Procurement: A complete guide plus tips to boost efficiency

Procurement plays a critical role in stabilizing cash flow and maximizing profitability—two essential factors in an unpredictable market. It enables organizations to get the goods and services they need at the best prices and under the most favorable terms. 
 

However, to make the most of procurement's benefits, teams must understand its role in business operations and how to boost its efficiency. With the right mix of procurement strategies, companies can streamline the process and increase cost savings.
 

What is procurement?

Procurement is the process of finding and obtaining the goods, services, and raw materials a business requires to operate. It involves identifying a need and researching suppliers before negotiating contracts, making purchases, and managing supplier relationships.
 

Depending on a company's size, a procurement team or a single procurement manager may handle the procurement process. Some industries, like education, healthcare, hospitality, nonprofits, and government, have more complex procurement needs due to the volume and variety of goods they need to operate. They might also have to adhere to specific compliance requirements.
 

Understanding procurement vs. purchasing

Businesses often use the terms procurement and purchasing interchangeably, but the processes vary in scope. Procurement includes sourcing and negotiating necessary items, while purchasing focuses solely on the actual purchase and payment process. 
 

Examples of activities that take place during the purchasing process include creating purchase orders, processing payments to suppliers, and managing invoices. Purchasing can be seen as a subset of procurement that fits within the broader procurement process.
 

Why a good procurement process is so important

An effective procurement strategy is essential for all types of organizations. It impacts cost control, supplier management, and overall efficiency, leading to the following benefits:
 

• Cost savings: Procurement involves negotiating favorable contracts, consolidating spending across suppliers, and reducing waste by preventing unnecessary purchases.
• Goal alignment: Procurement helps ensure the company buys goods and services that directly support its strategic priorities, such as innovation and sustainability.
• More responsible, compliant purchasing: A detailed, intentional procurement process ensures merit-based decisions that follow regulations.
   

The 8 stages of the procurement process

While the procurement process varies between companies, it generally follows these overarching steps:
 

1. Identify company needs: The procurement lifecycle begins when someone inside your organization identifies a need for a good or service.
2. Plan: Procurement considers the demand for the product or service by analyzing current market trends and assessing procurement risk to inform purchase quantity.
3. Make a purchase request and get approval: Many companies require employees to file an internal document known as a purchase requisition, which is a formal request to make a purchase.
4. Assess and select vendors: This step may include gathering quotes or initiating competitive bidding from potential suppliers before evaluating options and choosing the best fit.
5. Negotiate contract and terms: Here, the supplier and purchaser work together to agree on pricing and terms.
6. Create a purchase order: Procurement then sends a purchase order to the seller as a formal offer detailing the items they want to buy.
7. Receive your purchase(s): You receive the items or services your organization purchased and ensure they meet specifications.
8. Keep records: The record-keeping step includes maintaining data on the contract, purchase order, and seller as part of monitoring the relationship.

Types of procurement and procurement management

Types of procurement and procurement management vary based on the level of spend control, how purchases are used, and purchasing needs. Understanding the differences between common types of procurement initiatives can help you optimize your purchasing strategies, improve your decision-making, and align your procurement practices with organizational goals.
 

Managed spend vs. tail spend

The expenses a business actively controls by strategically selecting suppliers, negotiating contracts, and overseeing purchasing activities are called managed spend. Tail spend is ad hoc spending that’s typically unmanaged due to low cost and purchasing volume or varied suppliers.
 

Although tail spend accounts for only about 20 percent of a company’s total spend, it makes up roughly 80 percent of total transactions. Structuring tail spend as part of a smart business buying strategy can make it more manageable and uncover hidden savings opportunities. Additionally, implementing a managed spend strategy aids in establishing a list of preferred vendors, negotiating better prices, and simplifying purchasing. 
 

Direct vs. indirect procurement

Direct procurement is purchasing raw materials used to produce your company’s core product or service. Indirect procurement is purchasing materials or services that support your company’s operating ability but aren’t part of the final product.
 

For example, purchasing wood used to build a home is an example of direct procurement, whereas purchasing a tablet that a home builder uses to organize contractor schedules is indirect procurement.
 

Both types of procurement are critical for business operations, as they support key functions. However, direct procurement typically has a greater impact on the quality of individual products, while indirect procurement influences efficiency and overall operations. 
 

Goods vs. services procurement

Goods procurement is the process of purchasing products, while services procurement involves acquiring services. Goods procurement typically covers physical items like office supplies or machinery, but it can also include software. Services procurement may involve hiring IT companies, consulting services, or building maintenance crews.

Tactics to boost procurement efficiency

Because procurement plays such an important role in a company’s bottom line, having a procurement strategy that improves efficiency is essential. A few simple tactics will get you started.
 

