What is Procurement: Types & Best Practice Tips

When asked, “What is procurement” many are surprised to learn that it differs significantly from purchasing. We’ll be breaking down the procurement process, comparing it to purchasing, looking at its benefits, and considering the steps in sustainable procurement. 

We’ll wrap up by discussing how automation and AI can streamline procurement processes, improving efficiency and positively impacting the bottom line. 

What is Procurement?

Procurement is the process that businesses use to source, purchase, obtain, and inspect the goods and services they need. Everything from raw materials to office supplies falls under its rather large umbrella. 

Operational in nature, it’s a key component of running a successful and smooth business. If an organization is unable to get the goods and services it needs at an acceptable price, profits decrease.

The procurement process in business can involve several departments and includes a series of steps from identifying requirements to price negotiations to payment processing. It is such a vital function that larger businesses and government agencies often have established procurement departments. 

How Does Procurement Work?

The procurement process involves several steps:

• Identifying the goods or services needed.
• Finding supplies, requesting quotes, and completing purchase orders.
• Communicating with suppliers about terms and costs.
• Receiving the goods and services.
• Payment for items.

All businesses are involved in a procurement process in some form. Small businesses or organizations may have just one person who is responsible while larger companies will designate a procurement team. 

Individuals on these teams will possess the special skills necessary for negotiating with different types of suppliers - one person simply can’t effectively deal with all of the facets. Procurement is an ongoing process and not a series of isolated acts.

What are the Benefits of Procurement?

In the past, sourcing goods and supplies was considered a backroom type of position and nobody thought much about what this person or department did. That is until the copier broke down and the majority weren’t quite sure who to call or when there was an obvious need for new software systems but it was unclear who was responsible.

What wasn’t fully grasped until quite recently is how important the procurement process is to a company. Procurement controls a significant portion of company costs and enhances risk assessment. 

Other benefits of procurement include:

• Cost savings - Streamlining the purchasing process aids in reducing costs and stabilizing cash flow which impacts the bottom line. 

• Quality - Companies need the right products and services at the right time. Without this, they can’t provide quality end products to their customers. 

• Goal alignment - Developing a strategic procurement process that aligns with stated goals keeps a company on track.

• Risk mitigation - A sound and strategic procurement model in the business process aids in identifying potential risks and weaknesses.

• Sustainability and ethics - The procurement process will reflect a company’s ethics. Sustainable sourcing and compliance lead to stability.

What is Competitive Bidding and Procurement?

When it comes to choosing suppliers, businesses and companies will develop their own unique procurement processes that often involve a bidding process. It’s not unusual for the company to formalize it with a Request for Proposal (RFP).

In competitive bidding for goods, suppliers submit proposals that outline unit prices, shipping costs, and delivery charges. Service proposals will include pertinent information like the number of individuals a project requires and technical support. 

Although cost is certainly a factor, the lowest bidder doesn’t automatically win the competitive bidding process. 

What are the Types of Procurement?

There are four main types of procurement and these are:

1. Direct Procurement

This is the procurement of anything that directly supports the company’s production. Direct procurement includes raw materials, components, services, parts, and wholesale items. The relationships with these suppliers are crucial because they directly impact company revenue, growth, and reputation.

2. Indirect Procurement

This is the procurement of the goods and services that meet the operational needs of a business but aren’t directly involved in production. Office equipment, supplies, furnishings, and marketing and advertising fall into this category.

3. Goods Procurement

These are physical goods (direct or indirect) that are obtained through the procurement process. 

4. Services Procurement

This type of procurement includes people-based services like agencies, law firms, outsourced IT, and facilities repair. These can also be direct or indirect. 

What is the Difference Between Procurement vs. Purchasing

Understandably, there might be confusion about procurement vs purchasing because both result in the goods and services being acquired. But there are some distinct differences between the two.

Purchasing involves buying goods and services, usually to meet immediate needs and is mostly transactional. A purchaser will seek the best price and not consider other factors. Purchasing isn’t synonymous with procurement but is instead, a part of the procurement process. 

On the other hand, procurement is a strategic series of steps with just one being the actual purchase. Procurement doesn’t focus so much on price as it does the long-term value to the company and that naturally evolves to enduring relationships with suppliers instead of one-time purchases.

