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Effective procurement is foundational to business growth.
Securing the right resources consistently ensures smooth operations and supports brand expansion. By streamlining workflows and tightening supply chain controls, companies can enhance product development, build stronger vendor relationships, and unlock new opportunities.
It all begins with a closer evaluation of the procurement process and where it can improve.
Key Takeaways
- View procurement not just as buying, but as your company’s strategic system for acquiring all essential goods and services, crucial for both daily operations and achieving larger business goals.
- The procurement process is a structured sequence of defined steps from identifying what’s needed and finding suppliers, right through to payment.
- Effective management of this cycle brings value by enabling smarter decisions, improving operational efficiency, and tightening financial controls across your organization.
- Beyond individual transactions, successful procurement also focuses on building strategic partnerships with suppliers to ensure quality, reliability, and secure better long-term value for your business.
What is Procurement?
Procurement is the organized system your business uses to acquire or source the essential goods and services needed to operate effectively and meet company goals. It’s a fundamental business function.
More Than Just Buying
Obtaining the right resources consistently is vital. It underpins daily operations and directly supports business growth. This is precisely the role of the procurement process.
While sometimes the word “procurement” is used simply to mean the act of purchasing, its true scope is much broader.
Consider the entire lifecycle: from identifying needs and vetting potential suppliers, through managing contracts and supplier interactions, right up to the final approval of an invoice for payment. It’s a complete cycle.
Procurement vs Purchasing
When your team makes a purchase, the focus is usually on efficiently fulfilling a specific, current need, usually emphasizing price and delivery speed. It addresses the “what we need now.”
Procurement, on the other hand, takes a more strategic view. It looks beyond single transactions to ensure buying activities align with key business objectives.
How does this acquisition support our long-term strategy? Which suppliers offer sustainable value and reliability, not just an attractive initial price? What risks must be considered and managed?
This involves strategic procurement management, negotiating favorable terms and conditions, building resilient supplier relationships, and focusing on the total value delivered.
Why the Difference Matters
Recognizing the distinction between purchasing and procurement underscores the importance of carefully managing the full procurement cycle to support well-informed business decisions.
Also, remember your organization likely interacts with this process from both sides – sometimes acting as the buyer carefully sourcing inputs, other times operating as the supplier responding to another company’s procurement needs.
The Three Pillars: Process, People, Paperwork
To understand procurement’s daily operations, the “3 Ps” framework offers a clear perspective:
- Process: These are your defined steps and established workflows – the procedures your teams follow for reviewing requests, placing orders, confirming receipt, and handling payments for goods or services. A clear process brings structure and predictability.
- People: These encompass all the stakeholders involved across various departments – operations, finance, legal, IT, procurement specialists – who initiate, authorize, or manage different stages. Smooth collaboration among these individuals is vital for success.
- Paper(work): This represents the flow of documentation and critical data through the cycle, whether digital records or traditional documents. This includes requisitions, POs, contracts, invoices, and receipts. Maintaining accurate, accessible records is fundamental for control, auditing, and analysis.
Keeping Spending on Track
A primary tool for financial control in procurement is the budget. This mechanism usually provides managers across the organization with specific spending limits for acquiring necessary goods or services.
This budget framework, often developed in partnership with your Finance Department, holds important strategic weight. Why? Because your company’s ability to secure the right resources at the right cost, while operating within these financial parameters, directly impacts profitability.
Considering procurement can influence a substantial portion of total company spend – sometimes 40% to 80% – careful budget management is clearly critical.
Understanding Procurement Maturity
It’s also helpful to recognize that procurement functions evolve. They often progress along a maturity curve – perhaps starting with basic, reactive methods and aiming towards strategic, data-driven operations.
How your company currently executes each procurement step likely reflects its position on this spectrum. Understanding where your organization stands today helps identify realistic and impactful areas for improvement, guiding your optimization efforts effectively.
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10 Steps in the Procurement Process
The beginning of the procure-to-pay accounting process starts with planning. Here are the ten most common stages of the procurement process:
#1) Recognize the company’s needs of goods and services
The first stage is known as needs recognition. In this beginning phase, a business starts its research. Planning is initiated for how goods and/or services can be procured in a timely manner, at a fair cost.
