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

Procurement is the process businesses use to secure the goods and services they need to operate, but it presents unique challenges for finance leaders. Without a solid procurement strategy and effective tools, your company risks overspending, delays, and inefficiencies.

But with the right approach, procurement can drive savings, improve supplier relationships, and give your business a competitive edge. Let’s dive into the procurement process. We’ll explore how to tackle common challenges and provide some key strategies for optimizing procurement management.

What is procurement?

When you identify a business need for goods or services, you’ve begun 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 will be time to negotiate the price and terms and create a purchase order.

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

Effective procurement helps businesses control costs, optimize spend, and ensure compliance with budgetary goals.

The main types of procurement

‍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.

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

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

These two procurement types fall under both direct and indirect procurement:

• Goods procurement is the purchase of tangible items, including physical goods, raw materials, and final products‍
• Services procurement refers to hiring people-based services that help you run the business, including contractors, maintenance, and consulting services

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

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, as 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 CPO (chief procurement officer (CPO), manages the process.

Regardless of your business’s size, effective procurement ensures you purchase that the right goods and services are purchased to keep operations running smoothly and 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 like computers, furniture, and stationery
2. Acquiring software licenses: Researching and purchasing SaaS solutions for the company’s operational 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, consulting, or marketing
5. Logistics management: Procuring transportation and shipping services to move products from suppliers to distribution centers is 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 for those performing government services to office equipment and supplies, software, and infrastructure services
• Food and beverage manufacturing procurement: Examples of things food and beverage manufacturers need to procure include ingredients, packaging, and parts and maintenance services for their manufacturing facilities
• Healthcare procurement: Healthcare providers need to procure things like medical equipment and supplies, office equipment and supplies, and cleaning and maintenance services

Procurement vs. purchasing: What’s the difference?

‍While often used interchangeably, procurement and purchasing are not the same. Procurement is a strategic process involving sourcing, negotiating, and managing the acquisition of goods or services. The purchasing process is a subset of procurement referring 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. And the benefits 3-way matching offers, like preventing overspend and improving supplier relationships, fall under procurement strategy.

What is the procurement process?

The procurement process encompasses all the steps of acquiring the products 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. ‍

1. Identify the goods and services your business needs

Begin by identifying what your business needs. In this example, let’s go with office furniture. It's important to specify the details—like the quantity and type of furniture.

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.

2. Search for suitable vendors

Once you’ve identified 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, like 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.

3. Negotiate the price and terms

It's a good idea to request quotes from at least three different office furniture suppliers before making a decision. Review each quote carefully 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.

4. Create a purchase order

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

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

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 damage or incorrect items immediately to avoid delays.

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’ll want to ensure 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.

7. Approve the invoice and make payment

‍Once you’re satisfied that the furniture meets your terms, approve the invoice for payment. Ensure timely payments to maintain good relationships with vendors and avoid late fees.

What are the benefits of effective procurement?

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

• Cost savings: 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 the ROI of the procurement process.
• Improved supplier relationships: An effective procurement process fosters trust and open communication between your business and suppliers. The result is more reliable deliveries, better service, and smoother collaboration overall.
• 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.‍

What are the main challenges of procurement?

While procurement offers significant benefits, it also comes with three main challenges. Understanding these challenges and implementing 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’ll 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. Noncompliance 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.

How can procurement software help?

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

Automated purchase order creation

‍By automating purchase order creation, procurement software eliminates manual work and reduces the chance 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 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

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

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 noncompliance and financial penalties.

Supplier performance evaluation ‍

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.

Inventory management‍

Inventory management tools let your business 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 overordering 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 requesting supplies via Slack and had to fill out multiple Google Sheets for each clinic. This made the entire procurement process tedious and prone to error.

Here are a few of the benefits Skin Pharm experienced with Ramp Procurement:

• Using a streamlined system has doubled the speed of their procurement process as a whole
• Automating the approval process has cut their approval timeline from weeks to just 2 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

Another benefit of working with Ramp is that you don’t have to abandon any tools that are working for you. You can approve requests right in Slack, review new contracts with Ironclad, and import or sync purchase orders with NetSuite.

Keep what’s working. Let go of everything that isn’t. See how a streamlined procurement process could keep your business moving forward with Ramp Procurement.