What are the most common types of procurement?

Procurement is the strategic process through which organizations acquire the goods and services necessary for their operations. This function encompasses identifying needs, selecting suppliers, negotiating terms, placing orders, and managing deliveries. Far more than simply “buying stuff,” effective procurement directly impacts financial performance by controlling costs while ensuring quality and timeliness. Companies across industries rely on procurement teams to navigate complex supply markets, establish beneficial vendor relationships, and create value through thoughtful acquisition strategies.

The scope of procurement extends throughout the entire supply chain, influencing everything from raw material sourcing to final product delivery. Large manufacturers might employ dedicated procurement departments that manage billions in annual spending, while smaller businesses often assign these responsibilities to finance or operations teams. Regardless of scale, successful procurement practices share common elements like market analysis, supplier evaluation, contract management, and performance monitoring. Organizations that excel in procurement gain competitive advantages through better pricing, higher-quality inputs, and more reliable supply chains.

Financial leaders increasingly recognize procurement as a powerful lever for organizational success. The most advanced procurement operations leverage technology to analyze spending patterns, automate routine purchases, and identify opportunities for consolidation or negotiation. Companies that invest in procurement capabilities typically see returns through reduced expenses, improved cash flow, and strengthened supplier partnerships. All of these things make procurement essential for driving business value as markets become more volatile, costs fluctuate, and supply chains grow more complex.

Procurement can be classified in several ways. Broadly, it can refer to what is being purchased, such as direct versus indirect procurement, as well as how the procurement process flow is carried out through methods like strategic sourcing, outsourcing, or electronic systems. We explore the main types of procurement in detail below, including their definitions, examples, challenges, and best practices.

Direct procurement

Direct procurement refers to purchasing materials, components, or goods that are directly used in a company's end products or core services. These inputs become part of the final product delivered to customers. A smartphone manufacturer's direct procurement includes buying microchips, display glass, and batteries, all essential parts of the phone. In service industries, a catering company's food ingredients represent direct procurement since they are critical to the service delivered. Because direct procurement is tied to production output and customer demand, it has an immediate impact on revenue and the Cost of Goods Sold.

Efficient direct procurement is vital since any shortage of key materials can slow or halt production and lead to lost sales, while poor quality inputs can impact the finished product's quality. Companies often establish long-term contracts or strategic partnerships with their direct suppliers to ensure reliable supply and stable prices. The top challenges in direct procurement include maintaining a reliable supply chain for critical items, managing raw material price volatility, and ensuring quality control of incoming materials. Organizations must coordinate tightly with production schedules and implement rigorous supplier management to address these challenges effectively.

To optimize direct procurement, organizations employ several interconnected strategies:

• Accurate demand forecasting allows companies to purchase the right quantities at the right times.
• Building strong relationships with suppliers secures consistent quality and delivery, often facilitated by sharing forecasts and contracts that guarantee supply and pricing.
• Diversifying sources for important materials or maintaining safety stock inventory helps protect against unexpected supply disruptions.

When managed effectively, direct procurement keeps production running smoothly while maintaining product quality and profitability.

Indirect procurement

Indirect procurement involves purchasing goods and services that are not part of the final product but are necessary for running the business. Examples include office supplies and equipment, utilities, marketing, travel, and professional services. Buying new laptops for employees or hiring an advertising agency are indirect procurements that support company operations without directly producing anything sold to customers. Indirect procurement typically affects operating expenses rather than Cost of Goods Sold.

These purchases may seem routine, but collectively they can be significant. Indirect procurement often represents around 40% of a company's total spend. Unlike direct procurement, which usually follows a planned schedule tied to production, indirect procurement is often decentralized. Different departments make their own purchases, leading to inconsistencies and less oversight if not managed carefully. Key challenges are a lack of visibility and control. Because spending is spread across departments on many small items, costs slip through the cracks or employees bypass procurement rules, resulting in maverick spending. Another challenge involves managing a diverse supplier base, as a company might have dozens or hundreds of vendors for indirect needs, making it difficult to negotiate bulk deals or enforce standards consistently.

