What Is Procurement? Types, Best Practices, Metrics

To maintain profitability, businesses must think strategically about selecting and purchasing their goods and services.

The stakes are high: Companies identified cost reduction as the top procurement priority in 2024, emphasizing the need for effective strategies to navigate economic challenges. According to The Hackett Group, “digital world-class” organizations achieve 96% higher savings in spend cost reduction, showcasing the transformative impact of optimized procurement processes on margins and growth​..

What happens to an organization that can’t ensure a timely supply of goods and services critical for business operations? It inevitably lags behind the competition.

The solution? An effective procurement process.

By implementing digital procurement strategies, companies can reduce operational costs, enhance the quality of their software, streamline their business processes, and promote transparency across all levels of the organization. These efforts can help drive growth, increase profitability, and improve competitiveness.

In this article, we’ll explore what procurement means for your business, steps to implement it successfully, and best practices for optimizing your procurement processes.

What Is Procurement?

Procurement is the act of sourcing and obtaining goods and services necessary for maintaining business processes. It’s the overall process of purchase planning, specification determination, research, sourcing, pricing negotiations, purchasing decisions, and further supply control. The ultimate goal of procurement is to invest in high-quality, cost-effective supplies that deliver the highest possible value for the business.

Procurement vs. purchasing

Procurement and purchasing differ in scope and focus, though they often overlap in practice.

Purchasing focuses on the transactional activities of buying goods or services, such as creating purchase orders, processing payments, and ensuring deliveries. For example, a marketing team ordering branded merchandise for an upcoming event is engaging in purchasing.

Procurement involves the entire lifecycle of acquiring goods or services, from identifying needs and sourcing suppliers to negotiating contracts and managing supplier relationships. Building a long-term partnership with a logistics provider to optimize supply chain costs is a procurement activity is a good example of this.

In essence, purchasing handles the “what” and “how much,” while procurement addresses the “why” and “who” with a strategic lens.

Procurement vs. strategic sourcing

Strategic sourcing is a critical component of procurement but takes a more targeted approach to supplier selection and cost optimization.

While procurement oversees the comprehensive process of acquiring goods or services, strategic sourcing focuses on evaluating spending patterns, analyzing market conditions, and establishing supplier agreements that drive value over the long term. For example, identifying a supplier that offers sustainable materials to align with a company’s ESG goals is a strategic sourcing effort.

Strategic sourcing focuses on proactive, data-driven decision-making, ensuring procurement efforts are efficient and aligned with the organization’s broader objectives.

Why Is Procurement Important?

Procurement drives organizational success by enabling smarter purchasing decisions and building robust supplier relationships.

An effective procurement strategy goes beyond cost-cutting—it enhances efficiency, mitigates risks, and ensures businesses operate seamlessly with access to the right resources at the right time. Companies that optimize procurement processes can reduce supply chain risks by up to 25%, reflecting their critical importance to business continuity and resilience.

A well-structured procurement process delivers key benefits:

• Cost savings through streamlined sourcing, e-invoicing, and centralized tracking systems that uncover long-term cost-reduction opportunities.
• Enhanced supplier relationship management (SRM) by fostering collaborative partnerships with vendors, ensuring uninterrupted supply chains and mutual benefits.
• Improved efficiency with procurement technology that automates tasks, reduces supply chain risks, and creates a standardized process for handling repetitive workflows.
• Simplified contract lifecycle management, from creation to renewal, with predefined templates and centralized data storage that eliminates inefficiencies.

When prioritized, procurement becomes more than a functional process—it’s a strategic lever for achieving operational excellence and sustaining growth.

Types of Procurement

Procurement can be broadly categorized into two primary types: direct and indirect. Understanding these categories is crucial for optimizing purchasing strategies, streamlining operations, and reducing costs.

Here’s a closer look:

Direct procurement

Direct procurement involves sourcing the goods and services essential to a company’s core operations. These purchases are directly tied to the production of products or delivery of services, making them critical to the organization’s revenue generation and overall success.

This type of procurement often requires meticulous planning, robust supplier relationships, and precise quality control to ensure the materials or services meet the organization’s operational and market demands. Effective direct procurement strategies can drive cost savings, enhance production timelines, and ensure consistent product quality, giving companies a competitive edge.

