What Is Procurement? 3 Main Types of Procurement

The term “procurement” encompasses all elements of a company's purchasing process. While it does involve the literal purchasing of goods, services, and property, procurement management goes far further to include strategic planning as well. The procurement process affects several business functions and requires a mastery of supply chain management, sourcing raw materials, and meeting purchasing goals. For this reason, procurement professionals come in high demand, and many companies even have an entire procurement department led by a chief procurement officer.

Consider the general elements of an average procurement cycle.

1. 1. Determining procurement needs: A company cannot begin acquiring goods and services without firmly establishing what the business needs. Prudent purchasing decisions start with a carefully considered strategy that aligns with the company's mission statement and values.
2. 2. Developing a procurement strategy: Just as potential purchases need measured logic behind them, so too does the strategy for making these purchases. A company may employ a chief procurement officer to develop this strategy, or it may turn to outside consulting services.
3. 3. Identifying potential suppliers: Procurement teams must maintain strong supplier relationships while always being on the lookout for new suppliers.
4. 4. Negotiating the best price: When engaging in direct procurement from a supplier, a company may need to directly negotiate for the best quality goods and services at the very best price. When engaging in indirect procurement via a third-party vendor, the price negotiations may be with the vendor itself. Having multiple vendors can lead to a competitive bidding process.
5. 5. Approving purchase requests: Some companies have purchase requests coming from a variety of departments. A procurement department determines what the company needs to meet its objectives and finds a way to source the requested goods and services.
6. 6. Maintaining procurement software: Cloud-based computer software has helped streamline the procurement process, but even companies fully bought into e-procurement automation must employ one or more professionals to oversee the software.
7. 7. Purchasing goods: After sufficient planning and sourcing, procurement teams can turn to actual purchasing activities. This involves making purchase orders and paying for them in a timely manner.
8. 8. Adhering to company values: Some companies implement an added social responsibility step designed to prevent them from purchasing goods linked to environmental destruction, child labor, or slave labor. For companies that prioritize social responsibility, all stages of the procurement process must align with those company values. If certain external sources and suppliers do not meet a company's standards for social responsibility, a procurement team is tasked with finding new vendors that do.

There are three main types of procurement activities: direct procurement, indirect procurement, and services procurement.

1. 1. Direct procurement: Direct procurement involves the direct purchase of raw goods, machinery, and wholesale goods that directly contribute to the company’s end product. The key stakeholders in direct procurement processes are procurement officers and contracted suppliers.
2. 2. Indirect procurement: Indirect procurement involves the purchasing of goods like office supplies. These goods don’t directly affect the company’s end product or bottom line, but they support the day-to-day management of the business. A small company may task office managers with indirect procurement processes while large corporations may employ a facilities management company to manage those purchases.
3. 3. Services procurement: This type of procurement can involve hiring temporary staffers, leasing software, and bringing in short-term vendors to work at an event or seminar.

Some people use the terms "purchasing" and "procurement" interchangeably, but the terms are not quite synonyms. Purchasing is an important transactional step in the procurement life cycle. It slots in alongside other elements like vendor relationships and sourcing the best prices. In other words, the key difference between procurement and purchasing is that purchasing represents one link in the larger procurement chain.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more.