by ProcureDeskLast Updated : Dec-04-2018
Bonus Material: Free Purchasing Policy Template
Looking to control cost and get better cash flow visibility? Are you looking to implement a new purchasing policy?
Then this strategy would help you implement a purchasing policy that not only helps control cost but also helps with setting up your company procurement process for growth.
In this step-by-step guide, we will walk you through the key elements of purchasing policy and how to write a highly effective purchasing policy.
This guide is for controllers and CFO’s who are looking to control costs and get better cash flow visibility through an effective purchasing process.
Before we get started, download our purchasing policy template by clicking the link below.
Then follow this guide and design a purchasing policy for your business.
What is the role of the purchasing policy?
After working with 100’s of companies, we have noticed the following benefits for companies
Purchasing policy removes the ambiguity around purchasing products and services from your vendors.
When you are a small company, purchasing is performed by very few employees. So you already have shared norms and you probably don’t need a written policy.
However, as the company grows from a few employees to a large number of employees or to multiple locations, this approach doesn’t work.
If you don’t set up a purchasing policy from the beginning, every department evolves with its own set of processes.
As the company continues to grow, these individual policies become the new norm, and it becomes difficult if not impossible, to consolidate these into one cohesive policy.
Having a purchasing policy from the start allows you to establish a standard set of guidelines across the different locations.
As you scale the operations, you can update the purchasing policy to accommodate any specific requirements for a location or department.
These are your purchasing commandments for your employees.
Let’s look at some examples
If you don’t have a purchasing policy, you probably don’t have a dedicated procurement department. That means purchasing is done within individual departments.
If the decision-maker in that department decides to make a purchase from a friend or relative, Is that acceptable within your company, or is that considered a conflict of interest?
It is not uncommon for vendors to entertain the decision-makers during the evaluation process or after they are selected as a vendor.
The question is to what extent?
Let’s say the vendor takes the decision-maker to Vegas for a trip just before the purchasing decision is made.
You should not be surprised that the vendor is selected for that product or service.
Is that acceptable behavior in your company?
The point is that no matter what is acceptable and what is not acceptable, having a common standard across the board helps employees to make their day-to-day purchasing decisions.
Along with a purchasing policy, you could implement a purchase approval process to mitigate unauthorized purchases or purchases from non-preferred vendors.
Schedule a call with our process specialist and we will show you how to implement and automate an effective purchase approval process to capture non-compliant purchases.
If you do have a purchasing department, then a purchasing policy helps you elevate the value of the procurement department.
Just defining the role of purchasing will not help increase procurement engagement with stakeholders.
We wish it were that simple!
However, by setting up a purchasing policy, you are letting employees know about the role of purchasing and how to engage with purchasing.
A purchasing policy also helps you establish and communicate a standard purchasing process for the company.
If you are using a purchasing system then a purchasing policy can help drive adoption for that system.
Purchasing policy is not just for your employees but it also provides standard guidelines for your suppliers on how to engage with your company.
If there is no purchasing policy, there are no guidelines for your suppliers.
Following are some of the areas where a purchasing policy can help
The alternative would be to define this in your purchasing policy for your suppliers.
For example, you can define an acceptable gift policy where you either mention what kind of gifts are ok or whether it is not OK for suppliers to bring any gifts.
By defining guidelines for your suppliers, you can streamline the communication and engagement process with your company.
In this section, we will cover the key sections you need in a purchasing policy. We will cover the table of contents first and then go into each and every section
Let’s look at each one of them now.
If you haven’t done this already, go ahead and grab the purchasing policy template by clicking on the link below
and then follow the step-by-step instructions below to create a policy that suits your needs.
Keep the objective simple. You should cover the why and scope of the purchasing policy.
For example –
“The role of the purchasing policy is to define standard methods and procedures for the Company to purchase products and services from different vendors. This policy covers all expenses for the company including items like taxes, payroll payments, etc. Those are defined as exceptions in the policy and proper procedures are defined to manage these payments.
Compliance with this policy is mandatory for all employees. Noncompliance with this policy could lead to action including termination of employment. The purchasing department is responsible for maintaining and implementing the processes defined in this policy. For any suggestions and feedback, please reach out to firstname.lastname@example.org “
The purchasing policy is not the only document where you should talk about the role of the procurement or purchasing department. But certainly doesn’t hurt to talk about the role of purchasing in your company.
It varies by each company so customize this section based on your needs.
