What are the different types of procurement?

Procurement has evolved in recent years due to supply chain disruptions, and it continues to do so thanks to changing market conditions. While acquiring resources has become increasingly complex, understanding the different types of procurement can help you build more resilient, cost-effective operations.

In this post, we'll cover the four types of procurement, its six methods and when to use them, best practices, and the fundamental components of effective procurement.‍‍

What is procurement?

Procurement is the process of sourcing, acquiring, and managing the goods, services, and resources your business needs to operate. Through strategic sourcing and global supply chain management, effective procurement helps optimize costs, quality, and supplier relationships.

It directly affects profitability, operational efficiency, supplier management, and risk mitigation by ensuring the right materials are available at the right time for the right price, whether sourced domestically or internationally.

The procurement process is highly involved, and your procurement team needs to balance costs while ensuring your business can acquire all the resources it needs to generate profits.

Why is procurement important?

Procurement plays a vital role in your organization's financial health and operational success. When done well, it delivers significant cost savings by negotiating better prices, identifying more efficient suppliers, and eliminating unnecessary spending. Smart procurement decisions directly boost your bottom line while managing risks that could disrupt operations or damage your reputation.

Effective procurement keeps your business compliant with regulations and industry standards, ensuring you avoid costly penalties or legal issues. It aligns your spending with business objectives, making sure every dollar spent supports your company's goals and priorities.

In addition, streamlined procurement processes improve operational efficiency by reducing delays, minimizing errors, and freeing up your team to focus on higher-value activities.

The ripple effects extend throughout your business. Well-managed procurement supports product quality, ensures timely delivery to customers, and provides the flexibility needed to adapt to market changes. It becomes a cornerstone that enables other departments to perform at their best while protecting the company's interests.

What are the 4 types of procurement?

‍Businesses rely on four types of procurement to acquire what they need for daily operations and long-term growth: direct, indirect, goods, and services. Let's take a closer look at each.

Direct procurement

Direct procurement involves purchasing materials and components that become part of your final product or service. For example, a furniture company might buy raw materials like wood and plastic that they use to produce their final products.

These purchases directly affect product quality and profit margins. Companies often establish long-term supplier relationships for direct procurement to ensure consistent supply and favorable pricing.

Managing direct procurement presents several key challenges:

• Supply chain disruptions: External factors like natural disasters or geopolitical events can halt production lines
• Quality control: Defective materials can compromise entire batches of product and damage brand reputation
• Price volatility: Fluctuating commodity prices can significantly impact production costs and blow up budgeting
• Supplier dependency: Over-reliance on single suppliers creates vulnerability when relationships, performance, or availability start lagging
• Lead time management: Long procurement cycles require accurate forecasting to avoid stockouts or excess inventory

Indirect procurement

Indirect procurement covers goods and services that support business operations without becoming part of the final product. This includes office supplies, professional services, maintenance contracts, and marketing activities. While these purchases don't directly generate revenue, they enable your workforce to perform effectively and keep operations running smoothly.

Indirect procurement significantly affects operational efficiency by ensuring employees have the necessary tools and services. Well-managed indirect procurement can reduce administrative burden and improve overall productivity.

Some key cost control considerations include:

• Spend visibility: Many organizations lack clear oversight of indirect spending across departments
• Contract management: Multiple small contracts can create administrative complexity and missed savings opportunities
• Approval processes: Lengthy approval workflows can delay essential purchases and frustrate employees
• Budget allocation: Departments often operate with separate budgets, leading to duplicated purchases and missed volume discounts
• Vendor consolidation: Working with too many suppliers increases administrative costs and reduces negotiating power

Goods procurement

Goods procurement focuses on acquiring tangible, physical products your company needs. This includes office equipment, computers, machinery, inventory items, and facility supplies. Unlike services, goods procurement involves products you can touch, store, and often resell or distribute.

Examples span from basic office furniture and technology hardware to specialized manufacturing equipment and retail inventory. The procurement process typically involves evaluating product specifications, comparing suppliers, negotiating prices, and managing delivery logistics.

Services procurement

Services procurement is the process of acquiring intangible offerings, like consulting, maintenance, IT support, legal services, and training programs. These purchases provide expertise, labor, or specialized knowledge rather than physical products. Service providers deliver value through their skills, experience, and time rather than tangible goods.

Common examples include management consulting, software development, facility maintenance, accounting services, and marketing agencies. Services procurement faces unique challenges, including difficulty measuring service quality, variable pricing structures, and complex performance evaluation.

Effective service contract management requires clear:

• Scope definition: Ambiguous service descriptions lead to disputes and cost overruns
• Performance metrics: Establishing measurable outcomes helps ensure service providers meet expectations
• Relationship management: Strong communication and regular reviews maintain service quality and address issues promptly
• Payment structures: Choosing between fixed-price, hourly, or milestone-based payments affects project risk and costs
• Intellectual property rights: Clarifying ownership of work products and confidentiality protects business interests

Direct and indirect procurement serve different business functions, while goods and services procurement require distinct evaluation criteria and contract management approaches. Each procurement type requires tailored strategies and management approaches to maximize value and minimize risk for your business.

