The complete guide to procurement in business
Key takeaways:
- Procurement in business is the sourcing and purchasing of goods and services that enable the business to function.
- Procurement can be direct or indirect, and it may involve purchasing goods or services.
- The five stages of a business procurement process — statement of need, strategic sourcing, purchasing, contract management, and supplier relationship — include both limited and ongoing processes.
- Implementing a procurement strategy and relevant technologies can take a business’s procurement process to the next level.
Procurement is a set of strategic, multi-departmental processes essential to a profitable business. These processes include sourcing, negotiating terms, purchasing, receiving, and paying for goods and services while maintaining compliance and supporting the company’s needs. For example, if an organization determines a need for a SaaS solution, it will go through a procurement process to acquire it. Often, the process will begin with strategic sourcing, where a team of stakeholders develops a list of specifications and asks potential suppliers to propose their solutions. The process ends by selecting and paying for the chosen solution.
Businesses may set all of their own procurement policies or operate using a hybrid approach where some of their policies are self-established and others are mandated by a state or local government.
What does procurement in business entail?
Procurement in business begins with a statement of need from a customer or internal stakeholder. Next, the procurement team determines what process will achieve that need from a supplier. Depending on the size of the business, procurement may be handled by a large, specialized team or by one person who manages all the organization’s buying needs.
The process needed may be a simple purchase from an existing contract or it may be that strategic sourcing is needed, which requires creating a solicitation or request for proposal. If a request for proposal is needed, the procurement team will work with stakeholders to determine the rules and guidelines for evaluating proposals and suppliers.
Next, a supplier will be chosen and the procurement team will conduct negotiations before finalizing an agreement with the awarded supplier. Finally, the goods or service will be received, invoiced, and paid.
4 different types of procurement in business
All businesses, whether large or small, have some or all of the four types of business procurement. In all four types, the goal is to acquire the best-quality products at the best price.
1. Direct procurement
Direct procurement is the process of purchasing anything that will be used in the core operations of a business. For example, in SaaS businesses that develop SaaS solutions for customers, direct procurement involves anything needed to create that solution.
2. Indirect procurement
Indirect procurement supports but does not directly contribute to a business’s bottom line. This type of procurement includes things needed for day-to-day operations. This means software products that help your company run, but aren’t necessarily part of your business offering. If you use finance or inventory management software, you’ll use indirect procurement to purchase these items.
3. Goods procurement
Goods procurement can be both direct and indirect. This type of procurement involves purchasing goods or any physical items needed for the business to operate. This includes wholesale items, office equipment, office supplies, raw materials needed to produce customer orders, and maintenance, repair and operations (MRO) items. It can also include certain types of non-physical goods, like software solutions if that solution is used in the creation of an end product.
4. Services procurement
Any people-based services needed for the business’s operation falls under services procurement. This may include hiring on-site work like your labor force or other professional services like law firms, security consultants, auditors, or consulting services. Much like goods procurement, services procurement can be both direct and indirect. If a business hires a third-party to implement a SaaS solution, it would be considered services procurement.
The 5 stages of the business procurement process
There are five main stages of the procurement process or procurement cycle.
1. Statement of need
The statement of need is the first stage of procurement in business. The statement may take the form of a purchase requisition or purchase request, an email or phone call, or a cross-functional team meeting to address a more complex need.
This stage usually involves the procurement team and one or more stakeholders involved in the need. For example, if the need is a SaaS product for a marketing team, stakeholders would include marketing representatives, an IT representative, and anyone else that would be involved in implementing or using the solution. At this stage, it is determined whether the procurement needs a formal competitive bidding sourcing process or a less formal request for quote process.
2. Strategic sourcing
During the strategic sourcing stage of procurement in business, market research and a make-or-buy analysis should be conducted. After specifications are developed with the stakeholder team, the procurement agent will often act as a project manager.
In this capacity, the procurement manager creates a project schedule, leads a selection process, negotiates contracts, helps kick off implementation, and assists with any needed change management. This stage will involve the procurement team, internal or external stakeholders, and suppliers.
