Understanding Procurement: A Comprehensive Overview

Procurement goes beyond simply buying office supplies—many organizations have dedicated teams for this critical function. In this guide, we’ll explore the process, different approaches, and strategies to optimize procurement for your business goals.

What Is Procurement?

Procurement is the act of sourcing and purchasing goods, services, or raw materials for a business from vendors or suppliers. 

It includes every action involved in and required for sourcing these goods or services, and an official procurement process helps purchasing teams request, approve, and track every purchase and control business spend.

Regardless of size or industry, no business is entirely self-sufficient. Everyone relies on purchasing goods and services provided by third-party suppliers to maintain internal operations and or manufacture products to sell.

Procurement involves not only deciding what to buy based on needs and budget but also ensuring that the company receives enough value from the purchase. 

Beyond Basic Transactions

We all perform procurement work ourselves as individuals. Any purchase you make depends on the quality of the product, the amount of time it takes to be delivered to your doorstep, how much value you’ll get out of your purchase, and many other factors.

But the process involved for businesses, nonprofit organizations, and governmental bodies is even more complex. In addition to finding out what goods and services offer the best value for money, procurement involves:

• Determining needs based on inventory management and market demand
• Planning the budget and inventory far in advance
• Conducting market research to find the ideal third party vendor
• Negotiating contracts with suppliers and undergoing competitive bidding
• Handling vendor relationships
• Performing quality assurance on the received goods and services
• Ensuring that the supply for a raw material or an essential service is always in stock
• Maintaining a purchase order record and other ways to measure procurement performance

For direct procurement (which we’ll explore in more detail below), you can think of procurement as a systematic approach to acquiring goods and services within a supply chain. A procurement officer needs to handle all the activities involved with finding the right goods and services a business needs while staying aligned with the business’s overall goals.

This broad definition just scratches the surface for what the concept entails. Let’s expand upon it now.

How Procurement Fits Into an Overall Corporate Strategy

Procurement isn’t just a financial function—it plays a critical, cross-functional role that supports broader business goals and influences operations across the entire organization.

In fact, according to the EY Global CPO Survey, CPOs globally are prioritizing value and savings, supplier performance, and supplier resiliency as the top three value drivers for their procurement strategy and operating model design. 

This clearly shows that procurement is viewed as a critical function not just for cost control, but for operational stability and the overall health of the supply chain.

Beyond the financial aspects, procurement strategy directly impacts the overall corporate strategy in a few ways.

• Corporate identity. What are the beliefs of your organization, and what does it stand for? The answers to these questions must align with your choice of goods and services. For example, if you pride yourself on environmental friendliness, the suppliers you choose better match that dedication.

• Position in the market. Who is your target audience, and what do they expect of you? Choose your vendor relationships in a way that matches with the needs and preferences of your client base.
• Human resources. Whomever you hire ultimately affects how the procurement process is approached. Are you hiring a properly experienced procurement professional, or should you entrust purchasing activities to someone else?

It makes sense that administrators often put a lot of time and effort into creating and staffing a procurement department since it basically defines the business model.

Types of Procurement

Procurement is typically divided into three main categories: direct, indirect, and service procurement. How much each type is used depends on the company, but all of them play an essential role.

To quickly see how direct and indirect procurement compare, here’s a summary:

Now, let’s explore each procurement type in more detail.

Direct Procurement

Some goods and services are required for the creation of your product lineup. A laptop manufacturer, for example, needs to order individual computer components like memory, batteries, and displays. This type of direct purchase is common in the manufacturing industry in general.

Because this category directly impacts your revenue and growth, the supplier relationship matters in the long-term, as not many companies change raw material sources often.

Indirect Procurement

Other purchasing activities are intended primarily to serve the internal, daily operations of the business like purchasing cloud-based software solutions, office equipment, travel expenses and utilities. Acquiring goods in this sense “keeps the gears turning,” so to speak, and is most common in service-based industries. 

The goods and services we’re talking about here are often consumable and temporary when compared to that of direct procurement, hence why the supplier relationship is often treated as short-term. However, forming trusting supplier relationships within indirect procurement are also important, and can serve buyers when shopping around for best prices and renewing contracts. 

Services Procurement

Companies never operate entirely as a homogenous group; you need ways to connect employees and processes together. You might pick up professional consulting services, software subscriptions, or contingent workforces to do so.

Services procurement, which “fills in the gaps” to generate a smooth workflow, often results in contract-based relationships with vendors.

Procurement vs Purchasing: Key Differences

Purchasing refers to the process of how goods and services are ordered. Purchasing sits within the larger process of procurement. 

Procurement involves a subset of unique processes that take place when an organization sources something. These include negotiations with various vendors or suppliers, the process of onboarding vendors to the organization, and the strategic selection of goods and services based on an organization’s budget, values, and more.

Here’s a side-by-side comparison:

End Goals

The purpose of procurement is to meet business needs through a strategic and efficient approach. This goes beyond the simple process of ordering a service or good, and digs deeper into the process of exploring different options and identifying the most ideal one based on certain criteria the company defines (like cost, location of the provider, etc.).

