What is the Meaning of Procurement? Types and Processes

What is the meaning of procurement? That’s not an existential question; this query plagues many professionals trying to figure out how to purchase the goods and materials they need for their company’s success.

Here’s a deep-dive look at procurement, purchasing, and how automation can simplify these daily tasks.

Defining procurement

Procurement is an umbrella term that encompasses the life cycle of purchasing products or services.

Some companies define procurement as solely the steps involved in purchasing, such as issuing a purchase order and paying for that purchase. Other organizations take a broader view of the procurement process and include early-stage tasks, such as sourcing suppliers and tracking goods en route to their warehouses.

The latter definition underscores the importance of procurement in maintaining a proper supply chain. You need a vendor that meets product standards and offers acceptable pricing to run your business.

Most people agree procurement includes these three components:

People

No matter how tech-forward an organization is, people are at the heart of every decision. The people included in the procurement process take care of everyday tasks, such as paying invoices, as well as making big-picture choices, like which goods or services to order and how much to budget for those purchases.

Paperwork

Paperwork helps document everything from payment terms and delivery requirements to customer satisfaction reviews. It creates a paper trail (even if those “papers” are actually digital) used for proof and reference purposes.

Process

The people decide how the procurement process will work. What distribution channels will be involved? Who is in charge of which tasks? How long do they have to complete those tasks?

Put a solid process in place, and you’ll see accuracy and efficiency improve. Settle for a lackluster procurement process or fail to adhere to approved guidelines, and your profits, vendor relationships, and productivity may all suffer.

How procurement works

Every organization has its own specific plan for procurement. That said, the standard template follows these steps:

1. Identify what items or services are needed
2. Write up a purchase request and solicit quotes from relevant vendors
3. Negotiate pricing and contract details
4. Complete a purchase order
5. Receive the contracted goods or services
6. Issue payment (this may occur before or after receipt, depending on agreed-upon terms and industry standards)

Procurement is more than a road map for bringing in inventory or contracting with a service provider. Your business’s success depends on your ability to strategically acquire the necessary materials to manufacture your signature widget or maintain monthly service contracts with a growing number of clients.

Poor procurement can even sound the death knell for a company that can’t keep essential items in stock or source components that support market pricing for their final product.

4 types of procurement

In-house or contracted procurement services generally take one of four forms:

1. Direct procurement: Whenever a buyer must procure something crucial to the end product they’re creating or selling, it falls under the definition of direct procurement. This could involve materials necessary for manufacturing, such as sheet metal or industrial machinery, or a finished product a retailer plans on selling to consumers.
2. Indirect procurement: Goods and services purchased with indirect procurement don’t go into end products but are still necessary to keep a business in operation. Computers, light bulbs, area rugs, and digital marketing packages don’t directly contribute to overall revenue, but an organization can’t run without them.
3. Goods procurement: Goods procurement includes all the physical products a company needs to operate or serve its end customer.
4. Services procurement: All paid labor a company uses during operations falls under services procurement. This includes factory cleaning services, content marketing freelancers, and security guards to watch over retail locations.

8 steps of the procurement process

Typical procurement processes follow these essential steps, with room for modification depending on organization-specific needs and preferences:

1. Identify what must be procured

What do you need to buy? This might be an ongoing need, such as copy paper, or a less-common purchase — the one-time buy of a warehouse or a seasonal deep clean, for example. Specs for the intended purchase should be detailed, but stop short of including an exact brand or model (unless there is no other viable option).

2. Send out a purchase request

A purchase request is a formal notice sent within your organization stating that you want to buy something. This documentation might go to a supervisor or head of purchasing for approval.

3. Send out a request for information

After the purchase request is approved internally, the procurement process moves outside the organization with requests for information (RFIs) sent to potential vendors. Like the purchase request, RFIs should be detailed — perhaps even more so, as you’ve likely determined what you need and can afford.

4. Evaluate vendors and negotiate with your favorite options

Once vendors respond to your RFIs, determine which ones best fulfill your needs based on your budget and overall vision. Consider factors like customer reviews, sustainability, availability of support, and delivery times.

Identify your top three choices and begin negotiations. Once you’re happy with one vendor’s terms, it’s time to move forward to purchasing.

5. Draw up a purchase order

A purchase order is the official request for goods or services that goes to your chosen supplier. The purchase order should echo the consensus you reached earlier in the procurement process.

Some companies follow this up with a bill of exchange that lists what goods and money are being exchanged, when the exchange will occur, who the payee is, and so on.

6. Receive and thoroughly inspect your order

Once your delivery has arrived, it’s important to unload your product or products and inspect them. You’re looking for any damage, but you’re also ensuring you received the exact model, make, color, size, and quantity you ordered.

Part of this step is “three-way matching,” where accounts payable compares the purchase order, packing list, and invoice information to ensure everything aligns.

7. Issue payment

Assuming the three-way match is approved, it’s time to pay your invoice. Automating this process ensures invoices are always paid on time and in the right amount, which goes a long way toward creating lasting vendor relationships.

8. Check your records

The process is almost complete, but only after you double-check your records and verify documentation for every step. You’ll want those documents at tax time, during board meetings, and for other bookkeeping purposes down the road.

Procurement stages

When you envision the procurement process, it may help to break it up into these three blocks:

• Sourcing stage: This covers everything relevant to finding products, such as identifying a need, seeing what’s on backorder, and identifying vendors.
• Purchasing stage: The purchasing stage encompasses negotiating with vendors, issuing purchase orders, and receiving the goods or services.
• Payment stage: Following approval of the goods received, the final step is to ensure order accuracy and issue payment.

Procurement versus purchasing: essential differences

Procurement and purchasing sound like the same thing, but there are crucial differences to remember.

• Definition: Procurement is a multistep process, while purchasing is the single act of buying a product or service.
• Scope: Procurement involves a much larger scope. You’re looking at the who, what, and how, whereas purchasing is almost solely focused on how much.
• Focus: Procurement deals with immediate and ongoing needs, but purchasing is mainly reactive, filling an urgent need.

Procurement in relation to competitive bidding and finance

Competitive bidding involves securing multiple bids from various vendors in pursuit of the best deal, which isn’t always about the lowest price. Suppliers will try to outdo each other on shipping terms and delivery times as well as pricing.

Competitive bidding can make procurement more complex, often occurring in industries with heavy restrictions and security concerns.

Procurement and finance are also linked, but not necessarily because they share the same vision. Procurement teams want to spend money, whereas those in charge of procurement in finance are trying to strategize spending to maximize profits.

Sometimes, those missions don’t quite align, but ideally, the two departments can work together to acquire what the company needs while protecting the bottom line.

Embrace data exchange and supply chain automation with Orderful

Procurement can be a lengthy and complex process, but learning shortcuts like system automation and procure-to-pay help you get what you need faster — and at the right price.

Electronic data interchange (EDI) can facilitate seamless and efficient communication between buyers and suppliers while automating the exchange of procurement-related information. Speak to an expert at Orderful today to see how EDI can transform your business.