3. Purchasing
The next stage of procurement in business is purchasing. During this stage, a requisition is approved, a purchase order is issued, and then the order is received and paid. Purchasing, logistics/receiving, and accounts payable are involved. This state is where your software contract negotiation takes place.
4. Contract management
The contract management stage begins when most think the procurement process is over. During this stage, the procurement team manages ongoing renewals. They negotiate prices, monitor any metrics established in the agreement, and work with both internal stakeholders and suppliers to answer contract-related questions and resolve any issues. This stage continues until the contract ends.
5. Supplier relationship management
The last, but also ongoing, stage in the business procurement process is supplier relationship management. This stage is often overlooked but is critical in understanding a supplier base. It includes categorization of suppliers, measurement of supplier performance, and ongoing management of the supplier relationship. Supplier relationship management involves procurement, suppliers and end-users who work with those suppliers.
3 steps to implement a procurement process in your business
If your business is currently lacking procurement processes or needs to refresh the ones in place, consider these three steps.
1. Define a procurement strategy
When establishing clear details on how the business will handle the procurement process, here are a few things to consider:
- What problems and challenges is the company facing that a procurement process will solve?
- Will there be key performance indicators that evaluate the success of the procurement process?
- What tools, like software stack management, will be needed to achieve the procurement process goals?
- How will suppliers be selected, and how will the supplier base be optimized?
2. Establish procurement policies and procedures
Once a procurement strategy has been defined, appropriate policies and procedures will help create the foundation for the procurement process by providing written guidelines and processes people within the business must follow.
Policies and procedures include things like requiring executive approval for spend levels, deciding purchase amounts and types through formal strategic sourcing, how to handle SaaS agreements, and how to use procurement technologies.
3. Implement procurement software
Dedicated procurement tools, like procure-to-pay or eProcurement, can optimize productivity and profitability by reducing manual work, reducing errors, and lowering overall costs. These allow procurement teams to focus less on transactional non-value-added activities and emphasize strategic efforts that drive value to the business.
The difference between procurement and purchasing
Although they are terms often used interchangeably, there are key differences between procurement and purchasing. Purchasing is a subset of the transactional processes that happen within the larger procurement process. Even though purchasing processes are often automated through SaaS solutions like eProcurement, procurement is a more complex process. It includes purchasing but also several other subsets, like strategic sourcing, logistics/receiving and accounts payable.
Why a procurement process matters for SaaS buying
A procurement process for the SaaS purchasing process is vital to supporting business needs and the bottom line. A functional procurement process can improve SaaS buying in a business. Here are some ways the procurement process can impact a business’s SaaS ecosystem.
Reduces waste and missed opportunities
A good software procurement process includes a system of checks and balances. Those are especially important when managing an ever-growing SaaS stack. Going through that process can help the business avoid duplicate SaaS purchases, non-compliant solutions, and unnecessary steps.
A procurement process that includes a contract management component helps the business manage contract renewals efficiently. This reduces the number of missed opportunities for cost increase avoidance and shelfware.
Preserves supplier relationships
A well-established procurement process includes a supplier relationship management component. This categorizes SaaS suppliers into appropriate segments and helps the businesses know precisely how to manage each unique supplier relationship. It also gives the supplier a greater feeling of partnership and can reduce unresolved conflicts.
Improves risk management
With SaaS buying comes a heightened need for risk mitigation. Software purchased outside of a procurement process may not be properly vetted by IT for things like data security. This can drastically increase a business’s security risks. Having a procurement process incorporates reviews and approvals by all necessary stakeholders for SaaS purchases, including IT and data security.
How Vendr can help level up your business’s procurement process
Vendr can help reduce and eliminate the legwork involved in SaaS buying by assisting in selecting SaaS suppliers, vendor relationship management, and contract and renewal management. Reallocate all the time your team used to spend on SaaS buying to other value-driving procurement activities.
