What is procurement? Everything you need to know about it

Procurement is everywhere, and it’s inevitable. Be it a publicly traded company or an early-stage startup, procurement is happening, whether it’s formalized or not. It can be complex, and making sense of it starts with understanding that it touches every part of a business: from the vendors you work with to the budgets you manage and the processes that keep spending in check.

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At its best, procurement becomes far more than an administrative function, it's a strategic lever that supports scaling and competitive advantage. Its added value extends well beyond cost savings. Done well, procurement strengthens supplier relationships, reduces organizational risk, and gives leadership the visibility they need to make faster, better-informed financial decisions.

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What is procurement? Definition and meaning

Procurement is the process of finding, purchasing, and acquiring the goods or services a business needs to operate. Procurement as a whole can bring immense value to a business that’s often hidden in plain sight, though it can also present many challenges.

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As long as you have business needs, money in the bank and internal stakeholders who will spend it, there will be procurement. Whether a procurement process and procurement policy are respected or not, that’s another story. 

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Why is procurement important for businesses?

The real question is: why wouldn't it be? With the right approach, procurement is a key strategic value driver, one that shapes your business's competitive advantage in ways that go far beyond a single purchase request.

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A well-designed procurement process keeps you out of compliance trouble in heavily regulated environments, secures favorable contract terms before you're locked in, and protects you from the kind of costly, multi-year auto-renewals that quietly drain budgets. The impact compounds over time, and so does the cost of getting it wrong.

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Types of procurement explained

The key types of procurement to be aware of are, direct vs indirect and goods and services. 

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Direct vs. indirect procurement

The main difference between direct and indirect procurement is their impact: direct procurement supports production and revenue generation, while indirect procurement focuses on cost control, compliance, and overall operational efficiency.

• Direct procurement refers to goods and materials directly used in the production of a company’s products. 
• Indirect procurement covers everything else needed to run the business, such as services, software, or office supplies. 

This distinction helps businesses better manage spending, streamline processes, and align procurement strategy with broader business goals.

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Goods vs services in procurement

Procurement covers two types of spend, and knowing the difference shapes how you manage each one.

• Goods are tangible, physical items. Think raw materials, equipment, hardware, office supplies. They're straightforward to evaluate: you either received what you ordered or you didn't.
• Services are intangible. They are delivered through expertise, effort, or access rather than a physical product. Think software subscriptions, consulting, or legal retainers. They're harder to measure, which makes contract management and performance tracking all the more important.

The distinction matters because sourcing, negotiating, and managing a one-time equipment purchase looks nothing like handling a multi-year SaaS contract.

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How does procurement work in a business?

Procurement is how a business acquires the goods and services it needs to operate. The word sounds formal, but the activity is universal, if your company spends money on anything outside of payroll, you're doing some form of procurement.

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Here's how it looks from two different vantage points:

• ‍From the end user's perspective, it starts with a need. Maybe your team needs new laptops, a software subscription, or an outside consultant. You identify the need, figure out how to fill it, and kick off a request to actually get it.‍
• From the procurement team's perspective, there's a lot more going on behind the scenes. They're vetting suppliers to make sure they're legitimate and compliant. They're enforcing a process so purchases don't happen on a whim or outside policy. They're negotiating with vendors to squeeze out the best pricing, terms, and overall value. They're converting purchase requests into official purchase orders. And they're working closely with finance to make sure spending stays within budget.

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The kicker? Procurement is happening at virtually every company, regardless of size or industry. A three-person startup buying cloud storage is technically procurement. A Fortune 500 company signing a multi-million dollar supplier contract is doing procurement. The difference is usually just how formal (or informal) the procurement process is.

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Procurement vs purchasing: Key differences

Procurement and purchasing are often used interchangeably, but they're not the same thing. Purchasing is actually a subset of procurement, it's the transactional part, the act of executing a buy once a purchase request has been made, approved, and an invoice received.

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Procurement is the broader discipline. It starts well before any money changes hands, with identifying a need, evaluating suppliers, negotiating terms, and making sure the right guardrails are in place. Purchasing kicks in at the tail end of that process, handling the actual transaction.

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Think of it this way: every purchase is part of procurement, but not every procurement activity results in an immediate purchase. Procurement is strategic; purchasing is operational. Confusing the two is part of why so many businesses underinvest in procurement as a function, they see the purchase orders, but miss everything that should be happening upstream.

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Procurement process

Procurement is composed of many subprocesses, involving many vendors, internal stakeholders, etc. Finding your way through the process can be tricky. 

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Here’s a simple breakdown of the key stages in the procurement process:

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Step 1: Need identification

You will first want to identify your business needs. This step defines what you need, how much of it, at what price, and by when it is required. You will want to consult relevant internal departments and stakeholders to make sure that your purchase aligns with business needs and requirements.

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Step 2: Supplier identification

Once your needs are clear, you identify potential suppliers who can meet your requirements. This includes researching the market, leveraging existing vendor databases, and shortlisting suppliers that align with your criteria in terms of cost, quality, location, and reliability.