Set procurement KPIs

Key performance indicators (KPIs), spend analytics, and industry benchmarks help organizations keep tabs on their performance against their goals. If your goal is greater efficiency, consider implementing procurement KPIs like the following:
 

• Purchase order cycle time: How long it takes for a business to process a purchase order, from creating a purchase requisition to sending the PO to the supplier
• Supplier lead time: The time between a supplier receiving an order and shipping it out
• Emergency purchase ratio: The number of unplanned or emergency purchases against the total number of purchases over a set period
• Spend under management: The proportion of total spend the procurement team manages 
• Procurement ROI: The overall performance and profitability of the procurement department
   

Using specific methods to measure your procurement performance helps identify areas for improvement and drive continuous progress.
 

Keep an eye on compliance

Noncompliance with procurement policies and government regulations can lead to legal issues, financial losses, and reputational damage. For these reasons, ensuring the entire company makes compliant purchases is essential. Tools like Guided Buying can help direct purchasers to stay within purchasing guidelines.
 

If all of your organization’s purchases aren’t coming through a dedicated procurement department, you must educate the entire company on how to buy the right goods and services. This may mean creating FAQ sheets or resource guides to clarify which items or suppliers align with the organization’s policies as well as reminding employees to stay within budget limits.
 

Centralize your data

If purchasing data is scattered across departments and platforms, centralizing it, especially with procurement software, can significantly improve efficiency. By storing procurement data in one location and regularly analyzing it, you: 
 

• Gain a holistic view of the company’s spending activities
• Move from reactive to proactive procurement
• Identify cost-saving opportunities
• Compare suppliers to select the best vendors 
   

A strong procurement system with built-in analytics makes accomplishing these objectives easier. Using forecasting tools allows organizations to predict challenges through historical data. When integrated with AI, they can even help predict supply chain disruptions. 
 

Using tech solutions to centralize data can also help organizations make progress toward their responsible purchasing goals by helping them measure the success of environmental, social, and governance (ESG) initiatives. This allows them to report on their consolidated spend with all their diverse suppliers, including certified small, local, and/or diverse sellers.
 

Expand and strengthen your supplier network

Building strong supplier relationships improves procurement efficiency by streamlining ordering workflows, enabling faster problem-solving, and creating a more predictable flow of goods. It reduces the time needed to research additional vendors and solicit new quotes while fostering quicker, more effective communication.
 

Ongoing supplier partnerships can offer shared accountability and collaboration for mutual growth. However, it can also be beneficial to maintain a large supplier network to open up cost-saving opportunities for your business.
 

Finding the right procurement strategy for your business

The ideal mix of procurement strategies varies by business and depends on factors like industry requirements, compliance needs, and scalability. 
 

Many businesses use the 80/20 rule (the Pareto Principle) to focus on the 20 percent of purchases that account for 80 percent of expenses. By prioritizing these high-cost purchases, companies highlight areas for impactful changes. 
 

However, smaller transactions add up, so it's essential to manage these purchases as well. Consider using a self-service procurement platform with built-in features that let you configure spending limits within your buying policies and allocate certain budgets to individual users.
 

Automation also helps optimize procurement. It aids in streamlining administrative tasks such as creating purchase orders, gathering approvals, and processing each supplier’s invoices. Automation leads to benefits like:
 

• Improved data accuracy
• Increased compliance
• Decreased cost savings from time savings
• Quicker vendor selection

Case study: How HAQM Business helped the USO optimize procurement

HAQM Business combines the convenience and value you expect from HAQM with features that help improve procurement management. We offer benefits like business-only pricing, a large selection of items, and Business Prime, which provides fast, free shipping on eligible items.
 

In 2017, the United Service Organizations (USO) worked with HAQM Business to start sourcing supplies via our integration with the procure-to-pay solution Coupa. Within five months, the USO rolled out the program to its entire global organization of 250 locations. 
 

Today, nearly 80 percent of all USO spending goes through this e-procurement integration, and between 80–90 percent of all spend is confirmed as the best pricing available. 
 

As a result, the USO has seen advantages like the following:
 

• Reduced processing times: Tasks like approving payable invoices and reconciling expense receipts, which used to take five to seven days, now only take two days.
• Faster delivery: Supplies that arrived in between two and five weeks from other suppliers now often get delivered in two days.
• Lower shipping costs: The organization uses Business Prime for the acquisition of goods, which typically results in free shipping.
• Improved spend visibility: The use of a centralized system across locations provides greater visibility into spending, helping the USO track how donor dollars are spent across time zones.
• Greater regional autonomy: Center directors in all locations manage their own regional budgets and purchases, allowing them to get what they need more quickly and efficiently.

Improve your procurement practices with HAQM Business

Developing a successful procurement strategy can lead to significant cost savings, time savings, payment efficiencies, and greater visibility and control over purchasing so you can continually improve your procurement process. 

Discover how HAQM Business streamlines procurement. Create a free account or contact sales today.