Procurement comprises a range of activities that deal with acquiring goods and services for the business. Different businesses define procurement in their own way, some businesses consider procurement to deal only with the acquisition of goods and services whereas others consider the various processes that lead up to the acquisition of goods as procurement.
Procurement is an important function of the business. It is important to monitor the procurement process to boost the business. When procurement is done effectively and efficiently, it will enhance the profitability of the business.
TYPES OF PROCUREMENT
Procurement can be classified under different heads. The types of procurement include :
- Direct procurement
- Indirect procurement
- Goods procurement
- Service procurement
Direct procurement, which is also known as direct spend or direct cost, refers to the acquisition of goods and services to produce the final product of the business. The resources obtained through direct procurement are used in the fundamental activities of the business.
The products obtained in this method will ultimately find their way to the customer. An example of direct procurement is, the manufacturer of computers will require different hardware and software to build up a proper computer system.
The manufacturer can acquire those required goods through direct procurement. The goods acquired end up with the customer in the form of the final product.
Direct procurement is common in manufacturing companies as they need resources on a regular basis to supply the customer. It is important for the procurement team to maintain a healthy relationship with direct procurement vendors.
Indirect procurement refers to obtaining goods and services which will contribute to the operating activities of the business. The resources obtained through indirect
procurement does not directly contribute to the final product of the business.
The goods procured under indirect procurement are usually used by the internal stakeholders. Indirect procurement can be understood better with an example.
In an office, the employees need various goods like furniture, pens, computers, water, and many other essentials. Therefore, these goods are obtained through indirect procurement as they help in the operating activities of the business.
Goods procurement refers to the procurement of physical items. Goods procurement includes only tangible items. Goods can be acquired either through direct procurement or indirect procurement. The nature of procurement depends upon the ultimate use of the product.
For example, the raw material required by a manufacturer to produce the final good can be acquired through direct procurement. And if an office needs some furniture, then it can be obtained through indirect procurement.
Service procurement refers to companies that provide people-based services to an enterprise. The workers found through service procurement do not come under the permanent workforce of the enterprise.
Some examples for service procurement are – technical consulting companies, law firms, marketing agencies, and other services. Service providers play an important role in today’s business world.
Companies rely on service providers to function smoothly. For example, companies rely on law firms to protect their intellectual property, accounting firms to maintain their books, call centers to assist their customers, and marketing agencies to provide a good image to their firm.
The various types of procurement help us understand the procurement process better. It will help us to implement the procurement functions in a way that will positively impact the business. Understanding the procurement process and implementing them accordingly will open up a whole new realm of growth for the business.