Indirect procurement

Indirect procurement encompasses acquiring goods and services that support the organization’s day-to-day operations but are not directly linked to the creation of end products or services. Though not revenue-generating, these purchases are vital for maintaining smooth business functions, improving efficiency, and fostering a productive work environment.

Indirect procurement can cover various needs, from technology tools and facility maintenance to employee training programs and professional services. While its impact might seem less immediate, effective management of indirect procurement can significantly influence profitability by optimizing operations and reducing overhead costs.

Other types, methods, and strategies

In addition to the two main types, businesses often leverage specific procurement methods or strategies to meet their unique needs.

• E-procurement refers to the use of online platforms and tools to manage requisitioning, ordering, and purchasing. It eliminates paperwork, streamlines the procure-to-pay process, and enhances collaboration between suppliers, vendors, and customers.
• Goods procurement involves sourcing tangible items that a business needs to operate. These items may include materials for production or supplies for day-to-day operations.
• Services procurement involves contracting external professionals, agencies, or organizations to address specific business needs. This is often project-based or aimed at achieving strategic goals.

8 Steps in the Procurement Lifecycle Flow

The procurement process, often called the procure-to-pay cycle, is a structured workflow that ensures goods and services are acquired efficiently and effectively.

Here are the key steps involved, enhanced with expert insights to ensure clarity and depth:

1. Need identification: The process begins by recognizing a specific need for goods or services. This step ensures that procurement decisions align with organizational goals and prevent future disruptions. It involves understanding operational requirements and setting clear priorities to address them.
2. Purchase requisition: A purchase requisition formalizes the need by documenting detailed specifications, budget constraints, objectives, and timelines. Preliminary vendor research may also occur here, helping to identify potential suppliers that align with organizational requirements.
3. Approval of requisition: The submitted requisition undergoes a thorough review to ensure alignment with budgets and organizational policies. Approvers assess whether the requested purchase is essential and feasible, allowing organizations to manage costs effectively while maintaining operational needs.
4. Vendor assessment: Once the requisition is approved, potential suppliers are evaluated against quality, reliability, cost-effectiveness, and compliance with ethical or regulatory standards. This step often includes reviewing past performance and references to ensure the chosen vendor is a strategic fit.
5. Quotation request: Detailed requests for proposals (RFPs) or quotations (RFQs) are sent to shortlisted suppliers. This step helps organizations compare pricing, delivery timelines, and additional terms to identify the most suitable option. Clear communication during this phase prevents misunderstandings down the line.
6. Negotiation and contract finalization: After selecting a supplier, negotiations occur to secure favorable pricing, delivery terms, and service levels. A formal contract is then drafted, detailing all agreed-upon terms to ensure accountability and mitigate risks. This document becomes the foundation of the procurement relationship.
7. Receipt and inspection of goods/services: Once the goods or services are delivered, they are inspected to verify compliance with the agreed-upon terms and quality standards. Timely reporting of discrepancies is critical to addressing issues promptly and maintaining accountability.
8. Supplier relationship management: Post-purchase, maintaining a strong relationship with the supplier ensures long-term collaboration. This involves regular communication, performance reviews, and providing feedback to build trust, resolve challenges, and enhance future transactions.

Each step plays a key role in creating an efficient, transparent, and effective procurement process. Implementing them ensures that your organization is equipped to meet operational needs while fostering strategic partnerships with suppliers.

Procurement KPIs & Metrics to Monitor

Measuring the effectiveness of the procurement efforts is the crucial step toward building a solid process. Here are essential procurement metrics to track, analyze, and optimize your source-to-pay activities and processes:

• Purchase order cycle time: The average time it takes to process requisitions and transmit purchase orders to vendors.
• Supplier lead time: The average time between sending a purchase order and receiving supplies.
• Supplier defect rate: The number of procured products or services that don’t meet quality specifications out of the total number of supplies.
• Supplier onboarding time: Measures the time taken to onboard a new supplier, including due diligence, contract negotiation, and system integration. Shorter onboarding times speed up the procurement process.
• Fulfillment accuracy: Measures the number of accurately fulfilled orders out of the total number of orders.
• Spend under management: Indicates the percentage of total procurement spend that is managed through formal procurement processes. Higher percentages suggest better control and oversight of spending.
• Order-to-cash cycle time: Tracks the time from placing an order with a supplier to receiving the payment. Reducing this time improves cash flow and operational efficiency.
• First-time match rate: The percentage of invoices that match the purchase order and goods receipt the first time without discrepancies. Higher match rates reduce the need for manual intervention and rework.
• Touchless invoice processing rate: The percentage of invoices processed without manual intervention. High rates of touchless processing signify effective automation and streamlined workflows.
• Contract approval cycle time: Tracks the time taken to review, approve, and finalize contracts. Reducing this cycle time accelerates the procurement process and enhances agility.
• Procurement process accuracy: The rate of errors in procurement processes, such as incorrect orders or payments. Higher accuracy minimizes costly rework and disruptions.

