What is procurement? An in-depth guide on types, processes, and benefits

Procurement is the process businesses use to secure the goods and services they need to operate. But it's more complicated than it sounds, and it presents unique challenges for finance leaders. Without a solid procurement strategy and effective tools, your company risks overspending and purchasing delays.

With the right approach, procurement can drive savings, improve supplier relationships, and give your business a competitive edge. We'll define procurement in business and how it works, exploring how to tackle common challenges and giving procurement examples along the way. Plus, we'll present key strategies for optimizing your procurement management process.

What is procurement in business?

Procurement is the process of sourcing, purchasing, and managing goods or services that a business needs to operate. It covers everything from finding reliable providers to negotiating contracts and ensuring timely delivery.

When you identify a business need for goods or services, you begin the first step of the procurement process. Next, you or your team will do some research to find the best vendor for your needs. Then it's time to negotiate the price and terms and create a purchase order (PO).

When the goods or services arrive, the next step in the procurement process is to inspect them and confirm that they meet the agreed-upon terms. If all is well, your accounts payable (AP) team will match the invoice, PO, and delivery receipt. Once your team approves the invoice and pays, the procurement process is complete.

Unlike general purchasing, which focuses on executing a single transaction, procurement is a strategic, end-to-end process that helps businesses control costs, optimize spend, and ensure compliance with any regulations.

Why is procurement important?

Procurement is more than just a back-office function; it’s a strategic process that directly influences your company’s efficiency and financial health. When done well, procurement helps control costs by securing favorable terms, managing inventory wisely, and avoiding unnecessary spending. It also strengthens supplier relationships.

Beyond day-to-day transactions, procurement plays a key role in reducing risk and upholding industry regulations and ethical standards. When procurement aligns with broader business goals, it becomes a powerful driver of efficiency and long-term financial strength, keeping your organization competitive.

Types of procurement

‍Procurement is typically split into two categories: direct and indirect procurement, with additional distinctions between goods, services, and public-sector procurement. Understanding the difference between the various types of procurement can help you manage your processes more effectively.

Direct procurement

Direct procurement refers to purchasing goods and services that directly impact your company’s production, such as raw materials or components‍. These purchases are essential to creating the end product your business sells.

Indirect procurement

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. These purchases help keep your business running smoothly without contributing directly to your product output.

Goods vs. services procurement

You can also categorize procurement by what’s being sourced. Goods procurement is the purchasing of tangible items, including raw materials, equipment, and finished products. Services procurement refers to hiring people-based services, such as contractors, consulting, or maintenance, that help your business operate effectively.

It’s important to be strategic in all types of procurement. Strategic procurement means analyzing suppliers, market conditions, and long-term needs to make informed decisions that reduce costs and improve supplier relationships.

Procurement vs. purchasing: What’s the difference?

‍While often used interchangeably, procurement and purchasing aren't the same. Procurement is a strategic process that involves sourcing, negotiating, and managing the acquisition of goods or services. The purchasing process is a subset of procurement that refers to the actual transaction: Placing the order and making payment.

Procurement is the strategic part of the process because it focuses on finding long-term value for your business and optimizing workflows. Purchasing focuses on executing the transaction efficiently.

To further illustrate the difference between procurement and purchasing, let’s look at where each step in the entire procurement process falls:

Note that 3-way matching is the only part of the process that’s considered both procurement and payment. It’s the initial step toward making a payment. It falls under procurement strategy because it prevents overspending and improves supplier relationships—both of which are core responsibilities of procurement.

How does procurement work?

Procurement starts with identifying your company’s needs. The procurement team then makes purchasing decisions that support business operations and positively impact your bottom line. They’re responsible for negotiating terms, finding the best suppliers, and ensuring that all purchases align with your business’s operations.

Procurement is an ongoing lifecycle, not a one-time task. Businesses continually manage supplier relationships, control costs, and adapt to changing demands. 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 chief procurement officer (CPO), manages the process.

