Procurement is an integral part of every company’s processes. From managing vendor relationships to sourcing the right raw materials, the different types of procurement play an important role in boosting a company’s profit margins.
In this guide, you’ll learn all about the different kinds of procurement along with the following:
What is procurement?
Procurement refers to the strategic planning and execution companies conduct when managing their supply chain. It involves 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.
There are four types of procurement: Direct procurement, indirect procurement, goods procurement, and services procurement.
Types of procurement
There are four different types of procurement:
- Direct procurement: Direct procurement is the purchase of items that directly impact a company’s final product. It includes purchasing raw materials, wholesale goods, procurement software, or services that play a critical role in the production of your end product.
- Indirect procurement: Indirect procurement involves purchasing items that don’t directly contribute to the production of the company’s end product. This includes office supplies, furniture, equipment maintenance, marketing, or consulting services.
- Goods procurement: Goods procurement is the material procurement of tangible items, such as office supplies, raw materials, and other physical goods. It can also include procuring software subscriptions.
- Services Procurement: Services procurement is procuring people-based services that help you run your business. It can include anything from software purchases to hiring contractors. Services procurement can also include items that fall under the direct and indirect procurement categories.
The three pillars of procurement
Successful procurement planning process revolves around three pillars. These are:
- People: The “people” are individuals responsible for the execution of the procurement lifecycle. They typically initiate every step of the procurement process and track tasks to ensure successful execution. The number of people involved may vary depending on the types of the goods and services the company plans to purchase.
- Processes: An effective procurement process results in smooth business operations and potentially reduces costly mistakes. Procurement is a highly complex task and the key to ensuring success is designing efficient sub-processes. Good processes ensure companies have the goods and services they need at the right time, for the right price.
- Documentation: The paperwork involved in every phase of the process is an integral part of procurement success. Keeping all the documentation in a centralized place is helpful in case of an audit or a dispute. Good documentation helps you align your teams around common goals and simplifies process execution.
Procurement versus purchasing and sourcing
While laypersons might use these terms interchangeably, procurement, sourcing, and purchasing refer to different aspects of the larger procurement process. The table below summarizes these differences.
How procurement impacts your business
Procurement is a strategic function that organizations can use to improve profitability. If utilized proactively, it can drive business growth. Here’s the impact procurement has on the different aspects of a business:
- Gross margins: High procurement costs translate to lower gross margins and vice versa.
- Net margin: Purchasing goods or services that do not directly influence a company’s end product (indirect procurement) affects net margin.
- Business efficiency: Procurement impacts the overall company’s efficiency. An effective procurement process lowers costs.
- Manufacturing efficiency: Better procurement results in easier manufacturing schedules.
- Competitiveness: Procurement affects supplier relationships. A better procurement process leads to better relationships, supportive suppliers, and competitiveness during tough times.
Primary functions of procurement in business
Here are five common procurement functions:
- Sourcing: One of the most vital procurement functions in every organization is the sourcing and procurement process. Sourcing goods and services for a company’s day-to-day operations requires strategic planning. The procurement team locates the right supplier, negotiates terms, and ensures goods are received in the correct quantity, in good condition, and at the right time.
- Negotiation: Negotiation is vital for every organization’s profitability because if spending is high, it will reduce net margins. A great procurement team should be able to negotiate the best deals for the company to save costs.
- Contracting: The procurement team is responsible for finding the right suppliers based on price, quality, reliability, and reputation and awarding contracts to those who fit criteria best. Companies work with vendors who meet company standards, ethics, and industry regulation.
- Monitoring supplier performance: Keeping track of suppliers' performance to ensure that they meet quality standards and deliver on time is critical. By maintaining supplier performance records, companies can create a map of trusted suppliers they can always rely on.
- Policy compliance: Finally, the last and the most critical procurement function is policy compliance. While policy compliance varies by organization, procurement professionals ensure that every step of the procurement process aligns with the company’s and its industry’s protocols. Failure to comply with regulations often leads to hefty fines and a loss of brand reputation.
What is the procurement process?
The procurement process is a series of steps that teams execute when sourcing products and managing the company’s supply chain. Here are the six steps on the procurement process.
