The 4 types of procurement explained

HP paid $55M to settle allegations of corruption. In 2010, the electronics firm allegedly paid individuals to win US government contracts. This is a perfect example of indirect procurement gone wrong. But fraud can also target the other types of procurement — and you need to protect all of them. Keep reading to learn about the different types of procurement, and how to optimize your purchase process with suppliers.

Trustpair is an anti-fraud software that integrates with different procurement platforms, adding a layer of security to your procurement process. Purchasing has just become more secure! Request a demo to learn more.

What is procurement and why is it important?

Procurement definition

Procurement is the process by which organizations purchase the necessary goods and services they need to operate and grow. Part of the challenge of procurement is sourcing suppliers who meet your requirements in terms of:

• Quality,
• Cost,
• Delivery Time of good or service,
• Compliance and Contract,
• Other relevant procurement supply chain criteria.

This continuous process of purchasing goods and services involves managing various vendors, contracts, and supplies and goes on for as long as the company exists. Supplier management is an integral part of procurement and is also necessary for creating long-term partnerships with them.

Why is effective procurement important?

Procurement is a key activity of any business or non-profit organization. Without the purchase of goods and services, there would be no production of value — no business.

Purchasing teams are here to find the best businesses to use as your supplier and to effectively manage your orders. They have to ensure the data for each vendor is accurate, from the updated supplier price to their preferred payment method.

It’s important to optimize your procure-to-pay process so your company thrives. Being proactive in your vendor management means you’ll be able to reach your goals.

Here are some benefits of an effective procurement strategy:

• Reduces cost and increases profit margins,
• Decreases purchasing risks of procurement and order mistakes,
• Improves supply chain resilience and flexibility,
• Fosters long-term strategy planning,
• Contributes to a good brand reputation.

What are the different types of procurement?

While procurement is often referred to as one process, there are four different types of procurement. Each refers to acquiring goods and services of different categories.

Direct procurement

Direct procurement is the most straightforward type of procurement. It’s about sourcing the goods and services the company needs to create the finished products it sells.

Concretely, direct procurement is about obtaining goods and services:

• Raw materials,
• Wholesale goods,
• Essential software needed for day-to-day business operations,
• Any service that is directly linked to the end product.

For example for a retail company, direct procurement would include the raw materials needed to fabricate the finished good and/or any wholesale products that are bought to be resold.

Indirect procurement

On the other hand, indirect procurement describes the goods and services that don’t directly go into your finished product or services, but that are still necessary for running your operations.

Indirect procurement involves orders such as:

• Furniture,
• Marketing and consulting services,
• Support software.

If we take our previous example, indirect procurement for a retail company would be:

• Maintenance costs for their offices and shops,
• The services of an advertising agency to run their next campaign,
• Invoicing or accounting software.

Goods procurement

Good procurement is another of the types of procurement needed by an organization. As its name indicates, it relates to acquiring physical and tangible items for your company.

Here are some examples of goods procurement;

• Office supplies,
• Raw materials and wholesale goods,
• Software subscriptions.

Any of this can be from direct or indirect procurement, that is to say, a purchase can fall both under the “indirect procurement” and “goods procurement” for example.

Services procurement

The last of the types of procurement is services. It includes services rendered by other people and companies that are needed for business operations and growth activities.

Some examples of services procurement purchases are:

• Cleaning services,
• Hiring contractors for a specific project,
• Creative or consulting services.

As with goods procurement, services procurement encompasses both direct and indirect purchases.

What is the typical procurement process?

Every procurement team has a different procurement process based on the needs of their business, their market, and the regulations they need to respect.

That being said, these are the general 5 steps procurement process:

1. Identifying your needs: getting clear on your supply chain needs in terms of indirect, direct, good, and services procurement is very important. Clarity will save you time and money down the road when it comes to the actual purchase.
2. Sourcing suppliers: finding and researching suppliers that can provide goods and services that will meet your order requirements.
3. Negotiating with your vendors: ensuring your profit margins remain where they should be is important. That’s usually when your potential suppliers move from fixed costs to maybe giving you a discount based on quantity.
4. Contracting: formalizing your relationship with your selected supplier through a procurement contract. Contract terms should include costs, delivery times, quality and quantity of goods and services, and any other relevant criteria such as ESG. That’s also when you need to check supplier compliance with local and industry regulations.
5. Purchasing goods and services: creating the purchase order, which is when you buy goods and services under your contract terms. Services are rendered, goods are delivered, and payment is issued.
6. Evaluating performance (also called contract management): monitoring your suppliers is important to ensure the best quality standards and compliance. Keeping track of your vendors throughout time also means you will be able to identify which are the most reliable.
7. Working toward strategic alignment: fostering a closer relationship with your key suppliers. It’s important to invest in your supplier relationship management — the social aspect of it — to ensure long-term collaboration. Supplier management is about aligning your strategic goals with your trusted suppliers, resulting in mutually beneficial growth. Learn the difference between supplier management and procurement in this article!

Learn more about supplier risks and vendor onboarding best practices in our dedicated white paper

What are procurement best practices?

Like every company, you already have a procurement process in place. So the question is: how can you get to the next stage in optimizing it?

Here are our recommendations at Trustpair:

Regularly review your processes

As a buyer, it’s important to evaluate your processes regularly to ensure they’re:

1. Relevant
2. Secure.

Organizations change with time, and so should your procurement process. Being proactive about keeping your procurement methods relevant can make a huge difference in your business.

With 96% of US companies targeted with fraud in 2023, optimizing your procurement processes is also a matter of security. Keeping your processes up-to-date means you’ll be less likely to fall victim to cyber fraud.

Concretely, it means:

• Mapping out your current processes.
• Asking your procurement teams (and other people involved) to help spot inefficiencies and security breaches.
• Adapt and streamline your process, including technology to improve your workflow.

Use automation

Procurement software is a must for companies who deal with numerous vendors. Many large companies use a software solution already, as it helps streamline their processes.

Automation helps with:

• Improving visibility,
• Smooth out bottlenecks,
• Centralizing information,
• Fostering collaboration,
• Reducing human mistakes.

It also helps increase security, as software is more secure than a spreadsheet traveling on a pen drive (which is also very inefficient!).

However, using procurement software isn’t enough to guarantee your safety. Nowadays, hackers and criminals know how to bypass this layer of security using social engineering techniques.

For example with vendor fraud, fraudsters can:

• Send a fake invoice impersonating one of your real suppliers and ask for money to be sent to their account,
• Create a fake company and send you real invoices for goods and services never rendered. That’s usually done with the help of one of your employees or someone who knows your procurement process well (like another supplier).

Those things are almost impossible to detect while they’re happening, and your procurement software won’t help you either. That’s when Trustpair comes in!

Our anti-fraud solution prevents and detects third-party fraud. Our solution continuously audits your vendors’ credentials, using three-way matching to ensure you always know who you are sending funds to. It’s also a good deterrent to reduce internal fraud risks, sending a strong message to your employees that any attempt will be spotted.

The best part? We integrate with the main procurement software, making your experience seamless and safe. With Trustpair, you can upgrade your procurement process and make it 100% secure. We’ve helped 200+ companies around the world to completely eradicate the risk of third-party fraud.

Key Takeaways:

There are 4 types of procurement: indirect, direct, goods and services. Each relates to a different type of procurement needed for an organization to operate. Your procurement processes must be updated regularly to keep up with the latest best practices and security measures. Using Trusptair helps secure your procurement process from fraud.