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.
 9 Steps in the Procurement Process
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 – 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. Once a supplier is chosen,
companies should develop that relationship over time to establish the best value,
get the best price, and save time on their future procurement activities.
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 the price and
specific terms (e.g. delivery times) for the purchase, 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. The purchase order
outlines the price, specifications and terms and conditions of the product or
service and any other additional obligations.

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. The company can reject the
receipt of the delivery if the product is not up to standard (e.g. damaged or missing
product). Rejection is almost always due to a damaged product.

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.
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.
Procurement KPIs
By monitoring procurement Key Performance Indicators (KPIs), businesses
can boost the efficiency of their procurement process, track progress toward
business objectives and identify areas for improvement. Here are some
commonly measured procurement KPIs:

Purchase order cycle time: Monitor the average number of hours or days it
takes to process requisitions and send purchase orders to suppliers.

Purchase order cycle time = # of hours or days it takes to process

requisitions and send purchase orders to suppliers / # of purchase orders sent
to suppliers

Supplier lead time: The average number of days it takes for suppliers to
send items after they receive a purchase order.

Supplier lead time = # of days it takes for item(s) to arrive after supplier
receives purchase order / total # of purchase orders sent to supplier

Number of suppliers: Having more suppliers gives the company more

options but also increases administrative work. Many procurement groups
monitor the number of vendors in their supplier networks and periodically
remove little-used suppliers to increase efficiency.
Supplier defect rate: An important measure of supplier quality, this is usually
measured as the number of defective parts divided by the total number of
parts supplied.

Supplier defect rate = # of defective parts from vendor / total # of parts from
same vendor

Supplier availability: This measures each supplier’s ability to respond to last-

minute or emergency demands.

Supplier availability = # of times supplier fulfilled business orders / # of

orders sent to supplier

Fulfillment accuracy: This measures the percentage of orders that suppliers

fill accurately and match the purchase order exactly.

Fulfillment accuracy = # of accurate orders from supplier / total # of orders

from same supplier

Total ROI of procurement process: This measures the value a business’s

procurement strategy delivers to the organization. It’s the ratio of the annual
savings generated by the procurement group to the total annual amount spent
on procurement.