Effective indirect procurement management requires establishing company-wide policies and using a centralized process, purchase cards with spending controls, or approved supplier list for common items. This ensures departments buy through preferred vendors at negotiated rates, reducing unauthorized purchases. Organizations also benefit from tracking indirect procurement by category and department, analyzing this data to identify opportunities to cut costs or consolidate suppliers. Many companies leverage e-procurement software that provides catalogs of approved products and automates purchase requests and approvals, making it easier for employees to follow procurement guidelines while giving management real-time visibility into spending. By implementing these strategies, companies control indirect procurement costs without hampering day-to-day operations, resulting in lower overhead, fewer budget surprises, and greater accountability for operational spending.

Strategic sourcing

Strategic sourcing is an approach to procurement that focuses on long-term value rather than just short-term wins. It involves a holistic view of purchasing through analyzing overall spend patterns, studying the supplier market, and building long-term supplier relationships to secure the best value. This contrasts with a traditional approach that might simply choose the lowest price vendor without considering other factors. A strategic sourcing team might favor a supplier with a slightly higher price if that supplier provides better quality and reliability because it lowers total costs over time.

Adopting strategic sourcing yields several advantages for organizations. By looking at the total cost of ownership, companies uncover savings through bulk purchasing, a streamlined supplier base, and fewer hidden costs, such as quality problems that lead to rework or downtime. Long-term agreements make suppliers more invested in delivering quality and innovation. With clear performance metrics, buyers benefit from higher quality inputs and on-time deliveries, and can even collaborate with key suppliers on improvements. Through careful vetting and diversification of vendors, strategic sourcing makes the supply chain more resilient by avoiding over-reliance on any single supplier and ensuring alternate sources are available if a primary supplier experiences difficulties.

Strategic sourcing represents a proactive, data-driven procurement practice that helps businesses get the best overall value from suppliers, not just the lowest price, while building a more reliable supply chain for the future. It requires investment in analytics capabilities and relationship management but delivers significant returns through improved supplier performance and reduced total costs.

Procurement outsourcing

Procurement outsourcing means hiring an external service provider to handle some or all of your company's procurement tasks. In this type of business process outsourcing (BPO), a third-party specialist manages purchasing activities on your behalf. A small business might outsource office supply purchases due to limited staff, while a larger firm could outsource IT procurement to specialist providers for efficiency.

Procurement outsourcing can reduce costs and improve efficiency in multiple ways. An outside provider often secures better prices thanks to their market expertise and buying power, while companies save on the overhead of maintaining a full in-house purchasing team. It also provides access to skilled procurement professionals who can help streamline the purchasing process. Consequently, employees spend less time on routine buying and can focus more on core business tasks that drive revenue and growth.

When outsourcing procurement functions, companies must navigate certain risks and considerations. When you outsource, you relinquish some direct oversight of purchasing decisions and supplier selection. The provider might make choices that do not perfectly align with your company's preferences, potentially leading to quality issues or non-compliance if the outsourcing partner prioritizes cost over your standards. Relying heavily on one outside provider also introduces dependency risks. If the partnership ends suddenly or the provider underperforms, procurement operations could face disruption. To mitigate these risks, companies should establish clear agreements, implement performance metrics, and develop backup or transition plans.

Overall, outsourcing parts of procurement can deliver significant benefits for non-core purchases but requires careful management. Businesses should select reputable partners, set clear expectations, and continuously monitor performance to ensure they’re getting proper value out of the relationship.

