Controllers and Finance managers:
Looking to increase visibility into cost and control spending? And don’t have all the purchasing data in a single place?
A well-designed process can help you control costs and increase cash flow visibility. A purchase requisition system can then help to automate that process.
A common myth among many small companies is that management should be reviewing every requisition. If you think that is the right approach, you are setting up your company for failure.
In this article, we will cover a step-by-step process for setting up an effective purchase requisition process.
Using this process, most companies see a 30-40% reduction in the time it takes to create a purchase requisition.
The time it takes to create a requisition is an important productivity measure for the entire company.
By optimizing the requisition process, you can increase the productivity of the entire company.
Here is what we are going to cover in this article.
But before we get started, download the Requisition System Checklist
Then follow along to see how to optimize your requisition process.
Or give the checklist to a team member so that they can find and implement the best purchase requisition tool for you.
Table of Contents
A purchase requisition is a process for employees to request approval for the purchase of products or services.
The approval can be done by a manager, director, or senior management of the company.
But why do you need a purchase requisition in the first place?
Let’s look at that first.
Purchase requisition serves the following purpose in a company:
Let’s review each of these in detail.
When you have an efficient purchase requisition system, you can set up a review process so that all expenses are reviewed before a purchase is made.
And if a purchase is not required or needs to be delayed, you have the opportunity to do so. In other words, you can control the maverick Spend.
Let us explain with an example:
Let’s say your sales team just invested in a CRM tool to get a better handle on your customer data.
The marketing team is also looking for a new email marketing tool.
If the CRM tool can support marketing requirements, you can consolidate both department requirements in a single tool.
That is not only one less vendor, you also save cost by negotiating a better price for additional licenses.
Another example is office supplies.
Let’s say you keep a stock of the most common items for office supplies.
A new employee might not know that and they put a requisition in for purchasing supplies.
With the requisition system, you can reject the purchase and route it to be fulfilled by stock that you already maintain.
Another benefit of a purchase requisition is that allows you to avoid any procurement fraud.
You can also increase transparency by requesting many quotes from vendors and selecting the vendor with the best pricing.
With a purchase requisition process, you have complete visibility into your Spend.
With a requisition process, the spending is pre-approved so that the finance team always knows what is coming down the pipe for cash flow needs.
As opposed to a credit card purchase, where you have to wait for employees to submit expense reports to see what has been spent.
With a requisition process, you can also get granular data.
For example, if you are just looking at your chart of accounts, you can see the summary of total Spend and the list of suppliers.
However, you don’t know the line-level details.
Let’s say you spent $100,000 on Advertising in a year.
Was that on online media, PPC ads, or anything else? That is the level of granularity you can get with a requisition process.
This not only helps with spend visibility, but it also helps you with better budgeting.
Especially if you do zero cost-based budgeting.
Most of the companies use a version of the purchase requisition form that then manually gets routed for approval.
Do you know how much productivity is lost due to the manual requisition process and the paperwork associated with that?
As per a recent study, it costs almost $60 to approve a purchase request.
That is the time spent on activities like:
The above cost doesn’t include the opportunity cost of delayed products or services and their impact on business.
With an automated requisition process, you reduce the cost of the operation. That also leads to increased employee productivity.
Most of our customers see at least a 45% decrease in the total time taken to create a requisition.
This can be achieved within the first 15 days of going live.
Here is how a typical purchase requisition workflow. The common steps in purchase requisition management are:
The steps are covered in detail
Let’s look at the typical purchase requisition process flow. These steps can be easily automated using a procurement system.
The first step in a purchase requisition process is the initiation of a purchase request.
In this step, an employee submits a request for the purchase of a product or service.
The basic information that is being captured is as follows:
If you have a manual process, then the employees need to remember where to go to pull the requisition form, what values to fill, and so on.
A manual process not only impacts productivity but also leads to errors due to bad data entry.
With an automated requisition process, you can allow users to create requisitions with only a few clicks.
