For many companies, procurement is a crucial business process. So, what is procurement? It’s when companies acquire goods and services from suppliers to grow, improve operations, and optimize business performance.
Procurement processes have evolved over the years, and now they are more dynamic than they once were. Nowadays, buyers communicate directly with suppliers regarding their purchase orders and purchase order tracking.
This blog post covers the question, “What is procurement?”, and four different types of procurement. With this, you can grow your business and maintain an efficient procurement management process. Keep in mind the difference between procurement vs purchasing.
What Is Procurement?
Procurement involves different activities pertaining to the process of acquiring goods and services. Its purpose is to obtain competitively priced goods and services that deliver the most value.
The answer to the question, “What is procurement?”, will differ based on the company or industry. Some companies believe that procurement includes multiple stages. These include gathering business requirements, sourcing suppliers, tracking the receipt of goods and services, and updating payment terms.
Other businesses believe that procurement involves fewer activities. These include issuing a purchase order and making the payment for said order.
It’s common for people to confuse procurement with purchasing, similar to how one may confuse purchase orders vs invoices. However, purchasing differs from procurement in that it involves a more in-depth and strategic process. The main goal for purchasing is to arrange company spending and obtain specific goods or services.
Key Takeaway: Procurement involves different activities pertaining to the process of obtaining goods and services. This includes sourcing, making purchases, negotiating, supply tracking, and maintaining records.
3 Stages of Procurement
The procurement process consists of multiple steps. However, they can be simplified into three stages. These include the following:
- Sourcing stage. The sourcing stage consists of the initial steps that businesses take to identify their needs. They create a purchase request, oftentimes using a purchase order template, and assess their suppliers. After businesses complete the initial sourcing, they start building strong relationships with their suppliers. This is part of the supplier relationship management process. A solid relationship provides an opportunity for suppliers to learn from their partners, develop trust, and improve their products, and processes.
- Purchasing stage. For most businesses, the purchasing stage involves negotiating payment terms, creating orders, as well as receiving and inspecting the goods and services. It’s common for buyers to also keep up with purchase order tracking processes during this stage.
- Payment stage. Part of the payment stage involves obtaining an invoice for the purchase order. Accounts payable will match the invoice to the PO number to verify order and invoice accuracy. Once confirmed, the invoice can be approved and paid. Be sure to familiarize yourself with the invoice definition and the invoice management process.
Why Is Procurement Important?
Procurement is important in business because it helps with supply chain management. It allows businesses to find reliable suppliers that are able to provide them with goods and services that match their needs. This is true whether the business is interested in raw materials inventory for manufacturing or finished goods inventory.
Having a solid procurement process also minimizes costs and helps identify suppliers that provide quality products. Keep in mind that there are different types of procurement that your team may follow.
4 Types of Procurement
The procurement process is often divided into four different categories. Each procurement type can be used by a single business. However, the frequency with which they use the procurement process will depend on the industry.
The four types of procurement include:
1. Direct Procurement
This type of procurement directly impacts your business’ revenue and growth. With that being said, it’s possible for you to need certain goods and services for your product lineup. For example, if you’re opening a coffee shop, chances are that you will need wholesale coffee products.
When you’re establishing a business, you’re not likely to change the source of your raw materials often. In this case, that would be your wholesale coffee beans supplier.
2. Indirect Procurement
Some purchasing activities help serve the internal, daily operations of a business. These include purchasing office supplies, cloud-based software solutions, utilities, and travel expenses.
When you acquire these goods, you’re keeping operations running smoothly. This is especially true in the service-based industry, such as the hospitality industry.
The goods and services that are acquired through indirect procurement are oftentimes temporary and consumable compared to those from direct procurement. This is why these types of supplier relationships are short-term.
Despite the short-term supplier relationship, it’s still essential to establish a trusting relationship when dealing with indirect procurement. This can help you get the best prices for your products and be essential for renewing contracts.
3. Services Procurement
Not all businesses operate in the same way. In fact, you will find that you oftentimes need to connect processes and employees together. This is possible through software subscriptions, such as eCommerce fulfillment software, restaurant inventory management software, and consumer relationship management software.
Services procurement helps fill in the gaps between different workflows. As a result, businesses have seamless business processes and contract-based relationships with their suppliers.
4. Goods Procurement
This procurement process refers to acquiring physical items. However, it can also tie into software subscriptions, similarly to services procurement.
Proper and effective goods' procurement stems from having good supply chain management practices. It’s possible for it to also include direct and indirect procurement.
Technology That Manages Procurement
It’s no surprise that technology is taking over the business world. When it comes to procurement, technology also helps ensure seamless processes.
Procurement software is a technology that helps manage processes by forecasting future procurement decisions and detecting patterns. This is done by deploying electronic sensors and data analytics.
Modern procurement software allows users to do more than just handle bookkeeping and data entry. The software includes machine learning functions, artificial intelligence, and blockchain.
- Machine learning allows businesses to generate accurate predictions from existing data in order to plan future spending, forecasting, and logistics, such as 3PL.
- Artificial intelligence is important to have because it’s used in the supply chain for inventory forecasting and demand planning. It allows businesses to quickly and easily analyze large amounts of data.
- Blockchains record transactions in a digital log which boosts traceability.
Frequently Asked Questions About Procurement Technology
Procurement plays an important role in business success and profitability. It involves different activities that require strict attention to detail in order to ensure that you get the most value.
In many cases, supply chain management software helps speed up and simplify the procurement process while reducing costs. If you're still wondering, "What is procurement?", read through the following commonly asked questions:
What Is the Difference Between Purchasing and Procurement?
The difference between purchasing and procurement is that purchasing is a small part of the procurement process. Procurement refers to sourcing and acquiring goods and services. Purchasing refers to negotiating for and paying for the goods and services that were ordered.
What Are the 3 Stages of Procurement?
The 3 stages of procurement are sourcing, purchasing, and receiving. Here’s what these three stages cover.
- Sourcing. During this stage, the business considers its needs for products and services. Based on them, companies find suppliers that offer these goods. The next step of the sourcing process is to create purchasing requests. After the business has chosen suppliers, they usually strive to maintain a good relationship with them.
- Purchasing. One of the important parts of the purchasing stage is to negotiate prices. Businesses can use various methods and leverages to negotiate rates.
- Payment. This is the final stage before the process starts again. Payment can be subject to negotiation as well. Some businesses might prefer to pay after each delivery while others might pay invoices after a specific time. For example, some businesses pay to distributors at the end of each month.
What Are Some Examples of the Different Types of Procurement?
- Example of direct procurement. When a manufacturing company orders raw materials and machinery needed for the production of goods.
- Example of indirect procurement. When a restaurant pays for food ordering software like Revolution Ordering or for marketing ads on social media.
- Example of goods procurement. A coffee roaster ordering green coffee beans to roast and grind.
- Example of services procurement. A business using the services of a law firm or a marketing agency.
What Is an Example of Procurement?
An example of procurement is a business in the meat industry ordering meat products. They start off by identifying the goods they need and proceed to find the ideal vendor. Once they choose the vendor, they move forward to negotiating payments and terms. They also track the receipt of the goods.
What Are the Different Types of Procurement?
The four different types of procurement include:
- Direct procurement
- Indirect procurement
- Good procurement