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Step 3: Supplier evaluation

Next, you assess shortlisted suppliers to determine the best fit. This involves comparing pricing, product or service quality, delivery timelines, financial stability, and potential risks to make an informed decision.

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Step 4: Supplier negotiation

With a preferred supplier selected, you negotiate key terms such as pricing, delivery schedules, payment terms, and contract conditions. The goal is to secure the best value while building a strong, long-term relationship.

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Step 5: Purchase request and purchase order creation

A formal purchase request is submitted and approved internally to ensure alignment and budget control. A purchase order is then issued to the supplier, clearly outlining quantities, pricing, delivery details, and agreed terms.

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Step 6: Receive and check the goods

Once goods or services are delivered, they are received and inspected to confirm they meet the agreed specifications, quality standards, and quantities. Any discrepancies are flagged and resolved with the supplier.

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Step 7: Invoicing

The supplier submits an invoice, which is reviewed and matched against the purchase order and delivery receipt. This step ensures accuracy and prevents errors or overpayments before approval.

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Step 8: Payment

After validation, payment is processed according to the agreed terms. Timely and accurate payment helps maintain strong supplier relationships and ensures smooth future transactions.

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What are the benefits of procurement?

Remember, procurement will happen regardless of your business’s intentions. There are ways that procurement can and should be optimized to drive value. Reality is, this list could be go on. 

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Below are some of the main benefits that result from optimizing procurement: 

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• Cost savings
• Time savings
• Visibility and control over spend
• Operational efficiency
• Data driven decision making
• Risk reduction
• Better compliance
• Ability to scale

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What are some challenges in procurement? 

Procurement is a double edged sword, with benefits come challenges. Being aware of procurement challenges will help you design and implement an effective procurement process built for success. 

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Manual work 

Procurement teams still spend significant time on tasks that could be automated: data entry, purchase order creation, invoice matching, and approvals. Manual work slows cycle times, introduces errors, and pulls skilled teams away from higher-value work like supplier negotiations.

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Fragmented communication and data 

With the many stakeholders involved, going back and forth can feel like playing telephone. This is particularly common when multiple tools are used and ERP end users struggle to log requests or updates correctly. Fragmented communication leads to fragmented data, especially between the ERP and any accounting system, making it hard to get a single, reliable view of spend, commitments, or supplier performance.

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Staying compliant and avoiding risk 

Operating in highly regulated environments means procurement teams must enforce procurement policies, maintain audit trails, verify supplier credentials, and stay on top of changing regulations. Without the right systems in place, non-compliant purchases slip through, maverick spend goes undetected, and companies are exposed to financial, legal, and reputational risk.

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How can procurement software improve your process?

The ERP is the beating heart of a business, one of the most critical, and most difficult systems in the business to work with for end users. Procurement software doesn't replace it. It works with your ERP. 

• It takes complexity away from end users: When employees aren't required to interact directly with the ERP, user adoption and policy adoption become one and the same.
• It reduces manual work: Purchase order creation, invoice matching, approval routing,  automated, so procurement teams can focus on work that actually moves the needle.
• It creates a single source of truth: Procurement and finance gain a unified, real-time view of spend, commitments, and supplier performance.
• It meets your organization where it already operates: Native integrations reduce friction, accelerate adoption, and close the gaps where maverick spend takes root.

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Procurement process optimization: a real-world case study

Flix, a leading global travel-tech company with over 5,600 employees, was facing growing complexity in its procurement processes. Teams were spending valuable time manually entering the same data across both their ERP and ticketing systems, creating inefficiencies, slowing down approvals, and limiting visibility across requests.

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To streamline operations and improve the employee experience, Flix implemented Pivot as its procurement solution.

Since using Pivot, Flix has achieved:

• 75% reduction in approval times, accelerating decision-making across teams
• 30% decrease in procurement cycle times, enabling faster execution and reduced bottlenecks
• End-to-end visibility into requests, empowering employees with clear, real-time insight into procurement status

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By eliminating manual work and centralizing workflows, Pivot has helped Flix improve its procurement process adoption, making it faster, more transparent, and easier to navigate for every stakeholder involved.

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Streamline your procurement with Pivot

Procurement's strategic value is often hidden in plain sight, beneath stakeholder management, fragmented workflows, and spreadsheets that aren’t scalable. Pivot sheds light on that value, turning procurement from a cost center into a competitive advantage. Pivot is a full-suite source-to-pay procurement platform designed for teams who need to gain control and increase visibility on spend. 

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Pivot brings together seamless intake-to-procure, procure-to-pay, AP automation, spend analytics, budget management, and more, equipping your team to run a robust, efficient procurement process. 

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Pivot is easy-to-use, fast to implement, and full of features and capabilities without the added complexity that often comes with source-to-pay platforms.

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Get in touch with our team to learn more about Pivot.