Large companies ($1bn + revenue) have a high volume of purchasing activity, whether it is the number of purchase orders generated, suppliers, or the number of invoices processed by the A/P department. These companies have implemented an automated purchasing system which automates most of the activities in procure to pay (P2P) process. They are reaping the benefits of purchase process automation in terms of cost control and reduction, better visibility into cash flow and simplified purchasing processes.
When it comes to mid-market companies, especially in the revenue range of $50 – $150M, the purchasing activity has grown over a period and some companies are still using manual processes for purchasing. When a company is in growth mode, it makes perfect sense to focus on revenue generating activities rather than cost center like purchasing, but if managed properly companies can benefit from the purchasing process automation and reap the cost savings from productivity improvement, better visibility into cash flow and compliance.
Let’s first define various activities in the whole purchasing process and how most of the mid-market companies are doing it.
Steps in Purchasing Process
1. Requisition: This the first step in the purchasing process, employees looking to purchase a product or service. If the process is not automated, you are mostly doing it through a manual email process. It is not uncommon for employees to fill a paper form or an excel file with what they need and then send for approvals before it is routed to a buyer for execution. The problem with the manual process is that it is time-consuming and can’t scale without adding more headcount.
2. Spend authorization/approval: The second step is the approval of the purchase. It is very common to see the approvals routed via emails. In some cases, companies still manage this through paper-based process and approvals are obtained on printed forms. If your employees are using credit cards for purchases, then the approvals are likely happening post-purchase when they file their expense reports. The best compliance is proactive using pre-purchase authorization.
3. Purchase order: This step includes generating the purchase order and sending it to the supplier. This step normally involves creating the purchase order and emailing the purchase order, this type of activity can be easily automated, resulting in time and savings for your company. Also, the manual process leads to more errors while creating the purchase order and that generates a lot of back and forth.
4. Receipts: Creating receipts not only serves the purpose of confirming whether you received your order but it also helps keep track of where the assets like laptops are post-purchase. It also prevents fraud because there is an audit trail of who received the item and when.
5. Invoice and payments: Most mid-market companies don’t have automated processes to capture invoices which means that the Accounts Payable team is spending time on entering the invoices in your ERP/accounting system. This is an activity which you can easily shift to your vendors, asking them to enter invoices directly into your systems through a supplier interface. The best practice is to move to electronic invoices so you can completely avoid the data entry overhead.
Benefits of Automating the Purchasing process
Having talked about the process, let’s talk about key benefits which mid-market companies can achieve by automating the purchasing process from requisitions to invoices and payments
Better Cost control: Automating the purchasing process provides a better mechanism to control cost. Since all purchases are approved before purchase, managers have an opportunity to review whether the spend is required or not. Depending on company spend, this could result in significant savings. As per a recent estimate from research firm Spendmatters, mid-market companies can see cost reduction by 2-3% after implementing an automated purchasing tool. The reason for cost avoidance is that the spend is preauthorized and managers can effectively control spend and avoid unnecessary spend. Also, it helps to align the purchase timing with your cashflow strategy.
The other benefit of purchasing automation is that it helps reduce the fraud. By implementing a workflow for purchase and invoice approval, companies can ensure that one person doesn’t have control and authorization of overall spend process. For example, the same person should not be authorized to issue purchase orders and issue payments. This reduces the opportunities for fraud and protects a company’s most important asset – Cash.
Reduce Waste and inefficiency: Lean operations is not just doing more with less but also reduce any waste and inefficiencies in your operations and processes. If you look at the overall purchasing process, the value-added activities are negotiating the best price and ensuring that purchases are authorized and vetted. If you have a manual purchasing process then you have a lot of inefficiencies in the process, which includes
- Employees filling up tedious requisition forms takes a long time to create a purchasing requisition and leads to errors.
- Sending email for purchasing approvals and chasing managers for approvals.
- Keying in the purchase orders and invoices into your accounting systems.
- Overheads of sending emails for purchase orders and scanning invoices.
The above activities lead to lower productivity and higher headcount requirement as you scale your business. A purchasing system can automate these things, reduces time and effort and eventually allow your employees to spend time on value-added activities.
Visibility into cashflow: Having visibility into cash flow is critical for businesses of all size, CFO’s are not only challenged with growing the business but also running the operations effectively. An automated purchasing system can provide a detailed view of the cash flow including
- Proper accruals of open purchase orders.
- Purchases which are received but not invoiced.
- Standard invoicing aging reports.
- Predictive analytics on the cash flow requirements based on the purchasing history and trend.
Automating the purchasing system leads to better visibility and provide information on decision maker fingertips.
Purchasing cost reduction: When it comes to negotiating better cost with your suppliers, the more prepared you are, the better it is. Most of the companies have limited information about their purchasing patterns. You can pull a supplier spend report from your accounting information but it does don’t help you understand spending patterns, for example
- What are you purchasing at line item level, especially on the Indirect spend side – office supplies, cleaning supplies, marketing, advertising, IT hardware and software etc.
- Do we buy in bulk or do we buy in small batches?
- What is the unit price trend over time for key commodity items?
- When was the last time pricing was negotiated?
- Are we buying the same item from different suppliers across different plants?
An automated purchasing system not only provides productivity benefits but also present granular information which helps in negotiating better cost.
Better employee experience and morale: Policy and controls are important for corporate governance. Creating policy documents is the easiest part, implementing it is somewhat challenging and implementing it in an employee friendly manner is even more challenging. Purchasing policy is no different and that is where an automated purchasing system can simplify the process by automating the controls and guiding the users on what needs to be done at each step. Most of the modern purchasing systems allow companies to define policies in the system and automatically alert employees of any violations and corrective measures which need to be taken to remediate the situation.
Purchasing automation done right can help in controlling cost, reducing cost strategically, provides better visibility for financial management and high morale for your employees. I am curious to know about your purchasing process and lessons learned, feel free to drop a note in the comments section.