What are the Steps in the Procurement Process?

Procurement teams work out their best practices and systems but there are also common steps to be found. These include:

1. Identify the needs - Identify products, materials, software, or services needed for projects or operations.

2. Source suppliers - Finding the best suppliers that meet company needs is an early step in the procurement process. Alternative suppliers should also be sourced to mitigate risk during supply shortages.

3. Submit a purchase request - This is a formal request that lets managers know a need exists, how much it will cost, a time frame, and the quantity needed. When approved, the procurement team can proceed with the vendor selection and purchase. 

4. Evaluate and select vendors - Competitive bidding processes like a request for proposal (RFP), request for quote (RFQ), or e-auctions are ways that the procurement team can evaluate and select vendors.

5. Negotiation price and terms - Receiving at least three quotes from potential suppliers is a common best practice. When a price has been decided, the next step is to put terms in writing.

6. Create a purchase order - While a purchase request was previously approved, creating the purchase order is now necessary. The purchase order is detailed and sent to the chosen supplier.

7. Receive goods and check the quality - When the goods are delivered, the procurement team checks them against the order and inspects the quality of the goods.

8. Reconcile and match - Also called a three-way match, the procurement team, accounts payable, and receiving will compare the shipment against the invoice.

9. Process invoice and payment - A standardized system ensures the invoice is paid on time which helps to build positive relationships with suppliers and aids in avoiding late fees.

What is Sustainable Procurement Management?

As people and companies have become more aware of their environmental impact, sustainable procurement has increased in importance. Suppliers are not just being evaluated on prices but also on environmental and ethical practices. When making purchase decisions, sustainable procurement teams consider green practices and how to lower environmental impact. 

Sustainable procurement considerations include:

• Fuel optimization - optimized shipping routes and green fuel use.
• Energy efficiency - reducing the carbon footprint.
• Waste management - evaluation of supplier’s waste reduction, recycling, and disposable practices.
• Sustainable materials - renewable and recyclable materials lower environmental impact.
• Ethical labor practices - making sure suppliers engage in fair labor standards.
• Carbon footprint - considering greenhouse gas emissions.
• Water conservation - assessing water usage during production processes.

How to Account for Procurement?

Companies will usually include the costs of procurement into their financial accounting and some companies can hire dedicated procurement managers or specialists. Large companies are moving to hire executive-level chief procurement officers (CPOs). The advantage of having a CPO is that procurement is given a strong voice in company planning and strategizing. 

CPOs oversee the standards for procurement, work with accounts payable to ensure suppliers are paid on time, and work with the procurement teams to help make decisions when there are several bids on the table. 

Some companies set up their CPOs with finance automation that uses technology and software to streamline and automate manual procurement process tasks. 

How Does Automation and AI Help with Procurement?

Complex procurement tasks such as spend analysis, contract management, sourcing, and compliance management are made easier with automation and AI. The speed and accuracy of AI significantly streamlines tasks, resulting in increased overall efficiency. 

Some ways the automation and AI helps with procurement are:

• Comparing costs - AI quickly compares costs so that companies realize the best price-per-unit on supplies.

• Replacement sourcing - When companies grapple with stock outs or insufficient quantities, AI can locate exact or similar replacement items and calculate the costs.

• Supplier performance management - AI simplifies supplier lifecycles and optimizes partnerships to ensure efficiency.

• Invoice processing and payment - Automating invoicing tasks reduces errors, speeds up transactions, and ensures timely vendor payments. 

• Speed analytics and budgeting - Speed analytics platforms use AI to look at expenditure patterns, opportunities for savings, and accurate budgeting. 

How Does SolveXia Help With Procurement?

CPOs and their procurement teams face the challenge of doing more and more. Through the use of no-code automation, SolveXia is able to combine data, create reports, reconciliations, and advanced analytics in minutes instead of days.

Our automations streamline processes with greater control and accuracy and the SQL server easily scales data. See how SolveXia can help expedite your key finance functions with 90% fewer errors. 

Wrap Up

The simple answer to “What is procurement?” is that it’s a process to obtain needed goods and services. However, we’ve seen that the reality is much more complicated and that the use of procurement automation and AI can streamline tasks, increase efficiency, improve supplier relationships, and help to improve the bottom line.