Regardless of your business’s size, effective procurement ensures you purchase the right goods and services to keep operations running smoothly and stay within budget.

Procurement examples

‍Procurement includes everything from purchasing computer hardware to managing supplier relationships. Here are five common examples of procurement:

1. Sourcing office supplies: Identifying vendors, negotiating prices, and purchasing items such as computers, furniture, and stationery
2. Acquiring software licenses: Researching and purchasing SaaS solutions for your company’s needs
3. Securing raw materials: Buying essential materials from providers to ensure production lines stay operational
4. Outsourcing services: Contracting external vendors for services like IT support, legal, or marketing
5. Logistics management: Logistics management deals with procuring transportation and shipping services to move products from suppliers to distribution centers. It’s a key part of supply chain management.

Here are a few examples of procurement needs in various industries:

• Government procurement: Government procurement needs could include everything from buildings and vehicles to office equipment and supplies, software, and infrastructure services
• Food and beverage manufacturing procurement: Food and beverage manufacturers need to procure goods like ingredients and packaging, as well as parts and maintenance services for their manufacturing facilities
• Healthcare procurement: Healthcare providers need to procure things such as medical equipment and supplies, office equipment and supplies, and cleaning and maintenance services

What are the 7 steps of the procurement process?

The procurement process encompasses all the steps of acquiring the goods or services your business needs to keep operations running smoothly. Navigating the process efficiently can make a big difference in saving time and money and avoiding headaches.

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

Step 1: Identify the goods and services your business needs

Begin by identifying what your business needs. For example, say your business needs office furniture. It's important to specify the details, such as the quantity, type of furniture, materials, and so on.

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

Step 2: Search for suitable vendors

Once you identify your requirements, start searching for potential office furniture suppliers and submit a request for quote (RFQ) or request for proposal (RFP).

Be sure to include detailed specifications, such as what type of furniture and how many of each type, as well as any size, color, or material requirements. That way, you’ll be able to accurately compare quotes and guarantee informed decision-making.

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.

Step 3: Negotiate the price and terms

It's a good idea to request quotes from at least three vendors. Carefully review them and negotiate terms like pricing, delivery schedules, and contract details.

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

Step 4: Create a PO

After agreeing on terms, formalize the order by creating a purchase order. The PO for this office furniture purchase should outline:

• What furniture you're buying
• How much it will cost
• Your expected delivery date

Step 5: Receive and check the goods or services

When the office furniture arrives, carefully inspect it to ensure it meets your expectations and matches the order details and delivery receipt. Address any issues with damaged or incorrect items immediately to avoid delays.

Step 6: Invoice receipt and processing

When your accounts payable team receives the invoice, they should conduct a 3-way match by comparing the purchase order, invoice, and delivery receipt. They make sure the office furniture received matches the details on those documents to avoid paying for unauthorized or incorrect furniture. Getting these documents in order also helps prevent errors in recordkeeping.

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.

Step 7: Approve the invoice and make payment

‍Once you’re satisfied that the furniture meets your terms, process the invoice for payment. Making timely payments helps maintain good relationships with vendors while avoiding late fees.

What are the benefits of effective procurement?

Here are some of the benefits you can experience by optimizing your procurement process:

• Cost savings: An optimized procurement process saves money. By improving supplier selection, negotiating better contracts, and managing inventory efficiently, you can lower procurement expenses, boost profitability, and increase return on investment (ROI).
• Improved supplier relationships: Effective procurement fosters trust and open communication between your business and suppliers. The result is more reliable deliveries, better service, and improved collaboration.
• A stronger supply chain: The strong partnerships fostered by effective procurement also help you negotiate better terms, forecast supply needs, resolve issues quickly, and adapt to change
• Compliance and risk management: Effective procurement helps mitigate risks associated with supply chain disruptions, quality issues, and regulatory compliance. Thorough supplier evaluations and robust contract management practices can help your organization minimize potential risks.‍
• Operational efficiency: A well-structured procurement process eliminates unnecessary delays and inefficiencies, helping your business run more smoothly and respond quickly to changing needs

What are the main challenges of procurement?

