct spend is easier to trace, contract and manage compared to indirect spend.  
• Strategic integration: It signals that supplier diversity is a business imperative, not just a compliance box. 
• Economic multiplier: Diverse suppliers engaged in direct spend create stronger outcomes for underserved communities (jobs, growth, local investment). For example, a 2021 report showed that one organization’s direct spend with small and diverse suppliers supported 105 of 171 total jobs created.  

Tier 1 and Tier 2 Spend – Where Direct Spend Sits 

• Tier 1 spend = direct procurement with diverse suppliers (you contract them directly).  
• Tier 2 spend = indirect procurement (your suppliers subcontract to diverse firms). 
• For supplier-diversity programs to be mature, Tier 1 direct spend is often prioritized because you have more control and visibility. 

How to Manage Direct Spend for Supplier Diversity 

Step-by-Step Actions 

1. Map your direct spend categories. Identify goods, services and supplier contracts that feed your finished product. 
2. Define diverse supplier criteria. Use recognized certification programs (WBENC, NMSDC, etc.). 
3. Set targets for direct spend with diverse suppliers. For example: a certain percentage of a component category spend must go to a diverse-owned business. 
4. Source and qualify suppliers. Create onboarding pathways, performance metrics and relationship management processes. 
5. Track and report. Use dashboards to measure percentage spend, supplier count, retention, quality, and innovation contribution. Metrics are evolving beyond spend into outcomes.  
6. Integrate with procurement strategy. Make direct spend with diverse suppliers part of your strategic sourcing, not an add-on. 
7. Communicate internally and externally. Show how supplier diversity in direct spend supports corporate goals (ESG, innovation, market access). 

Best Practices & Tips 

• Prioritize categories where you have high spend and can likely switch suppliers. 
• Leverage your existing supplier base and engage Tier 1 diverse suppliers rather than creating entirely new ones. 
• Provide development support (mentoring and capacity building) to help diverse suppliers meet your requirements. 
• Use contract language to include diversity goals in RFx processes. 
• Monitor quality, delivery, and cost performance as rigorously as any supplier. Diverse suppliers must be treated as strategic partners. 
• Communicate wins: highlight how direct spend with diverse suppliers delivered business value such as innovation, cost savings, and risk mitigation. 

Case Study – Direct Spend and Supplier Diversity 

Let’s review a brief illustration:

The Federal Reserve Bank of Atlanta (2021) procured $9.8 million directly from small and diverse suppliers (their “direct channel”). That spend supported 171 jobs, 105 of which stemmed from the direct channel.  
Take-away: Direct spend with diverse suppliers not only meets social impact goals but also translates into meaningful economic results. 

Statistics You Should Know 

• According to a 2023 benchmarking report, the average spend with certified diverse suppliers is only 3.6% of total procurement spend.  
• According to a 2025 industry survey, 86% of organizations still use “percentage spend with diverse suppliers” as a core metric, but increasingly measure supplier retention, local economic impact, and innovation outcomes. 
• In the 2023 rankings of S&P/Russell 1000 companies, 22% of companies disclosed any spend amount in diverse-supplier categories.  

Key Takeaways 

• Direct spend is procurement dollars for goods or services that are directly tied to the production of your final product. 
• Supplier diversity means integrating historically under-represented businesses into your procurement processes. 
• Focusing supplier-diversity efforts on your direct spend ensures diversity is woven into your core operations, not just peripheral. 
• To execute well: map direct spend categories, set targets, onboard diverse suppliers, track performance, and integrate with sourcing strategy. 
• Current benchmarks show that many companies are still in early stages of integrating diversity into direct spend (average around 3.6% diverse spend). 
• Managing direct spend with diverse suppliers delivers business value (innovation, risk mitigation, community impact) and reinforces your commitment to inclusion and equity. 

Conclusion

In short, direct spend is a foundational lever for making supplier diversity meaningful, not just in rhetoric but in action. By channeling your core procurement dollars toward diverse suppliers, you strengthen your supply chain, support underserved communities, and align your business with evolving ESG expectations. 

STARS empowers organizations to advance supplier diversity by helping them identify, qualify, and engage diverse suppliers across their direct and indirect spend. Through smart analytics and data-driven insights, STARS enables companies to measure real economic impact and turn supplier diversity into a growth strategy. 

If your organization is ready to elevate its supplier diversity program and make direct spend a strategic advantage, contact STARS today to discover how we can help you build a measurable, high-impact supplier diversity initiative.