What is Procurement?

Procurement helps businesses secure the goods and services they need to operate, but it also presents unique challenges for finance leaders. Issues like cost control, supplier risk, and compliance can quickly complicate the process.

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Without a solid procurement strategy and effective tools, companies risk overspending, delays, and inefficiencies. But with the right approach, procurement can drive savings, improve supplier relationships, and give your business a competitive edge. Ahead, you’ll learn about the procurement process, how to tackle common challenges and some key strategies for optimizing procurement management.

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What is procurement?

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Procurement examples

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Procurement includes everything from purchasing computer hardware to managing supplier relationships. 

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Here are five examples of procurement: 

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• Sourcing office supplies: Identifying vendors, negotiating prices, and purchasing items like computers, furniture, and stationery.

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• Acquiring software licenses: Researching and purchasing SaaS solutions for the company’s operational needs.

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• Securing raw materials: Buying essential materials from providers to ensure production lines stay operational.

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• Outsourcing services: Contracting external vendors for services like IT support, consulting, or marketing.

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• Logistics management: Procuring transportation and shipping services to move products from suppliers to distribution centers is a key part of supply chain management. 

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Types of procurement: Indirect vs. direct procurement 

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Procurement is typically split into two categories: direct and indirect procurement. Understanding the difference between these two types will help you manage your procurement activities more effectively.

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• Direct procurement refers to purchasing goods and services that directly impact a company’s production, like raw materials or components. 

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• Indirect procurement, involves sourcing items that support day-to-day operations but don’t directly tie to production, such as office supplies or IT services. 

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The key difference is that direct procurement affects the end product, while indirect procurement supports the overall business infrastructure.

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Read more: Direct vs indirect procurement differences and when to use 

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There are also two further categories that fall under direct and indirect procurement: 

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• Goods procurement is the purchase of tangible items, including physical goods, raw materials, and final products. 

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• Services procurement refers to hiring people-based services that help you run the business, including contractors, maintenance, and consulting services. 

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Read more: What are the different types of procurement?

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Procurement vs. purchasing: what’s the difference?  

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While often used interchangeably, procurement and purchasing are not the same.

Procurement 

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Procurement is a strategic process that involves sourcing, negotiating, and managing the acquisition of goods or services. It’s focused on finding long-term value for the business and optimizing workflows.

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Purchasing 

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The purchasing process is a subset of procurement and refers to the actual transaction—placing the order and the payment. It focuses on executing the transaction efficiently.

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Read more: Difference between procurement, purchasing, and sourcing

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How does procurement work? 

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Procurement starts with identifying company needs. The procurement team then makes purchasing decisions that support business operations and positively impact the bottom line. 

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They’re responsible for negotiating terms, finding the best suppliers, and ensuring purchases align with business operations.  

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Procurement is an ongoing lifecycle, not a one-time task, as businesses continually manage supplier relationships, control costs, and adapt to changing demands.

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In a small business, a few people or one dedicated procurement professional may handle the whole process. In a large company, a dedicated procurement department, led by a CPO (chief procurement officer) manages the process. 

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Regardless of business size, effective procurement ensures the right goods and services are purchased to keep operations running smoothly and within budget.

What is the procurement process? 

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Procurement is the backbone of any business, ensuring you have the goods and services you need to keep operations running smoothly. But navigating the process efficiently can make a big difference in saving time, money, and avoiding headaches. 

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Here's a simple breakdown of the seven key stages of the procurement process: 

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1.  Identify the goods and services your business needs

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Begin by identifying what your business needs, whether it's raw materials for production or supplies for daily operations. This could include sourcing new office furniture, hiring an IT professional, or renewing a software subscription. It's important to specify the details—like the quantity of furniture, contractor qualifications, or the length of the subscription.

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Consult with relevant departments to ensure the purchased items align with their requirements. Clearly defining these needs upfront will make the entire procurement cycle more efficient.

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2. Search for suitable vendors

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Once you’ve identified your requirements, start searching for potential suppliers and submit a request for quote (RFQ) AKA request for proposal (RFP). Be sure to include detailed specifications so you can accurately compare quotes, and guarantee informed decision-making.

