ChatGPT & AI in
Procurement Course

Free Preview Lesson

Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Goods Procurement — Driving Value and Circularity

Key take-aways

  • Procuring goods focuses on product quality, cost considerations, delivery times, supplier stability, and regulatory adherence.
  • There are three main categories of goods in procurement: direct, indirect, and capital.
  • Goods include raw materials, components, and sub-assemblies; while services include consulting, expertise, and labor.

Goods procurement is a process with multiple steps. It requires procurement leaders to source, negotiate, manage contracts, and handle order placement to ensure their businesses have a steady and high-quality supply of the goods they need.

This article covers the particulars of the procurement process for goods and how, when done efficiently and responsibly, can bring maximum value to an organization.

After reading this article, you’ll understand the distinction between goods and services in the procurement process, and how cost savings and sustainability can co-exist to drive equal value and impact to an organization.

Overview of Goods Procurement

Goods procurement specifically refers to the process of sourcing and buying goods, such as raw materials and components.

Once acquired, these goods will be used within a business to produce an end product or to aid company operations.

Procuring goods requires careful planning around product quality, cost, delivery times, supplier stability, and regulatory adherence.

This process can vary depending on the industry, company, or type of goods being sourced. 

Procurement of Goods vs Services

Procurement of goods and services both involve buying some type of product or resource for a business. 

You could say, perhaps, that services are a type of product. But it’s smart to be specific as to what type of product that is. This is where the differences come in.

Goods
Include physical products like raw materials, components, and sub-assemblies
Involves purchase orders, quantity specifications, and delivery times
Focuses on product quality, price, and durability
Risk management for quality, availability, inventory, and specifications
Metrics include product quality, defect rates, delivery time, and total cost of ownership
Requires inventory management to handle stock levels, storage, and logistics
Usually involves one-time payments upon delivery
Legal concerns include warranties and liability for defective products
Services
Include tasks, expertise, consulting, and labor
Involves detailing the scope of service, duration, and performance metrics
Focuses on the provider’s experience, skills, and past performance
Risk management for service quality, performance, and alignment with contract terms
Metrics include service quality, agility, customer satisfaction, SLA adherence, and cost value
May require resource planning and allocation
Payments may be recurring or based on hours worked, depending on the agreement
Legal concerns include intellectual property, performance failures, and confidentiality

Categorizing Goods in Procurement

When we talk about goods in procurement, it’s important to note the three main categories: Direct goods, indirect goods, and capital goods. Here is a quick breakdown of each.

Direct Goods

Direct goods are materials that are directly incorporated into an end product a company is producing. These goods are parts or even ingredients to make the final product that will be offered to the end-user or consumer.

For example, direct goods for a fashion brand would be cotton, silk, and linen fabrics to make their clothing lines. When we talk about direct procurement, it is often the top priority for procurement professionals.

It is at this stage that procurement teams focus on how to maximize cost savings, manage potential risks, and also drive overall value for the business.

Another part of sourcing direct goods is the focus on supplier relationship management, which is a key contributor to reducing risks and ensuring that all acquired goods are of the best quality.

Indirect Goods

Indirect goods are products or services that businesses acquire to ensure continued operation, but are not directly included in the final product.

These goods are still undeniably essential to achieving the goal or end product, but they are not a direct component of that product.

For instance, indirect goods for a dessert foods manufacturer would be aluminum trays and pans to bake its products.

But the main product the manufacturer sells is cakes, bread, and other pastries which will be sold in bakeshops and grocery stores.

Capital Goods

Also known as durable goods, capital goods are used for the production of other goods to get to an end product or service. This includes machinery, equipment, vehicles, and infrastructures. 

An example of capital goods for a publishing company would be its procurement of a printing press to make books, newspapers, and others.

Similar to indirect goods, capital goods are also essential for making the product for the end-user, but they are not included in the final product.

Sustainability in Goods Procurement for 2024

In green procurement, the topic centers around eco-friendly alternatives to goods and consumer practices. To zoom out on this perspective, think of the movement to eliminate single-use plastic from the packaging of finished goods.

But we think sustainability covers more than environmental factors. When we talk about sustainable procurement in 2024, we also consider the broader perspective on how our sourcing practices impact wildlife and biodiversity. 

Green procurement practices go hand-in-hand with ethical procurement, which includes fair labor practices, awareness of our businesses’ impact on communities, responsible harvesting of natural resources, and more. 

More businesses are beginning to recognize the devastating impacts of traditional procurement practices that don’t factor in sustainability. We emit 50 billion tonnes of CO₂ each year, which is close to 50% higher than the recorded emissions in 1990.

In goods procurement, the triple bottom line or 3Ps — People, Planet, and Profit — are non-negotiable. This means that we should create equal value that is fair for local economies, the environment, stakeholders, and anyone who could be impacted by our business practices.

Cost vs Sustainability Trade-off

Cost will always be a priority in procurement decisions, with organizations making significant efforts to minimize spend while being profitable.

Meanwhile, sustainability in procurement is equally important for building a circular economy and staying transparent in business.

Below are some of the key considerations when it comes to cost vs sustainability.

1. Long-term costs

Sourcing cheaper goods might give you access to instant cost savings, but the long-term risks and damages to the environment and society far outweigh the pros.

