What is Procurement: Meaning, Process Flow, Types, Examples

Procurement is a strategic function that creates value and competitive advantage for businesses. It can help enterprises to reduce costs, increase efficiency, and mitigate risks. They can achieve this by acquiring the best quality products at the best possible prices.

But what is procurement? Continue reading to understand the meaning of procurement and how the procurement lifecycle works. 

What is Procurement?

Procurement involves obtaining goods and services from external sources to fulfil business needs. It is a business function that aims to reduce costs while getting the most value from the purchase. The process involves activities such as planning, supplier evaluation, negotiating the terms, purchasing the goods, and receiving and inspecting the goods, all while maintaining records for every stage in the process.

Procurement processes are resource-intensive and can impact a company’s bottom line. The procurement process can greatly boost profits by optimizing and aligning the same with business goals.

For example, A Pvt. Ltd. wants to buy laptops for its employees. Here’s what the procurement process will look like: 

1. A identifies how many laptops it needs, what specifications and features the employees need, and its budget for the purchase. 
2. It ranks laptops according to their features, delivery timelines, and impact on business goals. It also considers suppliers, their availability, prices, service quality, and reliability.
3. It gets approval from the management and submits a formal purchase requisition to the procurement department —an internal document authorising the purchase— after getting the same approved by the relevant managers.
4. The procurement department files a request for quotation (RFQ) to potential suppliers — inviting them to submit bids. 
5. The department receives the bids, evaluates them, and selects the most suitable supplier. 
6. Then, it creates a purchase order — an official document confirming the laptop order with the supplier. 
7. When the supplier delivers, the procurement department receives and inspects the laptops. If there are any defects, the department connects with the supplier to resolve them.
8. Once it receives the invoice, A’s procurement department passes on the same to the accounts payable team for verification, accounting, and payment.

Types of Procurement 

Procurement can be classified into the following types depending on how the company procures the products and uses them:

Based on the method of procurement:

• Direct: Procuring products used in the production/manufacturing process. For example, raw materials and machinery.
• Indirect: Procuring products to meet operational needs. For example, laptops and office supplies.

Based on the type of supply: 

• Goods: Procuring physical products to meet the basic needs. For example, raw materials. It may also include software.
• Services: Procuring services performed by other people. For example, consultancy or legal services. 

As described earlier, goods and services procurement can be further divided into direct and indirect procurement. 

Procurement Process in India 

A detailed procurement process looks like this:

1. Identify business needs: This is the first step in understanding the products and services that your business needs and forming a specific plan to obtain the same at a reasonable cost and within a defined timeframe.
2. Purchase requisition: Purchase requisitions are documents raised by customers/internal users to request the procurement department to fulfil an existing need. It contains important information such as the description of the item, quantity, price, and reason for purchase.
3. Reviewing requisition: The procurement team can only start its operations once the finance team or the manager has approved the purchase requisition.
4. Creating a solicitation process: When a requisition is accepted, the procurement team will put together an individual procurement strategy and a solicitation plan. After the budget is agreed, the procurement team sends out requests for quotation (RFQ) to suppliers to obtain and compare offers to shortlist the best supplier. 
5. Evaluate contracts: Once the solicitation process has been closed, the procurement team will review and evaluate the best-suited supplier based on quotations and delivery timelines. After finalising the supplier, the procurement team creates a contract that specifies the terms and conditions of the supplier partnership, as well as consequences in case there is a breach. Once this contract is finalised, a PO is sent to the supplier, who accepts it, and the contract is activated. 
6. Order management: The supplier provides the promised goods/services within the time frame specified. Following this, the procurement team inspects the order and informs the supplier of any problems.
7. Approve invoices: The supplier sends the invoice once the product review has been completed. This is matched with the PO and the delivery note. The accounts payable department then gets the necessary approvals, and the finance department makes the payment to the supplier according to the payment terms agreed in the PO.
8. Record keeping: The procurement department maintains records of all the transactions and documents in a centralised location. This helps monitor the performance of the suppliers as well as adjust strategies to improve cost savings.

Key Challenges in Procurement 

Some key procurement challenges in the complex and changing business environment are:

• Contract management: Ensuring transparent, fair, and flexible contracts with suppliers, especially in uncertain or volatile times.
• Supplier onboarding: Establishing a smooth and streamlined process to onboard new suppliers and vendors, including:
  • Verifying their credentials, qualifications, and capabilities
  • Conducting due diligence and risk assessments
  • Negotiating contracts and terms and 
  • Setting up payment and delivery arrangements.
• Internal communication: Communicating effectively with internal stakeholders, such as managers, departments, or functions, to avoid misunderstandings, conflicts, delays, or missed opportunities.
• Process efficiency: Eliminating or minimising waste or redundancy in procurement processes to reduce delays, errors, rework, or dissatisfaction.
• Risk management and mitigation: Identifying, assessing, monitoring, and mitigating potential risks affecting procurement operations or performance, such as supply chain disruptions, supplier failures, compliance violations, reputational damage, or legal issues.
• Manual processes: Following conventional manual procurement processes often lead to errors, delays, and bias, which can affect the efficiency of your operations. 
• Lack of visibility: Having limited visibility of the procurement process can make it difficult to track spending, monitor supplier performance, and identify potential risks.

How to Optimize Your Procurement Process 

To optimize your procurement process, you can follow these steps:

• Review alignment with business goals: Ensure your procurement process supports your objectives and direction. For example, if cost reduction is your business goal, your procurement processes should focus on finding cost-effective suppliers and negotiating favourable terms.
• Map and analyse the current procurement process: Document the existing workflow and activities involved in your procurement process. Identify the importance and resources involved in each step. Then, analyse the transitions and interactions between each step and stakeholders in your procurement process. Look for gaps, bottlenecks, or delays that may impact the bottom line.
• Create a list of automation opportunities: Evaluate the potential benefits of automating some or all of the tasks and activities in your procurement process. Automation can help you save time, reduce errors, increase accuracy, and enhance productivity.
• Conduct a spend analysis: This means identifying and examining your procurement expenses. This helps you come up with strategies to decrease costs, increase efficiency, or improve supplier relationships.
• Centralise the procurement function: Unlike decentralised procurement, where you purchase goods from various locations/units, centralised procurement manages all purchases from a single headquarters. This helps you streamline your operations, enhance risk management, and better manage your spending.

Future Trends in Procurement in India 

Procurement functions in India are likely to take a sustainable and digital turn shortly, with many companies already initiating such transformations: 

Digital transformation of procurement

Procurement in India is likely to adopt and implement more digital solutions that can enhance the efficiency and effectiveness of the procure-to-pay (P2P) process. 

These solutions can help procurement to automate and simplify workflows, reduce costs and errors, improve data quality and analytics, and increase transparency and collaboration. 

Sustainable sourcing

Companies in India are turning out to be more environmental-conscious and likely to procure products from environmentally-conscious suppliers (this process is called sustainable sourcing). 

Supplier-centricity and innovation

Procurement teams are likely to develop strategic partnerships with suppliers who can offer value-added services and competitive advantages. 

Procurement can leverage the suppliers’ expertise, capabilities, and networks to address business needs and challenges, such as sustainability, agility, quality, and risk management.