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What Is Procurement? A Comprehensive Guide for Finance Teams

Every dollar a company spends begins with procurement. Yet, for many finance professionals, this critical business function remains somewhat of a mystery.

After working with hundreds of finance teams over the past decade, industry experts have observed firsthand how a well-managed procurement process can reduce costs by 5-15%, whereas poorly managed procurement can result in significant financial losses.

So, what exactly is procurement, and why should finance teams care? Here’s a breakdown in simple terms.

What is Procurement? Defining the Basics

Procurement is the process of finding, acquiring, and managing the goods and services your company needs to operate and grow. It’s more than just “buying stuff” – it’s a strategic approach to getting what your business needs at the right price, time, and quality.

Procurement can be compared to grocery shopping for a business. The process involves:

  • Identifying needs
  • Finding the best sources
  • Negotiating favorable prices
  • Ensuring goods arrive in good condition
  • Managing payments
  • Maintaining supplier relationships

However, procurement or acquisition is not the same as purchasing. Purchasing is the transactional aspect of acquiring goods and services, while sourcing refers to identifying and evaluating suppliers. Procurement encompasses the entire process, from identifying needs to payment and supplier relationship management. Procurement has evolved from a back-office function to a strategic contributor to financial performance. Finance leaders who understand procurement gain a powerful lever for improving profitability.”

Purchasing is the transactional part of buying goods and services. It’s one piece of the procurement puzzle.

Sourcing is finding and vetting suppliers. Again, just one component of procurement.

Procurement encompasses the entire process from identifying needs through payment and supplier relationship management.

“Procurement has evolved from a back-office function to a strategic contributor to financial performance.”

“Finance leaders who understand procurement gain a powerful lever for improving profitability.”

 

Why Procurement Matters to Your Bottom Line

The numbers tell the story:

Companies with mature acquisition practices see 7.5% higher profit margins than their peers (Source: Deloitte’s Global CPO Survey)

Every dollar saved through procurement goes directly to the bottom line

For a company with 5% profit margins, $1 saved in procurement equals $20 in new sales

Last year, We worked with a mid-sized manufacturing company whose CFO had always viewed procurement as “just buying stuff.” After implementing structured acquisition processes, they identified $1.2 million in annual savings – without changing suppliers. The key? Simply applying procurement best practices to their existing spending.

Procurement affects your financial performance in several ways:

  • Cost reduction: Beyond negotiating better prices, effective acquisition reduces total cost of ownership (TCO) by considering factors like maintenance, disposal, and hidden costs.
  • Risk management: Supplier financial stability, compliance issues, and supply disruptions all impact your company’s risk profile. Good procurement practices mitigate these risks.
  • Cash flow impact: Strategic payment terms negotiation can significantly improve your working capital position.
  • Compliance safeguards: Procurement processes help ensure regulatory compliance and reduce the risk of penalties.
  • Competitive advantage: Access to innovative suppliers and early-adopter technologies can give your company an edge.

 

What questions do you have about how procurement affects your company’s financial health?

  • The typical procurement process follows these steps:
  • Need identification: Recognizing what the business requires
  • Supplier research and selection: Finding and qualifying vendors
  • Negotiation: Securing favourable terms
  • Purchase order creation: Documenting what you’re buying
  • Contract management: Maintaining agreements
  • Receiving and inspection: Verifying goods/services meet requirements
  • Invoice processing: Reviewing and approving for payment
  • Payment: Completing the transaction
  • Record-keeping: Maintaining documentation
  • Supplier relationship management: Ongoing vendor performance evaluation

The accounts payable team enters the picture mainly at steps 7-8, but understanding the entire process helps AP identify issues earlier and process payments more efficiently. One finance director experienced reduced invoice exceptions by 62% simply by having her AP team understand the procurement steps that happen before an invoice arrives.

 

Procurement’s Role in the Supply Chain

Procurement sits at the beginning of your supply chain, acting as the gateway for everything that enters your business.

A Harvard Business Review study found that procurement decisions influence up to 70% of supply chain disruptions. When procurement teams select reliable suppliers and build strong relationships, the entire supply chain becomes more resilient.

Procurement connects to other business functions in several ways:

  • Finance: Affects budgeting, cash flow, and payment timing
  • Operations: Determines material availability and quality
  • Legal: Manages contract terms and compliance
  • IT: Supplies systems and technology
  • Marketing: Provides marketing materials and services

This interconnectedness is why procurement can’t operate in a silo. Cross-functional collaboration is essential.

 

Different Types of Procurement You Should Know

Not all procurement is created equal. Understanding these distinctions helps finance teams allocate resources appropriately:

Direct vs. Indirect Procurement:

  • Direct procurement involves materials and services that go directly into your products (like raw materials for manufacturing)
  • Indirect procurement covers everything else (office supplies, professional services, technology)

While direct procurement typically gets more attention, indirect often represents 15-40% of company spending – with less oversight.

 

Centralized vs. Decentralized Procurement:

  • Centralized: One department handles all procurement
  • Decentralized: Individual departments manage their own purchasing
  • Hybrid: Strategic acquisition is centralized while day-to-day purchasing is decentralized

The hybrid model has gained popularity, with 63% of companies adopting this approach according to a CAPS Research study.

