Procurement: The Process, the Capabilities, and How to Design It

Key Takeaways

• Procurement is broader than purchasing. Purchasing places orders; procurement also covers sourcing strategy, supplier selection, contracts and supplier management.
• Procure-to-pay is the end-to-end value stream from a need to a paid supplier. It crosses procurement, receiving and accounts payable.
• Strategic sourcing decides how a category is bought and from whom; transactional purchasing makes buying within those decisions fast and compliant.
• Assess procurement capability by capability. The weak point is often one capability, such as contract management, not the whole function.
• Most procurement value is decided before the purchase order: in category strategy, supplier selection and contract terms.
• Operating model choices, centralized, decentralized or center-led, determine who owns each capability.

What Is Procurement?

Procurement is the set of activities by which an organization acquires the goods and services it needs from outside suppliers, on the best terms it can get, with acceptable risk.

It is often used interchangeably with purchasing, but the two are not the same. Purchasing is the transactional part: raising a requisition, issuing a purchase order and following it to delivery. Procurement includes purchasing and the work around it: analyzing what the organization spends, deciding how each category should be sourced, running competitive events, qualifying and selecting suppliers, negotiating and managing contracts, and measuring how suppliers perform.

Procurement buys two broad kinds of thing. Direct spending goes into what the organization sells, such as raw materials and components for a manufacturer. Indirect spending keeps the organization running: software, facilities, professional services, travel, marketing. The two are usually managed differently. Direct spending is tied to production plans and quality requirements; indirect spending is spread across many budget holders, which makes it harder to see and harder to control.

The work also divides by horizon. Strategic procurement decides how a category will be bought for the next few years. Tactical procurement runs the sourcing events and contracts that put those decisions into effect. Operational procurement handles day-to-day buying within them. Organizations that blur these horizons tend to spend skilled category managers' time chasing purchase orders.

The Procurement Process: Source-to-Contract and Procure-to-Pay

Procurement is usually drawn as one process. It is clearer as two connected value streams: one that sets up how a category is bought, and one that runs each purchase.

Source-to-contract runs occasionally, perhaps once every few years per category. It starts from a need or an expiring contract, analyzes spending and the supplier market, runs a sourcing event, evaluates bids, negotiates and awards, and ends with a signed contract and suppliers set up to be ordered from.

Procure-to-pay runs constantly, thousands of times a month in a large organization. It starts when someone needs something, and ends when the supplier is paid. Its stages are simple to describe and surprisingly hard to make fast: the request, approval, a purchase order, the supplier's confirmation, receipt of the goods or service, matching the invoice to the order and receipt (the "three-way match"), and payment.

The two streams depend on each other. If source-to-contract has done its job, most purchases in procure-to-pay go through a catalog or an existing contract, at agreed prices, with no negotiation. If it has not, every purchase becomes a small sourcing exercise, and the procurement team spends its time on transactions instead of strategy.

Procurement Capabilities: A Capability Model

A capability model breaks procurement into the distinct abilities an organization needs, independent of who performs them or which system supports them.

The model below is the Sourcing and Procurement branch of Capstera's Supply Chain Management capability model, which has seven Level 1 capabilities and 45 at Level 2 in total. It shows the seven Level 2 capabilities that make up procurement, each with its definition and examples of the measures used to assess it. Sourcing strategy, the decision about what to make or buy and how to structure the supply base, sits one level up in the same model under supply chain strategy, because it is set with the rest of the supply chain rather than within procurement alone.

Two features of the model are worth noticing. First, it separates capabilities that are often merged in practice: contract management is distinct from strategic sourcing, and supplier collaboration is distinct from supplier performance management. Second, every capability is defined as an ability, not a team or a system. The same capability may be performed by a central team in one organization and by business units in another; the definition does not change.

How to Assess Procurement Capability

"Procurement is slow" or "procurement does not save money" are symptoms. A capability assessment finds which capability is causing them.

Rate each capability on two dimensions: how important it is to the organization's strategy, and how well it performs today, using evidence from the measures rather than opinion alone. A manufacturer exposed to a few critical components should weight supplier risk management highly; a professional services firm whose spending is mostly indirect may weight purchasing and contract management more.

The result, a capability heat map, usually tells a more precise story than the complaint that started it. Slow buying is often a purchasing capability problem, such as missing catalogs or long approval chains, but sometimes a contract management problem, because there is no contract to buy against and every purchase becomes a mini-tender. Missed savings may come from strategic sourcing, or from contract management if negotiated prices are never enforced when the invoices arrive.

The heat map then guides investment. A procurement suite, a new operating model and a category management program fix different capabilities, and it is worth knowing which one is weak before choosing among them.

1. List the procurement capabilities, using a reference model so nothing is missed.
2. For each, gather evidence: the measures above, process maps and stakeholder interviews.
3. Rate importance to the strategy and current performance on a consistent scale.
4. Publish the heat map and agree the priority gaps with the business, not only within procurement.
5. Choose interventions per capability: process, people, technology or operating model.
6. Set targets for the measures that define each gap, and track them.

Procurement Operating Models

Once the capabilities are clear, the operating model decides who performs each one and where.

