What does procurement mean? A quick go-to guide

Procurement isn’t just fancy corporate jargon for purchasing. In business, the term refers to the entire goods and services acquisition process. We’re explaining the complexities with a no-nonsense definition, the 4 main types, a step-by-step process rundown, and procurement best practices.

Table of contents
Procurement meaning Examples Procurement types Other procurement methods in NZ Procurement process Best practices Wise Business: Cost-efficient cross-border transactions FAQs

What does procurement mean in business?

Procurement refers to a multi-stage process of procuring goods or services, from sourcing to shipping and cost negotiations to quality control. Effective procurement reduces operating costs, streamlines processes, mitigates risk, and ensures regulatory compliance.

For larger companies, especially those in manufacturing, procurement is a complex procedure that can make or break financial viability. If a company can’t source sufficient quality goods at a reasonable cost within a specific timeframe, it will struggle to compete. Due to its crucial role, many businesses dedicate personnel, and often entire departments, entirely towards procurement.

A professional specialising in the field is called a Procurement Officer, while the head of a department is the Chief Procurement Officer (CPO).

Procurement in New Zealand: Real-world examples

An Auckland-based construction company, for example, will need to obtain bulk building materials and outsource expertise. Cost is crucial for profitability, but so is quality to maintain its good reputation. The company would use a competitive tendering process to find suitable subcontractors, then mitigate risks by periodically reviewing delivery timeframes and workmanship.

A Kiwi food and beverage manufacturer, on the other hand, will source raw ingredients from local farmers. As one missing ingredient could wreak havoc, the company must build a positive relationship and negotiate long-term contractual agreements. Its Procurement Officer could perform a risk analysis and find back-up suppliers should one farmer suffer crop failure due to severe weather.

Understanding procurement types

Procurement specialists divide the practice into 4 main types, with a degree of overlap between them.

• Direct procurement: Goods and services used directly in the production process, such as milk from a farmer or trusses from a steel manufacturer. Quality is crucial, as these supplies directly impact the company’s revenue and reputation.
• Indirect procurement: Goods and services not directly used in production, such as office supplies and travel arrangements. Many view quality as less critical since indirect procurement doesn’t directly impact the end product.
• Goods procurement: The direct or indirect procurement of physical supplies, such as fruit, timber, and office equipment. Goods can be raw supplies, like steel, or manufactured products, like machinery.
• Services procurement: The direct or indirect procurement of professional services, such as consultants, marketing agencies, and IT specialists. Outsourcing services helps companies fill workforce gaps and improve efficiency.

Other common procurement methods in NZ:

Competitive bidding

Competitive bidding is the most common procurement approach, especially for large-scale projects. The procuring company starts the process by issuing a request for proposal (RFP) that outlines its key requirements.

Vendors then submit a proposal summarising how their goods or services meet the company’s needs, and provide an itemised quote, including shipping and payment terms.

When bidding on goods, vendors detail the materials, size, weight, and any other features that may indicate quality, as well as the quantities and delivery timeframes. For services, proposals focus on the number of staff, the time required to complete the project, and the type of support provided.

The procuring company then chooses the supplier based on various factors, not necessarily on cost alone.

Competitive bidding isn’t the only method.

• Single-source procurement relies on a single, pre-approved vendor.
• Negotiated procurement is when a small number of pre-qualified vendors bid on a tender.
• A framework agreement refers to ongoing contracts with a specific supplier for a set timeframe.

Government procurement

In New Zealand, government agency procurement accounts for 17% of the country’s GDP, or around $51.5 billion annually.¹

Public procurement must follow a strict set of guidelines, making it more time-consuming and complex than equivalent private sector processes. The five principles guiding government procurement are:

• Plan and manage for great results.
• Be fair to all suppliers.
• Get the right supplier.
• Get the best deal for everyone.
• Play by the rules²

What does the procurement process look like?

The procurement process varies between industries, companies, and even products and suppliers. Nonetheless, most procurement teams follow these steps or something similar:

1. Identifying requirements: Evaluating procurement needs, whether direct or indirect and one-off or ongoing.
2. Finding suppliers: Releasing a request for proposal (RFP) to launch a competitive bidding process and compare potential suppliers.
3. Choosing suppliers: Selecting a suitable supplier, and maybe also an alternative supplier to minimise risks.
4. Negotiation: Agreeing on terms like cost, quantity, timeframes, and payment conditions.
5. Purchase order: Submitting a formal purchase order that aligns with the terms of the negotiation.
6. Checking the procurement: Verifying that the quality and quantity of the procured goods or services match the terms stated in the purchase order.
7. Payment: Processing the supplier’s invoice using an approved payment method within the specified timeframe.
8. Review: Analysing procurement KPIs to assess supplier suitability, ensure compliance, mitigate risks (such as changing regulations or supply chain disruptions), and renegotiating terms where appropriate.

