What Is Business Procurement? (Plus Types and Examples)
By Indeed Editorial Team
Published April 14, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Business procurement is the process of purchasing goods and services from a source external to the business. The procurement process involves sourcing products, negotiating purchasing terms, purchasing the items, thoroughly inspecting them and keeping detailed records of each step in the process. Learning more about business procurement can help you ensure the proper function of the business for which you work. In this article, we discuss what business procurement is and how it works and provide a list of specific types of procurement, along with examples demonstrating how companies procure goods and services.
What is business procurement?
Business procurement is the act of a business acquiring a good or service for its own use. Companies regularly obtain goods and services to carry out their regular business functions. Smaller businesses typically procure goods and services on a much smaller scale than larger corporations. The goods and services that a company procures might include raw materials, maintenance supplies, consumer products, processed materials, office equipment, site planning, marketing services or recruitment.
The procurement process involves both a buyer and a seller. It's especially important because it helps companies of all sizes find reliable suppliers that can provide the goods and services that meet their unique needs. It also has a range of benefits to businesses, from helping to streamline complex processes to potentially reducing the costs of raw materials. For example, a company that requires an ongoing service like email security can choose a provider that best meets its requirements at a competitive price through the procurement process.
How does business procurement work?
The procurement process typically involves a number of distinct steps and may even require using a large portion of a company's resources. It also tends to be ongoing, meaning the business can create relationships with suppliers to continue to procure goods over an extended period of time. The procurement process generally includes the following steps:
1. Identifying the goods and services the company requires
The first step typically involves the company identifying its individual requirements for specific products or services. These requirements may be long or short, depending on factors like the size of the company or the time of year. The items may include new products or services the company has never purchased before. A company might also restock existing goods or renew a service subscription. At this stage, businesses often analyze a variety of details to better determine their needs, including specific service characteristics, detailed parts specifications and budgetary constraints. Procurement professionals might also meet with individual department heads.
2. Submitting a formal purchase request
A purchase request is often necessary when a company plans to purchase a large number of new goods or services. The purchase requisition is a formal document an employee or department creates to request formal permission to purchase goods or services on behalf of an organization. The document notifies the company that a purchase is necessary.
It also includes various specifications, such as the price of the goods, the time frame to make the purchase, the necessary quantity of goods and other important information. The department that manages procurements reviews the document and either approves or denies the request. If the department approves the request, the procurement team can then begin to select a vendor.
3. Selecting vendors
Vendor selection involves deciding on the right vendors and submitting a request for quote (RFQ). An RFQ is a solicitation for goods and services that allows a company to give competing vendors the chance to submit their prices. Besides price, vendor selection frequently involves assessing vendors on their reputation, timeliness, quality and overall reliability. Some companies also include the social responsibility of their supplies. For example, a company that strongly values environmental responsibility may choose a supplier that only uses sustainable materials.
Related: What Is a Vendor?
4. Negotiating price and purchase terms
After selecting a few vendors, a company's purchasing team typically spends some time examining each quote they obtained before negotiating purchase details, like the price. Most companies obtain at least three quotes from suppliers so that they have alternatives if a deal doesn't go as planned. Once the company agrees on the final purchase terms, it reviews the purchase and gets it in writing. After both parties sign the agreement, it becomes a legally binding contract between the buyer and the seller.
5. Receiving and inspecting the goods or services
The final step in the business procurement process involves the company receiving the goods or services and thoroughly inspecting them for potential errors or physical damage. If there's any damage, the company can notify the seller. Companies generally want to ensure the product or service quality meets or exceeds their expectations before making another order with the same supplier. After receiving and inspecting the order, the company records the order, including price negotiations, receipts, invoices and any other records associated with it. Keeping a record can be useful in future negotiations and may prevent potential disputes.
Types of procurement
There are a few ways companies categorize their procurements. Typically, this categorization depends on how the company plans to use the items it's in the process of procuring. Here are the most common types of procurement activities:
Direct procurement is the purchase of anything that's necessary to produce a final product. For a manufacturing company, this might include raw materials or machinery. While this type of procurement is most common with manufacturing firms, service-oriented companies can use it to purchase services. For a service company, direct procurement might include skilled personnel. Businesses frequently make direct procurement purchases because it's a key source of revenue for them.
Indirect procurement involves purchasing items that a firm might not directly use to produce a product or service but are still essential for the daily operations of the organization. Indirect procurements don't increase revenues like direct procurements, but they help the company operate efficiently. These procurements might include office supplies, office furniture, advertising campaigns, IT services or equipment repair services.
Goods procurement consists of the purchase of physical items and is most common with manufacturing companies. It might also include items that aren't physical, such as software subscriptions. This form of procurement may include a combination of both indirect and direct procurement, and it generally requires effective supply chain management practices like supply, production, inventory and tracking planning.
Services procurement focuses on procuring nonphysical services that involve people. Depending on the individual company and its needs, this might include purchasing on-site security services, using contractors, hiring lawyers or leasing vendors to assist with an event. Like goods procurement, this form of procurement can procure goods both for both indirect and direct use.
Examples of business procurement
Here are a few examples of business procurement in different industries:
Automobiles Galore is a car manufacturer that specializes in producing a variety of cars, trucks and SUVs. The company directly procures mechanical components like engines, transmissions, batteries and alternators from a few trusted suppliers. These parts go into producing vehicles that are both highly fuel-efficient and long-lasting.
Electronics company example
WorldPhone Connect, LLC is an electronics company that sells a variety of mobile devices, laptops, computers, scanners, office appliances and monitors. The company is planning to expand into the kitchen appliances market and procures an external consultant to educate the team on the latest trends in this segment of the market. The consultant also helps WorldPhone Connect devise an effective marketing strategy.
Events company example
Rachel's Event Planning is an events company that assists smaller organizations with organizing their corporate events and outings. The company's sales team uses telephones to make calls to prospects and learn more about their specific needs, but the phones they use are getting old. Rachel's Event Planning procures newer phones from a supplier to better support the team in its efforts.
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