Your business is growing quickly.
Your accounts payable team is processing hundreds of invoices a month from different suppliers, ordered from different departments, and all with different purchase order number systems and payment terms.
It's time to give a little order to that chaos with a dedicated procurement practice.
But in your initial research, you’ve realized something: there’s more than one kind of procurement.
In this article, we’re going to shed some light on the different types of procurement. Specifically, we’re going to look at the four primary kinds of procurement, alongside eight important procurement strategies.
A quick overview of procurement
Procurement is the technical name used in business to describe obtaining goods and services needed for the company to operate.
It’s about much more than just buying things, however.
Good procurement involves critical processes like supplier vetting and evaluation, contract negotiation, and even competitive bidding.
4 common types of procurement
Most small businesses will handle all procurement duties under the same umbrella, whereas large organizations might have several people who handle specialized aspects of procurement.
That’s where the following four types of procurement really come into plan.
That said, even SMBs can benefit from understanding how procurement can be divided up, as they may decide to hire people with specialized experience depending on the company’s specific needs.
1. Direct procurement
Direct procurement is the acquisition of the raw materials and goods required for the company’s core production processes.
For example, a company that manufactures smartphones would classify the purchase of chips and glass screens as direct procurement, and a builder would consider raw lumber to be a direct procurement purchase.
2. Indirect procurement
Indirect procurement is the opposite of direct procurement.
Anything that a business needs to purchase but that doesn’t go directly into what they produce and sell is considered under indirect procurement.
Some common examples include utility bills, marketing and advertising services, and office supplies.
3. Goods procurement
Some companies choose to separate the procurement of goods and services into separate activities, roles, or even departments.
Goods procurement is the sourcing and purchasing of any goods (physical items) that the business requires.
Many of the goods a company requires will go directly into production, so that will also be direct procurement. However, some goods, like office supplies, would fall into indirect procurement.
For this reason, some large international enterprises go a step further and have separate direct goods and indirect goods procurement responsibilities.
4. Services procurement
Services procurement is the purchase of sourcing and managing service providers, such as building contractors and marketing agencies.
Most services fall under the indirect procurement umbrella, so it's rarer to see organizations separate direct and indirect services procurement.
Where we do see some common distinctions, however, is in the types of services being procured.
There are three main subcategories used by enterprises, with everything else usually falling under general services procurement:
- Works procurement: The sourcing and management of construction-related services.
- Leasing procurement: The acquisition and administration of leases, most commonly vehicle, real estate, and equipment leases.
- Software procurement: The purchasing and oversight of software licenses, including managing updates and integrations in conjunction with IT.
Common procurement strategies, tactics, and methods
Now that you’ve got a handle on the four different types of procurement, you’re probably ready to launch into yourself, right?
Before you dive right in, take note of some of the strategies and tactics used by procurement professionals to reduce risk, cut costs, and drive more value from vendors.
Competitive bidding
Competitive bidding involves asking multiple potential suppliers to submit bids for a contract.
Is a good move for well-defined projects that come with high costs, where the difference between suppliers can be in the tens of thousands.
This can, however, be a time-consuming affair and may not be the best route for creating healthy long-term supplier relationships.
Strategic sourcing
Strategic sourcing is about prioritizing overall value in place of cost-cutting.
While a cost-centric sourcing approach would simply have you choosing the vendor with the lowest price, strategic sourcing is about balancing cost savings, quality, and other values important to your company (like sustainability, for example).
It's a better approach for long-term procurement needs, especially when quality is a concern, but it might not be the best solution for those who need a quick, low-cost, short-term fix to their current purchasing needs.
E-procurement
E-procurement (electronic procurement) refers to the use of modern software systems to automate aspects of the procurement processes.
Its a good move for any companies looking to streamline procurement operations and workflows, work more efficiently, and reduce paperwork and admin.
In most modern organizations, all procurement is e-procurement.
There are a number of powerful digital tools that can support more effective and efficient procurement processes, helping you cut down on costs and find better quality vendors faster.
