What are the different types of procurement?

The past several years have brought big economic and supply chain disruptions—and with them, big changes to the role of procurement in business.

But while acquiring resources has become increasingly complex, understanding the different types of procurement can help you simplify the procurement process and enjoy the benefits of strategic procurement.

Consider whether your procurement needs fall under direct or indirect procurement and under goods or services procurement, and you’ll be well-positioned to make the best procurement moves for your business.‍‍

What is procurement?

Different stages of the procurement process include procurement management, supply chain management, and purchasing. Procurement is a highly involved process that impacts several aspects of a business, from profits and revenues to manufacturing and logistics.

Procurement professionals need to balance costs with ensuring that the business is able to procure all the resources it needs to generate profits.

The 4 main types of procurement

‍There are four different types of procurement, though there can be some crossover between them:

1. Direct procurement

Direct procurement is the purchase of resources your business requires to create or deliver a final product. Examples include the purchase of raw materials for companies that manufacture goods or direct labor costs for service-based businesses.

An example of direct procurement would be a furniture company buying the fabric, wood, or glue it uses to make its furniture.

2. Indirect procurement

Indirect procurement involves purchasing items that don’t directly contribute to the production of your company’s end product. These are resources you need to support the overall running of your business, such as office supplies, furniture, equipment maintenance, marketing, or consulting services.

For the hypothetical furniture company above, an example of indirect procurement would be contracting a cleaning service to clean their showroom.‍

3. Goods procurement

Goods procurement is the material procurement of tangible items, such as office supplies, tools, equipment, and other physical goods. Depending on how you use the goods you procure, goods procurement could fall into the category of either direct or indirect procurement.

Both raw materials like cotton and ink and finished products like clothing and pens fall under goods procurement.

4. Services procurement

Services procurement is procuring people-based services that help you run your business. This category might include contracting cleaning, maintenance, or IT services. Again, services procurement could fall under either direct or indirect procurement.

An example of direct services procurement would be contracting an additional hairstylist for your salon during a busy period. Contracting a roofing company to replace the roof of your salon would fall under indirect services procurement.

6 methods of procurement and when to use them

Once you’ve identified your business needs and outlined all the details, it’s time to determine the best procurement method for your situation.

It’s important to understand the different procurement methods so you can select the one that balances factors like how much time your company has available to spend on the bidding process and the level of detail you need from potential bidders.

Let’s explore the six methods of procurement as well as when and how to use them:

1. Open tendering

In open tendering, your company uses a public forum to invite bids from all interested suppliers for the products or services you need. Then, you evaluate the bids, select the candidate providing the best value, and sign a contract with them.

Open tendering can work well for direct or indirect procurement and for both goods and services procurement. It can be a good choice when you want to get the most competitive offers possible and don’t have any particular vendors in mind.

2. Restricted tendering

Also known as closed tendering, restricted tendering is similar to open tendering in that it also involves soliciting bids from suppliers. The difference is that in restricted tendering, you only invite suppliers you’ve already preselected to bid.

Like open tendering, restricted tendering can work well for both direct and indirect procurement and for both goods and services procurement. It’s a great approach when you have a few potential vendors in mind already or have time to conduct research to select a few companies you’d like bids from.

3. Two-stage tendering

The two-stage tendering procurement method combines facets or both open and closed tendering.

The two stages are:

• Stage 1: Invite all qualified potential suppliers to submit bids
• Stage 2: Narrow down the received bids to your top choices and ask each of those for a more detailed proposal before making a final selection

You can use two-stage tendering for either direct or indirect procurement, as well as goods or services procurement. It’s usually more appropriate when your needs are fairly complex, like when a design needs to be created before the goods can be produced or the services can be performed.

4. Request for proposals (RFP)

A request for proposal (RFP) is a request for a more detailed bid. It’s generally used for complex projects. In an RFP, you’ll go into more detail about your requirements and ask potential vendors questions about how they would go about meeting those requirements.

You could use an RFP for either direct or indirect procurement, but its complex nature means it tends to be more commonly used in indirect procurement. You could also use an RFP for either goods or services.

An RFP is best when you have a complex need that no existing product or service would exactly meet. It invites potential vendors to explain how they could solve your problem.

5. Request for quotations (RFQ)

A request for quotations (RFQ) is similar to an RFP in that it’s a request for a bid when you know exactly what you need. And like an RFP, an RFQ will provide detailed information about your needs.

However, an RFQ is more focused on getting prices from potential vendors. It’s best used when what you’re requesting is very cut and dry, so you won’t need a lot of details about how your needs would be met. This makes it different from an RFP, which is a better choice when your needs are more complex.

An RFQ can be used for either direct or indirect procurement, but the simplicity of the projects involved means it tends to be a better choice for your direct procurement needs. It can also be used for either goods or services procurement.

6. Single-source procurement

With single-source procurement, your company uses a single supplier to meet as many needs as that supplier is equipped to meet. So, instead of finding the best supplier for each subcategory of a need, you find the best supplier for the general need as a whole.