E-procurement

Electronic procurement refers to the use of digital technology to conduct and control a company's purchasing processes. Instead of relying on paper forms or email threads, e-procurement uses software to automate the workflow from requisition to payment. For instance, an employee can request supplies through an online portal, a manager approves it electronically, and a purchase order is automatically sent to the supplier. Delivery and invoicing are tracked in the same system, which can then match the supplier's electronic invoice to the order and receipt for fast payment. This end-to-end digital approach replaces cumbersome manual steps with a seamless, integrated process.

The benefits of e-procurement extend across multiple business operations. Automating purchasing steps greatly accelerates the procurement cycle. Tasks like approvals and order generation that might take days on paper can be completed in hours through the online system. Fewer manual touchpoints also mean fewer errors, resulting in quicker fulfillment of business needs. By making processes more efficient, companies cut the administrative costs associated with procurement. E-procurement also provides transparent spend visibility, allowing management to see company-wide purchasing patterns, which helps in negotiating bulk discounts and curbing unnecessary purchases. Ensuring that employees buy from approved suppliers at negotiated prices prevents maverick spending and keeps costs under control.

With all purchases flowing through one system, e-procurement creates a clear audit trail for every transaction. This visibility makes it easier to enforce procurement policies and adhere to budgets. The software can automatically require proper approvals and flag orders that deviate from rules, helping maintain compliance with internal policies and external regulations. E-procurement platforms centralize procurement information, enabling detailed reporting and analysis. Companies can study purchasing trends to forecast demand or identify inefficiencies. Modern e-procurement tools are scalable and often integrate with finance or inventory systems, with many now using artificial intelligence to recommend optimal purchasing decisions. As a result, e-procurement continually evolves with new capabilities and adapts to changing business needs.

E-procurement transforms purchasing into a faster, smarter, and more controlled function. It has become a cornerstone of modern procurement strategy as businesses seek to reduce costs and boost productivity. By digitizing procurement, companies become more agile and data-driven in managing their supply chain and vendor relationships.

Most companies use a combination of these procurement types. For example, a manufacturing firm will engage in direct procurement for raw materials, use strategic sourcing to optimize key supplier contracts, rely on e-procurement tools for efficiency, and maybe outsource certain indirect procurement tasks. It's useful to compare the different procurement types to understand their distinct characteristics and when each is most applicable.

Having examined the various procurement approaches and their relative strengths, organizations must determine which combination best serves their specific needs. Choosing the right procurement strategy involves several key steps that build upon your understanding of the different procurement types. The process begins with assessment and concludes with ongoing refinement, creating a cycle of continuous improvement in your procurement function.

Assess your procurement profile

Start by identifying what your company purchases and how these items should be categorized. A thorough analysis allows you to determine what proportion of your spend falls into direct production materials versus indirect operational needs. Your specific industry significantly influences this distribution pattern. Manufacturing companies typically allocate substantial resources to direct procurement of production materials, retail procurement often balances both direct and indirect spending for merchandise and store operations, while service-oriented businesses concentrate their spending on indirect procurement categories. This initial assessment provides crucial context for all subsequent decisions, helping you focus resources where they will deliver maximum value. Understanding your procurement profile also reveals spending patterns that might benefit from different approaches, such as which categories might benefit from strategic sourcing or which routine purchases could be automated through e-procurement systems.

Evaluate internal capabilities

Once you understand what you buy, turn your attention to evaluating the strength of your procurement team and available tools. This honest assessment determines whether your organization possesses the necessary skills and resources to handle complex sourcing initiatives and large contracts internally. Many companies discover gaps in specialized procurement expertise or recognize that their team lacks the bandwidth to manage all procurement needs effectively. If your assessment reveals limitations, consider obtaining external support through consultants or outsourcing certain procurement activities to specialized providers. This evaluation should examine both technical capabilities like negotiation expertise and analytical skills alongside technological capabilities, including spend analysis tools and contract management applications. The results directly inform which procurement types you can reasonably implement with existing resources versus those requiring external support.

