What Is Procurement?

Procurement encompasses a range of activities involved in obtaining goods or services. What is

the purpose of procurement? In general, procurement teams work to obtain competitively priced
supplies that deliver the most value. However, not all companies define procurement in the same
way. Many companies consider that procurement encompasses all the stages, from gathering
business requirements and sourcing suppliers to tracking the receipt of goods and updating
payment terms, while others define procurement as a narrower range of activities, such as issuing
purchase orders and making payments.

Key Takeaways

 Procurement is a vital business function. When managed efficiently and done well, it can help
increase your business’s profitability.
 It includes a range of activities involved in obtaining goods and services, including sourcing,
negotiating terms, making purchases, tracking when supplies are received and maintaining
records.
 It’s important to continuously monitor and assess the procurement process to improve any weak
spots or inefficiencies.
 Technology can reduce procurement cost and administrative overhead by automating and
tracking procurement processes.

Procurement Explained

Traditionally, some businesses have used the term procurement synonymously with purchasing.
But now, purchasing is often seen as just one stage in a larger, more strategic procurement
process. So, what exactly is procurement?

Procurement involves every activity involved in obtaining the goods and services a company
needs to support its daily operations, including sourcing, negotiating terms, purchasing items,
receiving and inspecting goods as necessary and keeping records of all the steps in the process.
 Why Is Procurement Important in Business?

Procurement is an important step in understanding supply chains, because it helps a company

find reliable suppliers that can provide competitively priced goods and services that match the
company’s needs. That’s the case whether the company is seeking raw materials for
manufacturing, a marketing services provider or new office supplies.

For example, if a company needs a new supplier to provide an ongoing service for an indefinite
period of time — such as an email security solution — the procurement process helps the
company choose the supplier that best meets all of the business’s requirements at a reasonable
price. It enables the business to avoid wasting time, money and valuable resources dealing with
an inadequate supplier.

Minimizing cost is one important aspect of improving your procurement processes. But it’s also
vital to identify suppliers that provide the quality of goods and services that the company needs
and have the capacity to deliver reliably and a track record of doing so.

Types of Procurement

Procurement can be categorized in several ways. It can be classified as direct or indirect

procurement, depending on how the company will use the items being procured. It can also be
categorized as goods or services procurement depending on the items that are being procured.

 Direct procurement refers to obtaining anything that’s required to produce an end-product. For

a manufacturing company, this includes raw materials and components. For a retailer, it includes
any items purchased from a wholesaler for resale to customers.
 Indirect procurement typically involves purchases of items that are essential for day-to-day
operations but don’t directly contribute to the company’s bottom line. This can include anything
from office supplies and furniture to advertising campaigns, consulting services and equipment
maintenance.
 Goods procurement largely refers to the procurement of physical items, but it can also include
items like software subscriptions. Effective goods procurement generally relies on good supply
chain management practices. It may include both direct and indirect procurement.
 Services procurement focuses on procuring people-based services. Depending on the company,
this may include hiring individual contractors, contingent labor, law firms or on-site security
services. It may include both direct and indirect procurement.
How Procurement Works

The procurement process generally involves a number of steps. The business identifies particular

goods and/or services that it needs, sources the suppliers that will help the company reach its
business objectives, negotiates terms and costs and then purchases and receives the relevant
items.

A small company may have just one person handling procurement of all goods and services.
Larger companies may have a team of people specialized in dealing with different suppliers or
supporting specific internal business groups. For some items, the team may need to gather input
from several different business groups in order to determine the company’s overall requirements.

It’s important to remember that procurement doesn’t consist of a series of isolated acts — it’s an
ongoing process. For example, businesses generally aim to establish relationships with key
suppliers to help obtain the best service and lowest possible costs, which ultimately translate into
higher profit margins. Companies may also need to conduct regular quality assurance checks and
performance analysis to make sure suppliers consistently meet expectations.