The purpose of purchasing is to arrange company spending and acquire the chosen good or service.

Main Considerations

The process of procurement tends to place more emphasis on the value of a certain good or service, more so than its cost. Purchasing focuses more on price than value, which makes sense considering that purchasing centers around company expenditure.

Order of Operations

Remember when we mentioned that procurement involves the act of purchasing something? Indeed, purchasing fits within the larger scope of procurement. The scope of procurement activities extends from identifying a need all the way through to fulfilling it, with purchasing standing as the point toward the end of the procurement process when the need is fulfilled.

Tasks Involved

We’ll delve deeper into the exact steps of procurement, but for now, having a basic understanding of the different tasks involved in procurement can really help solidify the ways procurement differs from purchasing. The tasks involved in procurement differ to some degree across companies, and typically involve:

• Identifying the need for the good or service
• Submitting a purchase request
• Exploring the different available sourcing options
• Negotiating and closing contracts with selected suppliers
• Onboarding suppliers and collaborating on related documentation
• Creating a purchase order
• Receiving the good or service
• Conducting three-way matching
• Approving the invoice and executing payment

By contrast, purchasing focuses on fundamental tasks surrounding obtaining the good or service: ordering, receiving, and payment. That is, it focuses on transactional activities like purchase order handling, purchase requisitions, and payment processing.

Impact on Suppliers

It’s important to consider that suppliers or vendors are a key element to both procurement and purchasing processes. For each of the two processes, the supplier’s point-of-contact within the company may be different. The supplier’s relationship with each of these POCs will most likely also be different.

The person responsible for purchasing from the business’s side will be more focused on executing the transaction most efficiently, whereas the person or people involved in procurement will be interested in developing a friendly and mutually beneficial relationship with the supplier. Both strategies are important components of what is known as supplier performance management.

Procurement vs. Sourcing

Sourcing, as well as global sourcing and the purchasing process, is considered a subcategory of procurement. During this step, a business searches for potential suppliers for the goods and services it needs using data from market reports and industry experts. It will consider various factors of each vendor, including:

• Cost and quality
• Reliability
• Supplier certifications
• Financial risks
• Tax costs
• Potential logistical problems

It’s heavily recommended not to limit yourself to a single source. Not only is it more difficult to negotiate competitive rates this way, but you also put yourself at risk of potential disruptions if that supplier is undergoing difficulties.

Market awareness is key here, as a buyer will be able to take advantage of new opportunities and changes in the range of suppliers.

Procurement vs. Supply Chain

Another commonly confused term is supply chain management, of which direct procurement is actually a component. Procurement refers to the upstream work of obtaining goods and services for maintaining internal operations and manufacturing products. The supply chain covers both upstream and downstream workflows for the creation of a business’s product line.

To be more specific, the supply chain workflow picks up after procurement finishes. The steps that follow are:

• Manufacturing the business’s product output
• Transporting those finished units to wholesalers, warehouses, and distribution centers
• Distribution to retail
• Final sales to end consumers

Quality control and logistics matter significantly in the field of supply chain management. The goal of the process is to increase revenue while keeping supply rates and customer satisfaction up. As long as the output of your company reaches the hands of the consumer seamlessly, supply chain management is doing its work.

Procurement vs Supply Chain Management Examples

To help visualize the differences between procurement and supply chain management more clearly, let’s explore two scenarios:

1. A Local Bakery Preparing to Sell Its Artisan Bread

Procurement Activity: 

Your bakery’s dedicated procurement team (or the owner, in a smaller setup) sources and purchases high-quality organic flour, fresh yeast, and unrefined sugar from a carefully selected group of agricultural suppliers and regional wholesalers. 

They negotiate prices and ensure the timely and consistent delivery of these raw ingredients directly to your bakery’s production facility.

Supply Chain Management Activity:

This includes not only the procurement of all important ingredients but also the entire transformation process of those ingredients (precise mixing, careful kneading, patient proofing, and expert baking). 

It also covers the packaging of the finished loaves, inventory management of both raw ingredients and the freshly baked bread, the logistics of distributing the bread to various retail stores or directly to online customers, and even the process of managing customer returns or feedback.

2. A Technology Company Developing and Launching a New Mobile Application

Procurement Activity: 

Your company’s procurement activities include researching, sourcing, and then formally contracting with a specialized and reliable cloud hosting provider (such as Amazon Web Services or Microsoft Azure) to ensure a scalable server capacity for the new application. 

They might also be responsible for procuring annual licenses for software development tools or engaging highly skilled freelance quality assurance testers for specific project phases.

Supply Chain Management Activity:

Often referred to as a “Value Chain” for service-based businesses, this view includes not only the initial procurement of cloud infrastructure and development tools but also the entire, often iterative, software development lifecycle itself (which involves detailed coding, rigorous unit and integration testing, and systematic debugging). 

