The purchasing process is a procedure for buying goods and services. It varies from one business to another business but the significant elements and aim remain the same to actually obtaining products and services.
What is the Purchasing Process?
Definition: The purchasing process is defined as a process used for the purchase requisition of goods and services via a supply chain. It usually begins after the procurement team has defined the needs or demands. It can be a physical service or inventory.
Now the requisition gets generated along with the details of the essentials. It prepares the procurement department to take action. Request for Quotation (RFQ) or Request for Proposal is raised. The quotations are sent by suppliers responding to RFQ. A review is being managed, and the offer of the product or services is given the purchase order.
The purchasing process is also called the procure-to-pay (p2p) process. It involves two main parties: the purchaser and supplier/seller. Other parties become a part like intermediaries. The purchasing process is necessary for some reason. Those are
- Compliance with regulation
- Avoiding fraud
- Management of control and risk
Purchase Orders used in a Purchasing Process
A purchase order (PO) can be understood as a commercial document and the first official offer that a buyer issues to a seller or supplier to tell about the types, agreed prices, and quantities for the goods or services.
There are different types of purchase orders like:
- The Standard order – It is purchasing of goods or services but for one time
- The Planned order – The agreement on that particular product at a given date.
- The Blanket order – An agreement done on particular terms and conditions
Most of the purchase orders come with few terms and conditions. It is a contractual agreement.
Types of Purchases in a Purchasing Process
What kind of purchase is made depends on what a person is going to buy. The kinds of purchases may not be the same. Some of the purchase types are:
1) Individual or Personal Purchases
It involves the consumer purchasing for their consumption. It is the most common and important type of purchase. It drives the economy by the purchase of products and services. The economy slightly depends on them.
2) Commercial Purchases
Commercial purchases are made possible by the middlemen for the re-sale of products to meet other needs. Under the category of this type of purchase, Retails, wholesalers, and agents fall. They come up with their distribution channels to the customers. It is the most important organization.
3) Industrial Purchase
Here the purchaser buys to convert the item into a finished product and good. It includes buying raw materials like spare parts or tools, machines, supplies and consumer stores, components, office appliances, and equipment.
4) Government Purchase
The government purchase is a purchase where the government institutions buy public utilities in bulk.
9 Steps of a Purchasing Process
Different steps that are integral to the completion of a purchasing process are-
1. Examination of the needs
The organization recognizes the need for the item in solving a specific problem. The procurement squad describes the requirement needed. They also work with other teams to make sure how best it can be done.
For example, If an organization faces lofty travel expenses, the company might invest in a fuel-efficient company. It might also reduce the travel amount for the remote workers through investment in good telecommunication software.
2. Purchase Requisition to Purchase Order
The purchasing process includes the part of ‘ ‘purchasing” with a purchase request given to the purchasing manager or department of purchasing by a team, individual, or other departments. The purchase request or requisition includes the complete detail on the products or services to be acquired.
The purchase request that is below an established budget is updated automatically into the purchase order. It is submitted to the supplier for the product or service. The expensive purchase request or random order that is not in the budget gets forwarded to the individual for a review before getting transferred to PO. The rejected ones are returned to the party who issued them.
3. Review and Approval of the Purchase Order
The approved purchase orders are transmitted to the accounting team for verifying the funds whether it exists in a correct budget or not to cover the order of the item.
a) Pre-Screening Process
The first selection is followed through various criteria analysis for evaluation of the left candidates.
b) Precise analysis of each one
A person purchasing something establishes some criteria and examines the performance of every company. Though, the importance of each criterion varies. For the routine purchase, prices and timelines are the main attributes before the reputation of the supplier.
For the goods that need changes in the internal operating process, the main criteria are suppliers; adaptability, technical help, reliability of the goods. It is best to find the total cost of commercial condition and acquisition. Before that, it is necessary to ask the suppliers for precise costing. The payment terms must be acceptable. Lastly, it is vital to ensure that the timeline is correct.
Adaptability, sustainability, and financial security are the key factors that you should take into account at this stage.
Objective criteria to Analyze
- Geographic Location
- Terms and conditions
- Delivery time respect
- Easy operation
- Easy maintenance
- Product quality
- Technical specifications
- After-sales process
Subject criteria to Analyze
- Already existing relationship
- The reputation of the supplier
- Interlocutors’ personality
4. Proposal Requests
The purchase orders that get budget approval are made to return to the procurement team. They make a Request for Proposal (RFP).
The items are dispatched for soliciting bids to the vendors for fulfilling the order of the products or services. The supplier submits their bidding and reviews based on the compliance records, reputation, price, performance history.
