What is Procurement?: Everything You Need to Know

Procurement is a vital business function that involves the strategic process of sourcing and acquiring goods and services from external sources to meet an organization’s needs. Procurement encompasses identifying potential suppliers, evaluating supplier relationships, negotiating contract terms, and ensuring timely delivery to maintain operational efficiency. Effective procurement practices are essential for procurement teams to achieve cost savings, manage risk factors, and align purchasing activities with overarching business goals.  

In today’s complex supply chains, procurement professionals are pivotal in managing supplier relationships and ensuring that procurement processes contribute to business growth. By fostering strong relationships with suppliers, organizations can secure reliable suppliers, negotiate favorable payment terms, and enhance customer satisfaction. The procurement function focuses on cost management and strategic decisions that impact the entire procurement process and the organization’s competitive advantage. 

Key Takeaways 

• Procurement is a strategic process involving the acquisition of goods and services to fulfill business requirements. 
• It differs from purchasing by emphasizing value and strategic alignment over transactional activities.  
• Effective procurement practices are crucial for cost reduction, risk management, and achieving business objectives. 

How Procurement Works 

The procurement process begins with a purchase request, where business units specify their needs based on operational requirements and strategic goals. Procurement managers review these requests to validate the necessity of the purchase and determine the best procurement method, whether for goods, services, or materials. 

Once the request is approved, procurement managers identify potential suppliers by evaluating reliability, cost-effectiveness, and compliance with procurement policies. They assess supplier relationships to ensure they align with business needs and consider both preferred suppliers and new vendors offering competitive advantages. 

To initiate the purchasing process, procurement teams issue a request for proposals (RFP) or request for quote (RFQ), gathering bids from multiple suppliers. This allows them to compare offers, negotiate contract terms, and secure favorable payment terms and contract compliance. 

Throughout the process, procurement departments aim to improve efficiency by using automation tools and supply chain management software. These tools help reduce human error, streamline workflows, and ensure that all purchases align with business objectives and deliver cost savings, operational efficiency, and stronger supplier relationships. 

Competitive Bidding and Procurement 

Competitive bidding is a key aspect of procurement, allowing organizations to solicit multiple quotes from suppliers and choose the best value option. This process helps procurement teams secure cost savings by comparing pricing, quality, and delivery terms from different suppliers. 

By using competitive bidding, procurement specialists can make data-driven decisions that align with business goals and operational efficiency, ensuring better financial outcomes and stronger supplier relationships. It also fosters transparency and consistency, helping teams select suppliers that meet clear, predefined criteria while minimizing procurement risks and errors. Ultimately, competitive bidding enhances procurement practices and drives long-term value for the organization. 

Types of Procurement 

Procurement can be categorized into:  

• Direct Procurement: Acquiring raw materials and components directly used in production.  
• Indirect Procurement: Purchasing goods and services not directly involved in production, such as office supplies and software subscriptions.  
• Goods Procurement: Focusing on tangible products necessary for operations.  
• Services Procurement: Engaging external sources for services like consulting services and facilities management. 

Direct vs. Indirect Procurement 

Understanding the difference between procurement types is crucial:  

• Direct Procurement: Involves purchasing materials that directly impact the production process and customer service.  
• Indirect Procurement: Pertains to acquiring items that support daily operations but do not directly contribute to the end product.  

Goods vs. Services Procurement 

Distinguishing between goods and services procurement is essential:  

• Goods Procurement: Focuses on tangible items like inventory management and inventory control.  
• Services Procurement: Involves intangible offerings such as consulting services, emphasizing the importance of vendor relationships and contract negotiation. 

Procurement vs. Purchasing 

While often used interchangeably, procurement and purchasing differ:  

• Procurement: A strategic function encompassing supplier evaluation, contract management, and aligning with business practices.  
• Purchasing: A subset of procurement dealing with transactional aspects like order placement and payment approval. 

Key Differences Between Procurement and Purchasing 

• End Goals: Procurement aims for strategic alignment with business growth while purchasing focuses on executing procurement policies.  
• Primary Considerations: Procurement evaluates supplier management and risk factors; purchasing emphasizes cost and delivery schedules.  
• Order of Operations: Procurement involves strategic planning, purchasing deals with routine tasks, and closing contracts.  
• Tasks Involved: Procurement includes supplier evaluation and contract compliance; purchasing handles quotes from suppliers and invoice processing.  
• Impact on Suppliers: Procurement fosters long-term business relationships; purchasing focuses on immediate transactions. 

What are the Steps of the Procurement Process? 