While procurement offers significant benefits, it also presents four main challenges. Understanding these challenges and implementing effective strategies to overcome them is essential to a successful procurement process.

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.

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

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.

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.

3. Regulatory compliance and ethical sourcing

Navigating complex regulations and 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.

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.

4. Manual processes and inefficiencies

Outdated, manual procurement processes can slow down operations, introduce errors, and make it harder to track spending or enforce policies.

Solution: Streamline workflows by adopting procurement software to automate tasks like purchase order creation, approvals, and invoice matching. Automation reduces errors, saves time, and improves overall efficiency.

How can procurement software help?

Procurement software streamlines the entire end-to-end process, making it easier for stakeholders to manage costs, track spending, and stay compliant. Key features to look for include:

• Automated purchase order creation: ‍Procurement software automates PO creation, eliminating manual work and reducing the likelihood of errors. Automation speeds up the process, ensuring your team can place orders quickly and accurately. With Ramp, you can auto-generate POs based on pre-approved requisitions, making it simple to control spending from the start.
• Purchase requisition: Purchase requisition tools let your 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. 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. With Ramp’s advanced analytics, you gain full visibility into procurement spend across departments, allowing you to easily identify where money is being spent and make quick adjustments as needed.
• Supplier management tools‍: Supplier management tools help you organize and evaluate your company’s 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. Ramp's vendor management features are integrated across the platform, including procurement and AP.
• Budget and spend management‍: Budget and spend management features let you set spending limits, track expenses against budgets, and avoid overspending. Ramp’s software integrates budgeting with real-time spend tracking, giving your finance team control over every dollar spent in the procurement process.‍

Compliance and risk management ‍

Ensuring compliance with company policies and external regulations is crucial. Procurement software simplifies this task by embedding compliance checks into the process. Ramp’s platform helps finance teams manage procurement in line with regulatory requirements, reducing the risk of non-compliance and financial penalties.

Supplier performance evaluation ‍

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

Inventory management‍

Inventory management tools enable you to track stock levels, prevent shortages, and ensure that the right goods are available when you need them. This feature streamlines procurement and reduces costs by avoiding over-ordering or emergency purchases. With Ramp, you can integrate your procurement strategy with real-time inventory data, ensuring smoother operations.‍

Procurement software in action: A case study

‍Healthcare company Skin Pharm didn’t have an efficient procurement process in place. Employees were submitting purchase requests in Slack, and each clinic had to fill out multiple Google Sheets to order supplies. This made the entire procurement process tedious and prone to error.

That all changed when they started using Ramp. Here are some of the biggest benefits Skin Pharm got from Ramp’s procurement software:

• Using a streamlined system has doubled the speed of their procurement process overall
• Automating the approval process has cut their approval timeline from weeks to just 2 days
• Unifying all their spend in a single platform helped them cut their month-end close time from 25 to 12 days

The efficiency of their procurement process means Skin Pharm’s employees are getting the products and services they need to perform their roles much more quickly. On top of that, when you choose Ramp, you don’t have to abandon the tools that are working for you. You can still approve requests in Slack, review new contracts in Ironclad, and import or sync purchase orders with NetSuite.

Streamline your procurement process with Ramp

With Ramp’s procurement software, you can manage the entire procurement lifecycle, from intake to payment, in a single unified platform.

Our AI-powered request workflows make it easy for employees to submit requests, parsing contracts or screenshots to pre-fill forms automatically. Approvals get routed to the right stakeholders in parallel, based on your rules, so nothing falls through the cracks.

Thanks to automatic PO generation and real-time tracking, you’ll also gain clear visibility into committed spend. Our automated 3-way match flags discrepancies before payment, helping you prevent fraud and overcharges.

See how an automated procurement process can enhance your business with an interactive product tour.