Define priorities and constraints

With a clear understanding of what you purchase and your internal capabilities, effective procurement planning requires you to articulate your main procurement goals and acknowledge any constraints that might affect implementation. Common objectives include reducing costs, accelerating ordering processes, enhancing supplier quality, or mitigating supply chain risks. Simultaneously, identify constraints such as budget limitations, team size restrictions, or regulatory requirements that might narrow your options. These priorities and constraints guide strategy selection. If cost reduction represents your paramount concern, emphasize strategic sourcing or e-procurement approaches. Organizations facing significant staffing constraints might benefit from outsourcing certain procurement categories to manage workloads. This exercise ensures that your procurement strategy addresses your most pressing business needs while remaining realistic about implementation challenges.

Implement the best mix

Armed with insights from the previous steps, determine the optimal combination of procurement types for your specific situation. Most organizations benefit from implementing multiple approaches rather than relying on a single procurement methodology. You might maintain direct procurement in-house to protect critical supply relationships while utilizing e-procurement platforms for routine purchases and outsourcing select indirect spend categories. When implementing your chosen mix, phase changes gradually to ensure smooth transitions and allow stakeholders to adapt. Begin with pilot programs in limited categories before expanding more broadly. Provide adequate training and support during implementation to overcome resistance to change and ensure proper adoption of new processes or technologies. A thoughtful implementation plan balances the desire for rapid improvement against the organizational capacity for change.

Monitor and refine

After implementing your procurement strategy, establish mechanisms to track results and make necessary adjustments. Develop and monitor key performance indicators including spend savings, procurement cycle times, supplier performance metrics, and internal stakeholder satisfaction. Regularly gather feedback from procurement team members and internal clients to identify friction points or opportunities for enhancement. Use this performance data to continuously adjust your procurement strategy as your business evolves and market conditions shift. Successful organizations view procurement strategy as a living framework that requires ongoing refinement rather than a static approach. This commitment to monitoring and improvement ensures your procurement function remains aligned with changing business priorities and continues delivering maximum value to the organization.

By following this structured approach to procurement strategy development, organizations can tailor their purchasing practices to their specific size, industry context, and business objectives. The resulting framework will drive greater efficiency in purchasing processes while providing stronger support for company goals. Most importantly, this methodical approach transforms procurement from a purely transactional function into a strategic capability that contributes meaningful value to the enterprise.

The procurement function has evolved from a transactional activity into a strategic business capability that directly impacts performance. Different procurement types serve distinct purposes within organizations:

• Direct procurement addresses production inputs.
• Indirect procurement supports operational needs.
• Strategic sourcing emphasizes total value.
• Outsourcing leverages external expertise.
• E-procurement streamlines manual workflows.

When applied appropriately, each approach contributes to improved financial outcomes and competitive advantage. The right procurement mix requires analyzing your organization's specific needs and capabilities. Organizations that excel at procurement apply different approaches strategically across spending categories, matching each to specific value opportunities. This transforms purchasing from a cost center into a value creator that enhances profitability and organizational resilience.

Forward-thinking companies are increasingly turning to Brex to optimize their procurement processes. That’s because Brex integrates essential payment, tracking, reconciliation, and accounting workflows that accelerate procurement operations. Brex's corporate purchasing cards offer unmatched visibility and control over spending while streamlining approvals and eliminating expense reports, and its integrated spend management platform allows finance teams to set custom spending limits, create approval workflows, and gain real-time insights into departmental expenditures. Companies using Brex benefit from seamless accounting automation that reduces reconciliation time, automated bill pay that eliminates manual processing, and business banking solutions that accelerate cash flow.

Nishant Karandikar, Strategy and Operations Lead at Limelight Steel, says: "With Brex bill pay, invoices that need approval route to me automatically. I can verify them and schedule payment with a click — our procurement process is faster now."

Organizations seeking to modernize their procurement function and gain a competitive edge should sign up for Brex today to transform how they manage spending and unlock new levels of financial control.