Best Practices for Procurement Optimization

Optimizing procurement isn’t just about finding the best deals—it’s about creating a system that balances efficiency, risk management, and strategic value. These best practices can help refine your procurement process and drive measurable results.

1. Identify and mitigate risks

Procurement involves risks, from price volatility and supply chain disruptions to compliance issues and quality concerns. Identifying potential risks early is essential for maintaining operational stability. Implement a risk management framework that includes robust forecasting, supplier diversification, and contingency planning. Tools like supply chain management software can help predict and prevent disruptions, while clear contract terms safeguard against disputes and ensure adaptability to unforeseen changes.

2. Optimize inventory management

Effective inventory optimization requires more than simply balancing supply and demand—it’s about aligning inventory levels with broader business goals. Use real-time data to track inventory turnover, predict future needs, and minimize carrying costs. Advanced analytics and inventory management tools can streamline this process, ensuring you avoid stockouts without overinvesting in surplus inventory that ties up capital.

3. Strengthen vendor management practices

Strong vendor relationships are the backbone of successful procurement. A comprehensive vendor management strategy should build trust, foster collaboration, and ensure accountability.

Centralized vendor communication and performance monitoring systems can simplify processes like invoice approvals and compliance tracking. Regular performance reviews and open lines of communication also help create mutually beneficial partnerships, enabling better pricing and more reliable service delivery.

4. Establish a custom workflow

Every organization has unique needs, and a one-size-fits-all procurement strategy rarely works. Develop a custom workflow that reflects your company’s structure, goals, and industry requirements.

An effective workflow should outline clear steps for procurement approvals, budget checks, and vendor selection while incorporating tools like digital adoption platforms to onboard employees and streamline process adherence. This tailored approach reduces inefficiencies and supports informed decision-making.

5. Leverage e-procurement automation solutions

Manual procurement processes are time-consuming and prone to errors and inefficiencies. Embracing e-procurement technology enables automation of repetitive tasks such as purchase orders, vendor tracking, and compliance checks. This frees up resources for strategic activities like cost analysis and supplier negotiation. Automation also helps enforce consistency, ensuring every transaction adheres to established policies and standards.

6. Prioritize sustainability and compliance

Incorporating sustainability into procurement practices is no longer optional—it’s a business imperative. Evaluate suppliers on cost and their environmental, social, and governance (ESG) practices. Developing policies prioritizing ethical sourcing, waste reduction, and energy efficiency can lead to long-term benefits like enhanced brand reputation, compliance with regulations, and alignment with consumer expectations.

By implementing these best practices, organizations can transform procurement into a strategic advantage that drives operational excellence and long-term value.

How to Drive E-Procurement Adoption with Whatfix

Adopting e-procurement tools can revolutionize your procurement process, but ensuring seamless adoption requires a thoughtful approach to onboarding and training. Whatfix empowers teams to confidently navigate new systems and workflows while maximizing the value of e-procurement platforms.

Whatfix makes e-procurement adoption effortless by offering:

• Interactive onboarding and training: Equip employees with the knowledge and skills they need to use your e-procurement tools through contextual, step-by-step guidance directly within the application.
• Sandbox environments with Whatfix Mirror: Enable users to practice and explore workflows safely in a test environment, building confidence before live implementation.
• Guided experiences for new user onboarding: Simplify complex processes with in-app walkthroughs that guide users through key features and functions, ensuring a smooth transition.
• Integrated support flow: Reduce disruptions by embedding self-help content, FAQs, and troubleshooting guides within your e-procurement tool for on-demand support.

By streamlining adoption, Whatfix helps organizations unlock the full potential of their e-procurement platforms, driving efficiency and value.

Partner with Whatfix to transform your e-procurement journey today.