What is procurement? Understanding Its Process, Strategy, and Impact in Business

Procurement is the process of obtaining goods and services for a business. It involves deciding what to buy, finding and negotiating with suppliers, and arranging for the purchase and delivery of these items. In simple terms, it’s like shopping for a company, ensuring it gets what it needs at the right price and quality.

The three main types of procurement are:

1. Direct Procurement: Involves the acquisition of goods and materials that directly contribute to the production of finished products. Examples include raw materials for manufacturing.
2. Indirect Procurement: Refers to purchasing services or supplies required to maintain day-to-day operations, like office supplies, cleaning services, or IT equipment. Learn about direct vs indirect procurement.
3. Services Procurement: Focuses on obtaining services rather than goods, covering areas like consulting, legal services, and maintenance work.

Each type plays a distinct role in supporting the overall function and strategy of a business.

The procurement process typically involves seven key stages:

1. Need Identification: Determining the specific needs of the business, such as what goods or services are required.
2. Requirement Specification: Clearly defining the specifications or requirements for the goods or services needed.
3. Supplier Identification and Selection: Researching and selecting potential suppliers who can provide the required goods or services.
4. Solicitation Process: Initiating contact with potential suppliers, often through a request for proposal (RFP), request for quotation (RFQ), or request for information (RFI).
5. Negotiation and Contract Award: Negotiating terms and conditions with the chosen supplier and then awarding the contract.
6. Order Management and Delivery: Placing the order and managing the delivery and receipt of the goods or services.
7. Performance Review and Contract Management: Assessing the performance of the supplier and the quality of the goods or services, and managing the ongoing relationship with the supplier.

These stages ensure a systematic approach to procurement, leading to efficient and effective purchasing decisions.

Read about the entire procurement process.

The purpose of procurement is to ensure that a business obtains the goods and services it needs to operate effectively and efficiently. Key aspects of this purpose include:

1. Securing the Best Value: Procurement aims to acquire goods and services at the best possible value, considering factors like price, quality, and reliability.
2. Ensuring Quality and Suitability: It involves making sure that the products or services purchased meet specific standards and are suitable for the intended purpose.
3. Managing Supplier Relationships: Effective procurement includes building and maintaining good relationships with suppliers for long-term benefits.
4. Risk Management: It plays a role in identifying and mitigating risks associated with purchasing decisions, such as supply chain disruptions or non-compliance with regulations.
5. Supporting Organizational Goals: Procurement aligns its activities with the broader objectives of the organization, such as sustainability, ethical sourcing, and cost-efficiency.

In summary, procurement is about strategically sourcing goods and services to support a company’s operations and strategic goals.

The difference between purchasing and procurement is mainly in their scope and function:

• Purchasing is the act of buying goods and services. It’s a subset of procurement, focusing on the transactional phase of acquiring goods or services, like placing orders and paying invoices.
• Procurement is a broader process. It includes not only purchasing but also activities like identifying company needs, evaluating suppliers, negotiating contracts, and managing supplier relationships. Procurement is strategic, considering long-term goals and efficiency.

In essence, purchasing is about the transaction of buying, while procurement encompasses the entire process of acquiring what a company needs.

We have an article all about procurement vs purchasing.

Procurement often collaborates closely with the finance department, but it does not typically fall directly under finance. Instead, procurement is usually its own distinct function within an organization. Here’s how it generally works:

• Procurement Department: Focuses on the strategic process of sourcing, negotiating, and purchasing goods and services. It ensures that purchases align with the company’s needs and standards, and often involves managing supplier relationships.
• Finance Department: Deals with the broader management of the company’s finances, including budgeting, accounting, and financial reporting. It often works in conjunction with procurement to ensure that purchasing decisions fit within the budget and are cost-effective.

While separate, the two departments must work in tandem to ensure financial and operational efficiency. Procurement ensures the company gets the best value for its purchases, while finance manages and tracks how these purchases impact the overall financial health of the organization.

Learn how procurement software helps finance departments.

A procurement strategy is critically important for several reasons:

1. Cost Efficiency: It helps in achieving the best possible cost savings while maintaining quality, directly impacting the bottom line.
2. Risk Management: A well-defined strategy aids in identifying and mitigating risks associated with supply chain disruptions, price volatility, and supplier non-compliance.
3. Quality Control: Ensures that the goods and services procured meet the required standards, contributing to the overall quality of the company’s products or services.
4. Supplier Relationships: Facilitates the development of strong relationships with suppliers, which can lead to better terms, improved collaboration, and innovation.
5. Alignment with Business Goals: Aligns procurement activities with the broader objectives of the organization, such as sustainability, ethical sourcing, and operational efficiency.
6. Market Adaptability: Helps the organization adapt to market changes and emerging trends, maintaining competitiveness.

In summary, a procurement strategy is vital for optimizing spending, reducing risks, ensuring quality, and aligning purchases with the strategic goals of the organization.

Read our article dedicated to building a successful procurement strategy.