What Is Procurement? Types, Processes and Tech

Every organization engages in some level of procurement strategy, whether using an ad hoc process or administering a large, well-documented procurement practice. While managing and tracking procurement spending may vary, how the process is defined shouldn’t. 

But how do organizations define procurement? And is the definition of procurement important to company success? 

To answer these questions, we’ll help you gain a clear understanding of procurement, including: 

• What it is, its importance to your business, and the steps necessary for a successful procurement strategy 
• How using procurement technology can significantly reduce the time and expense of successful procurement management 
• How to improve the procurement cycle in your organization 
• Real-world examples of how Order.co helps fast-growing companies achieve streamlined and automated invoice and procurement management

Download the free ebook: The Procurement Strategy Playbook

What is procurement?

Procurement is the process of sourcing, acquiring, and paying for goods and services. While many organizations use terms like ‘procurement,’ ‘purchasing,’ and ‘sourcing’ interchangeably, these are different components of the total procurement function.

Purchasing focuses on ordering and delivery, and sourcing pertains to the suppliers used for purchasing goods, but procurement refers to the entire process. Procurement includes sourcing, acquisition, settlement, analysis of procurement data, and future-spend planning. 

Why is procurement important in business?

Every business requires materials, goods, and services to achieve its desired outcomes. Whether it’s software for communication, raw materials for making products, or services to maintain facilities, keeping the organization running is an expensive and time-consuming task. 

The primary mission of a procurement department is to acquire the goods a business needs at the best price and terms. Procurement professionals excel at building supplier relationships, negotiating advantageous terms, and streamlining the procurement process, from identifying a needed good or service to invoice payment.

With a streamlined procurement process, organizations increase cost savings, minimize wasteful spending, and analyze how and where budgets are most efficiently deployed. Automated procurement can help businesses save as much as $13 or more per invoice in processing costs. The money preserved through good procurement practices spurs growth and insulates the organization against downturns.

Ebook

The Procurement Strategy Playbook for Modern Businesses

Download the ebook to learn how to modernize your procurement strategy and realize the benefits of tech-enabled procurement.

Download the free ebook

Types of Procurement

Companies engage in different types of procurement, depending on business needs and immediate goals.

Direct procurement: This is the acquisition of goods and services directly related to production within your organization. Examples include the raw materials, software, services, or products that directly support the production of the products your company sells.

Indirect procurement: Anything not directly related to the production of goods is indirect procurement. This category includes office supplies, software the company uses to communicate internally, or facilities services not connected to a specific product your company offers.

Whether direct or indirect, companies require two types of purchases: goods procurement and services procurement.

Goods procurement: Goods procurement refers to any tangible object purchased, whether finished or unfinished. Raw materials, office supplies, desks, and other physical goods are considered goods procurement.

Services procurement: Any non-tangible purchase falls under services procurement. This includes professional offerings such as consulting services or facilities repair. It also encompasses purchases such as software, with software as a service (SaaS) increasing in business use and often becoming one of an organization's most significant service-based expenditures. 

How procurement works

Strong procurement management is one of the most critical components of an organization’s financial health. Procurement is often one of the most substantial portions of revenue spending, so it’s essential to keep a careful eye on expenditures at a granular level. This level of spending optimization requires a cross-departmental effort that draws on oversight from finance, legal, IT, and supply chain management stakeholders.

The procurement team may seem like an intermediary between internal stakeholders and suppliers. In reality, the department is responsible for the continuous administration and improvement of the procurement process and supplier lifecycle. 

There are many stages of the procurement process. Most procurement and purchasing activities fall into some general categories, including: 

Planning: The planning phase includes establishing budgets for departments or teams. This process happens in cooperation with the finance team and departmental stakeholders. 

Sourcing: Sourcing encompasses using competitive analysis and current strategic sourcing partnerships to identify the best suppliers to meet company needs. This evaluation process is conducted in conjunction with department heads and purchasing approvers.

Acquisition/payment: This stage includes ordering, reconciling, and paying for goods and services and meeting organizational needs while maintaining spending control. Such close attention to price and terms ensures the acquisition of the best quality products at competitive prices and under the most favorable terms.

Evaluation: Evaluation means using past performance and current data to understand and strengthen supplier relationships, prepare for future spending, and analyze available data to uncover further cost savings and improve the bottom line. 

Ebook

The Procurement Strategy Playbook for Modern Businesses

Download the ebook to learn how to modernize your procurement strategy and realize the benefits of tech-enabled procurement.

