Understanding the Basics: What Is Procurement?

Now more than ever, procurement teams are tasked with helping their organizations reach decisions on how to maintain business continuity while also planning for the future. With the help of technology, the office of procurement can more rapidly shift from a tactical organization to a strategic partner in the business. 

Increasingly, businesses are realizing that strengthening procurement, strategic sourcing, and supply chain management is critical to their success. With an efficient procurement process, they can improve operational efficiency, drive down costs, mitigate risk, and enhance supplier collaboration and engagement. To support these crucial efforts, procurement teams must be empowered with the right cloud-based capabilities.

In this article, we’ll explain more about the types of procurement, technologies that manage and support procurement, and why automation and technology have become increasingly important to the success of procurement processes and procurement teams.

What Is Procurement?

Procurement is the process of securing necessary goods and services for the business. There are two main types: direct procurement and indirect procurement.

Direct procurement is when companies obtain parts or materials that go into their end products (usually manufactured). In product-oriented organizations, management of sourcing and procurement is often handled by the manufacturing or operational teams.

Indirect procurement occurs more often in services-oriented companies, which typically see sourcing in categories such as contingent labor, consulting services, advertising, janitorial services, office supplies, or anything else that keeps the company running. This “indirect” spend often represents a considerable percentage of an enterprise’s expenses. In services-based companies, the team that manages the acquisition process typically reports to the finance department.

Another key piece of procurement is sourcing: the process of sending out requests for proposals (RFPs), vetting bids, negotiating with suppliers, and managing contracts for goods and services. Sourcing is the upstream process that helps enterprises make strategic supplier and cost decisions, while procurement is the downstream process that facilitates the receipt of and payment for goods and services. 

More and more, businesses are elevating the leader of procurement to the C-suite in the form of a chief procurement officer (CPO) to drive strategic spend management across their organizations. 

What Is Procure to Pay? 

Procure to pay (P2P) is the process by which organizations secure and pay for the goods and services they have sourced from their suppliers. Typically, it starts with the procurement department defining what suppliers an organization will contract with and what services they will provide. Then, employees create requisitions and select the goods or services needed. Once requisitions are processed, procurement creates purchase orders (POs) and pays invoices for the selected goods or services. P2P also includes catalog and inventory management, purchases, receipt and stocking, and invoice processing and payment.

What Is Source to Pay?

Source to pay (S2P) encompasses all of the procurement functions preceding P2P. These consist of sourcing specific products and services, including the internal management of procurement projects and external engagement in the RFP stage. Tools such as Workday Strategic Sourcing can help simplify:

• Project intake.
• Sourcing pipeline.
• Contract and supplier management.
• RFx (Requests for information, proposals, or quotes).
• Reverse auctions.

What Is Procurement Software?

Procurement software automates the process of securing goods and services and enables faster, smarter decisions across spend analysis, strategic sourcing, procurement, and payment. Procurement tools started with pen, paper, and calculators, and progressed through spreadsheets—still a primary tool for many smaller companies. Now though, procurement technology has evolved into an integral component of many enterprise resource planning (ERP) systems.

Workday offers both sourcing and procurement software that also integrates into our core Workday Financial Management system. Some Workday customers enjoy the added benefit of Workday Human Capital Management capabilities, connecting their people, finance, and procurement data for a holistic view into back-office operations. 

Enterprises can also monitor whether preferred suppliers and contracts are being honored and identify opportunities to create a new contract, or to enforce and reduce off-contract spending. An integrated system also enables insight into spend broken out not only by department but also by project, supplier, marketing campaign, and even by employee. 

Real-World Benefits of Automating Procurement

Automating procurement can greatly improve process compliance. That’s because disjointed manual systems force sourcing and purchasing teams to spend an unreasonable amount of time dealing with data and process challenges. Consequently, frustrated employees often bypass the purchasing process—which leads to rogue spend and increased risk to the business.

For most companies that automate procurement, the biggest benefit is strategic cost savings and increased efficiency. By reducing the hassle involved in buying from approved suppliers—especially where volume discounts have been negotiated—the cost of purchased services and goods can go down via increased use of approved suppliers. Also, simplifying the invoice-matching process can enable companies to take advantage of early pay discounts. On the efficiency side, procurement automation can help reduce the risk of human error by taking manual tasks such as data entry off of employees’ plates. This in turn frees up more time for employees to  tackle more strategic initiatives such as contract negotiation and supplier management.

