July 25, 2022
Explainer

Material procurement: What it is, why it’s important for your business, and how to execute it seamlessly

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Material procurement is an important portion of every company's procurement process. Procure high-quality materials, and chances are you'll gain a competitive advantage. Fail to plan properly, and your procurement process will become your biggest weakness.

In this guide, we’ll explain what material procurement is and how it fits into the broader procurement process.

What is material procurement?

Material procurement, or raw material procurement, refers to companies selecting, purchasing, invoicing, and paying for the raw materials they need to run their businesses. In the building industry, material procurement refers to procuring construction materials. 

However, the term relates to the procurement planning process across several industries.

What are the three types of procurement?

There are three types of procurement:

  • Direct: Direct procurement is the sourcing and purchasing of raw materials that directly impact your final product. It includes purchasing machinery, raw material, and other goods playing a central role in creating your final product.
  • Indirect: Indirect procurement refers to sourcing and purchasing of ancillary goods you need to run your business efficiently. For example, office supplies don't directly contribute to your final product but are essential to your business running smoothly.
  • Services: Services procurement refers to sourcing and purchasing software, external consultants, or any other service that helps you run your business. For example, hiring a marketing agency to manage a short-term campaign is an instance of services procurement.

Why is material procurement important?

Material procurement is central to your company's success. This process helps you source and purchase goods and services that help you make profits. A good material procurement process gives you the following advantages:

  • A high-quality product that delights customers
  • Sustainable profit margins 
  • Relationships with high-quality material suppliers that support your business
  • Address changes in demand and supply efficiently
  • An end-to-end view of your sourcing supply chain

Is material procurement the same as purchasing?

Material procurement and purchasing are not the same, despite many professionals using the terms interchangeably. Purchasing is a step in the procurement process. Procurement involves more functions such as:

  • Business goal mapping and forecasting
  • Vendor selection and evaluation
  • Price negotiation
  • Delivery time and handling
  • Invoicing and reconciliation
  • Payment approval
  • Alignment with manufacturing projections

As you can see, procurement activities are part of a broader process compared to purchasing.

What are the 7 steps in the material procurement process?

A good material procurement process features streamlined procurement management. While every company's procurement process differs, the following steps apply to nearly every industry.

Step #1: Determine needs and business goals

Determining an organization's business goals is not solely a procurement goal. In most organizations, the executive suite earmarks high-level forecasts, and various departments align their targets to those goals. Procurement works the same way.

For instance, the CFO might target a 10% increase in sales the following quarter. Manufacturing will thus increase its production targets, with a knock-on effect on procurement goals. A procurement department will fix its internal goals, calculate lead times, and determine which goods and supplies the company needs to achieve its broad goals.

Make sure you take your time determining the right goals. Every other step in the procurement process lifecycle from this one.

Step #2: Design a procurement strategy

Many companies dive right into selecting suppliers once they've fixed their goals. However, take the time to create a procurement strategy that fits well with your supply chain management plan. A procurement strategy gives you a framework to select and screen vendors, optimize the purchase process, and evaluate vendor performance.

Once you have a good strategy in place, you'll naturally enhance stakeholder relationships. Thanks to the transparent metrics and processes your strategy defines, you'll have no issues communicating expectations to your suppliers. This kind of open communication builds strong relationships, and your vendors are more likely to support you during tough times.

At the very least, you must define vendor performance metrics (KPIs) that help you quickly evaluate and rate the quality of services you receive.

Step #3: Identify and evaluate suppliers

Once you've defined your strategy, you can use it to identify and evaluate suppliers. Every supplier brings something different to the table. However, many companies equate supplier evaluation with price evaluation. Price is the most important factor in indirect procurement.

However, direct and services procurement impact your ROI significantly. Therefore, take the time to evaluate vendor quality, market feedback, and delivery terms. For instance, supplier A might demand short credit cycles but deliver high-quality goods on time. Choosing a less reliable supplier solely because of better credit terms doesn't make sense in this situation.

Step #4: Negotiate prices

Despite the focus on quality in direct and services procurement, raw material prices are important. Make sure you evaluate prices from an investment perspective and not an expense minimization one. An expense is spending you can reduce without significantly impacting your product.

An investment refers to spending that boosts profits and your business. Your objective when evaluating vendor prices is to focus on generating the most ROI with appropriate prices in direct and services procurement. In indirect procurement, you must focus on cost minimization.

When negotiating prices, review your existing cash flow to avoid offering credit terms that might put you in a hole. For example, if you notice that your cash flow might suffer over the next quarter, try negotiating for net 60 or greater payment terms with your suppliers.

Note that these terms might not always suit your suppliers, depending on your industry. However, cash flow data will help you balance inflows and outflows, leaving your cash position at an ideal level.

