Procurement can be classified in several ways: direct or indirect procurement, depending on how the company will use the purchased items. Alternatively, purchase goods or services by the purchased items.
Direct procurement refers to obtaining everything required to produce a final product. For a manufacturing company, this includes raw materials and components. For a retailer, this consists of any item purchased from a wholesaler for resale to customers.
Indirect procurement usually involves purchasing items essential to day-to-day operations but does not directly contribute to the company’s bottom line. This can include anything from office equipment and furniture to advertising campaigns, consulting services, and equipment maintenance.
Merchandise procurement broadly refers to the procurement of physical items, but it can also include items such as software subscriptions. Effective commodity procurement usually relies on good supply chain management practices (may consist of direct and indirect procurement)
Service procurement focuses on purchasing people-based services. Depending on the company, this may include hiring individual contractors, contingent labor, law firms, or on-site security services (may consist of direct and indirect procurement)
How does procurement work?
The procurement process usually includes several steps. The business identifies certain goods and services it needs, finds the suppliers to help the company reach its business goals, negotiates terms and costs, and then purchases and receives the relevant items. A small company may have only one person who handles the procurement of all goods and services. Larger companies may have a team of people who specialize in dealing with different suppliers or assisting specific departments in the organization. For some items, the team may need to gather information from several other departments to determine the company’s overall requirements. It is important to remember that procurement is not a series of individual actions but a continuous process. For example, businesses typically strive to establish ongoing relationships with major suppliers to achieve the best service and lowest costs possible, which ultimately translates into higher profit margins. Companies may also need to conduct regular quality assurance checks and performance analyses to ensure that suppliers consistently meet expectations.