Step #1: Locating needs and submitting a purchase request
The procurement process starts with identifying the need for a product, service, material, or software a company requires. Once a company identifies its needs, individual business managers submit purchase requisitions to the procurement team.
Step #2: Supplier evaluation and selection
With a detailed list of the items needed and an approved purchase requisition, it’s time to find potential suppliers and submit a request for quote (RFQ) or request for proposal (RFP). Finding the right supplier is crucial. Working with the wrong vendor could result in operations delays or worse.
When evaluating suppliers, it’s prudent to weigh available options to see where each excels and where they fall short. That said, supplier assessment should focus on the following aspects:
- Speed and quality
- Ease of communication
Step #3: Contract negotiation
Once a company has decided which supplier to work with, the negotiation process begins. The procurement team will work with the supplier’s sales rep to establish contract terms. Contracts include not only the pricing, it covers the whole process, from the price, delivery timelines, what happens in case of any damages, and other terms and conditions.
Step #4: Purchase order (PO) creation
If both parties are happy with the contract terms, the procurement team creates a purchase order and sends it to the supplier. A PO is a document that contains the description of the goods and services, quantity, and total costs. In most cases, the PO undergoes a separate approval process to ensure that everything is correct and there are no discrepancies.
Step #5: Receive goods, review, and conduct a three-way match
After the supplier receives your PO and ships the order, the procurement team receives the goods and reviews them for accuracy and quality. If the order meets expectations, a three-way match is conducted.
The accounts payable team carries out the three-way match to ensure that the goods and services received match the purchase order, invoice, and delivery receipt. If there are any discrepancies, the issue is solved before releasing payment.
Step #6: Record keeping
Finally, it’s vital to keep records of the entire procurement process, from purchase requests to contract terms, invoices, and other accompanying documentation. Record keeping is helpful when carrying out audits, settling potential disputes, and during tax time.
5 procurement challenges
Procuring goods, services, and products comes with several hurdles. Here are five common challenges that businesses of all sizes face in the procurement process.
1. Difficulty negotiating contracts
Contract management is not an easy task. It takes excellent negotiation skills to secure the best deals that lower a company’s spending. If an organization’s procurement team doesn’t have the skills to negotiate, the company’s bottom line takes a hit. Companies must ensure their procurement teams have the necessary training and infrastructure to review contract terms at all times.
2. Inaccurate or delayed invoices
Paying invoices on time and accurately is another procurement challenge many organizations struggle with. Delayed invoice payments impact supplier relationships. Building a rapport with vendors through timely payments will help build long-term partnerships. Use electronic systems to automate the payment process and keep suppliers happy.
3. Vendor management issues
Maintaining consistency and evaluating vendor performance is always a significant challenge in the procurement process. From finding the best supplier to keeping tabs on supplier performance and ensuring timely delivery, many organizations find it difficult to handle vendor management. Replacing time-consuming manual processes with electronic ones is the best way to handle this challenge.
4. Compliance to contract
Another challenge the procurement department faces is suppliers’ compliance to contract. With various supplier performances to keep track of, it can be challenging to determine which vendors meet their obligations.
Installing thorough performance review processes and maintaining a historical record of vendor performance are a couple ways companies can ensure top-notch compliance from their vendors.
5. Inaccurate data
For a company to make sound purchasing decisions, it requires accurate data. While the procurement process is continually becoming automated, not all programs are linked, and data entry is typically done manually, which might result in errors.
Making purchases using inaccurate data leads to inventory shortages, excesses, and other procurement challenges. Automation is critical in the procurement process. This gives a company’s procurement teams more time to identify the root causes of inefficiencies and fix them.
How Ramp boosts vendor management in the procurement process
Vendor management can be complex to execute. Here’s how Ramp helps you install vendor management best practices in the procurement process.
Negotiating contracts isn’t an easy task. It takes an experienced team to land the best procurement deals. Ramp will help you negotiate contracts and ensure that you save money over time.
Track all your vendors in one place
Keeping tabs on several vendors' performance can be an arduous task. With Ramp, you can track all your vendors in one dashboard giving you deep insights into vendor performance.
Invoice payment and processing automation
Manually paying bills increases payment clearance times and frustrates vendors. Ramp’s virtual and physical cards help you pre-approve 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. Use software to automate several portions of your procurement process to reduce workload and improve overall efficiency.