Procurement is a logistical challenge for companies of all sizes and statures. It involves multiple departments working together to manage costs, build supplier relationships, and ensure timely deliveries.

At its core, procurement is simply the process of acquiring the goods and services your business needs. However, the reality is often more complicated.

Many companies rely on outdated systems and unclear processes, which can lead to delays, increased costs, and frustration. 

In industries like construction, procurement can account for 40 to 70% of total spending, underscoring its importance in managing overall costs effectively.

If you’re seeking clarity on procurement and how to optimise it for cost savings, you’re in the right place. In this article, we'll cover the procurement meaning, key processes involved, and more.

What is Procurement?

Procurement is the complete process of finding, buying, and paying for the goods and services your organisation needs. It covers everything from identifying requirements to selecting suppliers, negotiating contracts, placing orders, receiving items, and making payments.

Unlike simple purchasing, procurement takes a strategic approach by analysing spending patterns, managing supplier relationships, and aligning buying decisions with your company's goals.

To better understand procurement, it’s important to distinguish it from a commonly misunderstood process: purchasing.

Procurement Vs. Purchasing

A lot of people use the terms procurement and purchasing interchangeably. However, these two are completely different processes. Procurement is the broader process of identifying needs, selecting suppliers, negotiating contracts, and managing relationships. It focuses on strategy and long-term goals. 

Purchasing, on the other hand, is the specific act of buying goods or services. It’s a smaller part of procurement, focusing on the transaction itself, ensuring the right items are acquired at the right price and time.

Now that we've established what procurement is and how it differs from purchasing, let's explore why procurement is crucial for businesses and how it directly impacts their success and growth.

Why Procurement is Important for Businesses

Effective procurement involves a lot more than just buying what you need. It’s a strategic function that directly impacts a company’s financial health, operational efficiency, and long-term success. 

How businesses approach procurement can significantly affect their cost management, supply chain reliability, and ability to stay competitive in the market. Let’s explore why having a solid procurement plan is so important for businesses:

• Cost Control: Procurement ensures that your business gets the best value for the money spent. Effective sourcing, negotiating, and contract management can lead to significant savings.

• Improved Efficiency: Streamlined procurement processes save time by reducing delays in acquiring essential goods and services. This improves the overall operational flow of the business.

• Risk Management: A well-managed procurement process helps mitigate risks such as supply chain disruptions or cost fluctuations. By maintaining strong supplier relationships and carefully managing contracts, businesses can avoid unnecessary risks.

• Competitive Advantage: When procurement is done right, your business will have access to high-quality goods and services. This can help improve your product or service offerings and ultimately give you an edge over competitors.

Up next, we will take a closer look at the procurement cycle.

Key Processes in Procurement 

The reason so many struggle with procurement is due to its complexity. Confusion is bound to arise when there are so many processes and stakeholders involved. It's much easier to navigate when everyone has a clear understanding of what needs to be done at each step. 

Below, we have detailed out the key processes in procurement, providing clarity on how each step contributes to a smooth and efficient acquisition process:

1. Identifying Needs

Your procurement process starts when someone in your organisation identifies a need for specific goods or services. This need should match your company's objectives and budget constraints.

2. Market Research

After identifying what you need, research the market to find potential suppliers. Consider factors like price, quality, reliability, and delivery times to ensure you’re choosing the best option. 

It’s important to compare suppliers and evaluate their reputations to avoid any issues later in the process. Doing this upfront helps you make an informed decision and avoid costly mistakes.

3. Requesting Proposals

Create detailed specifications of what you need and share them with potential suppliers. This usually takes the form of:

• Request for Information (RFI): General questions about supplier capabilities

• Request for Proposal (RFP): Detailed requests asking how suppliers would meet your specific needs

• Request for Quotation (RFQ): Straightforward price requests for standardised items

This process helps ensure you receive accurate and relevant information to choose the right supplier for your requirements.

With Kodo’s procure-to-pay solution, you can easily manage the entire proposal process. Use it to initiate, track, and approve purchase requests with full transparency and control.

