Updated: 13 March 2024
Contributors: Matthew Finio, Amanda Downie
In business, procurement refers to how companies acquire the goods and services they need from external sources to operate efficiently.
Procurement refers to how companies obtain the goods and services they need for business operations. Effective procurement is crucial for organizations to ensure that they have the right resources to operate efficiently and meet their objectives. Procurement involves a series of steps including:
- Identifying the needs of the business
- Sourcing reliable suppliers
- Negotiating contracts
- Managing relationships with the suppliers
- Maintaining records of every step
Because streamlining these processes can increase profitability, the goal of procurement is to obtain the necessary products or services at the best possible value while also balancing factors such as quality and delivery time. It’s an ongoing process—many companies conduct periodic QA checks and performance analyses, the results of which can lead to supplier contract renegotiations or a search for alternative suppliers.
In a smaller company, procurement might be handled by one person. Larger companies often have a procurement department that is led by a chief procurement officer who oversees the processes. Effective communication and collaboration among various stakeholders, including procurement professionals, legal, and finance teams and end-users, are necessary for successful procurement outcomes.
For example, a partnership between procurement and finance allows the finance team to better understand how selecting the right goods and services can maximize profit. Leading to more accurate budgeting and projections. Internal business partnering on tech modernization is often essential to ensure continuous improvement and implement technologies that benefit procurement, finance and accounting, and supply chain operators. Together, they can optimize their end to end workflow with trusted data, AI-led insights, and automation. Adherence to ethical standards is crucial throughout the procurement process. Legal standards must be followed as well, ensuring ethical practices, mitigating risks and safeguarding the integrity of the organization’s operations.
The types of products and services a procurement team acquires are diverse and depends on the organization’s mission and needs. Examples include supplies, office equipment, furniture, raw materials for manufacturing, machinery, facilities, contract workers, recruitment services, travel-related services, marketing materials and more.
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Procurement is an essential part of understanding and optimizing the supply chain because it helps businesses choose suppliers that meet its requirements at a reasonable price. When done well, procurement efficiently identifies suppliers that have the goods and services a company needs and can deliver them at the right capacity, schedule, and price.
Successful procurement supports a company’s brand image and reputation, allowing it to affordably obtain what it needs to reliably offer customers its own quality goods and services. It can also increase profits—reducing a business’s purchasing cost base by 8-12% and bringing 2-3% in additional annual savings.1
The stages of the procurement process are commonly referred to as the procurement lifecycle, which reinforces that it’s a continuous process, not a linear one. Specific steps within each stage vary depending on the organization's size, industry, and the nature of the goods or services being procured.
Identify needs: Determine the goods or services that are required and their specifications.
Identify potential suppliers: Use research, industry databases and networking to prequalify suppliers based on their experience, capacity, and reputation.
Submit an RFI: Issue a request for information (RFI) to determine each supplier’ capabilities.
Submit an RFP or RFQ: Issue a request for proposal (RFP) or request for quotation (RFQ) that specifies your organization’s needs, terms, and conditions to receive a detailed proposal from suppliers.
Evaluate and select suppliers: Evaluate bids or proposals from suppliers and make selections based on cost, quality, delivery time, and other relevant considerations.
Negotiate and draft contracts: Negotiate terms and conditions with selected suppliers including pricing, payment terms, and delivery schedules. Draft and finalize contracts that outline the agreed-upon terms and conditions.
Issue purchase orders: Create and issue purchase orders (POs) to chosen suppliers, specifying the details of the transaction including quantity, price, and delivery requirements.
Receive and inspect delivered goods: Monitor suppliers’ performance in fulfilling orders based on the agreed-upon terms and verify that delivered goods and services comply with negotiated specifications.
Conduct three-way matching: Compare the purchase order, receipt of goods or services and the supplier’s invoice to ensure quantities, prices, and delivery are all consistent.