The long-term perspective of sustainable procurement shows the impact of environmentally friendly and ethical procurement practices.

Therefore, while sourcing goods that come at lower costs might be great initially, sustainability’s long-term benefits to cost savings as well as brand resilience are incomparable.

2. Creating Value

Creating value in business through sustainable procurement practices considers the balance of cost savings with eco-friendly and ethical principles.

It’s important to create value through efforts like minimizing spend where possible, creating innovation by engaging suppliers and their businesses, and more.

However, we don’t need to compromise our responsibility to the environment and society to be profitable and resilient. It’s the opposite.

When an organization actively practices sustainable procurement, it becomes more trustworthy. Consumers develop a strong sense of trust and loyalty, which leads to a stronger brand reputation and of course, more sales.

3. Product Innovation

Buyers and suppliers need to collaborate on sustainable solutions to boost innovation in the supply chain. To achieve this, businesses can engage with suppliers and other stakeholders to find areas where they can incorporate sustainability.

For instance, businesses might find that their production processes could be more resource-efficient by using less water and electricity. Another example would be adding eco-friendly improvements in goods by reducing the volume of plastic sourced for manufacturing.

Sustainable product innovation is an essential part of procurement that helps businesses keep pace with consumer expectations while creating a competitive edge across international markets.

4. Risk Management 

Sustainable procurement practices go hand-in-hand with risk management, with unethical and irresponsible procurement that can result in legal penalties, brand damage, and supply chain disruptions.

Unsustainable procurement of goods can affect the diversity of the supplier base, making your supply chain more susceptible to disruptions and risks.

Additionally, procurement goods that fail to meet ethical and sustainability standards can be at high risk for defects and lost trust from consumers.

Whether it’s in the unethical sourcing and production of goods, single-use packaging materials, or resource-intensive transportation methods, failing to incorporate sustainability can be damaging to both the environment and your brand reputation.

5. Supply Chain Resilience

Having a sustainable supply chain effectively makes it more resilient, transparent, and efficient. Unsustainable supply chains that depend on sourcing resources excessively and from environmentally vulnerable regions destroy the trust that suppliers, customers, and other stakeholders have in your brand.

Switching to renewable energy, diversifying the sourcing pool, and collaborating with ethical suppliers are just some of the key steps you can take to build a resilient supply chain that is diverse, sustainable, and reliable. 

Furthermore, a resilient supply chain is less susceptible to sudden disruptions, such as natural disasters and changes in weather patterns, consequently ensuring that business stays efficient, stable, and continuous.

My Experience in Goods Procurement

In this article, I will be sharing my experience in goods procurement.

1. In your time as a procurement manager sourcing goods, can you share an experience you had that had a lasting impact on the organization? 

I have a great story about this. I was once in the lead of sourcing a raw material; oil, and at the end of the negotiation process, I thought it would be smart to also implement an e-auction.

First I worked six months on finding an alternative supplier for all my current suppliers. So I had two suppliers, and then I negotiated on price with both of them. And then when I finished my verbal negotiation, I organized an a-auction. With the e-auction, we saved millions of euros extra, so even after my negotiations, the computer did better than me. 

So in the e-acution, both suppliers were competing with each other to win the deal to deliver the oils to my employer, which was a nice result. One of the lessons I learned from that is that you should always have an alternative supplier, so make sure you have two suppliers.

Lesson two is to first negotiate yourself. And when you reach a point where you cannot achieve more, work on implementing an e-auction, because sometimes a computer can work more efficiently than a human, like in the case of this negotiation. With this approach, I achieved a major saving for my company.

2. Can you share a personal experience about driving sustainability in goods procurement?

At a certain period, we had a target to reduce packaging. So from a procurement perspective, my target was to use less packaging, less plastic, less oil, less paper, etc. 

I had a clear target which I mentioned to my suppliers — I said that I would be hosting a two-day event within which every supplier will give a 30-minute presentation to me about how they plan to achieve the target. 

And in those two days, 32 suppliers visited our headquarters where they all presented their packaging reduction strategy plans. So in that way, together with my suppliers, we achieved my target. Note that this wasn’t mandatory and I only asked them to help me and to help themselves to make the world a bit of a better place with less single-use packaging.

Marijn Overvest

CEO/Founder, Procurement Tactics

Conclusion

To sum up, goods procurement is a non-negotiable part of business, factoring in sourcing and purchasing of products needed for production. 

Balancing cost savings with sustainability in procurement allows businesses to increase their long-term value while managing risks and building a greener tomorrow.

As more businesses are incorporating sustainability into their procurement processes, they become better positioned to build a brand that is resilient, trustworthy, and socially and environmentally conscious.

Frequentlyasked questions

What makes effective goods procurement essential for businesses?

Goods procurement is necessary for business operations to continue and for manufacturing end products. It helps businesses maintain a steady supply of their products to meet customer demands.

What are the main categories of goods in procurement, and what are the differences?

They are direct goods, indirect goods, and capital goods. Direct goods are part of the final product; indirect goods are part of production but not the final product; and capital goods are durable items used in production.

How does sustainability play a role in goods procurement, and why is it important to balance cost savings with green practices?

Sustainability in goods procurement factors in environmental and ethical factors. It not only contributes to environmental principles but drives long-term value for businesses.

About the author

My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.

Marijn Overvest Procurement Tactics