#2) Submit a purchase request
The next step is a purchase requisition, which is basically a written means of permission to make the expense. It’s an internal document used by staff to raise a request for the goods and/or services required to complete a job. It contains all the details needed for approval, including but not limited to):
- Product
- Quantity
- Price
- Name of requester
- Department
A purchase request should include any essential data to fulfill the existing need and keep operations running smoothly. The purchase requisition should always have key information to procure goods, services, or works.
#3) Review the requisition package
The official process of procurement only starts after the purchase requisition is approved and a cross-check for budget availability is completed. In these beginning stages, managers and department heads review the requisition package. They check if there is a genuine need for the requested goods and/or services, and verify whether the funding is available.
Approval of the requisition request will turn it into a purchase order (P.O.). Rejected requests are sent back to the requisitioner with the reason for rejection.
#4) Solicit the best suppliers
After the P.O. is generated, the procurement team will develop a procurement plan and a corresponding solicitation process. The scope of this plan ultimately depends on the complexity of the requirement.
Once the budget is approved for an expense, the procurement team forwards a request for quotation (RFQ) to vendors with the intention to receive and compare bids to shortlist the best suppliers.
#5) Review and evaluate the top suppliers’ performance
In the evaluation stage, the solicitation process is closed. At this point, the procurement team will review and evaluate supplier performance, referrals, and quotes to determine the best price and fit.
#6) Negotiate a contract
Contract negotiation begins after the vendor is selected and the purchase order is forwarded to them. A legally binding contract will be activated as soon as the vendor acknowledges and accepts the purchase order.
#7) Manage orders
At this stage, the vendor will deliver the goods/services within the specified timeframe. After receipt, the buyer will examine the order and notify the vendor of any issues with the received items/service.
#8) Conduct two and three-way P.O. matching
The supplier’s invoice must be validated prior to sending for approval. This is done through P.O. matching. The traditional sense would have AP staff searching for receipts, P.O.’s, and other paperwork, and attaching that to the invoice. This is so all data is in one spot for the approver to give their signature.
In automated P.O. matching, companies like Tipalti streamline the process of collecting paperwork. In a three-way match, the purchase order, invoice, and receipt are compared to ensure there aren’t any discrepancies.
Once matching is complete, the invoice is sent for approval.
#9) Approve or dispute invoices
At this stage, the appropriate approvers will review all paperwork and sign off on payment. The invoice is then forwarded to payment processing.
#10) Keep records
Once all payment is sent, a company accounts for the transaction. A record is made for bookkeeping and auditing purposes and all appropriate documents are stored in a centralized location.
Types of Procurement Activities
| Procurement Type | Description | Strategic Focus / Key Activities |
|---|---|---|
| Direct Procurement | Purchasing items that directly contribute to the final product or service delivered to customers (e.g., raw materials, components, resale goods). | – Build strong supplier relationships- Ensure consistent quality and availability- Support production and revenue generation- Align procurement with brand reputation |
| Indirect Procurement | Acquiring goods/services needed for operations but not part of the final offering (e.g., office supplies, IT, travel, marketing). | – Maximize cost efficiency- Consolidate vendor base- Maintain operational support- Control diverse spend categories |
| Services Procurement | Contracting external expertise or labor (e.g., consultants, agencies, legal support, IT services). | – Define scopes of work and SLAs- Set clear performance expectations- Source specialized capabilities- Monitor contract compliance |
| Goods Procurement | Acquiring tangible items (can overlap with direct or indirect categories). | – Optimize inventory and supply chain- Control logistics and storage- Balance availability with cost efficiency- Streamline physical purchasing processes |
Your overall procurement management efforts involve several distinct but related types of activities, all essential for successfully acquiring the products or services your business needs.
When you look at the full scope, part of the procurement work may include activities like:
- Planning out purchase requests
- Establishing clear quality standards
- Determining exact specifications (getting this right prevents issues later)
- Researching potential suppliers,
- Implementing rigorous selection criteria
- Arranging financing, skilled negotiation, and even inventory management.