PROCUREMEMT PROCEDURE

Procurement processes vary greatly depending on each company’s structure and needs, but
generally include the following nine core steps:

1. Identify which goods and services the company needs. First, a business must identify its
requirements for a specific item or a service. This may be a new item that the company hasn’t
previously purchased, a restock of existing goods or a subscription renewal. This step typically
involves delving into the nitty-gritty details of what the business needs, such as the precise
technical specifications, materials, part numbers or service characteristics. At this stage, it’s a
good idea to consult all business departments affected by the purchasing decision to ensure the
procured items accurately reflect the needs of each department.

2. Submit purchase request. When an employee or business group needs to procure a

significant quantity of new supplies or services, they make a formal purchase request (also
known as a purchase requisition). A purchase request notifies the company that a need exists,
usually via department managers, purchasing staff or the financial team, as well as specifications
such as price, time frame needed, quantity and other important things for the purchasing team to
keep in mind. The department overseeing the purchase can then approve or deny the purchase
request. If approved, the procurement team can proceed with selecting a vendor and making the
purchase.

3. Assess and select vendors. With a clear list of requirements and an approved purchase
request, now is the time to find the best vendor and submit a request for quote (RFQ) – this is
what the purchasing team sends to potential suppliers in order to receive a quote (estimated price
of a good or service) – it is important to be as detailed as possible so you can compare apples to
apples. Vendor assessment should focus not only on cost but also on reputation, speed, quality
and reliability. Many companies consider ethics and social responsibility as well, since
procurement is often intertwined with corporate identity. A retailer that prides itself on
sustainability would stand to benefit from partnering with environmentally responsible suppliers,
for instance.

4. Negotiate price and terms. A common best practice is to get at least three quotes from
suppliers before making a decision. Examine each quote carefully and negotiate where possible.
If you need to walk away from a deal, be sure that you have concrete alternative options. Once
you’ve agreed on final terms, be sure to get them in writing.

5. Create a purchase order. Fill out a purchase order (PO) and send it to the supplier. The PO
should be sufficiently detailed to identify the exact services or goods needed and to enable the
supplier to fill the order.

6. Receive and inspect the delivered goods. Carefully examine deliveries for any errors or
damage. Make sure everything is delivered as specified in the PO and that the quality meets or
exceeds expectations.

7. Conduct three-way matching. Accounts payable should conduct three-way matching by

comparing the purchase order, order receipt or packing list and invoice. The goal is to ensure the
goods or services received match the purchase order and to prevent payment for unauthorized or
inaccurate invoices. Highlight any discrepancies between the three documents and resolve issues
before arranging payment.

8. Approve the invoice and arrange payment. If the three-way match is accurate, approve and
pay the invoice. Businesses should strive to have a consistent invoice payment process
through accounts payable that checks that payments match the invoice amount and due date. A
 standardized process can help make sure invoices are always paid on time, which can prevent
late fees and build good relationships with suppliers.

9. Recordkeeping. It’s important to maintain records for the entire procurement process, from
purchase requests to price negotiations, invoices, receipts and everything in between. These
records may be useful for multiple reasons. They help the company reorder goods at the right
price in the future, as well as assist with auditing processes and calculating taxes. Clear, accurate
records can also help resolve any potential disputes.

Stages of Procurement

The nine major steps of the procurement process can also be thought of in three distinct stages:
the sourcing stage, the purchasing stage and the receiving stage.

 Sourcing stage: This covers the initial steps in which the business identifies its needs, creates a
purchase request and assesses vendors. Even after the initial sourcing steps are complete, it’s a
good practice to build a strong relationships with suppliers. They can establish grounds for
suppliers to learn from partners, improve products and processes and develop trust.
 Purchasing stage: This stage includes negotiating terms, creating orders and receiving and
inspecting goods and services.
 Payment stage: Accounts payable conducts three-way matching to ensure order and invoice
accuracy. The invoice can then be approved and the payment is arranged. Records of all
invoices, orders and payments should be kept and carefully maintained.

Procurement Life Cycle

Organizations commonly think of steps in the procurement process as a life cycle. This
perspective provides a reminder that all the tasks and stages in the procurement process overlap
and rely on each other and that the process is continuous. A carefully thought-out procurement
life cycle also recognizes the integration between the process and the business as a whole,
including the need to align with existing company rules and procedures covering areas such as
budgeting. The process is not always linear, and sometimes adjustments need to be made to
account for a dynamic digital supply chain with shifting suppliers, availabilities and costs.
 Three Components of Procurement

Three key components work together to make the procurement process happen: people, process
and paperwork.