Specifying and Planning 
The first step in the procurement process involves defining business requirements and aligning them with operational needs. Procurement teams must assess the quantity, quality, and specifications of goods or services required, ensuring that they support larger business goals and drive operational efficiency. This stage also includes budget planning, forecasting demand, and outlining procurement policies to establish a strategic roadmap for sourcing materials or services from external sources. Effective procurement planning reduces procurement inefficiencies, minimizes supply chain risks, and ensures that all purchasing activities contribute to cost savings and business growth. 

Identifying and Selecting Suppliers 
Once the requirements are clearly defined, procurement professionals must identify and evaluate potential suppliers to establish a network of preferred suppliers. This process involves supplier evaluation, reviewing vendor relationships, and assessing supplier reliability based on criteria such as pricing models, delivery schedules, and historical performance. Procurement teams must also conduct due diligence to ensure suppliers comply with contract terms, environmental impact considerations, and corporate identity standards. Selecting the right suppliers is crucial in mitigating risk factors, improving supply chain resilience, and optimizing procurement efficiency. 

Negotiating and Contracting 
After selecting a suitable supplier, procurement managers enter the negotiation phase to finalize contract terms and define contractual obligations. This includes discussions on payment terms, cost reduction strategies, service level agreements (SLAs), and compliance with procurement policies. Successful contract negotiation ensures that both parties benefit from the agreement, reducing the likelihood of disputes and costly errors. Contract management is critical in maintaining transparency, enforcing accountability, and ensuring long-term vendor relationships that align with business practices and procurement lifecycle objectives. 

Placing the Purchase Order 
Once the contract is finalized, procurement specialists issue purchase orders (POs) to formally request goods or services from the supplier. The purchase order contains essential details such as order quantity, specifications, pricing, delivery schedules, and payment discounts. Ensuring accuracy in the purchasing decision helps procurement departments avoid human error, delays, and discrepancies in procurement workflow. Automation tools, such as those offered by RohanProcure, streamline this process by reducing manual workload and improving procurement efficiency through digital purchase request approvals and seamless invoice processing. 

Expediting 
Expediting involves closely monitoring the supplier’s progress to ensure that goods or services are delivered on time and according to agreed-upon specifications. Procurement managers track delivery schedules, address supply chain disruptions, and intervene when necessary to prevent delays that could impact daily operations. By maintaining proactive supplier management and leveraging supply chain management software, procurement professionals can enhance procurement efficiency, minimize procurement process risks, and ensure that contractual obligations are met without interruptions. 

Receipt and Inspection of Purchase 
Upon delivery, procurement teams thoroughly inspect goods or services to verify compliance with order specifications, quality standards, and business requirements. If issues arise, such as defective products or incorrect shipments, procurement managers coordinate with suppliers for replacements or adjustments. This step is vital for maintaining customer satisfaction, reducing costly errors, and ensuring that procurement practices support sustainable supplier relationships. Procurement efficiency depends on rigorous quality control measures that prevent disruptions in the supply chain and optimize inventory management. 

Invoice Clearing and Payment 
The final step in the procurement process involves processing supplier invoices, ensuring payment compliance, and reconciling financial records. Procurement departments review invoices against purchase orders and delivery receipts to verify accuracy before authorizing payments. Ensuring timely payment approval helps maintain positive vendor relationships, secures payment discounts, and strengthens contract compliance. Leveraging automation tools like RohanProcure can enhance procurement efficiency by reducing manual processing, mitigating human error, and improving financial transparency in procurement workflow. 

Take Your Procurement to the Next Level with Rohirrim 

Optimizing procurement processes is essential for achieving operational efficiency and business growth. Rohirrim’s RohanProcure tool empowers procurement teams by automating the drafting of acquisition documents, reducing manual overhead, and enhancing collaboration.  

By leveraging artificial intelligence and machine learning, RohanProcure streamlines the entire procurement lifecycle, from supplier evaluation to contract management, ensuring compliance and minimizing costly errors. Experience the benefits of automation tools and data-driven decisions to enhance procurement efficiency.  

Contact Rohirrim today to schedule a demo and discover how RohanProcure can transform your procurement function, drive cost reduction, and improve supplier relationships. 

FAQ 

What is procurement in simple terms? 

Procurement is the process of acquiring goods or services from external sources to meet a business’s needs, ensuring quality, cost-effectiveness, and timely delivery. 

What are the three types of procurement? 

The three main types of procurement are direct procurement (buying raw materials for production), indirect procurement (purchasing operational supplies like office equipment), and services procurement (contracting external providers for services like consulting or maintenance). 

What does a job in procurement mean? 

A job in procurement involves managing purchasing activities, supplier relationships, contract negotiations, and cost-saving strategies to ensure efficient procurement processes that align with business objectives. 

What is an example of procurement? 

An example of procurement is a company purchasing raw materials from a supplier to manufacture its products, negotiating contract terms, and ensuring timely delivery to maintain production efficiency. 

Farah van Caloen

Director of Marketing