Understanding the Basics of Material Procurement

A business needs to purchase raw materials to manufacture its products and provide the services it offers. It’s the baseline cost for basic needs. 

Sourcing these materials from suppliers helps maintain steady production. However, there are many factors to consider when working in material procurement.

The supply chain evolves and changes as a business grows, and more materials are required. In the modern purchasing process, there are various ways of procuring materials, and the most suitable method depends on the type of product or service being offered.

The procurement team must find a reputable and reliable supplier that can provide the business with the necessary materials day-to-day, on time, and at a reasonable cost.

In this article, we will discuss the material procurement process and some tips on procurement strategy, as well as contract and vendor management.

What is Material Procurement?

Procurement is the method of acquiring or obtaining goods, services, or works from an external source. Raw material procurement is a type of procurement that involves the process of researching, selecting, ordering, and paying for the raw materials required for constructing a building or structure.

The procurement process involves identifying and selecting vendors or suppliers, negotiating prices and terms, and awarding contracts.  The direct procurement process is critical to supply chain management and can significantly impact an organization’s bottom line. Companies must carefully consider all of these factors to facilitate smarter decision-making.

The terms purchasing and procurement may be used interchangeably, but there is a distinction between the two. Purchasing is buying goods or services, while procurement is a broader term that includes purchasing, but also includes sourcing, negotiation, and contract management.

Factors to Consider in Material Procurement

There are many factors to consider in material management, including cost, quality, availability, and delivery time. Organizations must balance these factors to increase profitability and get the best value for their money. 

Cost

Cost is often the primary consideration when procuring materials. Organizations want the best price possible for the goods and services they need to continue business operations. It’s critical to compare prices from different suppliers, negotiate for the best price, and observe strategic sourcing.

Quality

Quality is another important consideration when procuring materials. Quality is crucial because it affects the performance of the materials or products being procured. For example, if a construction company procures wood that is lower quality than required for a stable structure, they won’t be able to provide a good product to their customers, even if the lower quality means a cheaper price. The types of materials and level of quality will always affect supplier relationships. This is especially true if someone doesn’t find value in the transaction. 

Organizations want to purchase products that meet their standards and requirements. They may need to sacrifice costs to get the desired quality. This can help gain a competitive advantage over competitors and strengthen business partnerships.

Availability 

The availability of materials is a factor that can affect what you buy and from whom. Organizations want to make sure that the products they need are readily available, often on a consistent basis. The sustainability of the supplier relationship also comes into play here. The more a vendor can provide for you consistently, and on time, the longer the relationship will last.

Availability is challenging when a company is trying to procure rare or unique items. They may need to place orders well in advance to get the goods when needed. If certain items are not available, this can affect the entire supply chain.

Delivery Time 

The delivery time of materials is also an important factor to consider. Organizations want to ensure that the products they need are delivered on time. This can be challenging if the suppliers are located in different parts of the country or world. It is important to understand the supply chain well to manage expectations and include expected delivery dates in your vendor contracts.

Importance of Procurement of Materials

Material procurement is an important part of direct procurement as it helps to ensure that businesses can source and purchase the raw goods they need to keep their operations running. Effective material procurement also reduces the chances of disruptions due to shortages within the supply chain.

In many cases, procurement operations are also responsible for ensuring that materials are sourced at the most competitive prices, which can lead to significant cost savings for the company. It can also help you gain a competitive advantage, as some suppliers may offer better terms to those who commit to larger orders.

Organizations can use several different methods for procurement, and the most appropriate will depend on the type and quantity of materials required and the company’s budget and preferences. Some common methods include direct procurement, indirect procurement, and online procurement.

Direct and Indirect Procurement

In any business, either materials must be acquired to produce products, or products that are not raw materials must be acquired to provide a service. Procurement as a whole is broken down into direct procurement and indirect procurement. 

Direct material is a term used for those items that become an integral part of the finished product. In contrast, indirect materials are used in manufacturing but not incorporated into the final product. Indirect materials might include the following:

• Packaging
• Labels
• Marketing services
• Human resources
• Software licenses 

There are advantages and disadvantages to both indirect and direct procurement. Businesses have more control over the quality, timing, and cost when doing direct material sourcing. They can also be sure that the materials will meet their specific requirements. 

However, direct materials can be more expensive, and there may be a greater risk of disruptions in the supply chain.