Since the process can is automated, there is a moderate learning curve.
Once the request is created, employees submit it for approval as per the approval matrix.
Most companies have an approval or authorization matrix. For example, a spend over $500 needs to be approved by a director and so on.
There are two main challenges we see with the manual purchasing processes:
Companies have a complex approval matrix. Sometimes a single requisition needs 2-3 approvals. How many people really need to approve a requisition before you can make the purchase!
The thought process is that we should have tighter control over Spend.
We agree and we preach that but…
You also need to have accountability so that you can trust the line managers or directors to do their job.
The second issue we see is that the process is manual. You create a request form, then email it to the manager for approval.
The process is simple but managers forget to approve the request and approval gets lost and so on.
To avoid all these issues, automate the approval process so that employees don’t have to waste their time chasing purchase approvals.
The last step in the process is to convert a requisition into a purchase order.
After that send the purchase order to the vendor after assigning a purchase order number.
Not every requisition needs to be converted into a purchase order.
For example, you can use the requisition system to issue office supplies that you have in stock at your location.
Or you probably need to place the order by calling the vendor.
There are a few things to consider here:
Can you automate the conversion of requisition to purchase orders? If that is the case, you don’t have to manually convert every requisition into a purchase order.
Set up rules so that you can easily decide what requisitions to convert to a purchase order or not. For example, you can have a flag at a vendor level so that you know how an order needs to be placed.
To summarize, the purchase requisition process has three main steps:
So far we have covered the purpose and benefits of a purchase requisition system. A purchase requisition system is also known as a procurement solution.
We also covered that you can set up a manual purchase requisition process by setting up a requisition form.
We will now cover the automation of the purchase requisition process. As you review the process, try to map activities that can be managed by the procurement department or the purchasing department.
Here are the key features you would need in a purchase requisition system software.
The first basic feature you need in a purchase request process is the ability for your employees to submit a purchase request.
The idea is to automate the manual purchase request process and reduce the effort to create a requisition.
Here are things to consider for purchase request:
With the purchase request, there are two main goals:
1. Simplify the process for creating a requisition.
2. Increase employee productivity so that they are not spending a lot of time on data entry to create a requisition.
Here is how a sample requisition form like:
In the previous section, we mentioned that the goal of purchase request automation is to simplify the purchasing process.
And there is no better way to simplify the purchasing process other than using supplier catalogs.
We have covered this topic in detail in the catalog and purchasing experience article.
But here is a summary:
Catalogs enable employees to create requisitions by browsing and selecting the items they want to purchase.
That way they are not spending time manually entering line item details.
For example, You purchase office supplies from a local vendor. They offer you a standard rate card for the items you purchase from them.
You should create a catalog so that users can easily select items they would like to purchase.
Here is how simple a catalog process is:
Sometimes, it is not feasible to maintain a vendor catalog because of the number of items they sell. So instead, you can link your purchasing system to the vendor’s website. This type of catalog is called a punchout catalog.
This allows employees to browse the catalog and pick what they need to buy but still get the data back to the requisition for approval.
Punchout catalog is a win-win scenario.
Employees don’t need to type in the data and Companies have complete control of what is being purchased.
Here is an example of a punchout catalog:
The biggest frustration employees face is not knowing what accounting codes to use on the purchase requisition.
That leads to a lot of guesswork and back and forth emails with the accounting department.
So take the guesswork out of the equation, we recommend that the requisition system should support the following features:
User-based accounting defaults:
With user-based accounting defaults, you can set up a rule to default the user chart of accounts in every transaction.
But default doesn’t mean that they can’t change the accounting codes, it is just that they have something to start with.
For example, If an employee purchases office supplies most of the time, all you have to do is set their default code to “Office Supplies”.
Or whatever is the equivalent account in your chart of accounts.
Supplier based accounting defaults:
With supplier-level defaults, you are setting up accounting defaults for a supplier.
