Purchasing is the activity of procuring products or services by a buyer from a supplier. The simplest example of purchasing is the day-to-day purchasing done by a company. For example, you are purchasing a laptop from CDW or Amazon.com.
The main activity in the purchasing process is to complete the purchase transaction. The buyer can complete the purchase transaction by issuing a purchase order to the vendor, placing an order with the vendor through a website, or just calling.
Whether an organization issues a purchase order depends on its maturity. For example – a small company might not have a purchase order process, While a growing company will always issue purchase orders to the vendors.
The purchasing process varies from company to company. A small company might not have a process at all. At the same time, a large company might have a highly bureaucratic process.
But here are the key steps in the purchasing process:
This step is the first step in the purchasing process. In this step, you determine what you do need to purchase and why. For example, you need to purchase a new laptop for a new hire.
This step involves getting quotes from different vendors to assess the best value for the company. You might do this formally by requesting quotes from the vendors or just do this informally. For example, you can browse different vendor websites to check the price of the laptop you want to purchase.
The purchase approval process involves getting formal approval before making the purchase. The purchase approval process ensures that a manager or appropriate person approves the purchase.
The approval process allows managers to check for budgets and ensure that the purchase is indeed required.
It could be as simple as sending an email for approval or using a purchasing automation system to send a purchase order request.
After the managers approve the request, a buyer can issue a purchase order to a vendor. It is optional as many small companies don’t use a purchase order process.
If your company uses a purchase order process, this step includes generating the purchase order document and sending it to the vendor.
The last step in the purchasing process is to track the purchase order through its lifecycle.
This process generally involves tracking the order acknowledgment by the vendor and shipment tracking of the order.
Once the buyer receives the order, the purchase creates the purchase order receipt. This document is also known as a Goods receipt note (GRN).
The GRN helps the AP team with the 3-way matching process.
An operation or dedicated purchasing team is responsible for the purchasing function.
Whether you have a dedicated purchasing team is a factor of size.
If you are a small company, everyone in the company purchase product or services.
If you have $5M + in revenue, that is where we see the need for a dedicated team.
Whether you have a purchasing department, we highly recommend a well-documented purchasing process. It could be a separate document, or this could be part of your purchasing policy.
The key benefits of the purchasing process are as follows:
With an established purchasing process, managers can approve the purchase before the vendor is issued the order.
With greater Spend control, the management can approve or reject a purchase, allowing you to control spending.
With a purchasing process, employees are not confused about how to purchase a product or service.
When you give your employees a step-by-step process for purchasing, productivity improves across the organization. Purchasing process automation further increases productivity.
A purchasing process allows you to capture all the spending in one single place. Whether using a spreadsheet to keep track of purchase orders or a purchasing system, the finance team has one single place to track all the commitments made by the company.
It leads to better cash flow planning and better Spend management.