A centralized model puts procurement in one team that buys for the whole organization. It gives the most leverage with suppliers and the most consistent policy, at the risk of being distant from what the business units actually need. A decentralized model lets each business unit buy for itself; it is responsive, but it fragments spending and duplicates suppliers. Most large organizations end up with a center-led or hybrid model: a central team owns category strategy, policy, systems and the largest sourcing events, while business units or shared service centers handle day-to-day purchasing.

The capability model makes these choices concrete. Instead of debating whether "procurement" should be central, the organization decides capability by capability: strategic sourcing for shared categories, central; purchasing, a shared service; supplier collaboration for direct materials, with the plants that work with those suppliers daily. That is a more defensible design, and it is easier to change one capability's placement later without reorganizing everything.

A Worked Example: Fixing Slow Purchasing at an Insurer

An illustrative example. The insurer and its findings are invented to show how a capability view changes the diagnosis.

A mid-sized insurer's managers complain that buying anything takes weeks. The proposed fix is a new procurement system, and a vendor demonstration is already scheduled.

The business architecture team maps procure-to-pay first and assesses the procurement capabilities against evidence. Purchasing itself performs adequately once a request reaches it. The delays sit elsewhere. Most indirect spending, especially professional services and software, has no contract to buy against, so each request triggers a fresh quotation process. That is a contract management gap. And requests for software also need security and architecture review, which happens late, after a supplier has been chosen, and often sends the request back to the start.

The insurer still buys a procurement suite, but the program is reshaped. The first wave puts framework agreements in place for the five largest indirect categories, so most purchases can go straight to an order. The second moves the security and architecture review to the start of software requests, with a short list of pre-approved products. Only then is the new system configured, around a process that no longer needs to work around missing contracts. The measures chosen in the assessment, share of spend under contract and requisition-to-order time, become the benefits the business case promised and the ones it is held to.

Procurement and Business Architecture

Business architecture connects procurement to the rest of the enterprise in three useful ways.

First, the capability map shows procurement's dependencies. Supplier risk management depends on supply chain planning for which items are critical; contract management depends on legal; purchasing depends on finance for budgets and accounts payable for payment. Weaknesses often sit at these boundaries, and a model that covers only procurement will miss them.

Second, value streams show procurement in context. Procure-to-pay is itself a value stream, but procurement also appears as stages inside others: a new product launch needs suppliers qualified; a new customer contract may need subcontractors. Mapping those streams shows where procurement speed affects revenue, not only cost.

Third, the information view. Supplier, contract, purchase order, receipt and invoice are shared business objects. When supplier master data is duplicated across systems, spending cannot be analyzed and risk cannot be seen. A business data model that defines these objects once is often the quiet prerequisite for every procurement improvement that follows.

Go further

• Vendor management — Managing suppliers after the contract is signed: performance, relationships and risk.
• ERP system — Procure-to-pay is one of the core value streams an ERP system runs.
• KPI meaning — How to define the procurement measures above so they settle arguments.
• Supply chain resilience through capability modeling — Supplier risk in the context of the wider supply chain.

Frequently Asked Questions

What is procurement?

Procurement is how an organization acquires the goods and services it needs from outside suppliers. It covers analyzing spending, setting sourcing strategies, selecting suppliers, negotiating and managing contracts, placing orders, and managing supplier performance and risk.

What is the difference between procurement and purchasing?

Purchasing is the transactional part of procurement: raising requisitions and purchase orders and following them to delivery. Procurement also includes the strategic work that comes before purchasing, such as sourcing strategy, supplier selection and contracts, and the supplier management that comes after.

What is procure-to-pay?

Procure-to-pay (P2P) is the end-to-end process from identifying a need to paying the supplier: requisition, approval, purchase order, supplier confirmation, receipt, invoice matching and payment. It spans procurement, the people receiving goods or services, and accounts payable.

What are the main procurement capabilities?

Strategic sourcing, supplier qualification and onboarding, contract management, purchasing, supplier performance and relationship management, supplier collaboration, and supplier risk management. Sourcing strategy, deciding what to make or buy and how to structure the supply base, is usually set at the supply chain strategy level.

What is the difference between direct and indirect procurement?

Direct procurement buys what goes into the products or services the organization sells, such as raw materials and components. Indirect procurement buys what keeps the organization running, such as software, facilities, professional services and travel.

What is a procurement operating model?

The design that decides who performs each procurement capability and where: centrally, in business units, or in a shared service. Common models are centralized, decentralized and center-led, in which a central team owns strategy and major sourcing while day-to-day buying happens closer to the business.

How do you measure procurement performance?

Capability by capability. Examples include savings against baseline and sourcing cycle time for strategic sourcing, share of spend under contract for contract management, purchase order cycle time and first-time invoice match for purchasing, and supplier on-time delivery for supplier performance management.

What is a three-way match?

A control in procure-to-pay that pays an invoice only when it agrees with the purchase order and the record of what was received, in item, quantity and price. Mismatches are held for review.

Pro Tips

• Map procure-to-pay end to end, including receiving and accounts payable, before deciding that procurement is the problem.
• Report share of spend under contract alongside savings. Savings negotiated into contracts nobody buys against are never realized.
• Decide the operating model capability by capability, not for procurement as a whole.
• Define supplier, contract and purchase order once, in a business data model, before buying a procurement system.
• Bring security and architecture review to the start of software and services requests, not the end.