Let’s use a medical office as an example: Instead of finding the best deal on needles and syringes, then the best deal on cotton balls, and then the best deal on bandages, with single-source procurement, you would find the single best supplier who can meet all those needs.

You can use single-source procurement to meet your direct or indirect procurement needs. You can also use it for goods or services procurement, but it’s usually more common to single-source goods.

Single-source procurement is typically the way to go if any cost savings you would get by going with multiple vendors wouldn’t be worth the extra effort. It’s also worth considering some of the benefits of single-source procurement, like the simplicity of dealing with a single supplier and any potential volume discounts.

The fundamental components of effective procurement

‍Effective procurement planning is built on three fundamental components: finding the right suppliers, maintaining good relationships with those suppliers, and continuously optimizing both of those processes.

Here’s how each component works:

• Sourcing: Sourcing involves determining where to procure your resources from. Needless to say, you’ll want to select the best possible suppliers. This is largely about cost and quality, but it should also involve diversification of suppliers, managing supply chain risk, and regularly assessing alternatives based on new technologies or offerings.
• Supplier relationship management (SRM): Regardless of your company's size, positive relationships can benefit you. A huge part of effective procurement is managing those relationships. SRM involves regular communication, performance monitoring, and working together with suppliers to improve processes and reduce costs.
• ‍Process optimization: The final component of effective procurement is seeking continuous improvement in your processes. This might include looking for opportunities to automate certain tasks, implementing the right procurement software, and creating clear guidelines and working documentation of procurement processes.

Procurement optimization aims to reduce manual work, minimize errors, and speed up the procurement cycle while improving compliance and transparency.

How procurement impacts your business

Understanding the components of effective procurement can help your company to better strategize and improve profitability and resilience. If used proactively, that understanding can drive business growth and reduce risk.

Some of the impacts effective procurement can have on a business include:

• Higher margins: ‍The more cost-effective you are in your procurement, the higher your gross margins will be. It comes down to how well procurement can drive down costs without impacting quality. Effective procurement can also improve the overall efficiency of your business’s operating expenses, which can improve overall net profit margins.
• Efficiency gains: ‍Procurement impacts the company’s overall efficiency. An effective procurement process lowers costs, including the cost of time spent on tedious manual tasks. Better procurement results in easier manufacturing and project schedules.
• Competitiveness: Procurement affects supplier relationships. A better procurement process leads to better communication between your company and your suppliers. More efficient procurement processes can also help you pay invoices in a timely manner. Happy, supportive suppliers can help you stay competitive during tough times.
• Improved risk management: The past several years have shown us that global supply chains are not 100% resilient in all scenarios. So while cost improvement is important, you’ll also want to ensure that your procurement solutions are adaptable. An effective procurement strategy should focus on your organization's ability to deliver throughout volatility.

How procurement automation can help

Along the stages of the procurement lifecycle, it can be easy to spend too much time on the manual tasks involved in keeping the process moving. Slow approvals can cause delays, and it’s easy to make mistakes along the way.

Here are a few ways procurement automation can help:

• Save time on manual tasks: You can scan and upload paperwork rather than inputting it manually and automatically compare documents like invoices and POs
• Expedite approvals: You can set custom approval workflows to eliminate any confusion or delays around the approval process
• Reduce errors: Standardized, automated procedures, document scanning and uploading, and document comparisons can reduce manual errors and flag suspected problems like duplicates or missing fields

Automating the procurement process can help your business overcome your biggest procurement challenges.

How Ramp boosts vendor management in the procurement process‍

Vendor management can be complex to execute. Here’s how Ramp helps you use supplier management best practices throughout the procurement process.

1. Benchmark prices accurately

Negotiating contracts isn’t easy. It takes an experienced team to land the best procurement deals, but even the most experienced negotiators need accurate pricing data.

Ramp’s Price Intelligence extracts your contract details and benchmarks the price against those of our other customers, providing you with instant visibility into what other businesses are paying for the same software.‍

2. Track all your vendors in one place

Keeping tabs on the performance of several vendors can be time-consuming. Ramp lets you track all your vendors in one dashboard, giving you deep performance insights. Ramp’s Vendor Management dashboard also gives you a single view into every vendor detail, document, and transaction so you can find exactly what you need quickly and easily.

3. Invoice payment and processing automation

Manually paying bills increases payment clearance times and frustrates vendors. It can also lead to overpayments and other errors that can cost you even more. Ramp’s virtual and physical cards help you pre-approve vendor spending and ensure contract compliance. Upload your supplier contract to Ramp and pay invoices in a few clicks with Ramp Bill Pay.

Procurement is central to your company’s success. Executing the different types of procurement efficiently will help you reduce costs, improve supplier relationships, and boost margins.

By using Ramp to automate and streamline your procurement process, you can reduce workload, cut costs, and improve the overall efficiency of your business.