A few examples include:
- Software sourcing tools that come with pricing databases and contract insights
- The use of artificial intelligence to perform and collate vendor risk analyses
- Automated matching of invoices with purchase orders
- AI-driven solutions for filling out RFPs (request for proposal) and security questionnaires
Decentralized procurement
Companies can choose between centralized and decentralized approaches to procurement.
Where centralized procurement handles all business sourcing and purchasing needs in a single department, decentralized procurement empowers individual departments or brands to handle their own procurement requirements.
This is a good fit for businesses with diverse needs, as it can allow for tailored purchasing decisions, where stakeholders are closer to the purchasing process and can identify the right goods or services for their needs.
It can, however, push costs up, as companies are less able to take advantage of economies of scale, and have reduced control over supplier choice.
Vendor-Managed Inventory (VMI)
VMI is when the supplier manages your inventory levels.
Rather than you placing orders on a regular basis, the vendor has access to your inventory numbers and provides additional supply as required.
It’s better for industries with stable, predictable demand, as suppliers can provide the same shipment on a regular basis.
Sole sourcing
Sole sourcing is the practice of purchasing from only one supplier despite having multiple options available.
This is an important strategy where a certain supplier has unique capabilities or where consistency and reliability are critical.
It does, however, increase risk — as you’re dependent on a single vendor — and makes it harder to access competitive pricing.
Supplier diversification
Supplier diversification is the opposite of sole sourcing. It encourages engaging with and purchasing from multiple suppliers.
The idea here is to mitigate supply chain risks to reduce dependency on any single vendor. It also helps you to ensure competitive pricing, as you can analyze different vendor offers against one another.
Collaborative procurement
Collaborative procurement is a strategy that involves working together with multiple organizations to access economies of scale.
For example, you might partner with a group of other similar businesses to purchase a certain good — computer monitors, for example — at a heavily discounted price.
Collaborative procurement comes with the benefit of greeting enhanced bargaining power, but it does require a high degree of cooperation as well as alignment between the buyers involved.
What is the procurement cycle?
The procurement cycle is a series of steps that those responsible for acquiring goods and services for businesses follow. It's the stages involved in purchasing what a company needs.
These are the stages involved in the typical procurement cycle:
- Identify business needs. The company determines exactly what it is they need to purchase and what it will be used for.
- Supplier identification. Procurement experts look for potential vendor solutions.
- RFP or RFQ. The procurement team asks for proposals or quotations from potential supplier options.
- Evaluation and selection. A suitable vendor is selected.
- Vetting. That vendor is vetted, and a risk assessment is completed.
- Negotiation and agreement. The terms of the purchase are agreed upon, and a contract is signed.
- Order fulfillment. The vendor provides the goods or services required.
- Inspection and approval. The buyer confirms the goods or services received have fulfilled expectations.
- Payment. The purchaser releases payment.
- Performance evaluations. The procurement team runs a supplier evaluation. In the case of a continuous contract with the vendor, a supplier management process begins.
How procurement impacts businesses
Effective procurement teams and processes have a number of important benefits for growing businesses, including:
- Reduced costs — through better supplier sourcing, use of automation, negotiation efforts, and bulk purchasing
- Improved quality — through the use of quality assurance programs, vendor vetting, and supplier management programs
- More efficient supplier chains — through effective vendor management and supplier diversification
- Reduced risk — thanks to dedicated vendor vetting processes
- Healthier cash flow — as a result of lower overall costs plus improved payment terms negotiated leveraging good vendor relationships
A modern solution for all types of procurement
Almost all businesses are engaging in all four types of procurement: direct, indirect, goods, and services procurement.
Small businesses tend to manage all four within the same role or team, whereas larger companies may choose to split them out and prioritize specialization.
Whichever route you choose, you’re going to need a modern solution that helps support supplier management.
A good financial operations platform — such as BILL — can help you to:
- Automate accounts payable (getting vendors paid faster and keeping them happy)
- Access business credit to fund new purchases
- Report on spending behaviors to drive strategic sourcing decisions
Start using BILL to transform your procurement operations today.