Best practices for a streamlined procurement process

Large-scale procurement takes a lifetime to master. But there are a few best practices you can follow to fine-tune the process.

Comprehensive planning

Effective procurement requires in-depth planning to define your requirements, objectives, strategies, and policies. Finding the right supplier involves high-level analysis and making a trade-off between quality, cost, and timeframes.

Setting realistic budgets and deadlines

All suppliers have limitations. Procurement Officers must evaluate the local market to assess realistic costs and timeframes, then select a supplier that aligns with their cash flow restrictions and operational schedules.

Fostering positive relationships

Whether they’re dairy farmers or online freelancers, savvy procurement officers build strong working relationships with their suppliers. Good rapport leads to improvements in performance, reliability, and possibly even price, all while streamlining collaboration.

Adopting fair trade policies

New Zealanders take ethical and environmental responsibilities seriously. A transparent procurement policy prioritising things like lower carbon emissions and animal welfare can help get consumers onside.

Using the right software

Procurement software automates tedious tasks such as sending purchase request orders, processing invoices, managing contracts, and analysing spend. From SAP to Procurify and Odoo, a wide range of options caters to businesses of varying requirements and industries.

Regular reviews

Procurement isn’t a static process; one supplier won’t always offer the best deal. Ongoing audits hone procedures, strategies, and systems to help a company adapt to growth and external market forces.

Risk management

From crop failures to sicknesses and regulatory hurdles, suppliers can suddenly pull the plug for a whole host of reasons. Effective procurement requires identifying risks and taking steps to mitigate them, such as negotiating arrangements with alternatives.

Offshore sourcing

It’s no secret that goods sourced abroad cost significantly less than those made here in New Zealand. Negotiating bulk orders with Asian manufacturers has become the go-to procurement strategy in today’s globalised world.

Wise Business: Cost-efficient cross-border transactions

One sure-fire way to cut procurement costs is to find cheaper goods and services overseas. But with banks adding multiple charges to international transfers and offering an awful exchange rate, much of those savings get eaten up by fees.

Wise Business offers a cost-effective alternative for globally-minded Kiwi companies. Our international transfers use low, transparent pricing and the mid-market exchange rate so you can save when sending money overseas. An efficient, user-friendly batch payment function simplifies proceedings and lets you pay up to 1,000 recipients, ranging from suppliers to contractors, simultaneously.

Wise Business helps streamline overseas business payments without foreign transaction fees, saving up to 6x compared to other providers.

• Free to register — Send money to 140+ currencies with no hidden exchange rate markups
• Make up to 1,000 transfers at once with the Wise batch payments feature
• Fast, low-cost payouts to customers, freelancers, employees, investors, and suppliers globally
• Automate invoice payments, recurring transfers, and international payroll
• Fast and fully secure payments through Wise, even for large amounts

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This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

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Common FAQs on procurement

1. What is the meaning of multiple procurement cycles?
The term “multiple procurement cycles” refers to when a company uses different procurement processes for different departments, regions, or goods and services.

2. What does Incoterms mean in procurement?
The International Chamber of Commerce (ICC) publishes standardised rules, known as Inoterms, that define the core responsibilities of buyers and sellers during the procurement process.

3. What does S2C procurement mean?
Source-to-Contract (S2C) refers to the entire procurement lifecycle, from identifying needs to finding suppliers and finalising contracts.

4. What does RFP mean in procurement?
A request for proposal (RFP) is a formal document soliciting bids from vendors for specific goods and services. The request outlines core requirements and asks vendors to provide the cost of fulfilling those requirements.

5. What does material procurement mean?
Material procurement is the process of acquiring raw materials needed for manufacturing, construction, or food preparation.

6. What does parts procurement mean?
Parts procurement is the acquisition of components, materials, or spare parts.

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Sources:

1. Procurement NZ: What is procurement
2. Procurement NZ: Principles charger