Purchasing Process: Everything you need to know (plus 3 best practices)
What is your purchasing process like? If you can’t answer this question, you might be missing out on opportunities to save costs and improve productivity.
Effective purchase processes can help you reduce supply expenses, build strategic relationships with suppliers, prevent fraud, and offer priceless opportunities to collaborate and innovate.
In this article, you will learn what a purchasing process is and three best practices you can apply to your business.
What is the purchasing process?
The purchasing process refers to the steps involved in carrying out a business transaction. Also known as the procure-to-pay process (P2P), it involves the purchase requisition of goods and services through your supply chain.
The purchasing process is different from a procurement process.
When an individual wants to buy a product, say scheduling software, the person will research to buy the product with the needed features within their budget.
The purchasing process for businesses is similar, but it involves several stakeholders and a lot more steps (we’ll get to those later). With a formal purchasing process, businesses can keep track of and control direct and indirect spend. The benefits of a purchasing process are endless. It helps you collaborate with and build long-lasting relationships with your suppliers. An efficient purchasing process also keeps your financial records ready for audits
Importance of purchasing process
Here’s why building a business purchasing process is important for your business.
Reduce costs and increase profits:
An effective purchasing process helps you cut costs. It helps you identify suppliers who offer quality products and services at lower prices.
Having a purchasing process in place prevents you from falling prey to scams. In 2019, a cybercriminal from Lithuania scammed Facebook of $100 million by sending fake invoices requesting payments of services the company never requested. This might have been prevented by a standardized purchasing process.
Also, a rigorous purchase process ensures that purchases stay within the budget and you optimize spend in your organization.
Build quality long term relationships with suppliers
Having a purchasing process also allows you to find and maintain quality relationships with your suppliers. It reduces irregularities like late payments, inconsistent records, and communication gaps. You can also review the performance of suppliers to choose to continue the relationship or terminate it.
Maintain accurate records
A consistent purchasing process enables you to maintain accurate records of the expenses within your business. These records help you maintain an audit trail that tracks the cash flow of your organization. With complete and correct accounts you have an accurate picture of the financial health of your organization.
Gather and analyze valuable data
Another benefit of a purchasing process is the ability to gather and process valuable financial data.
With digital procurement tools like Procurify, you can analyze this data and unveil insights about your business to make informed and data-driven decisions.
What are the steps of the business purchasing process?
The purchasing process varies from business to business. But here are elementary steps of the purchasing process you can adapt to your business.
1. Identify and assess your business needs
Examine and list the products and services your business needs to solve problems or continue operations.
Business needs vary depending on the nature of operations and the industry they are in. For example, if your company produces phones, it will need to order computer chips.
One of the ways to identify needs is by talking to heads of departments and collating supply requests that come in. For example, the head of the IT team might mention that several software developers asked for ergonomic chairs or new computers.
Another way is by keeping track of how different departments spend by taking a look at invoices and receipts. Review the vendors and their services against the prevailing market price. There may be a need to change suppliers or reduce demand to curtail waste.
2. Write a purchasing requisition and purchase order
When a member of a department identifies needs, they will write a purchase request or requisition which outlines details of the products and services to be purchased. They will forward it to the purchasing manager or department head.
The person or team requesting will set the criteria for selecting the supplier including terms and conditions, price, track record, product quality, terms of payment, timelines, and other specific technical requirements.
The manager will accept the purchase requisition if it is within the company’s budget. If it exceeds the budget, it is either sent upward for approval or returned to the individual requesting review. Then it is transferred to the Purchase Order.
3. Review and approve the purchase order
Next, the purchase order is assessed by the accounting team which verifies that the budgeted funds are available to cover the costs. To make the most of the purchasing process your organization should have formalized approval workflows and a clearly defined order purchase approval system.
4. Request for proposals from prospective suppliers
Once the purchase order is approved, it is forwarded to the procurement department. The department sends out a request for proposals and receives bids from prospective suppliers.
