Types of Procurement – 8 Examples of Procurement Practices
Running a large, complex and high-value procurement strategy means understanding when to use each procurement type, its impact and how to track and manage procurement effectively.
From complex infrastructure to daily business operations, there are eight key types of procurement to know. Identify how these are actioned in the procurement process, including the alternative procurement methods that can streamline construction projects.
8 types of procurement with examples
There are many different types of procurement, each with its own strengths and weaknesses. Identifying and selecting the right type of procurement for a project is key to a successful procurement strategy.
1. Direct procurement
Direct procurement is the purchase of goods or services that are essential to the organization's core operations. The availability and price of directly procured goods and services can impact the cost of goods sold (COGS) of the company. This directly influences the company’s profitability.
Direct procurement can be done through a variety of processes, including open tender, restricted tender, or single-source procurement.
Example of direct procurement:
Direct procurement includes procurement of raw materials and components for construction, manufacturing or processing. For example, a construction company may directly procure steel beams, and other components and raw materials like sand, gravel, and cement needed to lay the foundation and construct a bridge.
2. Indirect procurement
Indirect procurement, also known as indirect spend, is the purchase of goods and services that support the organization's day-to-day operations but are not part of the works, services or products the company delivers. When prices of indirectly procured items and services fluctuate, there’s no direct impact on the cost of goods sold (COGS). Of course, there is still an impact on operating expenses, which can erode profit margins.
Examples of indirectly procured goods and services may include office supplies, catering services, travel arrangements, and maintenance contracts.
Example of indirect procurement:
For a construction company, office rental and maintenance are indirect procurement. For a structural design or engineering company, the purchase of software used to create the drawings and plans is indirect procurement. An employee training program on resilience is another example of indirectly procured services.
3. Services procurement
Services procurement is the process of requisitioning people-based services (as opposed to goods) at an enterprise level, with an agreed scope and deliverables. Labour required is strategically outsourced for a specific purpose.
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 a construction company to design and build the bridge.
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6. Leasing procurement
Leasing procurement is the process of renting assets through leasing agreements instead of purchasing them outright. This helps with cash flow and can be a cost-effective way to access assets that are expensive or 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 promptly contracting goods, services, or works in a timely and efficient manner to respond to an emergency situation.
Emergencies may include natural disasters, pandemics, public health crises, and security threats. Emergency procurement is time-sensitive and streamlined, which 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.
Stages in the procurement process
Step 1: Identify the need
The first step in the procurement process is to identify the need to outsource or contract for services or goods. This step considers the business or organization as a whole for big-picture visibility. A budget is set and scoping begins to identify the requirements for the upcoming purchases or contracts.
Once the need has been identified, a draft 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: Identify and evaluate suppliers
Once the purchase request has been approved, the next step is to evaluate and select suppliers.
How to determine the best suppliers for procurement
Conducting market research, evaluating supplier risk management strategies, social responsibility, customer reviews and references, capacity and scalability can help to identify the best suppliers to work with.
Once a shortlist is created, a site audit to inspect production processes and quality control may help in the final decision.
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
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Ease of communication
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Ethics and values
Step 3: Negotiate contract terms with selected supplier
Once a supplier has been selected, the next step is to negotiate a contract. The supplier agreement should include all of the relevant terms and conditions, such as the price, delivery schedule, payment terms, and warranty. A lawyer should prepare or review the contract before it’s signed.
Step 4: Finalise the Purchase order (PO)
Once the contract has been signed, the purchase order is drafted in step one is finalized and 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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Approval of workflow
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Delivery deadline
Step 5: Receive invoice and process payment
In response to the purchase order, the supplier will send an invoice that details the agreed price, with instructions on how to make payment. Payment terms will align with what was agreed in the contract.
Paying invoices on receipt is a practice that helps build a positive supplier relationship, though most invoices will allow 30 days or longer for payment.
Step 6: Delivery and audit of the order
Once the goods or services are received, compare the order with the invoice and purchase order to ensure that all details are correct. This “three-way match” will quickly identify and remedy any order issues, minimising delays.
If there is any issue with the order quantity, quality or description, contact the supplier to rectify the problem promptly.
Step 7: Maintain an accurate record of invoices
Keep an accurate record of invoices and payments. This helps to identify any over or under-spending, issues with a particular supplier and ensures all documentation is convenient for audits and financial reporting.
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 for construction
Increasingly, governments and parties managing complex infrastructure procurement 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:
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.
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.
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.
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Questions about procurement types:
What are the 4 main types of procurement?
In the supply chain, there are four types of procurement: Direct and indirect procurement, which are methods used to procure goods and services. So goods and services procurement can be direct or indirect, and both direct and indirect procurement can include goods and services.
What are the 4 pillars of procurement?
The four pillars of procurement excellence are:
Spend analysis
Strategic sourcing
Contract management
Supplier relationship management
What are the 7 stages of procurement?
Procurement can be broken into 7 discrete steps:
Identify the needs
Presolicitation
Tender preparation
Tender Process
Award Process
Contract Process
Records Maintenance