What Is Procurement?

Every organization needs to buy things, whether they’re a 10-person startup or a multinational corporation. A sandwich shop might buy paper and pens at an office supply store using funds they’ve set aside for expenses. A medical device manufacturer might need to buy radioactive materials from another country. All of this falls under the umbrella of procurement and getting it right can mean the difference between blowing the budget or turning a profit.

What Is Procurement?

Procurement refers to the process that organizations use to find and buy the materials they need to operate. Think of a pharmaceutical lab, for example. Inside that lab you might find all the equipment needed to perform scientific experiments: beakers, test tubes, chemicals, centrifuges, and so on. All of this equipment is acquired using a procurement process, typically managed by a procurement department within the company.

Procurement Explained

Procurement processes vary according to industry, regulations, company size, and budget, but they generally include similar steps. It starts with a request to buy something. Going back to our pharma example, a medical research team might need machines to analyze blood or tissue samples. They submit a request to the procurement department with a justification as to why they need this equipment, along with specifications (for example, “must maintain constant temperature for proper sample analysis”). If the request is approved, the procurement team looks for the right equipment, at the right price, from the most reliable supplier. They often do this by sending a request-for-quotes (RFQ) to all the suppliers of medical equipment that they work with, helping to ensure that the company gets the right machine at the best price.

Suppliers respond to the RFQ with quotes, and the procurement team selects the quote that best suits their needs and budget. They send the supplier a purchase order, and the supplier delivers the machine, along with an invoice that the university’s finance department must pay. This entire process is known as “source-to-pay.”

This is a simple example of procuring a single piece of equipment. Procurement processes can become increasingly complex depending on the size of the organization, the industry, the volume of orders, and the number of suppliers. For example, a big manufacturing company might need to procure the raw materials used to make its products—steel, aluminum, wood, rubber, and so on—from all over the world. On top of that, they would need to procure the manufacturing equipment used inside their factories (e.g. robotic arms, lathes, conveyer belts, etc.), safety gear, forklifts, warehouse pallets, computers, and maybe even the real estate where the factory is built. This would involve thousands of suppliers and millions of transactions per year. It would also entail thousands of contracts, outlining the legal terms that the suppliers, and the manufacturers, must abide by. Government organizations face their own complex procurement processes, generally involving publicly posted RFQs to make the process open to all potential bidders and transparent to taxpayers.

All this complexity has led to the development of procurement software, which companies use to automate the process as much as possible. With the help of built-in AI, procurement software can now automate more of the complex steps that could previously only be done by people—for example, drafting a cover letter for an RFQ. As AI evolves, it could help automate more of the source-to-pay process.