Understanding the different categories of what your company procures helps refine your strategies and processes. These activities generally fall into four main areas:
Direct Procurement
This category covers acquiring anything that directly becomes part of the procurement of your final product or service delivered to customers. For manufacturers, think raw materials or crucial components. If you’re a retailer, this is the merchandise you purchase specifically for resale.
Because these acquisitions directly impact your production output, revenue generation, and often your brand image, the focus here tends toward building strong, reliable, long-term relationships with key suppliers.
Consistent quality and assured availability? Those are paramount. For service-oriented businesses, the direct cost equivalent often corresponds to the labor involved in service delivery.
Indirect Procurement
This involves acquiring all the other goods or services necessary for your daily operations, but that don’t directly form part of the final offering sold.
Consider indirect procurement as securing the resources that support your business infrastructure – things like office supplies, IT equipment, marketing initiatives, corporate travel, consulting services, or facility maintenance.
While absolutely essential for operations, these purchases typically don’t influence your gross profit margins in the same direct way.
Therefore, your strategic focus might lean more towards maximizing spending efficiency, achieving better cost control across diverse categories, and potentially consolidating your spend with fewer, preferred potential suppliers.
Services Procurement
This area deals with sourcing and contracting for people-based expertise or capabilities. It’s a wide field, covering needs like hiring temporary personnel or specialized consultants, engaging legal firms or creative agencies, contracting security providers, or obtaining IT support.
While service-focused companies rely heavily on this, almost every organization procures various services (software subscriptions and maintenance contracts are common examples).
Since you’re often buying an outcome or specialized knowledge rather than a physical object, what’s truly critical? Defining clear scopes of work, establishing measurable expectations via Service Level Agreements (SLAs), and agreeing on performance metrics upfront are vital for success.
Goods Procurement
This simply refers to the acquisition of any physical, tangible item. You’ll notice it can overlap with both direct procurement (like production materials) and indirect procurement (like office furniture).
For businesses heavily involved with physical products, effective supply chain management (SCM) and sound inventory control practices are fundamental disciplines closely linked to the purchasing process. This often involves carefully managing order quantities, coordinating inbound logistics, and optimizing storage to ensure product availability while minimizing holding costs.
How Bidding Works for Different Types
When selecting potential suppliers, especially for higher-value or more complex requirements, you’ll often utilize some form of competitive bidding.
- For goods, the bidding process can sometimes be more standardized. You’ll typically request proposals from suppliers outlining specifics like unit pricing, shipping details, and delivery terms and conditions.
- For services, bidding frequently requires more comprehensive proposals. This is because you need to assess factors beyond just the cost – such as the expertise of the proposed team, the technology they’ll use, their service delivery methodology, support structures, fee breakdowns, and importantly, those performance commitments defined in SLAs.
In either case, your procurement teams usually manage the process of soliciting bids (often through formal requests like an RFQ or a more detailed Request for Proposal) and evaluating the submissions.
Remember, the final selection should aim for the best overall value, considering quality, reliability, and strategic fit alongside the price.
Leading organizations often conduct these competitive exercises periodically to maintain market awareness and cultivate strong supplier partnerships.
Optimizing the Procurement Process
Effective procurement starts with streamlining workflow. Optimization offers better controls over every stage of the procurement lifecycle.
Here are a few tips to help you get started:
- Define a clear procurement strategy
- Enable quick adoption with in-depth staff training
- Determine costs and plan according to budget
- Invest in smart procurement software like Tipalti
- Create an open channel of communication with suppliers
- Integrate procurement processes with APIs
- Establish policies and process compliance
Spend Analysis
The finance team should have controls in place for analyzing procurement spend to decrease costs, increase efficiency, and improve supplier relationships. Examining this procurement activity is typically known as “spend analysis.”
Spend analysis (and the resulting analytics) is one of the key tools used to proactively identify savings opportunities, optimize buying power, and manage risks. This deduction allows a business to identify areas of cost reduction and process improvement which results in a lower overall cost to procure goods/services.
