Find out more about the different types of procurement and the many procurement methods that are available to organisations and when they are best used.
By Steve Rowland on 1 August 2022
The UK and global supply chains are part of a dynamic, constantly evolving market, which presents a difficult task for any organisation’s procurement team. Trying to keep up with how the markets change, as well as the different methods and types of procurement available to them, can be challenging.
That’s where eXceeding comes in – a procurement consultancy that was founded on the principle of providing impartial, best practice, procurement advice to organisations of all shapes and sizes. Working with both the public and private sector, eXceeding has a wealth of experience delivering procurement solutions to the marketplace.
This guide outlines the different types of procurement, covering what they are in detail, as well as the many procurement methods that are available to organisations and when they are best used.
In total, there are four different types of procurement:
Each of these can be broken down by their main functions within the organisation and whether they’re procuring a good or service. Sometimes the different types of procurement can vary depending on the organisation but in general, these are the accepted classifications.
Direct procurement refers to anything used to create a product that’s offered to the end user. This isn’t just limited to raw materials of products – it can also include supplies that are re-sold by an organisation.
Direct procurement is often the type that is prioritised by an organisation. It will be thoroughly planned out and budgeted for, relying on long-term agreements with suppliers. But without a solid strategy for direct procurement, an organisation may come into serious issues, such as a failure to acquire all the parts necessary for their products, resulting in nothing to offer the end user.
Indirect procurement includes items that are of great importance but are not necessarily essential to the manufacturing or production process. These purchases are usually of more day-to-day items that an organisation may need, including everything from computers and general office equipment to marketing and advertising services.
Indirect procurement is less reliant on long-term relationships and in-depth strategies, with purchases often made as and when required. This gives the procurement teams much more flexibility when it comes to purchasing and is much less dependent on the cost of procurement.
Goods and works procurement can fall under either the direct or indirect categories, as it refers to the purchasing of physical items and things such as software subscriptions. For this type of procurement to be successful, it relies on good supply management to ensure the different goods are kept on top of and arriving at the designated times, that costs aren’t driven up, and that a steady stream of goods are coming in.
This type of procurement is much more focused on people-based services that an organisation might need. Again, this can come under both direct and indirect procurement but lends itself more to the latter. Services procurement can include:
Services procurement is less reliant on good supply management and more so on good working relationships and communication.
Put simply, a procurement method is the method or process used by an organisation to procure goods, supplies, and services. The method chose may depend on a number of things, including the industry an organisation is in, the type of procurement they are looking for, or on specific circumstances such as emergencies etc.
In total, there are 7 different types of procurement methods for a team to choose from:
The names may vary depending on the organisation and the industry, but the process is the same.
Open tendering is really just another way of saying competitive bidding. In this method, organisations will bid on goods in an open competition, designed to encourage competitors to obtain goods, which emphasises the value of money. It is, however, seen as an ineffective way for procurement of large quantities due to its focus on the output process and not abiding by strict standards needed for large-scale procurement.
Open tendering requires a company to do the following:
Often referred to as selective bidding, this method of procurement limits the number of requests for tenders that can be sent by a supplier or service provider. Like open tendering, this method is known as a competitive procurement method, but in this instance, the competition is limited to agencies invited by the procurement team.
This means that the procuring team should also establish clear guidelines for selecting the suppliers and service providers on the invitation list, ensuring the best-suited agencies are chosen from and that the result is not random. An advantage of this approach is that it saves an organisation time and money during the selection process.
An RFP is a term used by organisations around the world and is not exclusive to the procurement industry. It’s a method used by procurement teams that wish to be proactive in their selection. By searching out the best suppliers or service providers in the industry, the procurement team can then request a proposal from them as to why they would be the best fit for a project.
This method of procurement is done through a two-step proposal process. An agency will submit a two-envelope proposal – the first containing the details of the submission and the second containing the financial bid from the agency, which should only be opened once the first proposal has been approved or rejected. This takes any biases based on cost out of the equation. It also allows the proposal with the best qualifications and price to be selected.
This method is used to gain general information from vendors in a formal way using consistent proposals, helping an organisation narrow down who the best suppliers and service providers are.
Organisations will often use an RFI when they’re unsure on what the best solution for their problem might be, as requests can span a variety of suppliers and service providers. This method is often seen as a casual request for help from suppliers, allowing a procurement team to quickly see what the next steps are and how potential suppliers can meet their needs.
For this method of procurement, there are two procedures that are used, which can be disadvantageous for procurement teams that are on a tight time frame. However, this method does allow for more flexibility in terms of discussing how mutual needs can be met.
Similarly to an RFP, the first procedure involves the procurement team receiving two envelopes, with the proposal in one and the cost of the proposal in the other. However, in this case, the bidder must also submit a technical proposal, highlighting how their solutions fill the requirements. This proposal will be scored based on relevance to the solution needed. The winning bid will then be invited to discuss how they can come to an agreement over the technical proposal and, if a final agreement is reached, then they’ll submit their financial proposal and begin to negotiate the contract.
The second procedure has suppliers and service providers submit a partial proposal. This will include methodology and technical specifications, but not to their full extent. This gives the procurement team more room to customise and discuss requirements. Once the highest bidder is selected, they will be invited to submit the full proposal, and only then will the financial proposal be opened.
The RFQ method is used particularly for small-valued goods and services. This is the least complex method used and allows for fast turnaround for procurement teams. Much less formal than other methods, the procurement team will select a minimum of three vendors and ask each of them for a quote. The quotes will then be compared and analysed against each other, in line with the requirements, before one is chosen.
Single source procurement is a non-competitive method of procurement that’s used when a procurement team wish to only acquire goods or services from a sole provider.
Requiring strict approval from management beforehand, this methos is only used when circumstances call for it. This includes:
The type of procurement method used is highly dependent on the circumstances and what is right for the organisation. It can also often depend on the good or service an organisation is looking for or the requirements the procurement team has regarding time frames etc. Although there may be 7 methods, an organisation will often favor one or two more than the others.
eXceeding provides fair and impartial advice for any organisation looking to improve their procurement strategy, offering help and guidance with or without a procurement leader. Get in touch to collaborate together and to learn about how your organisation can improve its indirect procurement through better cost optimisation and supplier management.
Before eXceeding, Steve spent 16 years working on the supplier-side of outsourcing. During Steve’s 24 years’ experience, he has worked on global and UK outsourcing deals, ensuring the creation of win-win partnerships.
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