You could add something simple like
“The role of the purchasing department to help the organization get the best value for the product and services we purchase, reduce cost, reduce supply risk, and enabling stakeholders to reach their business goals.”
Also, you can add a brief about the role of the purchasing department in day-to-day activities.
Something on the lines of:
“ Purchasing department is responsible for running the vendor selection process by working with different stakeholders. The purchasing department would be the main point of contact for the suppliers during the vendor evaluation and selection process. Purchasing will coordinate the activities, schedule, and scoring of the vendor responses by working with both internal and external stakeholders”
Use this section to introduce the procurement value to the organization.
A word of caution, Don’t get overly prescriptive on how purchasing would perform activities at this time. That should be handled by the control mechanism you have in place. For example, if you have an eSourcing tool, then that tool will take care of the scoring, evaluation ratings, etc.
The intent of this section is to communicate to the company regarding the vendor setup and onboarding process.
The purpose of this is two-fold.
What should be covered here?
You should cover the process and supporting documents. Something on the lines of
“All new vendors should be vetted by the purchasing department to ensure that they meet various predefined criteria for vendor selection. If required, the evaluation should be conducted by inviting multiple vendors to bid and then selecting the best value match vendor for the company.
Please note that this process is applicable to standard vendors. There are exceptions that would not be vetted by the purchasing department. Those exceptions include
2. Interest and bank payments
3. Government payments.
All your other exceptions here”
The next section is to define the vendor setup process. An example would be
“ All vendor setup requests should be sent to the A/P department with supporting documents (include a link to the supporting documents). All requests must be approved by the immediate manager and the approval should be attached to the vendor setup request”
If you have a system to manage the vendor request process then define the process here. If that is not the case, you probably can accept setup requests through email. We generally recommend setting up a generic mailbox to receive a supplier onboarding request. For example email@example.com
Before we get into who can sign the contract, it is important to identify when you need a contract.
Some companies have a dollar threshold, for example – a contract is only required over $50,000 in Total Contract Value (TCV).
In other cases, we have seen that companies take a more holistic approach when it comes to contracts. They focus on risk rather than the dollar value.
If there is a risk that needs to be mitigated, they will put a contract together, no matter what the dollar amount is.
The intent of this section is to define two things:
a ) who can sign a contract and commit to the company on behalf of the organization.
b) Are there different levels or individuals who can sign contracts based on the Total Contract Value (TCV).
A TCV is calculated by taking the annual committed amount X number of contract years. For example, if you are committing $100,00 for 3 years, then the total contract value is $300,000.
Before you do this, a quick question.
Do you want the business to sign the contract?
By business, we mean the budget owner or the department which is committing to spend the money.
Or do you want signing authority to be centralized in a single place?
We highly recommend that you centralize the review and the signing authority to a single group. We have seen this function sits within purchasing or legal.
Centralizing the review and signing authority has two major benefits
1. It is easy to ensure that the corporate standard is followed.
The standards could be legal terms like indemnity, insurance, or the law of a specific city. It could be commercial terms like payment terms etc.
2. By centralizing the review and signing authority, you can ensure that all contracts are stored in a single place. It becomes much easier to track contracts and renewals once you have contracts in a single place.
Collaborate with your legal team and set up a contract review process.
Some purchasing departments have a more hands-on approach where they review and sign contracts until the contract is within the fallbacks defined by the legal team.
And in some companies, every contract must be reviewed and signed by legal.
There is no right and wrong answer here, to define what is more efficient for your company.
Once you have established who can sign the contracts, the next step is to define different levels at which contracts can be signed.
For example – in case of contracts are signed within purchasing, you can set up authority as following:
This is covered in the Contract signing Authority section of the purchasing policy template.
Purchasing authority levels specify what amount is authorized at what level of the organization before a purchase order (PO) can be issued to a supplier.
This is also applicable to other expenses and non-PO invoices.
Why a different contract signing authority and purchasing authority?
If you have centralized the contracting authority, let’s say with purchasing or legal. In that case, you still want the actual purchases to be approved by the business so that they are aware of where they are spending their money.
Moreover, not every purchase requires a contract, hence the need to define a separate purchasing approval authority.
Some considerations while defining the approval authority.
1. Keep it simple. If every time your employees have to look up the policy to understand where the approval should come from, then it is not simple!
2. Keep in mind the approval cycle when you set up approval authority limits. For example, if you set up approval authority in such a way that managers can only approve up to $5,000 then consider the cost of sending every purchase for approval up the chain.