It further extends to the marketing and sales efforts needed to attract and convert users, the digital delivery and download process of the application, the provision of ongoing customer support and technical assistance, and the critical long-term management of app updates, security patches, and feature maintenance.

What Are the Steps In the Procurement Process?

The procurement process can vary by organization, but most follow a common structure. Here’s a typical procurement flow:

• Identify the business need.
  Department heads, managers, or stakeholders determine what goods or services are required and justify the purchase. Inventory control ensures the business maintains the right stock levels—enough to operate efficiently, but not so much that it ties up capital.
  
• Submit a purchase requisition.
  If a preferred supplier exists, the request is submitted for approval. The designated team reviews the requisition to ensure it aligns with business goals before it advances.
  
• Issue an RFQ if no supplier is available.
  If there’s no existing supplier, the procurement team sends out a Request for Quotation (RFQ). Through market research or tendering, analysts evaluate potential vendors based on pricing, quality, and value.
  
• Review and approve requisitions.
  All purchase requests go through an approval process where department leads and stakeholders validate the need, check available funding, and finalize the technical specifications.
  
• Make the purchase.
  After approval, contracts are negotiated, vendors are selected, and the goods or services are delivered. A 3-way match process ensures the purchase order, invoice, and received items align before payment is made.
  
• Record the transaction.
  Post-purchase, the procurement team documents the transaction in a centralized system. This step is vital for future audits, performance tracking, and resolving any disputes or discrepancies.

Among the sub-processes of procurement are demand planning and forecasting, the selection of suppliers, vendor negotiations, and KPI assessment.

Procurement KPIs

It’s much easier to understand the progress and performance of your business when you have KPIs to measure against. If any of these metrics dip below acceptable levels, procurement teams will know exactly when adjustments should be made. The following are the essentials.

• Purchase order cycle time, cost of each PO, and lead time.
• Supplier availability, quality, and compliance level.
• Return on investment, including savings and cost avoidance.

Procurement key performance indicators come in many forms. Additional ways to measure success include:

• Inventory. Warehousing management is a common bottleneck for procurement efficiency. KPIs to measure here include stock and fulfillment accuracy, back order rate, and inventory turnover.
• Employees. How effective is your staff training? What percentage of your employees are performing well or underperforming? Questions like these matter since staff productivity has immense implications for procurement.
• Timeframe. Speed can be just as important as cost when it comes to inventory procurement. Pay attention to lead time, purchase order cycle time, and other factors.
• Return on investment. There are always ways to optimize your investment, whether it’s determining cost per order or finding competing suppliers to purchase from.

Measuring success through KPIs not only helps you track progress but also convinces upper management of the importance of procurement.

Why Procurement Needs Technology

Manual procurement processes are often slow, disjointed, and costly. Common pain points include:

• Disconnected Systems: Finance and procurement often operate on separate platforms, creating misalignment.
• Fragmented Communication: Critical conversations across email, Slack, or in-person are hard to track.
• Poor Supplier Collaboration: Lack of clarity around documentation frustrates vendors and slows down onboarding.
• Limited Budget Visibility: Reactive budgeting leads to overspending.
• Supplier Confusion: No centralized vendor list leads to inconsistent and inefficient purchases.

The Role of Procurement Software

Procurement software (eProcurement) centralizes and automates key activities, helping businesses:

• Improve Forecasting: AI and machine learning predict demand and optimize spend.
• Streamline Data Capture: OCR and Intelligent Document Processing eliminate manual invoice entry.
• Enhance Vendor Collaboration: Supplier portals enable self-service onboarding and real-time communication.
• Ensure Contract Control: Contract Lifecycle Management (CLM) tools track milestones, automate compliance, and simplify renewals.
• Gain Spend Visibility: Analytics dashboards surface trends, savings opportunities, and vendor performance insights.

Smarter, Scalable, and Accessible Tools

Modern eProcurement platforms offer features tailored for agility and growth:

• Integration with ERP and accounting tools
• Mobile alerts for reordering and status updates
• Auto-generation and delivery of POs and confirmations
• Cloud access for broader scalability
• Intuitive dashboards for user-friendly navigation
• Competitive bidding modules for supplier efficiency

The Future: Digital Procurement for All

From RFQ handling to contract audits, procurement software is transforming the supply chain. Automation isn’t just for enterprises—cloud-based tools now make advanced procurement tech accessible to businesses of all sizes, empowering teams to focus on strategy, not paperwork.

Streamline Every Step of Procurement

Procurement plays a vital role in both operational efficiency and long-term business growth. By embracing modern tools—from AI-powered forecasting to centralized vendor management—companies can eliminate bottlenecks, boost transparency, and unlock greater value from every transaction.

Ready to see how transformation is possible?

Learn how Tipalti’s own finance team overcame key automation challenges to build a streamlined, scalable procurement operation in the ebook, “Streamlining Finance Automation”. From supplier onboarding to global payments, their journey offers valuable insights for any organization.