The following are some common sources of procurement spend analysis data:
- Purchase orders
- ERP (enterprise resource planning) tools
- Data shared by suppliers
- General ledger info
- Credit ratings
- Transaction data
- Risk reviews
- Other internal systems
- External sources
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Key Benefits of Working with Suppliers
Long-term success is incumbent upon solid supplier relationships, which don’t happen overnight (or without nurturing). Implementing and executing a supplier development program is vital for long-term success. It allows for stronger collaboration and greater visibility into supplier risks. This results in faster recovery times from disruptive events and greater controls on avoidance strategies.
Continual and open dialogue with suppliers helps to address supply chain issues quickly and react accordingly. A well-designed and executed supplier development program reduces costs and leads to stronger relationships. This has huge business advantages like:
- Increased supplier responsiveness and engagement
- Full transparency between all parties
- Higher rate of customer satisfaction
- Streamlined sourcing activities and lead times
- Improved collaboration
- Better quality, reliability, and manufacturability for new designs
- Increased awareness of supplier diversity
Supplier development also leads to more responsiveness and increased visibility of the full supply base to procurement. This type of relationship management can be carried out through purchasing or the quality control department, depending on organizational structure. As long as there is some sort of program in place, you’re on the right track to diverse and committed suppliers.
FAQs
How does e-procurement work?
What is e-procurement? E-procurement is the process of buying something online. Sometimes called “supplier exchange” it’s the business-to-business (B2B), business-to-consumer (B2C), or business-to-government (B2G) purchase and sale of supplies, services, and work through the internet, as well as data and networking systems, such as electronic data interchange (EDI).
When implemented correctly, e-procurement facilitates communication with suppliers by creating a direct link through bids, purchase orders, e-mails, and more.
E-procurement helps to automate manual processes to free up time and avoid human errors. It simplifies a procurement system through advanced technologies, compliant steps, and a touchless digital process.
What are some common issues in the procurement process?
A major challenge in the procurement process is supply risk. This is an umbrella term for a multitude of concerns that encompass buying what you need for running a business.
Potential fraud, market shifts, quality, delivery problems, and cost all constitute the most common types of risk. Additionally, compliance issues like policy adherence and corruption create a more volatile environment for efficient procurement functions.
Here are some of the top issues procurement departments face right now:
• Poor supply chain transparency
• Inaccurate data
• Compliance to contract
• Better risk management
• Control and visibility of spending
The solution starts with an active procurement risk management program. This will help to anticipate risks and safeguard businesses from any issues that arise during procurement.
Every purchase brings a set of critical factors like product quality, customer satisfaction, vendor reliability, company reputation, and more.
What’s the purpose of a procurement audit?
Auditing your procurement process is important to ensure compliance, drive accuracy, and improve efficiency. It entails periodically reviewing procurement processes, contracts, and vendor history to make sure contract terms are being met.
The primary objective of a procurement audit is to determine if the current level of delegated authority is efficient and to formally evaluate the performance of a supplier. It can also be used to create documents that further streamline procurement practices and focus efforts within an organization.
How long should the procurement process ideally take?
That’s a popular question, but honestly, there isn’t a single universal answer for optimal process cycle times. The actual duration depends on variables like purchase complexity, industry standards, and how streamlined your internal operations are.
The main objective, however, should always be efficiency. Manual processes, particularly around known bottlenecks like invoice approval, can easily stretch processing times out for many days – 10, 15, sometimes even 20 days or more isn’t unusual.
Compare that with highly efficient organizations leveraging automation for tasks like three way matching and digital approvals.
They often manage to shrink critical cycle times, like invoice processing, down to just 3-5 days. Measuring your own key intervals (like requisition-to-PO time) provides a concrete benchmark to pinpoint where delays occur and where to focus improvement efforts.
How should we handle invoices that don’t have a Purchase Order (Non-PO Invoices)?
Non-PO invoices skip the standard purchase order checks, increasing the risk of unapproved spending or fraud. To manage them effectively, establish a separate, clearly defined process. This should include:
• Stricter approval workflows (often with higher-level sign-offs)
• Verification that goods/services were received and satisfactory
• Accurate GL coding and documentation
Procurement software can streamline this by applying tailored workflows to ensure proper review before payment.
What’s the difference between Procure-to-Pay (P2P) and Source-to-Pay (S2P)?