You need to balance risk and accountability.
We suggest that you look at your average order amount. If you don’t have purchase orders, look at the average invoice amount for vendor payments ( that excludes payroll, finance payments, etc.)
Based on the amount, you can define a threshold on what needs to be approved at each level. Keep your process simple, because the approval cycle adds to the cost of the purchase order.
With that said, the simplest way to define a purchasing authority level is by job titles or job levels. Here is an example:
This is covered in Purchasing authority levels of the purchasing policy template
When it comes to authorization limits, it is a fine balance between risk and accountability. If your company culture promotes accountability, then, by all means, have a higher approval limit at every level.
But if you are focused on cost control, maybe you want to define lower limits so that all purchases are reviewed at a director level and above.
Implementing and ensuring compliance with the signing authority is a challenge for growing companies. We have helped hundreds of companies automate the purchase approval process. Want to control your spending using automated purchase controls? Click below to schedule a free no, obligation product tour.
The intent of Delegation of authority is to define a process for an approver to delegate their approval authority levels to someone else.
A delegation of authority can be temporary – for example, someone is on vacation, or it could be a permanent delegation of authority, for example, an executive permanently delegates the approval authority to her executive admin.
You should have a bare minimum of two things in the delegation of authority
The delegation process is straightforward, it is the standard process one has to follow to delegate the authority. If you have a purchasing system, then most systems have the ability for the users to delegate their approval authority to someone else.
The second aspect of delegation is to define the levels to which the authority can be delegated.
For example, A person can delegate one level up or one level down. The idea is to ensure that even though the authority is delegated, it is delegated at a level where the person can use the right judgment to approve expenses.
That means, a manager can delegate to Sr manager or Director but can’t delegate down. Similarly, a Director can delegate down to a Sr. Manager but not to a manager.
This section is an opportunity for you to define a standard purchasing process you would like your employees to follow.
Things which should be covered in this section
This section covers how the requisitions should be submitted by the employees. If you have a purchasing system, then mention that system here. In some cases, companies have different systems for different types of purchases. For example, Direct material requisitions are created in the ERP system and Indirect materials are purchased through a different system.
In case you have a manual system, then define the requirements for a requisition. For example, buying justification, line-item details, preferred vendors, associated contracts, etc.
This section covers how the requisitions would be approved and who needs to review them before an order can be created.
If you have an automated purchasing system, then you can just mention that the approval authority is defined in the system and the system would automatically route the requisition for approval based on the purchasing policy.
In case this process is not automated, then you should instruct your employees to ensure that the spend is authorized at the right level based on the corporate spend policy.
This section covers how the purchase orders would be generated and sent to the vendor.
If the process is fully automated, then you can just mention that the system would take care of sending the purchase orders to the vendors.
In case this process is manual, you can define your purchase order generation process in this section.
More automation not just leads to simplification of the process, it also reduces the transaction cost of processing a purchase order.
This is covered in Section 7 “Purchasing process and accepted norms” of the purchasing policy template.
A blanket purchase order is a set amount that is preauthorized for a vendor.
For example, your cleaning supply vendor sends you a monthly bill for cleaning services.
Since the services are not fixed, the bill could be different from month to month.
So instead of creating a purchase order every month, a blanket order allows you to authorize an approximate amount (Let say for a year) and the vendor can keep on invoicing against that order till the amount is exhausted.
If your company allows purchase orders, then this section should define the following:
This section defines how the company is going to accept the invoices from the vendors:
Download the purchasing policy template
This section outlines the process which the vendors need to follow to submit the invoices. The same is applicable to internal users too, in case they need to submit a request for payments or other invoices where a purchase order is not applicable.
In general, there are two approaches to submit invoices
Whether your suppliers are sending the invoices to an email box or using an e-invoicing solution, your goal should be to avoid paper invoices, so that you are spending resources on scanning the invoices.
It might not be possible all the time to receive digital invoices, for example – Utilities.
Some companies have a No PO, No Pay policy – that means a vendor will not be paid unless an invoice is associated with a valid purchase order number.
It is certainly a best practice and we encourage you to adopt these best practices while setting up the purchasing policy.
Make sure, you communicate the expectations to end-users. For this to work, users need to create purchase orders in advance so that vendors can invoice against them.
If you don’t use purchase orders, then this might be a hard sell.
An exception to the above process
Not all vendors would have purchase orders or your employees would need to make payments, for example – regulatory payments. In that case, clearly identify those exceptions so that there is no ambiguity in the process.
