# What Is Procurement? Definition, Types, vs. Purchasing

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*— Investopedia / Candra Huff*

## What Is Procurement?

Procurement is the process of buying or otherwise obtaining goods or services, typically for business or government purposes and usually on a relatively large scale. Often confused with purchasing, procurement represents a more strategic and less purely transactional process.

### Key Takeaways

*   Procurement is a strategic process involving the purchasing of goods or services.
*   It differs from purchasing, which is primarily transactional and can be considered as one part of the procurement process.
*   Procurement involves a series of steps, including the specification of requirements, solicitation of bids, price and contract negotiation, the purchase transaction, and payment processing.
*   The procurement process can involve multiple departments within an organization.
*   Larger businesses and government agencies often have dedicated procurement departments.

## How Procurement Works

In business, the procurement process can be a vital part of a company's strategy because the ability to obtain sufficient quantities of materials or services at an acceptable price can determine if operations will be [profitable](https://www.investopedia.com/ask/answers/012715/what-difference-between-profitability-and-profit.asp). Similarly, government agencies must pay close attention to procurement in order to remain within budget. Procurement budgets typically allot a specific amount that managers can spend to procure the goods or services they need.

Broadly viewed, the procurement process entails every step from the preparation and processing of a request for certain items to the receipt of the good or service and approval of payment. On a more detailed level, this can involve establishing standards and specifications for goods and services, forecasting the organization's needs, researching and selecting suppliers, arranging for [financing](https://www.investopedia.com/terms/f/financing.asp), negotiating prices and contracts, finalizing the transaction, making payments, and [managing inventory](https://www.investopedia.com/terms/i/inventory-management.asp). As such, companies often require support from several different internal departments, and coordination among them, for successful procurement.

Depending on their expertise, those departments might divide up such tasks as:

*   Choosing the goods and services required based on the organization's strategic needs
*   Soliciting quotes from suitable suppliers
*   Working out a price and contract terms
*   Receiving the shipment and submitting payment for it

Procurement is considered an integral part of [supply chain management](https://www.investopedia.com/terms/s/scm.asp).

## Competitive Bidding and Procurement

Different businesses and government agencies will have their own processes for choosing suppliers. This often involves multiple potential suppliers and some form of [competitive bidding](https://www.investopedia.com/terms/c/competitivebid.asp).

Competitive bidding for goods generally requires that suppliers submit proposals that detail the per-unit price of the item, along with shipping and delivery terms. In the case of services, proposals can involve the numbers of individuals who would work on a project, the type of technical support that is required, and other matters. To initiate this process, businesses and especially government agencies will often issue a formal [request for proposals (RFP)](https://www.investopedia.com/terms/r/request-for-proposal.asp), spelling out their needs.

Ultimately, the organization that solicited the bids will choose one or more suppliers, based on cost and other factors. The lowest bidder won't necessarily get the business.  

## Types of Procurement

Procurement can be divided into four basic types, with some overlap between them. These include:

*   **Direct procurement**: This kind of procurement involves any goods or services that are directly involved in the production process. For a manufacturer, for example, that can include raw materials and component parts made by others.
*   **Indirect procurement**: The obtaining of goods and services that are required to meet the operational needs of a business but that are not directly involved in the production process is referred to as indirect procurement. Examples can include office equipment and supplies, furnishings, and services such as marketing or advertising.
*   **Goods procurement**: Any physical goods that businesses acquire through the procurement process fall into this category. They can involve either direct procurement (as in raw materials) or indirect procurement (as in office supplies).
*   **Services procurement**: Like goods procurement, services procurement can be either direct or indirect. Direct services procurement may refer to labor directly involved in the production process, while indirect services procurement can include things like on-site security to guard the premises.  
    

> **Fast Fact**
>
> Companies will generally have different budgets and processes for managing direct costs compared to indirect costs.

## Procurement vs. Purchasing

Procurement and purchasing both result in the acquisition of goods and services, so it's easy to confuse the two. But there are some key distinctions between them.

Purchasing is largely a transactional process involving the buying of certain goods and services, usually to satisfy an immediate need. Purchasing tends to be heavily focused on obtaining the best price rather than on other factors. It can be thought of as part of the procurement process, rather than being synonymous with it.

Procurement is more of a strategic process, often involving a series of steps (as outlined above), only one of which might involve the actual purchase. Procurement tends to focus more on long-term value to the business than on price and also to foster more enduring supplier relationships than simply one-off transactions.

The table below highlights those key differences:  

## Accounting for Procurement

Procurement costs are generally integrated into the [financial accounting](https://www.investopedia.com/terms/f/financialaccounting.asp) of a company, since procurement involves acquiring goods and/or services for the revenue goals of the business.

Depending on their size and needs, some companies may also employ a dedicated procurement manager or procurement specialist to lead these efforts. Increasingly, larger companies are adding executive-level chief procurement officers (CPOs for short) to assume responsibility and give procurement a greater voice in their strategic planning. The CPO typically:

*   Oversees procurement standards
*   Works with [accounts payable](https://www.investopedia.com/terms/a/accountspayable.asp) to ensure efficient payment
*   Serves on procurement teams making procurement decisions when there are multiple competitive bids

## What Is Meant by Procurement?

Procurement is the start-to-finish process involved in obtaining, or "sourcing," something that the buyer, such as a business or government agency, needs to do its work. That can involve either goods or services.

## How Is Procurement Done?

Procurement can be carried out in a variety of ways at its various steps. For example, organizations may encourage competitive bids from large numbers of potential suppliers or choose to work with a small group of exclusive suppliers or even a single source.

## What Is Public Procurement?

Public procurement is another name for government procurement, in which states or agencies purchase goods and services from the [private sector](https://www.investopedia.com/terms/p/private-sector.asp).

## Is Procurement the Same As Purchasing?

While they are similar, purchasing may simply refer to the act of buying goods and services, while procurement can include setting specifications, researching and vetting suppliers, and additional steps both before and after the purchase transaction.

## The Bottom Line

Procurement is a strategic process that involves the acquisition of goods and services. Properly executed, procurement performs a critical function that can make the difference between a profit and a loss or staying within a budget or exceeding it.

> **Article Sources**
>
> 1.  IBM. "[What Is Procurement?](https://www.ibm.com/topics/procurement)"
>     
> 2.  Institute of Supply Chain Management. "[Procurement vs. Purchasing: How to Spot the Difference & What It Means for Your Supply Chain Management](https://www.ioscm.com/blog/procurement-vs-purchasing-how-to-spot-the-difference-what-it-means-for-your-supply-chain-management/)."
>     
> 3.  Michigan State University. "[What Is Procurement Management?](https://www.michiganstateuniversityonline.com/resources/supply-chain/what-is-procurement-management/)"
>     
> 4.  National Association of State Procurement Officials. "[What Is Public Procurement?](https://www.naspo.org/careers/why-public-procurement/)"