They will review these bids based on the criteria listed in the previous step and choose a supplier. Based on previous purchasing experiences, create a list of validated suppliers and keep them in an e-procurement software like Procurify.
5. Negotiate and approve the purchase order
After selecting a vendor, they will be awarded a contract. Discuss the terms of the contract to ensure a win-win situation and modify the necessary sections. This will help you on your way to building a strong working relationship with your vendors. Note that the person who chooses the vendors and negotiates with them depends on the approval structure of your organization.
If you are in an industry where the negotiation power lies in the hands of strong suppliers, you need to level up your negotiation game. Here are some ideas to help you negotiate better from Harvard Business Review:
- Offer the supplier access to new markets. A beverage company reduced the yearly price hikes from their supplier by offering them access to two developing markets which the supplier had tried to reach but failed.
- Reduce the supplier’s risks. For example, you can consult with the finance department and arrange a long-term buying contract with your supplier at a profitable but realistic price.
- Create a new supplier. You can persuade a potential supplier who wasn’t interested in your industry to bid for the contract. This curtails the power of monopolies over your business.
If you and the supplier are satisfied with the terms of the contract you can sign it and formally place the order. After this, it becomes a legally binding agreement between your business and the supplier.
Thoroughly review the terms of the contract before signing. If possible, involve your legal team in the process to help you identify any loopholes in the contract.
6. Receive and verify the order
At the agreed upon time, the supplier ships the goods or delivers the service. The buyer should carefully inspect the received products or services to ensure they do not have flaws in quality or quantity. It is also important to use a checklist to assess what the vendor delivers.
If there are problems with the products or service you can share your concerns with the vendor.
Use the three-way matching system to verify the order. Compare the information on the shipping documents, the original purchase order, and the supplier’s invoice. This ensures that all the details related to the transaction are accurate.
It prevents your business from falling victim to fraudulent activities like invoice fraud, theft or rogue spend.
7. Approve the invoice and make the payment
Once you have verified that the three documents match, pay the vendor. Doing this promptly allows you to enjoy discounts and avoid late payment fees.
8. Update existing accounts
Update all accounting documents with the finalized orders. Ensure that these records are kept securely. You can lodge records in a centralized procurement software and store relevant physical documents in a specific place.
3 best practices for purchasing
Now you know how to build a purchasing process, here are three best practices to keep you on track:
1. Automate the process
Manually keeping a record of your purchases and other accounting tasks can slow down your operations. It keeps talent engaged in repetitive and boring tasks, which increases the risks of human errors. Automating your purchasing process will:
- Improve the accuracy and speed of the record-keeping process.
- Automatically do the three-way matching process on every purchase transaction.
- Allow the relevant team members to collaborate and approve different stages of the purchasing process in one centralized location. Different team members have access to the same virtual account and keep track of the purchasing process regardless of their location at different points in time.
- Help you effectively carry out shoes spent tracking and automatically export important data to the needed formats.
2. Build strong relationships with your suppliers
Focus on building a long-term relationship with reliable suppliers. These relationships evolve into partnerships where both parties benefit.
Vendors are often a great source of industry expertise. While you may be informed about the products and services you need, suppliers have years of experience in developing the products and offering services. They may have information and research findings to help you discover cheaper alternatives and new innovations. Having good relationships with your suppliers can help you reduce costs and increase your net profits.
3. Assess your needs regularly
As your business grows, your needs will evolve. Continuously review your business needs and purchasing process to keep up with the changes.
To optimize spending, observe your workflow and modify your orders as needed.
Improve your purchasing process with Procurify
Having a seamless purchasing process is essential in a fast-evolving business world. As your business grows, invest in a purchasing tool to keep track of spending and automate your purchasing process.
With Procurify, you can have more visibility into spend, generate purchase orders and securely pay your invoices. Ready to keep track of every step of your purchasing process without hassle? Book a demo with us today.
Editor's note Original publish date: 4 Dec 2013 Original author: Matt Lim We've since updated and republished this blog post with new content.