How Does Technology Transform Procurement? 

By using software to help manage the procurement process, especially automating workflows, approvals, and reviews while ensuring access to accurate and timely data, companies can achieve these benefits:

• Process simplification. Technology simplifies the procurement process by integrating disparate and disjointed elements into one cohesive process. 

• Increased visibility and control over spend. With a streamlined sourcing process, enterprises can better optimize spend and engage with key stakeholders. Sourcing and procurement leaders find the most success with platforms that enable cross-functional teams to quickly and efficiently share information, establish a record of their deliberations, and centralize data in a single hub. Such a system gives all interested parties ready access to purchase information, saving the time it usually takes to hunt through scattered spreadsheets and email messages.

• Time savings. With the right solution, sourcing and procurement teams can automate previously tedious activities and provide instant visibility to stakeholders and business partners. Companies can also support on-the-go purchasing with mobile-enabled business processes. Automation allows all parties to get things done as efficiently and effectively as possible.

• Better decision-making. Strategic sourcing software centralizes data and collaboration capabilities needed for analysis and decision-making, including visibility into future spend. Access to reliable data also enables an organization to better evaluate the effectiveness of its spending. And, by enabling teams to collaborate using their knowledge of products, vendors and markets, they’ll more likely select and source the best materials, products, and services from the most appropriate vendors. Digitally transformed sourcing and procurement departments have greater insight into markets and vendors, enabling sourcing and procurement to advise business stakeholders on pricing trends that may impact product cost, quality, and more.

• High adoption. With intuitive sourcing and purchasing tools that are easy to use, companies can increase enterprise-wide adoption and thereby drive compliance with procurement policies. 

• Increased value. By eliminating tedious and low-value work, sourcing and procurement experts, as well as accounting departments, can devote more time to strategic initiatives as opposed to transaction management.

• Improved scalability. Technology and automation play a major role in ensuring that sourcing and procurement capabilities can scale up as a company grows or its requirements shift.

• Increased transparency. With visibility into processes, strategic sourcing leaders can examine supplier relationships and contractual obligations so managing these becomes easier. Suppliers, meanwhile, can get more transparent access to projects and act as strategic partners to the enterprise. Workday Procurement, for instance, extends the Workday experience to suppliers through our supplier portal, which allows suppliers to maintain their personal data and specify their goods and services. Suppliers can also view their POs, view and load catalogs, view and respond to requests for quotes (RFQs), and view and create invoices from POs. This allows companies to automate invoice processing and payments while improving supplier management. 

Benefits of Connecting Workday Procurement to Other Systems

With an integrated system, enterprises can gain a holistic insight into spend and have more ability to enforce spend parameters and spot inefficiencies. In many cases, businesses that integrate Workday Procurement with their other enterprise management systems see drastic reductions in rogue spending and better savings tracking across the business. Additionally, increased automation and real-time reporting give companies a clearer picture of their contractual obligations and help them better allocate resources to future projects. 

A best-in-class financial and procurement management system enables organizations to:

• Drive maximum impact. Digitized procurement empowers teams with real-time spend visibility. With sourcing information and spend analytics linked with financial planning and analysis, enterprises get insight into recurring trends, annual budgeting, and how sourcing and procurement can best support business needs. With Workday Strategic Sourcing, for instance, organizations get visibility into spend from the very beginning and gain actionable insights into their sourcing data. 

• Make data-driven decisions faster. By consolidating all sourcing and procurement-related data into a centralized system, departments can more easily analyze their performance and make strategic decisions. Procurement teams today must be ready to quickly adapt to ever changing circumstances and opportunities. This requires access to data and insights from that data.

• Identify and repurpose savings. Workday gives you the details on who, what, when, where, and why in every transaction. With the ability to capture and analyze data in business terms, Workday allows you to better understand your organizational spend. 

Partner Strategically With the Business

Powerful procurement is a force for top-line growth, efficiency, and transformation, making companies smarter, faster, and more scalable. Real-time access to market data and trends makes procurement critical to strategic decision-making. Utilizing technology such as automation and advanced analytics will empower the procurement sector to successfully manage more complex challenges to unlock new value.

Curious how Workday can help you take procurement to the next level? Find out how you and your team can streamline procure to pay and save valuable time.