Procurement

Procurement: Definition, Process, and Key Concepts

Key takeaways
* Procurement is the strategic process of sourcing and acquiring goods or services needed by a business or government agency.
* It includes steps beyond the purchase transaction—specifying requirements, supplier selection, contract negotiation, delivery, and payment.
* Procurement differs from purchasing: procurement is strategic and relationship-focused; purchasing is transactional and price-focused.
* Organizations use competitive bidding (e.g., RFPs) to evaluate suppliers, but the lowest bid is not always chosen.

What is procurement?
Procurement is the end-to-end process of obtaining goods or services that an organization needs to operate. It covers everything from defining needs and researching suppliers to negotiating contracts, receiving deliveries, and approving payments. Procurement is an essential component of supply chain management and can strongly influence cost, quality, and operational continuity.

How procurement works
The procurement lifecycle typically includes:
* Requirement definition: setting specifications, standards, and forecasts for needed goods or services.
* Supplier research and solicitation: identifying candidates, issuing requests for quotes/proposals (RFQs/RFPs), and collecting bids.
* Evaluation and negotiation: comparing cost, quality, delivery, risk, and service terms; negotiating price and contract clauses.
* Order and fulfillment: placing orders, tracking deliveries, inspecting received items or services.
* Payment and recordkeeping: approving invoices, processing payments, and recording transactions for accounting and audit.
* Supplier relationship management: monitoring performance, addressing issues, and renewing or rebidding contracts as needed.

These activities often involve multiple internal teams—operations, finance, legal, and inventory management—to ensure alignment with strategic and budgetary goals.

Competitive bidding
Many organizations use competitive bidding to select suppliers. Common elements:
* Request for proposals (RFPs) or RFQs: formal documents that describe needs and evaluation criteria.
* Bid evaluation: considers price, quality, delivery timelines, technical capability, compliance, and total cost of ownership.
* Award decision: may prioritize long-term value, supplier reliability, or regulatory compliance over the lowest price.
Competitive processes are particularly common in public procurement, where transparency and fairness are required.

Types of procurement
Procurement is commonly categorized into four overlapping types:
* Direct procurement: Goods and services directly involved in production (e.g., raw materials, components).
* Indirect procurement: Items that support operations but are not part of the final product (e.g., office supplies, maintenance services).
* Goods procurement: Acquisition of physical products (can be direct or indirect).
* Services procurement: Acquisition of labor or professional services (can be direct, like production labor, or indirect, like security or marketing).

Note: Companies usually manage budgets and processes differently for direct versus indirect procurement because of their different impacts on cost of goods sold and operations.

Procurement vs. purchasing
Key distinctions:
* Scope: Procurement is strategic and holistic; purchasing is the execution of buying transactions.
* Focus: Procurement prioritizes long‑term value, supplier relationships, compliance, and total cost; purchasing focuses on price and immediate need.
* Activities: Procurement includes specification, sourcing, contract management, and supplier performance; purchasing typically covers order placement, receipt, and payment.
* Outcome: Procurement aims to optimize business outcomes across the supply chain; purchasing fulfills specific requisitions.

Accounting and organizational structure
Procurement activities are integrated into financial accounting because they affect costs, inventory, and budgets. Typical organizational elements:
* Procurement specialist/manager: handles day-to-day sourcing and supplier management.
* Chief Procurement Officer (CPO): an executive role in larger organizations that sets procurement strategy, standards, and governance.
* Collaboration with accounts payable: ensures timely payment, invoice reconciliation, and internal controls.

Common questions
What is public procurement?
Public procurement (government procurement) is the process by which government entities buy goods and services from the private sector, often subject to specific rules for transparency and competition.

Is procurement the same as purchasing?
No. Purchasing is one step within the broader procurement process. Procurement includes pre‑purchase activities (specification, sourcing) and post‑purchase activities (contract and supplier management).

Can procurement be centralized or decentralized?
Yes. Organizations may centralize procurement to gain leverage and consistency, or decentralize it to give business units autonomy. Hybrid models are common.

The bottom line
Effective procurement reduces costs, mitigates supply risks, and improves operational performance. By treating procurement as a strategic function—rather than merely a transactional activity—organizations can secure better value, stronger supplier relationships, and greater alignment with long‑term goals.