What are the different types of procurement?

The past few years have seen huge changes in the role of procurement. The impact of Covid19, high inflation, labor market challenges, global supply chain issues, and rising geopolitical tensions has made acquiring resources more complex than it has been in decades. 

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According to Deloitte's 2023 Global Chief Procurement Officer (CPO) Survey, procurement is moving away from a purely transactional focus. 

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“ [There’s a] growing need for procurement to enable growth, mitigate inflation/risk, and drive significant levels of value.” 

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But while the strategies, methods and technology being used in procurement is changing, the fundamentals of procurement remain the same. From managing vendor relationships to sourcing the right raw materials, the different types of procurement play an important role in driving company growth.

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What is procurement?

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Procurement is the process of finding and buying resources that a company needs, from raw materials to hiring staff. Different stages of the 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.

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Procurement professionals need to balance costs with ensuring that the business has access to all the resources it needs to generate profits.

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Types of procurement

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

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• Direct procurement: Direct procurement is the purchase of resources that are required 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. 

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

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• Goods procurement: Goods procurement is the material procurement of tangible items, such as office supplies, raw materials, and other physical goods. As you can see, goods procurement could fall into the category of both direct or indirect procurement, depending on what the goods are going to be used for.

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• Services Procurement: Services procurement is procuring people-based services that help you run your business. The most common costs in this category would be for hiring staff or paying contractors. Again, services procurement can include items that fall under both the direct and indirect procurement categories.

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The Fundamental Components of Effective Procurement

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Effective procurement planning is built on three fundamental components. Essentially, this comes down to finding the right suppliers, maintaining positive relationships with those suppliers, and continuous optimization of both of those processes. Here’s how each component works:

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Sourcing

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That is, where does the company get its resources from? This involves looking at an organization’s buying activities to ensure that the best possible suppliers are selected. This can be about costs, but it should also involve diversification of suppliers, managing risks in the supply chain, and assessing alternatives to current solutions based on new technology or vendors.

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Supplier Relationship Management (SRM)

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Regardless of the size of a company, every business benefits from positive relationships. 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.

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According to the Deloitte survey, 61% of CPOs believe that increasing supplier collaboration was the strategy that would deliver the most value in the coming year.

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Process Optimization

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The final component of effective procurement is seeking continuous improvement in the processes used. 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. Optimization aims to reduce manual work, minimize errors, and speed up the procurement cycle while improving compliance and transparency.

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How procurement impacts your business

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Procurement is a strategic function that organizations can use to improve profitability and resilience. If utilized proactively, it can both drive business growth and reduce risk. Some of the impacts effective procurement can have on a business include:

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Higher Margins

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The more cost effective your cost of goods is, the higher your gross margins will be. That’s all down to how well procurement can drive down those costs without impacting quality.

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Of course overall profitability isn’t just about the direct costs, but the indirect costs too. Effective procurement can also improve the overall efficiency of the operating expenses of the business, which can improve overall net profit margins.

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This is procurement at its most fundamental. All else being equal, the lower the cost incurred to run a business, the higher the profits.

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Efficiency Gains

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Procurement impacts the overall company’s efficiency. An effective procurement process lowers costs. Better procurement results in easier manufacturing schedules.

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Competitiveness: Procurement affects supplier relationships. A better procurement process leads to better relationships, supportive suppliers, and competitiveness during tough times.

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Improved Risk Management

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The past few years have shown us that global supply chains are not 100% resilient. According to McKinsey, 

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“Procurement leaders are therefore shifting focus from cost improvement alone toward resiliency and assistance to businesses that are adapting to volatile market conditions.”

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An effective procurement strategy needs to focus on an organization's ability to deliver throughout volatility. Not only does this help manage risk in the event of major catastrophic events or supply chain breakdowns, but it also represents the opportunity for a competitive advantage. As a pharmaceutical company CPO noted in the McKinsey piece above,

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“Procurement’s ability to adapt to these changes and monetize that volatility will be absolutely crucial for success.”

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The procurement life cycle

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The procurement process is a series of steps that teams execute when sourcing products and managing the company’s supply chain. However, a procurement strategy should never be static. It’s more accurate to think of procurement as a life cycle, where once a decision is made it is later reviewed and reassessed to ensure it remains the best option for the business.

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Here are the ten steps on the procurement process.

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Step #1: Locating needs and submitting a purchase request

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The procurement process starts with identifying the need for a product, service, material, or software. This could be a brand new requirement that the organization hasn’t had before, or it could simply be an existing need that is ongoing.

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Generally speaking, this will originate from individual managers within the business, who have identified a need for a specific resource for their team.