 People: People generally are responsible for initiating or authorizing every step of the
procurement process. In addition to procurement specialists, the people involved include other
stakeholders, such as accounts payable and the business groups that request the goods and
services. The number of people involved often depends on the value of the goods and services;
more stakeholders may be involved in specifying and approving high-value purchases.
 Process: An effective procurement process can help a company succeed by keeping costs down
and ensuring supplies arrive when the business needs them. A well-designed and methodical
process helps to promote accuracy and timeliness because every person involved knows exactly
what they need to accomplish and how long they have to complete the tasks. In contrast, a
disorganized procurement process results in inefficiencies and potentially costly errors.
Overpayments, for example, can impact the bottom line, while late payments negatively affect
relationships with suppliers.
 Paperwork: It’s important to maintain records for every stage of the procurement process and
ensure they are easily accessible. These records act as a store of organizational knowledge about
payment terms and supplier performance, helping the business maintain an efficient procurement
process — even if the procurement staff changes over time. In the case of an audit or a dispute, a
business must be easily able to follow the paper or electronic trail through each stage of the
procurement process.

Procurement, Purchasing and Supply Chain: What’s the Difference?

The terms procurement, purchasing, sourcing and supply chain are often used interchangeably.
However, there are important distinctions between them.

 Procurement vs. purchasing: If procurement involves purchasing, you might be wondering:

What’s the difference between purchasing and procurement? The answer is that purchasing is
essentially transactional, focusing on managing specific orders to meet company needs.
Procurement is a much broader and more complex set of processes, including establishing and
maintaining supplier relationships. Another way to think about the difference between
purchasing and procurement is that procurement takes a proactive approach that starts with
analyzing the company’s needs, whereas purchasing is a reactive approach — simply focusing
on obtaining what the company has already decided it needs.
 Procurement vs. sourcing: Sourcing, like purchasing, is only part  of the overall procurement
process. Sourcing is an early stage of the procurement cycle. It encompasses activities such as
identifying and assessing potential suppliers of goods or services, negotiating terms and selecting
the vendors that best meet the company’s needs.
 Procurement vs. supply chain: Procurement covers one aspect of supply chain management.
Procurement includes sourcing, obtaining and paying for goods and services. Supply chain
management also covers the logistics involved in obtaining goods, such as shipping and
warehouse management, as well as transforming the procured goods into products and
distributing them to customers.

Principles of Procurement

In public-sector organizations, the procurement process is generally similar to the process in

private-sector organizations — but with a few important differences. Because the people
involved handle public funds, they generally must follow rigorous principles during the
procurement process. These principles can be regarded as an ethical code of conduct that holds
public servants accountable for their purchases. Some of the principles may also be beneficial to
private-sector organizations.

The principles vary somewhat depending on the organization. Here are seven of the most
common procurement principles:

1. Value for money: The organization must manage funds efficiently and economically
when procuring goods and services. This may include conducting cost-benefit analyses
and risk assessments. It’s worth noting that low cost does not necessarily equate to
greater value; characteristics such as quality and durability also factor into determining
whether the purchase represents value for money.
2. Fairness: Procurement should not provide preferential treatment to individuals or
suppliers. All bids should be assessed objectively, based on how well they meet the
organization’s needs.
3. Competition: Organizations should seek competitive bids from multiple suppliers, unless
there are specific reasons not to do so, such as a sole-source provider where the good or
service is only available from a single vendor.
4. Efficiency: Procurement processes must be carried out efficiently to help maximize value
and avoid delays.
5. Transparency: Organizations should make relevant procurement information available
to everyone, including the public as well as suppliers. Information should be kept
confidential only when there are legal or other valid reasons to do so.
6. Integrity: Those who practice public procurement should always strive to be perceived
as trustworthy, reliable, honest and responsible. Funds must be used for their intended
purpose and in the public interest.
7. Accountability: People involved in the procurement process are accountable for their
actions and decisions. They are required to report procurement activities accurately,
including any errors.