What is Material Procurement?

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.

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

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What is material procurement?

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Material procurement, or raw material procurement, is the process of selecting, purchasing, invoicing, and paying for raw materials. This project has a huge impact on the success of a project. At this stage, you'll determine which materials you need, the quantities of materials required to complete the project, and the timeline under which the project will be completed.

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What are the three types of procurement?

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There are three types of procurement, including:

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• 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.

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• 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.

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• 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 service procurement.
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Why is material procurement important?

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Material procurement ensures that your business has the raw goods you need to develop products, drive innovation, and stay within your budget while doing so. A strong material procurement process gives you the following advantages:

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• A high-quality product that delights customers

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• Sustainable profit margins

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• Supportive business relationships with high-quality material suppliers

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• The ability to address changes in demand and supply efficiently

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• An end-to-end view of your sourcing supply chain

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Is material procurement the same as purchasing?

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Material procurement and purchasing describe two different tasks. Purchasing is a step in the procurement process, while procurement involves more functions, including:

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• Business goal mapping and forecasting

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• Vendor selection and evaluation

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• Price negotiation

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• Delivery time and handling

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• Invoicing and reconciliation

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• Payment approval

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• Alignment with manufacturing projections

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

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What are the 7 steps in the material procurement process?

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

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1. Determine needs and business goals

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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.

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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.

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Make sure to incorporate goal setting as part of your initial procurement project management. Every other step in the procurement process lifecycle stems from cementing priorities from the get-go.

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2. Design a procurement strategy

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Many procurement teams 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 systems. A procurement strategy gives you a framework to select and screen vendors, optimize the purchase process, and evaluate vendor performance.

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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 with your vendors, who will be more likely to support you during tough times.

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

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3. Identify and evaluate suppliers

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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.

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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 initiatives doesn't make sense in this situation.

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4. Negotiate prices

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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.

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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.

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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.

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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.

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5. Receive purchase orders and review

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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

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• Items ordered

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• Quantities

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• Prices

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• Expected invoice amount

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• Any additional payment details such as credit terms

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• Delivery due dates

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

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6. Receive and verify delivery

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

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• Verify delivery slips with POs. Note that your suppliers might partially fill POs by splitting goods across multiple deliveries.

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• Document delivery evidence such as Bills of Material, pictures of goods, and their condition.

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• Sign off on delivery after inspecting goods.

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• Communicate issues with suppliers immediately.

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• Store goods securely in your warehouse or facilities.

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7. Receive invoices and pay suppliers

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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.

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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.

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What are the four types of procurement?

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Every organization relies on a robust procurement process to function smoothly. But procurement isn't a one-size-fits-all approach. To optimize efficiency and cost savings, companies categorize their purchases into four distinct categories:

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• Direct Procurement

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Direct procurement focuses on acquiring the essential building blocks that directly impact your final product. Imagine a car manufacturer – their direct procurement activities involve securing raw materials like steel, rubber, and glass, alongside specialized equipment and software crucial for the assembly line. By strategically sourcing these direct materials, companies ensure a consistent flow of production and maintain the quality of their end product.

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• Indirect Procurement

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Indirect procurement deals with the essential yet non-production-related items that keep your business running.  Think of office supplies, furniture, utility bills, or even janitorial services. While not directly contributing to the final product, these purchases are crucial for day-to-day operations and employee well-being. Optimizing indirect procurement can lead to significant cost savings, allowing you to redirect those resources towards core business functions.

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• Goods Procurement

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Goods procurement is a subset of procurement that specifically focuses on acquiring tangible items. This encompasses the raw materials used in production (like cotton for a clothing company) as well as the finished goods themselves (think pre-packaged snacks for a grocery store). It can even extend to intangible assets with a physical form, such as software subscriptions that provide essential tools for your team.

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• Services Procurement

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Services procurement focuses on acquiring the specialized skills and expertise needed to run your business effectively. This can range from hiring marketing agencies for targeted campaigns to engaging software development teams to build custom applications.  Services procurement can even encompass elements from both direct and indirect categories.  For instance, a manufacturer might outsource equipment maintenance to a specialized contractor (direct procurement aspect) while also hiring a consultant to optimize their production layout (indirect procurement aspect).

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4 best practices for raw material procurement

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

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1. Create and share material demand profiles with vendors

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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.

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2. Work with suppliers to determine material delivery schedules

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Ask your suppliers about their delivery schedules and check on shipment statuses regularly. Many companies request a GPS feed of their shipments.‍

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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.

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3. Mitigate risk by choosing multiple suppliers

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If your company sources goods from several vendors, spread your orders among them. Sourcing the majority of your supplies from a few vendors could impact your supply chain if one of the vendors can’t meet their obligations. For instance, a vendor's bankruptcy might cause you to miss production schedules and lose market share.

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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.

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4. Embrace automation

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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.

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