This is applicable in cases where you only purchase one type of product from a supplier.
For example, If you are a Biotech company and all you purchase from a vendor is lab supplies, then you can set the default for that vendor.
So no matter who purchased from that vendor, the default supplier accounting code would be used.
Item-based accounting defaults:
You might have a granular chart of accounts and supplier level default might not work.
For example, A biotech company purchasing lab equipment and lab supplies from a vendor would not have a common supplier level default.
So in this case, you can set up a catalog of items and for each item, you can set up an accounting default.
This gives you the ability to assign granular accounting codes to each item, leading to better accounting data.
Most of our customers use the combination of these three strategies to simplify the purchasing process.
Once a requisition is created, the employees can route it for approval. A few considerations here:
The requisition system should automatically generate the workflow based on the pre-configured conditions.
Employees don’t need to refer to an authorization matrix every time they want to purchase something.
The finance team should have complete flexibility to define different workflows. For example: if you want to route a requisition based on what is being purchased or based on the $ amount.
The workflow engine should provide flexibility to route capital purchase requests to a project team. Or a standard Opex purchase that needs only a manager’s approval.
The system should maintain a complete audit trail so that auditors can certify controls based on the information in the system.
Here is an example of multi-step workflow with conditional routing:
However, the system dynamically identifies the correct workflow based on predefined conditions.
Once the request is sent for approval, the approvers should be able to approve the requisition with ease.
We suggest an omnichannel approval strategy for approval so that approvers can approve with ease.
The purchasing system should be able to support the following methods for approval:
With a mobile app, the approvers can approve the documents on the go.
The mobile app should support different platforms like iOS and Android.
Employees can approve the purchase requisition faster and they don’t have to log in to the system for approvals.
Some people live in their inbox and we get it!
That is why it is important to have the flexibility to support approvals only through email.
With email approvals, employees should be able to see the detailed data in email so that they can approve with confidence.
Review of approval:
Mobile app and emails are great for conveniently approving invoices. However, sometimes you need the ability to review the documents, make any required changes, and then approve the document.
That is why it is important to have the ability to review the document and edit it before approving it.
It is very beneficial for finance teams to review the items, fix the chart of accounts, and then approve the requisition.
That way, you can ensure that you don’t have to correct the downstream documents like Invoices/Bills.
Once the requisition is approved, it needs to be converted into a purchase order.
When it comes to a purchase order, you would need the following features:
Manual or automated rules for PO creation:
Based on the structure of your team, you might or might not want to automate the process of converting a requisition into a purchase order.
For example, some companies have internal stock of items like office supplies. So once the requisition is entered by the user, all that needs to be done is to issue the item to the employee.
In this case, no purchase order is required.
Another example is website orders. For example, you need to purchase something from a big-box retailer that doesn’t accept purchase orders.
In that case, a requisition doesn’t need to be converted into a purchase order.
You should have the flexibility to convert a requisition into a purchase order or manually review the purchase order.
Merging requisitions into a single purchase order
Many vendors still charge shipping for orders that are less than a certain threshold.
This is a common scenario for lab supplies, office supplies, IT supplies, and so on.
You should be able to combine the different requisitions into a single purchase order.
Or manually review a purchase requisition and decide the next steps.
This not simplifies order tracking, it also saves you cost on the shipping charges.
Once the order is placed, you need the ability to track the shipment as well as track what was received and when.
That is why a purchase requisition system should allow you to track the shipment status.
For example, you can just enter a tracking # and the system should be able to track the delivery status for you.
Moreover, when the delivery is made, the system should send you an update that your order has been delivered.
Once the order is received, the person who received the product should be able to mark the order as received and attach any supporting documents.
Using a purchase requisition system, our clients see the following benefits under 30 days
So get started by downloading the checklist and improve your purchase requisition process today!
If you are like me, you probably want to see how you can automate this process. So go ahead and click on the button below to schedule a demo with one of our product specialists