5. Agreement of Negotiation and approval
The appropriate vendor who wins the winning bid gets the contract. It gets refined and checked before signing to ensure all optimal terms and conditions.
The agreement has to be mutually satisfactory for both parties. After the contract is signed, the Purchase order gets a legally binding contract between the seller and the buyer.
6. Shipping and receiving the products
Within the agreed timeframe, the suppliers supply the goods or services. Once the buyer receives or performs (in the case of goods and services, respectively), the purchaser reviews that product or service carefully to ensure that it is the one that had been promised. In case of issues, the consumer notifies the vendor.
7. Matching in a 3 Way System
There is a 3-way matching system that revolves around the comparison of three things. It ensures that the transaction is perfect and correct. Those are:
- Shipping documents
- The packing slips along with the actual purchase order
- A supplier invoice
8. Approval of Invoice and Payment
The order that matches, get approval for payment. If any additional charges or other modifications are there, then it needs another step of approval. Once it gets approved, the payment gets issued to that vendor. These payments capture early discounts or any incentive to avoid late amounts.
9. Securing Record Updates
The completed orders get recorded in the books of the organization. The documents of the transaction are stored securely in a location.
Why follow a formal Purchase Process?
A formal process of purchasing is essential to avoid fraud and illicit rebates. Five A’s are vital for it. Look at those:
1) Approved Suppliers
Sometimes it is essential in ensuring the appropriate suppliers for a specific kind of goods and services. Suppliers should supply goods and services to meet the needs of the quality. They have to be financially sound and reliable for the process. Commercial risk and the prices have to be competitive in the market. Through approved suppliers, gain a sustainable relationship with them. In the future, it can be helpful.
2) Approval Process
The objective of the Approval process provides control to lessen the risk of fraud in an organization. The approval process eliminates inappropriate purchases.
3) Audit trial process
Recording the set of procedures of all the processes of purchasing is necessary. An audit trail system analyzes the events with precision. The audit helps in identifying errors or any branches of policy.
The goods that the organization procure have legal responsibilities to account for all the finances. For example, prices, dates, departmental details. It is a very vital bearing for an organization’s finances because taxes and profitability depend on this.
Why Automation is the very best practice of Purchasing
The purchasing process was made and recorded manually on the papers before the arrival of digital transformation. With the advent of the digital era, the purchase process has become more advanced with automation and various software tools (Artificial Intelligence, machine learning, etc.).
The old system of the process faced several challenges such as production shutdown, double payment for big purchases, too many orders to match them in shipping invoices.
The manual workflows are not sufficient for the organization to get an optimal return and a good supply chain. Beneficially, Automation and Artificial intelligence eliminate the challenges of outdated methods of the Purchasing process. The purchasing process can be effectively improved by automation in the following ways:
- Eradication of expenses from all the paper-based and manual workflow, storage, and records.
- Saves time and enhances procurement process
- Extra speed, accuracy, precision, and consistency.
- 3-way matching of automatic process
- Shorten invoice lifecycles
- Transparency of data
- Real-time analysis of data and much more precise planned decision making
- Vendor management can work with ease. Every bit of information can be available and accessible on the central server
- Develops and improves supply management
- Aims on vendor communication and collaboration
- The total cost of ownership Increases
- Creates a social responsibility in the purchasing process
Procurement Process vs Purchasing Process
The procurement process is sometimes interchangeably used for the purchasing process but they both are quite different.
A purchasing process is more confined to actually obtaining goods and services while on the other hand procurement revolves around the overall framework established for optimizing that purchasing for gaining optimum value, efficiency, and savings.
The procurement process is a method where people get goods or services. It takes into account the requisition of an order to approve an invoice. Procurement and Purchasing are a little bit different from each other. Procurement means the activities that involve obtaining goods. It is unique in operation structure.
The procurement management contains 3 Ps. Those are-
Process: Some rules need to be followed when reviewing, ordering, receiving, and paying money for products or services. Few checkpoints may elevate complications of the purchase.
People: The “people” are stakeholders and have a particular responsibility in this procurement method. The important part of stakeholders is to take care of initiations and authorizations at every stage.
Paper: It is the paperwork process and involves the flow of the procurement process. All details are kept secured for reference on paper.
Skill and care are both vital to get more out of the purchasing process. Especially in this competitive environment and fast-moving digital marketplace, it is not so easy.
Automating and formalizing the purchasing process is necessary. Immediate needs have to be met but along with that value and savings. The e-procurement tools can straighten the procurement process flow in good order. For sure, it can enhance and increase the productivity of a business.