Indirect materials are usually less expensive than direct materials and can be easily sourced from various vendors. The flexibility of indirect procurement can help avoid disruptions if one supplier cannot meet the demand. 

Moreover, an effective indirect procurement process can make a company more efficient. This is because indirect procurement managers can streamline the process of procuring goods and services, leading to reduced waste and improved turnaround times. 

Steps for Procuring Materials

There are typically five steps involved in the direct procurement of materials. They are as follows:

1. Requisitioning: This is the first stage and involves preparing and submitting requisitions for the required material. The requisition should include quantity, quality, delivery date, and more details.
2. Planning and scheduling: In this workflow, the procurement department plans and schedules the direct procurement process. This includes identifying potential suppliers, fixing delivery dates, creating a bill of materials, and more.
3. Negotiation and placement of order: In this stage, negotiations are held with the suppliers regarding price, quality, terms of delivery, etc. After the negotiations are complete, an order is placed with the supplier. In this stage, a purchase order may also be created.
4. Receipt and inspection of material: Next, the procured material is received from the supplier and inspected for quality and quantity.
5. Payment to the supplier: After inspecting and accepting the material, payment is made to the supplier based on the contract terms.

The above steps are broadly followed in most organizations. However, some organizations may have more specific procedures in place to procure materials, while still loosely following these basic steps in the lifecycle.

Managing Time and Material Contracts

With the different material contracts that a company may have, it is important to understand how to stay on top of them. Many factors are considered and included in these types of contracts and, if not acknowledged, could result in costly mistakes. To manage time and material contracts, here are a few key things to keep in mind:

1. It is important to have a clear and concise scope of work.

A concise scope of work is essential to avoid ambiguity in what is expected from the contractor. This can be accomplished by having a detailed project description that outlines all deliverables, timelines, and milestones.

2. Make sure you have a clear understanding of the billing structure. 

With time and material contracts, you are typically billed for the hours worked plus the cost of materials. It is important to clearly understand how the contractor plans to bill you so that there are no surprises.

3. Make sure that there is a plan in place for how materials will be procured.

This is important to avoid any delays in the project due to material shortages. It is also important to ensure you get the best price for the materials used. This includes understanding lead times, minimum order quantities, and payment terms.

4. Establish clear communication channels between the company and the supplier.

This is important to ensure that everyone is on the same page and that there are no misunderstandings. It will also save some time if issues arise since the concerns can be communicated quickly and efficiently.

By keeping these tips in mind, companies can avoid the pitfalls associated with managing time and material contracts. By having a clear scope of work, a direct procurement plan, and good communication, companies can set themselves up for success.

Procurement Automation

Procurement automation has revolutionized traditional supply chain processes, enhancing efficiency throughout the purchasing lifecycle. By leveraging artificial intelligence and machine learning, companies can automate key aspects of material procurement, from smart sourcing to order processing and invoice reconciliation. The right purchasing software will also help a business leverage spend analysis and forecasting tools.

Automation also reduces errors, minimizes manual intervention, and ensures compliance with procurement regulations and policies. This transformative approach enables procurement teams to better focus on strategic initiatives, like supplier relationship management, while providing real-time visibility into the procurement pipeline. Ultimately, it optimizes resource utilization, enhances decision-making, and contributes to overall cost savings.

Tipalti offers one of the leading platforms for intelligent procurement management, boasting simplified intake, advanced approval workflows, PO and supplier management, real-time integrations, spend analytics, and much more. It’s a good solution to get started on your procurement automation journey.

Final Thoughts

The material procurement process is important in any organization that relies on direct procurement. The goal is to ensure that the correct materials are obtained at the best possible price and on time. There are several different ways to procure materials, each with its advantages and disadvantages.

There is no one-size-fits-all solution when it comes to direct procurement. It’s important to understand the options available and choose the one that best fits the organization’s needs. 

With that said, here are a few final thoughts on the procurement process:

• Ensure a thorough understanding of the organization’s needs before starting the direct procurement process.
• Be sure to compare prices and delivery times from multiple suppliers before deciding.
• Pay close attention to detail, and don’t hesitate to ask questions. The goal is to get the best possible deal on the materials needed.

Following these tips will help ensure that the purchasing process goes smoothly and that the organization gets the best possible deal on the materials needed, which can help your business succeed and, in the end, improve customer satisfaction.

Ready to modernize your procurement operations? Tipalti Procurement offers a powerful, easy-to-use solution that manages all your purchases and enhances control over spending. Learn more.