Procurement is the commercial process of purchasing goods, services, or other works from external sources, and agreeing the terms on which they will be supplied. Major procurement activity may involve the use of a tendering or competitive bidding process. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement. Those who work in procurement tend to be known as procurement agents or purchasing agents. The term "procure" may also refer to a contractual obligation to "procure" something, i.e. to "ensure" that the thing is done.
As an organizational process, procurement is intended to ensure that the buying organization receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion. In practice, the procurement process is commonly organized into seven steps that provide structure and consistency across purchasing activities.Procurement Tactics, Procurement Process: Master 7 Essential Steps in 2026, published on 12 August 2021, accessed on 01 December 2025
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and fluctuations in the prices of goods. Organisations that have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account.Salam, M. A. (2007), Social responsibility in purchasing: the case of Thailand, International Journal of Procurement Management, vol. 1, issue 1/2, 97-116, accessed 27 January 2021. Salam refers to CSR in a purchasing context as "purchasing social responsibility" (PSR). On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen ways.
Overview The Institute for Supply Management (ISM) defines procurement as an organizational function that includes specification development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Federal US legislation defines procurement as including A company's procurement function, specifically its spending on suppliers, typically accounts for more than half of the company's total budget.
Purchasing is a subset of procurement that specifically deals with the ordering and payment of goods and services. Organizational procurement is also referred to as "organizational buying" or "institutional buying," for example, in studies of the buying behavior of staff involved in purchasing decision-making.Webster, F. E. and Wind, Y., A General Model for Understanding Organizational Buying Behavior, Journal of Marketing, Volume 36, Issue 2, April 1972
Procurement activities are also often divided into two distinct categories, direct and indirect spend. Direct spend refers to the production-related procurement that encompasses all items that are part of finished products, such as raw materials, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement concerns non-production-related acquisition: a wide variety of goods and services, from standardized items like office supplies and safety equipment to complex and costly products and services like heavy equipment, consulting services, and outsourcing services.Lewis, M.A. and Roehrich, J.K. (2009), Contracts, relationships and integration: Towards a model of the procurement of complex performance. International Journal of Procurement Management, 2(2):125–142.Caldwell, N.D., Roehrich, J.K. and Davies, A.C. (2009) Title needed.
Direct procurement Indirect procurement Raw material and production goods Maintenance, repair, and operating supplies, outsourcing Capital goods and services QuantityLargeLowLow ValueIndustry-specificLowHighNatureOperationalTacticalStrategicProcessScheduledScheduled or UnscheduledCapital ProjectExamplesSteel, Resin, RubberSafety Equipment, spare parts, ITWarehouses, Vehicles, Oil Wells
A 2011 report found that the average procurement department manages 60.6% of total enterprise spend. This measure, commonly called "spend under management" or "managed spend", refers to the percentage of total enterprise spend (which includes all direct and indirect spend) that a procurement organization manages or influences. Alternatively, the term may refer to the percentage of addressable spend which is influenced by procurement, "addressable spend" being the expenditure which could potentially be influenced.Jaggaer, How do you optimize addressable spend?, published 24 May 2016, accessed 16 January 2018 The average procurement department also achieved an annual saving of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%. A more restrictive definition of "spend under management" includes only expenditure that makes use of preferred supplier contracts and negotiated payment rates and terms.Britt, H., How to Bring More Spend Under Management, Una Group Purchasing Organisation, published 27 April 2021, accessed 15 June 2023
History The first record of what would be recognized now as the purchasing department of an industrial operation relates to the railway companies of the 19th century:Organized procurement has its roots in military logistics, where armies required structured systems for supplying troops with personnel, equipment, and material.
The modern history of corporate procurement often dates back to Henry Ford's response to the supply disruptions of World War I. After the war cut off supplies such as British-controlled rubber from Ceylon, and amidst Ford's mistrust of his own suppliers' practices, Ford moved from assembling parts made by outside firms toward full vertical integration.
Trust in supplier networks was restored during World War II, when the U.S. War Production Board, coordinated the distribution of materials and converted American industry to military production. General Motors at the time developed a variant of vertical integration by creating "captive suppliers” that balanced the benefits of in-house production with the cost and efficiency benefits of a free market.
In the wake of the 1973 oil crisis triggered by an OPEC embargo, Japanese automakers found an opportunity to capture market share. In addition to focusing on manufacturing smaller, more fuel-efficient cars, they also changed their manufacturing processes. Toyota had already begun developing what became known as the Toyota Production System, incorporating kanban scheduling and kaizen. A central element was keiretsu, a network in which Toyota took minority equity stakes in key suppliers, binding the companies together through mutual financial interest rather than outright ownership.
Facing continued Japanese competition in the 1980s, General Motors pursued aggressive cost reductions from suppliers and introduced a supplier-efficiency program known as PICOS, an acronym for "program for the improvement and cost optimization of suppliers", sending teams to analyze suppliers' manufacturing processes directly.
As outsourcing and global sourcing expanded through the 1990s, the resulting proliferation of direct supplier relationships became difficult to manage, leading to the practice of supplier tiering, in which large "tier-1" suppliers take responsibility for coordinating "tier-2" suppliers.
Since the 2000s, large technology companies such as Apple and Dell have moved away from the vertically integrated, plant-owning model exemplified by Ford. Instead they orchestrate extensive global networks of specialist suppliers bound by contractual and collaborative relationships rather than by equity stakes. For example, Apple does not manufacture the iPhone itself, but retains ownership of much of its underlying intellectual property, including its own silicon chip designs, and directs specialist suppliers down to the level of individual components.
Tim Cook, who became Apple's chief executive in 2011 after serving as the company's head of worldwide operations and procurement, is frequently cited as an example of a supply-chain and procurement specialist rising to lead a major corporation.
Sourcing and acquisition Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature (the process of physically buying a product or service) and sourcing and acquisition are viewed as more strategic and encompassing. The term procurement is used to reflect the entire purchasing process or cycle, and not just the tactical components. Procurement software (often labeled as e-procurement software) manages purchasing processes electronically.
Acquisition processes Some aspects of a procurement process may need to be initiated ahead of the majority of the project, for example where there are extensive lead times. Such cases may be referred to as "advance procurement".United States Coast Guard, RFP released for Coast Guard's heavy polar icebreaker, published 5 March 2018, accessed 24 November 2022
Many writers also refer to procurement as a cyclical process, which commences with a definition of business needs and develops a specification, undertakes search activities or places advertising aimed at identifying suppliers and adopts appropriate methods for consulting with them, inviting and evaluating proposals, secures on contract and takes delivery of a new asset or accepts performance of a service, manages the ownership of the asset or the delivery of the service and reaches an end-of-life point where the asset becomes due for replacement or the service contract terminates. At this point the cycle would recommence.Delta eSourcing, What is the Procurement Cycle?, accessed 21 January 2021Chartered Institute of Procurement & Supply, Procurement and Supply Cycle, accessed 21 January 2021 Bunn notes that search activities are a central preliminary action to be undertaken before buying decisions can be made.
The Chartered Institute of Procurement & Supply (CIPS) recommends involvement of procurement staff and skills from an early stage in the cycle, noting that such "early procurement involvement" can have a beneficial impact on the nature and timing of any approach to market, the specification and the sourcing strategy and supplier selection approach adopted.Rogers, P., Early Procurement Involvement, Procurement Glossary, Chartered Institute of Procurement & Supply, accessed 31 August 2023
Decision-making