Types of Procurement - 8 Examples of Procurement Practices
8 main types of procurement with examples
There are many different types of procurement, each with its own strengths and weaknesses. Here are eight of the most common.
1. Direct procurement
Direct procurement is the purchase of goods or services that are essential to the organization's core operations. A primary method of procurement management, direct procurement can be done through a variety of processes, including open tender, restricted tender, or single-source procurement.
Example of direct procurement:
A construction company is building a new bridge for the city. The company needs to purchase a large quantity of steel beams for the project. The company has a long-standing relationship with a steel supplier, and a contract in place for the purchase of steel beams at a discounted price. The construction company decides to directly procure the steel beams from this supplier.
2. Indirect procurement
Indirect procurement, also known as indirect spend, is the purchase of goods and services that support the organization's core operations, but are not essential. These goods and services may include office supplies, catering services, travel arrangements, and maintenance contracts.
Example of indirect procurement:
A construction company is building a new bridge for the city. The company needs to purchase office supplies for its employees. The company also needs a cleaning company to clean its offices. These goods and services are not essential to the completion of the bridge project, but they are necessary for the company to operate effectively. Therefore, this constitutes indirect procurement.
3. Services procurement
Services procurement is the process of acquiring services (as opposed to goods) from external suppliers.
Example of services procurement:
A government agency is planning to launch a new website. The agency needs to contract with a web development company to design and develop the website. The agency also needs a web hosting company to host the website. Both of these contracts are for services.
4. Goods procurement
Goods procurement is the process of acquiring physical items from external suppliers. Goods procurement can include the purchase of large and specialist items, such as medical equipment, vehicles, and construction materials.
Example of goods procurement:
A manufacturing company is producing a new line of products. The company needs to purchase raw materials, such as steel, plastic, and electronic components, to produce the new products. The company also needs to purchase packaging materials to ship the new products to its customers.
5. Works procurement
Works procurement is the process of acquiring construction or renovation services from external suppliers.This involves the construction or renovation of infrastructure, such as roads, bridges, and buildings.
Example of works procurement:
A government agency is planning to build a new bridge. The agency needs to contract with a construction company to design and build the bridge.
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6. Leasing procurement
Leasing procurement is the process of acquiring assets through leasing agreements instead of purchasing them outright. This can be a cost-effective way to acquire assets that are expensive or that depreciate quickly.
Example of leasing procurement:
A company is expanding its operations and needs to acquire new office space. The company decides to lease office space instead of purchasing it outright. Leasing is a more cost-effective option for the company in the short term. The company leases office space from a commercial real estate company.
7. Emergency procurement
Emergency procurement is the process of acquiring goods, services, or works in a timely and efficient manner to respond to an emergency situation. Emergency situations can include natural disasters, pandemics, public health crises, and security threats. Emergency procurement is often necessary because normal procurement procedures may be too slow or inflexible to meet the urgent needs of the emergency situation.
Example of emergency procurement:
A hospital is treating a large number of patients suffering from a highly contagious virus. The hospital needs to urgently acquire additional medical supplies, such as masks, gowns, and ventilators, to cope with the influx of patients.
8. Digital or e-procurement
Digital or e-procurement is the use of digital technologies to streamline and enhance the procurement process. It involves the use of online platforms, systems, and tools to automate tasks, improve communication and collaboration, and increase transparency and accountability.
Example of e-procurement:
A government agency needs to purchase new office supplies. The agency uses an e-procurement platform to solicit bids from potential suppliers. The agency then evaluates the bids and selects the supplier that offers the best value for money. The agency then places a purchase order on the e-procurement platform. The supplier receives the purchase order and delivers the office supplies to the agency.
Traditional stages in the procurement process
Step #1: Locating needs and submitting a purchase request
The first step in the procurement process is to identify the need for goods or services. Once the need has been identified, a purchase request is created. This document typically includes the following information:
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Description of the goods or services required
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Quantity required
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Estimated cost
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Delivery deadline
Step #2: Supplier evaluation and selection
Once the purchase request has been approved, the next step is to evaluate and select suppliers. When evaluating suppliers, the following factors are considered:
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Price
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Quality
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Delivery time
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Reliability
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Financial stability
Step #3: Contract negotiation
Once a supplier has been selected, the next step is to negotiate a contract. The contract should include all of the relevant terms and conditions, such as the price, delivery schedule, payment terms, and warranty. It is important to have the contract reviewed by a lawyer before signing it.
Step #4: Purchase order (PO) creation
Once the contract has been signed, a purchase order is created, which is sent to the supplier. The purchase order is a document that authorizes the supplier to deliver the goods or services. It typically includes the following information:
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Purchase order number
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Date of purchase order
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Supplier name and address
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Description of the goods or services required
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Quantity required
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Price
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Delivery deadline
Step #5: Receive goods, review, and conduct a three-way match
Once the goods or services have been received, they are inspected to ensure that they meet the requirements of the purchase order. A three-way match should also be conducted to verify that the purchase order, the invoice, and the goods or services received all match.
Types of procurement in government
Besides the main types of procurement we’ve already covered, government procurement can also be categorized by the procurement process used. The most common procurement processes are:
Open procedure
All interested suppliers are invited to submit bids, and the contract is awarded to the supplier who offers the best value for money.
Restricted procedure
This process is used when the government needs to pre-qualify suppliers before they are allowed to bid. This may be necessary for complex procurements or for procurements where there are concerns about security or confidentiality.
Negotiated procedure
This process is used when the government needs to negotiate the terms of the contract directly with the supplier. This may be necessary for procurements where there is a single supplier.
Competitive dialogue
Competitive dialogue is used for complex procurements where the government needs to develop a solution with the supplier. The government and suppliers engage in a dialogue to develop a technical specification for the contract before submitting bids.
Alternative types of procurement
Increasingly, governments and parties managing complex construction procurement projects are turning to alternative, more modern types of procurement over traditional design bid build. These alternative project delivery methods (APDMs) include:
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Public private partnership
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Progressive design build
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CMGC construction
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Agency CM delivery method
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Integrated project delivery
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Alliance contracting
This shift is for a number of reasons, including:
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Improved risk allocation: APDMs typically allocate risk between the government and the private sector in a more balanced way than traditional project delivery methods. This can help to reduce the risk for the government, particularly on complex projects where there is a high degree of uncertainty.
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Increased innovation: APDMs often encourage innovation from the private sector. This is because the private sector is often more motivated to find innovative solutions to save money and complete the project on time.
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Better value for money: APDMs can help to deliver better value for money for the government. This is because they typically involve a competitive bidding process and the private sector is often more efficient at delivering projects than the public sector.
Access to private sector expertise: APDMs can give governments access to the expertise and resources of the private sector. This can be particularly beneficial for complex projects where the government does not have the in-house expertise or resources to deliver the project on its own.