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In addition to price, consider other important factors like delivery speed, reliability, reputation, and product quality to ensure you find the best fit for your business.

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3. Negotiate the price and terms 

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It's a good idea to request at least three quotes from different suppliers before making a decision. Review each quote carefully and negotiate terms like pricing, delivery schedules, and contract details. 

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Once you’ve reached an agreement, be sure to get everything in writing. Securing favorable terms early on can save your business both time and money in the long run.

4. Create a purchase order 

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After agreeing on terms, formalize the order by creating a purchase order (PO). The PO should outline: 

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• What you're buying

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• How much it will cost

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• The delivery date

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5. Receive and check the goods and services

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When the goods or services arrive, carefully check them to ensure they meet your expectations and match the order details. Address any issues with damage or incorrect items immediately to avoid delays.

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6. Perform three-way matching before payment processing

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Your accounts payable team should conduct three-way matching by comparing the purchase order, invoice, and delivery receipt. Ensure the received goods or services match the purchase order to avoid paying for unauthorized or incorrect items. Getting these documents in order also helps prevent errors in record-keeping. 

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Identify and resolve any discrepancies between the documents before processing the invoice. This step safeguards against overpayment or fraud and ensures accuracy in the transaction.

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7. Approve the invoice and make payment 

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Once everything checks out, approve the invoice for payment. Ensure timely payments to maintain good relationships with vendors and avoid late fees.

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What are the benefits of effective procurement? 

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By optimizing your procurement process, you’ll lower costs and better manage risk: 

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Cost savings

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A key benefit of effective procurement management is cost savings. By improving supplier selection, negotiating better contracts, and managing inventory efficiently, businesses can lower procurement expenses, boost profitability, and increase ROI of the procurement process.

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Improved supplier relationships 

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When you handle procurement effectively, it fosters trust and open communication between your business and suppliers. The result is more reliable deliveries, better service, and smoother collaboration overall. 

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Strong partnerships also make it easier to negotiate better terms, forecast supplies, resolve issues quickly, and adapt to changes, ultimately creating a more efficient and resilient supply chain.

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Compliance and risk management 

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Effective procurement helps mitigate risks associated with supply chain disruptions, quality issues, and regulatory compliance. By conducting thorough supplier evaluations and implementing robust contract management practices, organizations can minimize potential risks.

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What are the main challenges of procurement? 

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While procurement offers significant benefits, it also comes with its share of challenges. Understanding these challenges and implementing strategies to overcome them is essential for successful procurement.

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1. Supplier risk and reliability

One of the biggest challenges in procurement is ensuring supplier reliability. Delays, quality issues, or sudden disruptions in the supply chain can throw off operations and hurt business performance.

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Solution: Conduct thorough supplier evaluations and build strong relationships with multiple vendors to maintain a diverse, reliable supplier base. You’ll mitigate the risk of relying too heavily on one source and ensures continuity in case of disruptions.

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2. Cost control and budget management

Managing costs while securing the best quality products or services can be tricky. Unforeseen price fluctuations or inefficient procurement practices can quickly inflate budgets.

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Solution: Implement robust contract management, negotiate favorable terms, and regularly review supplier performance to keep costs in check. Use data-driven insights to track spending and identify areas for improvement.

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3. Regulatory compliance and ethical sourcing

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Navigating complex regulations, sustainability policies, and ensuring ethical sourcing can pose significant challenges. Non-compliance or unethical practices can lead to legal issues, reputational damage, or financial penalties.

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Solution: Stay up to date with industry regulations and ensure your procurement strategy includes compliance and risk management measures. Work with suppliers who meet ethical and regulatory standards.

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7 Procurement KPIs to track

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Monitoring the right procurement KPIs helps keep your processes efficient and aligned with business goals. Here are seven key metrics to track:

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1. Supplier lead time: Measure how long it takes suppliers to deliver goods after placing an order. Shorter lead times mean faster operations and fewer delays.