Approve invoices and process payments: Approve invoices for payment and process payments in accordance with agreed-upon payment terms.
Keep records: Maintain accurate records of the entire procurement process including contracts, purchase orders, invoices, and communications.
Supplier performance must be evaluated based on criteria such as quality, timeliness, and adherence to contractual terms. Practice supplier relationship management (SRM), fostering ongoing relationships with key suppliers by providing feedback, addressing issues, and identifying areas for improvement and cost savings.
Procurement management involves the planning, execution, and control of the processes related to the acquisition of goods or services for an organization. Often known as the source-to-settle process, procurement management encompasses a range of activities crucial to the procurement process, from sourcing and purchasing to negotiating contracts, supplier relationship management (SRM), risk management, policy compliance and integrating with accounts payable.
The primary objectives of procurement management include obtaining the necessary resources at the best value, managing supplier relationships and mitigating risks associated with the acquisition of goods and services. Procurement software, also known as e-procurement software, plays a pivotal role in streamlining the process. By automating workflows, this software facilitates the efficient management of purchasing activities.
Beyond automation, it enables companies to analyze cost savings more effectively and monitor the performance of their suppliers. In essence, procurement management, supported by advanced procurement software, ensures a systematic and efficient approach to the entire procurement lifecycle, contributing to better decision-making and resource optimization.
Technology plays a crucial role in modern procurement processes, streamlining operations, enhancing efficiency and providing valuable insights. Here are some of the technologies that are used in procurement:
Artificial intelligence (AI) and machine learning (ML): AI and ML can analyze large data sets to identify patterns and trends, helping organizations make more informed procurement decisions.
Blockchain technology: Blockchain can enhance transparency and traceability in the procurement process and can be used to create a secure record of transactions, ensuring the integrity of data related to contracts, payments, and product provenance.
Contract management software (CMS): CMS automates the entire contractual process and protects procurement teams from wording and errors that have potential legal ramifications.
Cybersecurity solutions: Technologies such as encryption, secure access controls and threat detection systems help safeguard procurement data and systems from unauthorized access and cyberthreats.
Electronic document management: Digital document management systems streamline the handling of contracts, purchase orders and other procurement-related documents, reducing paperwork and improving efficiency.
eSourcing platforms: Electronic sourcing platforms facilitate the entire procurement process, from identifying potential suppliers to negotiating and finalizing contracts.
eProcurement platforms: Electronic procurement systems automate the purchasing process, from requisition to payment, and can help manage catalogs, generate purchase orders and track spending.
Mobile procurement apps: Mobile applications enable procurement team members to remotely access procurement data, approve purchase requests and track orders.
Procurement performance analytics: By collecting and analyzing procurement data, organizations can gain valuable insights that lead to better performance and decision making.
Procure-to-pay (P2P) software: P2P tools streamline the purchasing process and account payable systems and track the flow of all procurement processes.
Robotic process automation (RPA): RPA can automate and improve the accuracy of repetitive procurement processes such as data entry and invoice processing, allowing team members to focus on more strategic aspects of procurement.
Supplier relationship management (SRM) systems: SRM systems help businesses optimize relationships with suppliers, providing tools for communication and performance monitoring.
Supply chain management (SCM) software: SCM software offers a view of all the movements of products or services as they journey through supply chains, allowing tracking of supplier performance, deliveries, and disruptions.
While some people have used the terms procurement and purchasing interchangeably, they are not the same. Procurement is a strategy that starts with analyzing the company’s needs and is part of a more extensive process. In contrast, purchasing is a specific step that comes toward the end of the procurement process after sourcing, price, terms negotiations and other actions are complete.
On the other hand, procurement is just one aspect—or subset—of supply chain management. Supply chain management encompasses the entire process of obtaining goods, including logistics such as shipping, warehouse management, the transformation of goods into products and their distribution.
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Footnotes
1 Procurement, Bain & Company (link resides outside ibm.com)