In general terms, the purchasing process of a company involves an organized , informed process that empowers the purchase managers in the company to purchase right product for their need. The right purchasing process provides the company with a qualified supplier, a supplier who can provide higher quality products at the optimum price.
A purchasing process is needed in most large companies simply because there are so many things to be purchased. And all of them have to be purchased at the optimum cost. Thus, dedicating manpower to this process is important. On the other hand, via the purchasing process, you may get good regular suppliers also. Any business requires a regular supply of quality raw material, and hence building relations with suppliers is necessary.
The 7 Steps of Purchasing process and the role of Purchase department
1) The identification of the need. This is the step where your company wants to provide or add a service for their customers, for which it needs to acquire a product. Or they need something for their internal operations, or for employees. Therefore, the need for a purchase is identified.
For example, let’s take a printing company which also wants to provide Xeroxing facilities for its customers, as based on their research, adding xerox services would help them increase their profits. Therefore, in order to be able to provide the Xeroxing service, the company will need a Xeroxing machine at all its outlets. In this way the need for the purchase has been identified.
2) Selecting a specific product – Based on a highly developed and competitive market, there are a large amount of suppliers available on the market able to provide this kind of machine. The next step in the purchasing process consists in selecting a specific product. For this step, a list of product specifications should be made, which should also be based on what the company expects to achieve by purchasing this product.
3) Deciding the technical specifications – The third step starts with identifying and specifying the technical specifications that the desired product should have. The company should arrive at a list of required technical specifications for the product to ensure it meets the company needs.
4) Price – What is the price of the product or the budget the company has for the product or service it is looking for? As the price plays a vital role in the final selection of the desired purchasing item, the company should establish a desired budget for the respective purchase. The present budget should be based on the local available prices on the market. There should be a relation between technical specifications (quality) and price.
5) Contacting suppliers – The fifth step consists in researching and identifying potential suppliers. Usually companies tend to start focusing first on who supplies competing companies with resources before they start looking outside their area. But at this point of time, the company contacts most number of people who can supply to the company. This creates competition and is better for the company.
6) Finalizing suppliers – After two or more suppliers are shortlisted, and are able to meet the requirements set by the company, then the company is going to ask the final quotations from suppliers. There is usually a final negotiation process involved too and here is where the haggling of price happens the most.
7) The purchase – With all the above steps done, the company finalizes on one supplier. Or alternatively, it can place 70% of its orders to one supplier and 30% to another so that it maintains relations with both the suppliers and has a safety net in case any supplier is not able to meet demand or requirements.
For small companies, the purchasing department is responsible to acquire production assets, business equipment, facilities and other major items. Larger organizations often employ other people or outsource the process of the purchasing department.
The purchasing process does not end with the supplier receiving the contract. It continues until the products actually reach the company and in some cases it can be based on a long term relationship, therefore implying the need of a purchase order system which allows business owners to have a written historical record of various purchases.
If there is the case of a long term relationship between the company and the supplier, the supplier will probably opt for a contract in order to secure fixed cost agreements. Overall, the purchasing process can run smooth only if the company is fair in its requirement vs the suppliers it is looking for.