6 methods of procurement and when to use them

It’s important to understand the different procurement methods so you can select the one that balances your procurement team’s time with the level of detail you need from potential suppliers. The method you choose also influences how much you may end up spending.

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 that provides 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 of 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

Two-stage tendering allows for early contractor involvement and design refinement, leading to better value engineering and reduced project risks through collaborative development.

However, it typically requires more time and resources from both clients and contractors during the extended procurement process, and may result in less price competition since fewer contractors participate in the final stage.

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, such as when you need a workable design before you can produce goods.

4. Request for proposal (RFP)

A request for proposal (RFP) is a request for a more detailed bid. It’s generally used for complex projects that no existing product or service would precisely meet. 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 can 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 can also use an RFP for either goods or services.

5. Request for quotation (RFQ)

A request for quotation (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 clear, 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.

You can use an RFQ 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. You can also use it 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 handle. 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, 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 carries significant risks, including a lack of price competition that can lead to inflated costs, reduced innovation, and potential supplier complacency due to guaranteed business. It also creates a dangerous dependency on one supplier, making you vulnerable to supply disruptions, quality issues, or leverage being used against you in contract negotiations.

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, such as the simplicity of dealing with a single supplier and any potential volume discounts.

Procurement best practices

Effective procurement goes beyond just buying goods and services. These proven practices will help you build stronger supplier relationships, control expenses, and deliver better results across all purchasing activities:

• Consistent supplier communication: Regular dialogue with vendors builds trust, prevents misunderstandings, and creates opportunities for collaboration. Open communication channels help resolve issues quickly and identify ways to improve performance together.
• Cost tracking and transparency: Clear visibility into spending patterns and budget allocation enables better decision-making. Detailed cost analysis helps identify savings opportunities and ensures procurement activities align with financial objectives.
• Ongoing process improvement: Regularly reviewing and refining procurement workflows increases efficiency and reduces delays. Small adjustments based on experience and feedback compound over time to create significant operational improvements.
• Leveraging data and automation: Technology streamlines repetitive tasks and provides valuable insights through analytics. Automated workflows reduce manual errors while data analysis reveals trends that inform smarter purchasing decisions.
• Ensuring compliance and alignment with business goals: Procurement activities must support broader organizational objectives while meeting regulatory requirements. Clear policies and regular audits help maintain standards and demonstrate value to stakeholders.

Implementing these practices creates a foundation for procurement success. Businesses that focus on communication, transparency, improvement, technology, and alignment consistently achieve better outcomes and stronger supplier partnerships.

The fundamental components of effective procurement

‍Effective procurement planning is built on 3 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: This involves determining where to procure your resources from. Selecting the best possible suppliers 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. Supplier relationship management involves regular communication, performance monitoring, and working together with suppliers to improve processes and reduce costs.
• ‍Process optimization: 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 affects your business

Effectively using the procurement components 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 benefits of effective procurement 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: ‍An effective procurement process lowers costs, including the cost of time spent on tedious manual tasks. Better procurement results in easier manufacturing and more efficient 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 aren’t 100% resilient in all scenarios. So while cost improvement is important, you’ll also want to ensure 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

Throughout 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: Automated document scanning and uploading eliminates manual data entry, while built-in comparison tools automatically match invoices against purchase orders to streamline processing and reduce administrative workload
• Expedite approvals: Custom approval workflows route requests to the right people automatically and provide clear visibility into approval status, eliminating bottlenecks and ensuring faster decision-making across all procurement activities
• Reduce errors: Standardized, automated procedures, document scanning and uploading, and document comparisons can reduce manual errors and flag suspected problems such as duplicates or missing fields
• Cost savings: Automated spend analysis and contract management help identify savings opportunities, while streamlined processes reduce administrative overhead and enable better negotiation through data-driven insights
• Compliance: Built-in controls and audit trails ensure adherence to internal policies and regulatory requirements, while automated documentation creates a clear record of all procurement activities for reporting purposes
• Process transparency: Real-time dashboards and reporting provide visibility into procurement status, spending patterns, and supplier performance, enabling stakeholders to track progress and make informed decisions

Automating the procurement process supports agility and data-driven decision-making and can help your business overcome your biggest procurement challenges.

How Ramp streamlines your procurement process‍

Whether you're engaging in direct, indirect, goods, or services procurement, having the right tools in place can help you reduce costs, maintain quality, and strengthen supplier relationships.

Ramp makes procurement simpler and faster by automating manual tasks throughout the process. Our platform consolidates procurement, bill pay, and vendor management into a single solution, giving you real-time visibility into spending and ensuring your team stays on budget.

With Ramp, you can:

• Benchmark prices accurately: 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
• Track all your vendors in one place: The Vendor Management dashboard gives you a single view into every vendor detail, document, and transaction so you can find exactly what you need quickly and easily
• Automate invoice payment and processing: Virtual and physical cards help you pre-approve vendor spending and ensure contract compliance. Upload your supplier contract and pay invoices in a few clicks with Ramp’s accounts payable software.

Control procurement from the start. Optimize your procure-to-pay process with Ramp Procurement, or get started with a free, interactive demo to see how it works.