Step #5: Receive purchase orders and review

Once you've negotiated prices, your procurement department will send a purchase order (PO) to your suppliers. The PO will list details such as:

  • Order number
  • Items ordered
  • Quantities
  • Prices
  • Expected invoice amount
  • Any additional payment details such as credit terms
  • Delivery due dates

Once your vendors receive your PO, they will begin processing your order.

Step #6: Receive and verify delivery

Once your vendors have finished processing your order, they will dispatch goods. Make sure you verify vendor deliveries. Follow the tips below, at a minimum:

  • Verify delivery slips with POs. Note that your suppliers might partially fill POs by splitting goods across multiple deliveries.
  • Document delivery evidence such as Bills of Material, pictures of goods, and their condition.
  • Sign off on delivery after inspecting goods.
  • Communicate issues with suppliers immediately.
  • Store goods securely in your warehouse or facilities.

Step #7: Receive invoices and pay suppliers

Most suppliers will include an invoice with their deliveries. In such cases, you can match the invoice to the PO and verify delivery proofs. Assuming everything checks out, you can pay your supplier according to the credit terms they offered you.

Note that many suppliers offer early payment discounts. Make sure you capture them as much as possible. These discounts could help you save as much as 20% annually on purchasing costs.

4 best practices for raw material procurement

Raw material procurement can be complex to execute. Here are x best practices to help you create an efficient procurement process.

Create and share material demand profiles with vendors

Your company will face changes in customer demand every year. For example, retailers face fluctuating demand depending on the season. Share these expected demand profiles with your suppliers. They can plan their output better, resulting in timely deliveries to you. You’ll also build strong supplier relationships driven by transparent benchmarks.

Work with suppliers to determine material delivery schedules

Collaboration is the best approach in procurement. Ask your suppliers about their delivery schedules and check in shipment status regularly. Many companies ask their suppliers to give them a GPS feed of their shipments, automating the tracking process.

If you're expecting a surge in demand, let your suppliers know as quickly as possible. Aside from raw material supply, your vendors can figure out logistics and deliveries ahead of time.

Spread risk by choosing multiple suppliers

If your company sources goods from several vendors, spread your orders among them. Sourcing the majority of your supplies from a few vendors might cripple you if one of those vendors suffers adverse circumstances. For instance, a vendor's bankruptcy might cause you to miss production schedules and lose market share.

Follow this principle unless your raw materials are extremely scarce. In those situations, consider buying the vendor or owning a significant share of their company to minimize risk.

Embrace automation

Procurement is a complex process that involves much record keeping and verification. Automate these processes and you can focus on discovering inefficiencies in your supply chain.

How Ramp helps optimize the material procurement process

Procurement processes become more efficient when you use electronic solutions to eliminate clerical work. Here's how Ramp helps you build a great material procurement process.

Automate bill payments

Manually paying bills increases payment clearance times and might leave your vendors frustrated. High-quality vendors appreciate on-time payments. Ramp helps you automate payment approvals. You can pay your vendors using checks, virtual cards, or ACH.

Centralized SaaS vendor management

Avoid shadow IT when sourcing vendors for services procurement. Shadow IT refers to duplicate or unapproved apps on your network that might post security threats. Ramp centralizes all your SaaS subscriptions in one place, helping you track and approve expenses.

Eliminate wasted or double spending on SaaS

Thanks to widespread SaaS app use, you might be paying twice for the same app. Or worse, you might be paying for two apps with similar functionalities. Wasted spending of this kind increase expenses needlessly.

Ramp helps you identify upcoming subscription payments and digitize your expense policies. You can limit spending per merchant category and build approval workflows for spending greater than your thresholds. The result is an overview of your cash flow, and deep vendor spend tracking.

Material procurement is an important cog in a successful business strategy. Focus on identifying which procurement costs are an investment versus an expense. A good procurement strategy will help you boost profits while maintaining high product quality.

Learn how Ramp simplifies vendor management and streamlines material procurement.

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FAQs
What are the types of procurement?

There are three types of procurement:

  • Direct: Procuring materials that directly impact your product
  • Indirect: Procuring materials that do not directly impact production
  • Services: Procuring services connected to production

What are the steps in a material procurement process?

Here are the steps in a material procurement process:

  • Determine needs and business goals
  • Design a procurement strategy
  • Identify and evaluate suppliers
  • Negotiate prices
  • Receive POs and review
  • Receive and verify delivery
  • Receive invoices and pay suppliers

How can you ensure a top-notch material procurement process at all times?

You can build an efficient material procurement process by following these best practices:

  • Create and share material demand profiles with vendors
  • Work with suppliers to determine material delivery schedules
  • Spread risk by choosing multiple suppliers
  • Automate and track product metrics

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