Simply put competitive bidding is the process to get bids from different suppliers so that you can pick up the best deal for your company. Best a deal doesn’t always mean the lowest price. The best deal or best value means the product or service which meets your expectations at the lowest value possible.
What to define in a competitive bid policy?
A dollar threshold after which every purchase must go through a competitive bid process. Depending upon the average purchase order Spend and control required, this could be as low as $10,000.
You have to balance the compliance requirements with user experience and the resources available. Assuming you go with a $10,000 limit, then do you have the resources who can support all the competitive bid requests in a timely fashion.
Sometimes you have a single source vendor or sole source vendor. In that case, a competitive bid is not possible.
Here is the difference between sole and single-source vendors. In a single-source scenario, there are multiple vendors available but you have decided to purchase products or services from only one vendor. That is a strategic relationship and doesn’t want to bid the purchases every time.
A sole source vendor is a scenario where there is only one source available for the product you are purchasing. This is often the case with your Direct material suppliers because you are purchasing a unique product and you are often working with suppliers to develop their capabilities.
Here is an example of how you can define this:
Download the purchasing policy template
This is an important topic and you should not only spend time adding this to your purchasing policy but also ensure that you are often communicating this to your stakeholders and purchasing department.
Let’s first define a conflict of interest. The meaning is
“a situation in which the concerns or aims of two different parties are incompatible.”
In other words, if the person making the purchasing decision is somehow going to benefit from the purchase transaction, then there is a conflict of interest.
Let’s take an example
Bob is the head of engineering and he is looking for a vendor to provide machined parts as per company specifications. He calls a company “Machine Parts Inc” which is owned by his brother in law and decides to purchase parts from him. That is a conflict of interest.
The same is applicable for the purchasing team too
Let’s say a purchasing professional knows that the company often outsources software development work. He opens up his own shop and become a supplier to the company. That is a conflict of interest.
There are two approaches you can take to avoid conflict of interest
Ethical purchasing on the other hand is how purchasing professionals should behave when dealing with vendors
You should explicitly define in the policy what that means and what are the consequences of a policy violation.
Things to cover
– Whether purchasing professionals should accept vendors’ invitations to entertainment (Lunch, Dinner) during an evaluation process. Our recommendation is no but that is completely up to you.
– Whether purchasing professionals or any officer of the company can accept gifts from the vendor.
– In some countries, a bribe from vendors is acceptable. We don’t condone it and should be completely prohibited.
Supplier diversity is not a good corporate practice but it is also a way for your company to improve the community in which you live.
Here are a few things you can cover in your purchasing policy. If you do promote supplier diversity then here are few things which you should cover in the policy
This may or may not be a part of the purchasing policy document at your company because certain companies maintain a separate document retention policy that covers all documents across the board.
If you do cover this in the policy, connect with your legal and tax department and they can help you with understanding the document retention policy.
Tax likes to keep to retain purchasing records for tax audits and other reference purposes. Generally, the policy is for 7 years. Here is a good source for different categories and record retention
Though the procurement function has some common traits from company to company, it is highly dependent on the nature of the company and the type of Spend.
The same is true for the purchasing policy. You might be able to adopt a standard template but then you need to consider whether those policies are applicable to you are not. That is why we are not providing you a template for a purchasing policy but an approach and the important points you should cover in the purchasing policy.
With that said, let’s look at some key considerations for defining your company’s purchasing policy.
Are we stating the obvious? Yes and No
Everyone has heard this advice before but you would be surprised to see a lot of purchasing policies that are full of pages and pages of legal and procurement jargon.
So the obvious question is – for whom are we writing this policy? Is this policy for the purchasing team or is this policy for the employees of the company?
It is for the employees of the companies so that they understand how you conduct purchasing in this company.
So if you are thinking that your employees are going to read pages and pages of the purchasing policy document to understand how to buy something, good luck with that!
Here are a few suggestions on keeping the purchasing policy simple
Keep the purchasing policy as short as possible. How short?
We would recommend not more than 6-8 pages. That should be sufficient to communicate all you have to say about your purchasing policies. We don’t have any scientific data to prove this but based on our experience, this seems to be the optimum length.
Don’t use jargon in the document, use normal language. For example, instead of saying RFI or RFP, you can say we would send this out for bid to different suppliers.