4. Evaluating Proposals

In this step, you will be assessing supplier proposals based on predefined criteria. A thorough proposal evaluation helps ensure that you are allocating your resources mindfully. Before making a decision, evaluate criteria like:

• Price: Ensure the cost is within your budget and reflects the value you’re getting. Look for competitive pricing, but don't prioritise cost alone. Quality and post-purchase service are equally important.

• Quality: Assess whether the product or service meets your requirements in terms of durability, performance, and standards. Low-quality products can lead to more costs down the line.

• Delivery schedule: Check if the supplier can deliver within your required timeframe. Delays can affect your operations, so reliable timing is critical.

• Service level agreements: Review the supplier’s commitments to support, response time, and maintenance services. Clear SLAs ensure accountability and provide security for your business.

These factors help ensure that the selected supplier is capable, dependable, and aligned with your business needs, reducing the risk of complications in the future.

5. Supplier Selection

Choose the supplier that offers the best overall value, not just the lowest price. Consider long-term benefits like reliability and quality alongside immediate costs. A supplier that consistently delivers high-quality products and excellent customer service may cost more upfront. 

6. Negotiation and Contracting

Work out terms with your chosen supplier and create a formal contract. This document should clearly state:

• Detailed specifications

• Price and payment terms

• Delivery schedules

• Service level agreements

• Warranty terms

• Dispute resolution process

• Termination conditions

A well-defined contract ensures both parties are on the same page and protects your interests, setting the foundation for a successful partnership.

7. Purchase Order Creation

Create a purchase order (PO) that details exactly what you're buying, quantities, prices, and delivery information. The PO serves as formal confirmation of your order. 

Modern businesses are increasingly relying on automation to eliminate manual errors and speed up the procurement process. Kodo automates the creation and management of purchase orders for improved accuracy and reduced administrative headaches.

8. Receipt and Inspection

When items arrive, your first course of action is to check if the correct quantities and specifications are met. This includes confirming that the product types, sizes, and models are as expected. 

Next, inspect the quality of the items. Look for any signs of damage, defects, or missing components. If the items don’t match the order or are damaged, document the issues immediately and notify the supplier. 

Early detection allows you to address problems swiftly, either by returning the items, negotiating replacements, or adjusting the order.

9. Invoice Approval and Payment

Verify that the invoice matches both the purchase order and what you received. Process payment according to the agreed terms. 

Kodo's invoice management solution uses OCR technology to flag due dates, vendor risks, and key details for quick approvals. And with automated two-way and three-way matching, Kodo saves time, eliminates errors, and ensures effortless reconciliation.

10.   Record Keeping

Maintain complete records of the entire process for audit purposes, future reference, and supplier performance evaluation. Proper documentation helps ensure compliance with regulatory requirements and allows for easy information retrieval when needed. 

Now that we have a complete overview of the procurement cycle, we will learn about different procurement types. 

Types of Procurement

Procurement falls into four main categories:

1. Direct Procurement

This involves buying materials and components that go directly into your products. For manufacturers, this includes raw materials and parts used in production.

Direct procurement is critical for maintaining production flow and ensuring the timely availability of necessary materials..

2. Indirect Procurement

This covers goods and services that support your operations but don't directly enter your products. Examples include office supplies, cleaning services, software subscriptions, and professional services.

Indirect procurement helps maintain day-to-day business activities and ensures that support services are available to employees.

3. Goods Procurement

This category focuses specifically on physical products purchased for consumption or resale rather than production inputs. Examples include retail merchandise, food and beverage products, and finished goods for distribution.

Goods procurement ensures that businesses have the physical resources they need for operations, production, and daily functions.

4. Services Procurement

This specifically focuses on buying services rather than physical goods. Examples include IT support, consulting, marketing, and maintenance services.

Services procurement is essential for securing the external expertise and support that businesses need to operate efficiently and meet strategic goals.

Learning about the different types of procurement will help you navigate the specific requirements of services versus goods. 

However, to truly grasp the full procurement process, you must also understand the basic principles that guide every successful purchase. Let’s explore these fundamental principles and how they shape effective procurement strategies.