P2P focuses on the transactional flow—need identification, ordering, receiving, invoicing, payment, and record-keeping. It’s all about efficiency and financial control.
S2P includes everything in P2P but adds strategic sourcing activities like supplier selection, contract negotiation, spend analysis, and supplier relationship management.
Think of P2P as the operational engine, and S2P as the full end-to-end procurement strategy.
How Do You Negotiate with Suppliers?
The best practices for procurement negotiations depends on who you ask. When it comes to developing superior deals, here are a few tips:
Active Listening
Do not use your supplier’s time to rehearse arguments. Practice active listening during your counterpart’s speaking time to better formulate counterarguments.
Think Creatively
If a supplier is stubborn on price, consider “outside-of-the-box” opportunities to lower expenses. For example, a business can negotiate to reduce the amount of a down payment when buying in bulk. A company can also look for faster shipping without additional expenses, improvements to the warranty, and longer payment terms. You can also ask for early payment discounts when submitting invoices.
Agree on Negotiation
All parties must agree on the negotiation process. This includes things like the frequency of contact, team composition, and the choice of meeting venues. All of it plays a role in the effectiveness and quality of discussions.
All details should be clarified in advance to ensure everyone is on the same page. The negotiation process is anything but straightforward and often requires adjustments on both sides.
Build Trust
Always take the time to get to know your main contact. Having a mutual interest or shared goals are good ways to reach a deal. Even if discussions take place over email, setting up a call creates the best possible conditions for the negotiation. There’s a shared pleasure in getting the deal done.
Convey Repeat Business
When a supplier suspects you are serious about their product/service, and will give them repeat business, it leverages the negotiation process. If you have a trackrecord of past purchases, let them know how much business they can expect from you. If you’re just starting out, providing a sales projection plan is a good move.
Ask the Right Questions
Asking questions that are open-ended is a great way to move procurement negotiations in the right direction. Don’t hesitate to ask about specific needs, terms, limitations, or future expectations.
Talk to Multiple Suppliers
To encourage competitive pricing, talk to at least three suppliers and let them know you are gathering quotes and will go with whoever has the best price. Don’t forget to always take quality into consideration.
Instead of a single proposal per them, consider multiple offers. If you’re negotiating delivery, mention three different methods using variables of frequency, delivery points, and time slots. The idea is to never find yourself in a “take it or leave it” situation, but to work to find the best possible solution for both parties.
Offer Bigger Deposits for More Discounts
Every business is concerned about their accounts receivable. A good way to secure bigger discounts is to offer larger deposits on supplier orders. If the vendor knows they will receive 50 to 60 percent up front, it increases the buying power and makes pricing more negotiable.
Don’t Say Yes to the First Offer
The number one rule of negotiation is to never accept a party’s first offer. Instead, issue a counter-offer or ask they get back to you with a better price. This can be justified with the amount of business you’re offering to give them or the length of the partnership.
Transfer Business to One Supplier
More business means deeper discounts. If you’ve been giving business to multiple vendors, consider consolidation for cost savings. Before you take the plunge, however, call the supplier and ensure there’s a discount available.
Be Affable
It doesn’t matter how much business you give suppliers, if you’re the “problem customer.” If it’s too much work to do business with you, negotiations will be tough. Always maintain good supplier relationships which includes open communication, on-time payments, and mutual collaboration.
Define the “Best Alternative”
Have a fallback solution for when negotiations aren’t successful. This includes two things: #1) define the limit beyond which the deal is no longer an advantage and #2) identify an alternative solution so your back isn’t up against a wall. This allows you to approach negotiations with maximum peace of mind and ensures you’re closing a deal advantageous to your business.
Additional Tips
- Take it one step at a time and don’t rush
- Be aware of anchoring bias
- Present multiple offers simultaneously
Summary
For a business, fiscal responsibility starts here. Procurement is a vital business function directly related to the success of a company. Modern procurement relies on technology to gain a competitive advantage.
Look for automation tools that strengthen the process, minimize the chances of error, and fulfill all of your procurement needs. When managed efficiently, a streamlined procurement process flow can increase a company’s profitability, drive growth, and secure a positive source of revenue. Discover how Tipalti’s procurement automation tools can make this a reality for your business.