 

Strategic vs. Tactical Procurement:

  • Strategic: Long-term relationships, complex negotiations, high-value contracts
  • Tactical: Routine purchasing, straightforward transactions

 

Goods vs. Services Procurement:

  • Goods: Tangible items (equipment, supplies)
  • Services: Intangible deliverables (consulting, maintenance)

Service procurement is often trickier to manage due to the challenge of defining and measuring performance.

 

Technology Transforming Procurement

The days of paper purchase orders and filing cabinets full of contracts are long gone. Modern procurement leverages technology at every step:

  • E-procurement systems: Digital platforms that manage the entire acquisition process from requisition to payment.
  • Spend analysis tools: Software that categorizes spending data to identify savings opportunities and track compliance.
  • Supplier management platforms: Systems that track supplier performance, risk, and relationship information.
  • Contract management solutions: Applications that store, track, and analyze contract terms and obligations.
  • Procure-to-pay (P2P) systems: End-to-end solutions that connect procurement and accounts payable.

The most effective finance teams I’ve worked with ensure their acquisition and AP automation systems talk to each other. This integration reduces errors, speeds up processing, and provides better visibility into spending.

One manufacturing client reduced their purchase-to-payment cycle from 32 days to 9 days by implementing integrated procurement and AP automation systems, freeing up over $2 million in working capital.

 

Best Practices for Finance-Procurement Collaboration

When finance and procurement teams work together, magic happens:

Joint planning and budgeting: Align acquisition activities with financial goals and budgets.

Shared metrics: Track KPIs that matter to both teams, such as:

  • Cost savings achieved
  • Payment term improvements
  • Working capital impact
  • Process efficiency gains
  • Compliance rates

 

Regular communication: Hold joint meetings to discuss challenges and opportunities.

Clear procurement policies: Develop guidelines that balance control with flexibility.

Spend visibility: Create shared dashboards showing real-time spending data.

 

Common Procurement Challenges (And How to Solve Them)

Based on my experience with hundreds of finance teams, these are the procurement headaches I see most often:

  • Maverick spending: Employees buying outside approved channels. Solution: User-friendly acquisition systems and clear policies make compliance easier than workarounds.
  • Supplier management overload: Too many vendors to effectively manage. Solution: Supplier rationalization – strategically reducing your vendor base by 20-30% often improves service while reducing costs.
  • Poor spend visibility: Not knowing where money goes. Solution: Category-based spend analysis and dashboard reporting.
  • Process bottlenecks: Slow approvals and manual tasks. Solution: Workflow automation and clearly defined approval thresholds.
  • Siloed systems: Disconnected acquisition and finance technologies. Solution: Integration between systems or migration to a unified platform.

Have you faced any of these challenges? The solutions might be simpler than you think.

 

The Future of Procurement is Already Here

The procurement function is evolving rapidly. Here’s what’s happening now and what’s coming next:

  • AI-powered analytics: Machine learning algorithms that identify savings opportunities, predict supplier issues, and recommend optimal purchasing strategies.
  • Touchless procurement: Fully automated purchasing for routine items, reducing human intervention to exception handling only.
  • Sustainable acquisition: Environmental and social factors increasingly influence supplier selection and evaluation.
  • Predictive insights: Moving from reactive to proactive procurement based on forecasted needs and market conditions.
  • Block-chain for transparency: Immutable records of transactions and supply chain movements.

Forward-thinking finance leaders are already examining how these technologies can transform their acquisition function.

 

Your Procurement Improvement Roadmap

Ready to upgrade your procurement practices? Here’s how to get started:

Step 1: Assess your current state Map your existing procurement processes and identify pain points. Where do delays happen? Where do costs leak?

Step 2: Set clear objectives Define what success looks like. Is it cost savings? Process efficiency? Better supplier relationships?

Step 3: Start with quick wins Begin with high-impact, low-effort improvements like:

  • Consolidating office supply vendors
  • Implementing p-cards for small purchases
  • Creating a simple contract repository

Step 4: Build your business case Use data from quick wins to support more significant investments.

Step 5: Implement incrementally Roll out changes in phases rather than attempting a “big bang” approach.

Step 6: Measure and adjust Track progress against your objectives and refine your approach based on results.

One medical services company I worked with followed this roadmap and achieved:

  • 12% reduction in supply costs
  • 71% faster purchase order processing
  • 94% supplier delivery compliance
  • Zero stock-outs of critical items

 

The Bottom Line on Procurement

Procurement isn’t just about buying stuff – it’s about strategic acquisition of the goods and services that power your business. When finance teams understand and engage with procurement, they gain a powerful lever for controlling costs, managing risk, and improving working capital. How effective is your company’s procurement function? If you don’t know the answer, that might be your first opportunity for improvement.

Ready to learn more? Check out these resources.

Recommended Tools

  • Coupa – Comprehensive procurement platform
  • SAP Ariba – Enterprise procurement solution
  • Procurify – Mid-market procurement software
  • GEP SMART – Unified procurement platform

Industry Benchmarks

Procurement Standards

Key Terms

  • RFP (Request for Proposal): Formal document soliciting vendor proposals
  • TCO (Total Cost of Ownership): Complete cost of an item over its lifecycle
  • P2P (Procure-to-Pay): End-to-end procurement and payment process
  • Maverick Spending: Purchases made outside established procurement channels
  • Three-Way Match: Verification process comparing PO, receipt, and invoice

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