If you are fresh in entrepreneurship with limited business experience under your belt, you likely have a lot to learn before your business becomes a success. One of the most important aspects of business that new business owners might not know much about is the area of procurement. This guide should help you understand all the essential elements of procurement, from different types to various processes to assorted technologies, so you can build a business that lasts.

What Procurement Is

Procurement is the act of obtaining goods or services for a business. Contrary to sourcing, which is focused on identifying, researching and managing suppliers, procurement is concerned with securing the resources an organization requires for day-to-day operation. Procurement teams often work to maximize value while minimizing cost, though the precise processes used in procurement can vary from business to business.

Why Procurement Matters

Procurement is easily among the most important processes in business, especially within supply chain management. No business is an island; every organization relies on a complex network of other organizations to supply and demand materials, products, equipment, services and other resources. Because most businesses are highly specific in what they need to function, procurement is an invaluable process in allowing an organization to find suppliers with the right resources at the right price points. Without a procurement team, a business might waste undue time and money working with unreliable or inappropriate suppliers, which will cause that business to fail at meeting its goals — and perhaps fail altogether.

The Types of Procurement

There is no single right way to procure resources. Most organizations rely on a variety of types of procurement to ensure they have exactly what they need to survive and thrive. Some of the typical procurement categories include:

  • Direct procurement, or the procurement of resources required to produce an end product. In manufacturing, direct procurement might involve raw materials; in retail, direct procurement might involve items purchased from a wholesaler.
  • Indirect procurement, or the procurement of resources that are used in business operations. For example, office supplies like pens, computers and desk chairs or materials for advertising campaigns like billboards or online banner ads, are typically procured indirectly.
  • Goods procurement, or the procurement of physical or digital items. Generally, goods procurement teams are involved in supply chain management.
  • Services procurement, or the procurement of people-based services. There is a wide range of services that businesses can rely on, from contingent labor to secondary businesses and more.

The Steps in the Procurement Process

As mentioned above, the procurement process can look different in different organizations. Some business structures restrict procurement to issuing purchase orders and making payments, but most procurement teams have a wider range of responsibility. The typical stages of the procurement process look like this:

  • Identify the company’s needs. Consult with different business departments to determine what resources would benefit operations.
  • Submit purchase request. This notifies the company that a need exists and prepares the department in charge of cash flow to prepare for an expenditure.
  • Select vendors. Procurement must develop a set of requirements for vendors, request quotes from those that fit the requirements and perform other assessments to identify which vendors are most appropriate.
  • Negotiate price and other terms. Generally, procurement teams strive to obtain three quotes from different suppliers to better understand industry pricing before negotiating with the best vendor to make a deal.
  • Create purchase order. Purchase orders should be detailed documents that inform suppliers what, exactly, a company wants and expects.
  • Receive resources. It is good practice to inspect goods and services, even if a business has maintained a supplier relationship for years. Procurement mistakes can be costly and can be avoided with proper inspections.
  • Approve the invoice. After verifying the accuracy of the invoice through accounts payable, the procurement department should arrange payment to vendors.
  • Keep accurate records. Because procurement is so important, detailed and accurate records on every supplier and transaction are essential.

The Principles of Procurement

Like all members of an organization, the procurement team should adhere to certain core values created and maintained by business leaders. Still, there are a handful of principles that most procurement professionals tend to be guided by in their day-to-day tasks. These principles might include:

  • Value
  • Fairness
  • Efficiency
  • Transparency
  • Integrity
  • Accountability

Generally, it is wise for entrepreneurs unfamiliar with the complexities of procurement to hire procurement experts to manage this vital field of business function. Then, with the right tools and teams in place, any business can survive and thrive.