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2. Number of suppliers: Track how many suppliers you work with. A diverse supplier base reduces risk and increases flexibility in sourcing.

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3. Supplier availability: This KPI measures how often suppliers have the items you need in stock. High availability means fewer disruptions in your supply chain.

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4. Supplier defect rate: Monitor the percentage of goods from suppliers that are defective. Lower defect rates lead to higher quality and fewer returns or replacements.

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5. Fulfillment accuracy: Track how accurately suppliers fulfill orders, including delivering the correct quantity and products. High accuracy ensures smooth operations.

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6. Purchase order cycle time:  Measure how long it takes from creating a purchase order to receiving the goods. Faster cycle times improve efficiency and reduce bottlenecks.

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7. ROI of procurement process: Evaluate the return on investment (ROI) of your procurement efforts. Knowing your ROI helps you understand the value generated from the time and resources spent on procurement.

How can procurement software help? 

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Procurement software streamlines the entire procurement process, making it easier for stakeholders to manage costs, track spending, and ensure compliance. 

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Key features to look for include:

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Automated purchase order creation 

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By automating purchase order creation, procurement software eliminates manual work and reduces the chance of errors. Automation speeds up the process, ensuring that your team can place orders quickly and accurately. 

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With Ramp, you can auto-generate POs based on pre-approved requisitions, making it simple to control spending from the start.

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Purchase requisition 

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Purchase requisition tools let employees submit requests for goods or services that go through an approval process before purchase. Finance leaders can quickly approve purchases while maintaining control over what’s being bought. 

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It’s a simple way of making sure purchases align with budgetary goals and procurement policies.

Real-time budget tracking 

Real-time budget tracking lets you monitor spending as it happens, ensuring all purchases remain within budget limits. 

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With Ramp’s advanced analytics, you get full visibility into procurement spend across departments, so it’s easy to see where money is going and make quick adjustments when needed.

Supplier management tools 

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Supplier management tools help businesses organize and evaluate their supplier base. These tools store important information like contracts, pricing, and contact details, making it easier to manage relationships and ensure you’re working with the best vendors. 

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Ramp’s supplier management capabilities also track performance, so you know you’re getting value from your partners.

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Budget and spend management 

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Budget and spend management features lets you set limits on spending, track expenditures against budgets, and avoid overspending. Ramp’s software integrates budgeting with real-time spend tracking, giving finance leaders control over every dollar spent in the procurement process.

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Compliance and risk management 

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Ensuring compliance with company policies and external regulations is crucial. Procurement software simplifies this by embedding compliance checks into the process. 

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Ramp’s platform helps finance teams manage procurement in line with regulatory requirements, reducing the risk of non-compliance and financial penalties.

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Supplier performance evaluation 

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Regularly evaluating supplier performance helps maintain high standards and reduce risk. You can use procurement software to track key performance metrics like delivery times, product quality, and responsiveness, helping you make informed decisions about supplier relationships. 

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Inventory management

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Inventory management tools let businesses track stock levels, avoid shortages, and ensure that the right goods are available when needed. You can use this feature to streamline procurement and reduce costs by avoiding over-ordering or emergency purchases. With Ramp, you can integrate your procurement strategy with real-time inventory data, ensuring smoother operations.

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FAQ

What are the four main types of procurement?

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The four main types of procurement are:

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• Direct procurement involves buying goods used in production

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• Indirect procurement covers items for day-to-day operations

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• Goods procurement refers to buying physical items

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• Services procurement means acquiring services like IT or consulting

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What is procure-to-pay?

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Procure-to-pay (P2P) is the end-to-end process of purchasing goods or services, starting with identifying needs and ending with payment. It covers steps like supplier selection, purchase orders, receiving goods, and invoice approval.

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What is strategic sourcing?

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Strategic sourcing is the process of continuously evaluating and optimizing a company’s purchasing activities to find the best value. It involves analyzing suppliers, market conditions, and long-term needs to make informed decisions that reduce costs and improve supplier relationships.

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