Key Principles of Procurement

Procurement operates on several core principles that help you achieve your organisation’s goals efficiently. These principles guide your decisions, ensuring fairness, transparency, and value. Here's a breakdown of 7 procurement principles:

• Value for Money: Strive to attain the best balance of cost, quality, and service to maximise efficiency.

• Transparency: Conduct procurement processes openly and clearly to build trust with suppliers and stakeholders and ensure accountability.

• Fairness and Integrity: Treat all suppliers equally, making decisions based solely on merit and the organisation's needs, free from bias.

• Competition: Encourage competition among suppliers to get the best deals, drive innovation, and secure favourable terms for your organisation.

• Efficiency and Effectiveness: Maximise the use of resources to achieve desired outcomes quickly and without waste, improving productivity.

• Legal and Regulatory Compliance: Ensure all procurement activities adhere to local and international laws and regulations, safeguarding your organisation’s legitimacy.

• Sustainability: Prioritise environmentally and socially responsible sourcing, ensuring long-term benefits for both your organisation and the broader community.

These principles form the foundation for successful procurement strategies, making sure every purchase decision aligns with your organisation’s goals and values.

That said, at the same time, procurement is also continuously evolving as businesses strive to stay competitive. 

So, what does the future of procurement hold? Up next, we will highlight key trends and innovations that are reshaping how businesses manage procurement moving forward.

Top Procurement Trends Shaping the Future

The procurement function is developing rapidly, driven by technological innovation and changing business priorities. The procurement software market is projected to reach USD 15.75 billion by 2030, reflecting the growing shift toward digital solutions. 

Here’s a look at the key trends shaping procurement:

1. Increased Focus on Sustainability

More companies are incorporating environmental and social factors into procurement decisions, making sustainability a core evaluation criterion alongside price and quality.

Progressive procurement teams now develop ESG scorecards for suppliers, tracking carbon footprints, waste reduction initiatives, and labour practices. 

They implement circular economy principles by prioritising suppliers offering recyclable materials and take-back programs, and require detailed sustainability documentation, including emissions data and social responsibility certifications.

2. AI and Automation in Procurement

AI and automation are streamlining procurement by handling routine tasks and improving decision-making. In fact, 64% of companies are already using AI to simplify procurement. Automation systems manage everything from inventory to supplier selection, reducing manual intervention. These systems learn and improve over time, refining decision parameters and enabling procurement teams to focus on strategic tasks.

3. Predictive Analytics

Advanced data analysis helps forecast supply needs, predict price changes, and identify potential disruptions before they occur, shifting procurement from reactive to proactive.

Leading teams apply machine learning to historical purchasing data to forecast demand more accurately, reducing both stockouts and excess inventory. 

These tools analyse economic indicators and commodity markets to anticipate price fluctuations, while detecting subtle patterns that might indicate emerging supplier problems.

How Can Kodo Make Procurement Easy for You?

Kodo provides a suite of solutions that simplify and improve your procurement process. From initiating purchase requests to invoice reconciliation, Kodo helps businesses operate more efficiently in every step of the procurement cycle. Our comprehensive solutions include:

• Purchase Request: Easily create and submit purchase requests for approval, ensuring transparency and control from the start of the process.

• Purchase Order Automation: Our system generates professional POs instantly after approval, delivers them directly to suppliers, and maintains a searchable digital archive of all your purchasing documentation.

• Invoice Management: Kodo captures invoices through email, uploads, or supplier portal submissions, automatically matches them to purchase orders, and routes them for approval before seamless integration with your accounting system.

Conclusion

Procurement will continue to evolve as businesses embrace new technologies and adapt to changing demands. 

However, the basic principles of procurement will remain crucial across all industries. With automation, you can streamline processes, even as procurement becomes more complex and dynamic.

Kodo simplifies procurement tasks and easily integrates with existing accounting software and ERP systems to provide a seamless experience. You can customise and configure Kodo to streamline approval across teams and expedite procurement cycles. Our centralised dashboard allows you to collaborate with stakeholders, ensuring smooth operations easily.

Want to learn in detail about how Kodo fits into your finance operations? Talk to our sales expert today.