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Step #2: Supplier evaluation and selection

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With the requirements clearly outlined and an approved purchase requisition, it’s time to find potential suppliers and submit a request for quote (RFQ) or request for proposal (RFP). This process can be lengthy and comprehensive, but it’s important to spend the time upfront to give an organization the best chance for a successful relationship.

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5 Components of a great RFP

1. Specify the goals of your project or requirements
2. Provide a clear scope of work and budget range
3. Highlight any specific challenges or past failures
4. Publish the selection criteria
5. Specify the submission method

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When evaluating suppliers, procurement teams need to weigh available options to see where each excels and where they fall short. That said, supplier assessment should focus on the following aspects:

• Cost

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• Speed and quality

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• Reliability

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• Reputation 

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• Ease of communication

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• Ethics

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Step #3: Contract negotiation

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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, which includes the price, delivery timelines, what happens in case of any damages, and other terms and conditions.

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This part of the process should not be taken lightly. Procurement professionals need to consider all eventualities that could occur during the relationship, and ensure the contract provides coverage.

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There should be a clear outline of what the delivery should consist of, and what the penalties or outcomes are if this service standard isn’t met.  

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Step #4: Purchase order (PO) creation

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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.

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Step #5: Assess deliverables 

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After you’ve received the ordered goods or services, you will need to complete a quality audit to ensure that the deliverables align with the original request and agreed contract. 

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For raw materials this may include assessments of quality and timescales. For services, this should be built into the project management workflow to ensure there are updates being provided that show the service is being delivered as agreed.

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Step #6: Record keeping

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It’s 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.

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It will also form a fundamental part of the final part of the procurement life cycle.

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Step #7: Review

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Regardless of whether the purchase was for a one off deliverable or an area of ongoing need for a business, there should be a review process built into the procurement life cycle. This allows procurement teams to continuously improve their efficiency over time, highlighting both aspects that have worked well and gone badly through the process.

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The 5 biggest procurement challenges

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Procuring goods, services, and products comes with several hurdles. Here are five common challenges that businesses of all sizes face in the procurement process. 

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1. Difficulty negotiating contracts

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Contract negotiations are not easy. It takes a specific set of knowledge and experience to secure the best deals that lower a company’s spending. If an organization’s procurement team doesn’t have the skills to negotiate, every dollar extra they pay is a direct hit to the company’s bottom line. Companies must ensure their procurement teams have the necessary training and infrastructure to review contract terms at all times.

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2. Inaccurate or delayed invoices

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The fastest way to damage a supplier relationship is to not pay them on time. But paying invoices accurately and on time can be a bigger challenge than it appears, especially for large companies dealing with potentially thousands of suppliers. 

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The best way to mitigate this risk is to utilize modern technology to streamline and automate as much of the payments process as possible. 

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3. Vendor management issues

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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.

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This is another aspect of the procurement process that can be assisted by data. When data is collected on suppliers performance (for example, average delivery timescales or projects delivered to the original budget), it can be easier to compare and contrast different options in the market, and come prepared for future negotiations. 

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4. Compliance to contract 

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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. 

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Installing thorough performance review processes and maintaining a historical record of vendor performance are a couple ways companies can ensure compliance from their vendors. Again, data is your best friend here, as it provides a concrete picture of compliance.

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5. Inaccurate data

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So while data and analytics can go a long way to solving some of the other challenges we outlined, getting that data can be a challenge in itself.. While the procurement process is continually becoming automated, not all programs are linked, and data entry is often done manually, which might result in errors. 

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Making purchases using inaccurate data leads to inventory shortages, excesses, and other procurement challenges. Automation can help remove these manual processes and improve performance, freeing up procurement team resources on strategy and solutions, rather than data entry.

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This is why digital transformation is a core strategic priority for many organizations, with a recent EY survey finding that, 

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“More than half [of the procurement leaders surveyed] view digital as an immediate priority to enable cost savings, innovation, supply certainty and service.” 

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How Ramp boosts vendor management in the procurement process

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Vendor management can be complex to execute. Here’s how Ramp helps you install vendor management best practices in the procurement process.

Benchmarking prices accurately

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Negotiating contracts isn’t an easy task. It takes an experienced team to land the best procurement deals, but even the most experienced negotiators need accurate pricing data. Ramp Price Intelligence extracts your contract details and benchmarks the price, providing you with instant visibility into what other businesses are paying for the same software.

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Track all your vendors in one place

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Keeping tabs on several vendors' performance can be time consuming and highly manual. With Ramp, you can track all your vendors in one dashboard giving you deep insights into vendor performance. Ramp’s Vendor Management dashboard also gives you a single view into every vendor detail, document, and transaction so you can get answers about your vendors quickly and easily.

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Invoice payment and processing automation 

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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. 

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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.

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