Download

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Steps in the procurement process

Procurement practices are most effective when they follow a repeatable, optimized process. While every procurement team establishes a unique process for sourcing, acquiring, and paying for goods and services, the procurement cycle usually follows the following steps:

1. Identify a need: A stakeholder surfaces the need for a product, materials, software, or service in order to create products or conduct daily business. This need is outlined in an intake form or requisition form. 
2. Submit a purchase requisition: The stakeholder completes a purchase request. This form should include all relevant information needed to approve and process the purchase. The requisition may include recommendations for solutions or service providers. 
3. Evaluate potential suppliers: Depending on the process and type of purchase requested, procurement evaluates possible solutions and selects the best vendor to fulfill the request. Sometimes this takes the form of a competitive bidding process, such as a request for proposal (RFP), request for quote (RFQ), or a “three bids and a buy” process. 
4. Negotiate terms and conditions: Once the best supplier has been selected, the negotiation process begins. The procurement team works with the sales rep to establish pricing and terms for the purchase. Negotiations should be completed only after all departmental prerequisites have been met. 
5. Create a PO: Procurement drafts a purchase order to acquire the goods or services from the supplier. In most cases, the PO goes through a separate approval process to ensure all transactions meet expectations and check for potential issues or discrepancies. Procurement then transmits the purchase order to the supplier for fulfillment.
6. Receive and review goods: The supplier fulfills the order as requested. Once the goods or services are delivered, the procurement team receives and inspects them to ensure the quality and accuracy of the shipment. If the order does not meet expectations, the receiver may seek adjustments from the supplier or return the shipment. 
7. Reconcile and match: After receipt of goods is complete, a three-way match is conducted to ensure the shipment, invoice, and PO are accurate. The procurement team also conducts supplier evaluations to ensure all expectations and contact conditions are met during the delivery process. 
8. Approve and pay the invoice: Once three-way matching is complete, the supplier invoice is submitted for processing. The invoice is batched, coded, and scheduled for payment. 
9. Complete post-close activities: The procurement team is responsible for post-close operations and purchasing analysis. This may include record-keeping, reporting, spend analysis, supplier evaluation, contract management, and supplier onboarding (in cases where contracts are completed or terminated).

Case study: How Order.co helped WeWork automate procurement

The procurement process at small companies often starts out with a simple, manageable workflow. Some accounts payable (AP) teams can get by with manual processes for a time. But what about a company that experiences explosive growth? That success often comes with exponential growth in orders and invoices. 

This was the case for WeWork. The unicorn coworking company’s meteoric rise saw the addition of over 800 global locations in a few short years. It also added invoices — over a million per year and rising. The scale of operations left too much space for out-of-policy spending and surprise invoices that caused confusion and cost money. The company needed a way to streamline and automate processes for more than 2,400 orders per month across 100+ vendors. 

WeWork turned to Order.co in 2017 to eliminate its manual processes and automate its procure-to-pay process. With our help, the company created a fully functional, automated system integrated with Workday to get spending and processing under control. The changes created detailed spend visibility across every location and category, greatly reduced WeWork’s cost per invoice, and resulted in a simple, dynamic process that controlled budgets while allowing stakeholders to get needed supplies. 

To read the whole story of how WeWork used Order.co to revolutionize its procurement process, see the full case study here.

How Order.co can help manage procurement

Maintaining a streamlined procurement process and analyzing data is no small feat. Even in new and growing companies, procurement may deal with dozens of vendors and thousands of invoices. This generates an excess of data that can only be fully utilized with the help of technology. 

Using procurement management software to automate processes and centralize the data reduces the strain of manual procurement processes, and allows teams to understand how the organization spends money.

Order.co can help improve the purchase-to-pay process by:

• Allowing businesses to analyze and contextualize purchasing data in order to set more accurate budgets and plan capacity effectively. 
• Streamlining the vendor selection process and empowering buyers to use strategic sourcing partners when acquiring goods and services. 
• Centralizing contract, benchmarking, and supplier data to create better leverage in negotiations.
• Automating three-way matching and reconciliation to reduce effort and time spent on the process. 
• Streamlining the invoicing and vendor payment process to reduce manual data entry, eliminate invoice exceptions, and integrate and consolidate vendor payments.  

When you define procurement processes in your organization and empower your organization with the benefits of a robust procurement platform, the savings and productivity quickly add up. 

To get a better understanding of how Order.co can help your organization, schedule a demo and see the platform in action.