Bonus material: we have put together a simple policy template so that you don’t have to reinvent the wheel. Click here to download the purchasing policy template
A good way to check the jargon density is by asking a non-finance and procurement person to proofread the policy.
That would help you weed out the unnecessary jargon in the document.
You can significantly increase the chance of purchasing policy adoption by providing examples for each of the scenarios.
For example, if you are talking about a sole source (if there is the only vendor who can suffice your needs) vendor then provide an example where that would be applicable in your company. Let’s say you already have a sole source vendor for a given category or widget, then use that example.
Similarly, if you are talking about ethical purchasing and conflict of interest. Give a hypothetical example. For example, Bob is responsible for purchasing cleaning and janitorial services. Purchasing it from a company where he is a part-owner and his wife is the CEO is a conflict of interest.
Your employees need to understand the optics of the situation from other perspectives to better relate to such issues.
The policy is of no use if the policy can’t be easily adopted by your employees or it can’t be implemented.
We will explain a few example cases
Let’s say as part of the purchasing policy, you have defined a new set of authorization levels for approval of purchases.
So you currently may have a simple purchase approval process where the approval always comes from the manager but now your new process requires approval for different stakeholders based on the total spend. You also incorporated a new approval requirement from procurement.
Can this new approval process be easily implemented?
Yes, if you have a purchasing system with flexible workflow support.
No, if you have a manual approval process and now the users are left to interpret the approval process.
This is just one example but needless to say, it is not going to help to have a strong purchasing policy if it can’t be implemented.
We talked about providing examples, so here is one more example
Let’ say your company decided to implement a No PO, No Pay policy. In simpler words, every purchase must be a purchase order before the supplier can be paid.
Your organization is used to just calling the vendors and have them send the invoice for payment.
So do you have an adoption challenge at hand?
It looks that way. How do you overcome that?
You can make the change gradually over a period of time. For example, first, move the credit card users to purchase orders for all material items and then move to service orders in the next stage.
This should be also be supported with proper systems to make your user’s life easy. By building catalogs and purchase order automation you can easily provide a simple click-through process for creating purchase orders.
Most of the purchasing departments have this expectation that every employee must be aware of the company purchasing policies.
Just having a purchasing policy doesn’t mean people are reading it!
You have to continuously communicate the purchasing policy out to your employees and especially new employees.
We suggest that you create a cheat sheet (not more than one page) that lists the key areas you want your employees to be aware of. At a bare minimum, you should have the following
1. Purchase approvals
2. Need for purchase orders
3. Contract authorization limits and who can sign a contract.
To ensure the adoption of the policy, make frequent contact with your employee base through emails, lunch, and learn events, etc.
For new employees – talk to your HR team and see if the purchasing cheat sheet can be introduced in the employee onboarding guide or training.
Purchasing policy adoption needs continuous communication and reminder.
One more thing, seek continuous feedback on how the policy is working and incorporate that feedback. You as the policy owner would not know all the purchasing scenarios, so continuously ask for feedback and improve the purchasing policy.
Are you staffed adequately to support your purchasing policy?
A purchasing policy is a great start but make sure that you have sufficient staff to support your purchasing policy.
Let’s say as a part of the purchasing policy, you implement a bid policy. A bid policy defines the process for evaluating suppliers.
Now one of the bid requirements is that every purchase greater than $x amount should follow a 3 bid and buy process. That means you at least have 3 bids from different suppliers before you can make a decision.
Let’s say everything goes per your plan and now everyone is following a 3 bid process.
Do you have enough purchasing team members to support the new bid process?
Do you have an SLA defined with your stakeholder at which time you need to get back to them?
All these are practical considerations to ensure that what you are putting out there is fully adopted by your employees.
If you don’t have enough data to understand your resource requirements, make an educated guess. The other approach would be to start small, for example, set up a higher amount above which the bid process needs to be followed.
We hope this exercise helps you think through different scenarios and come up with a practical policy that is easy to implement and adapt.
When defining the corporate purchasing policy, also called corporate spend policy – you should focus on two things
1. What is the intent for each policy in the purchasing policy
2. What controls are available or what controls needs to be implemented to ensure compliance
Here is why they are important
In our experience, employees adopt the policy when they understand the intent behind it. Just asking them to do something without explaining the need for it would not lead to the desired adoption levels.
Let’s take an example – Bidding policy to ensure that you are getting the best rate possible.
If you are implementing a bid policy, most of the employees watch this as policing by corporate and unnecessary delays for them in making vendor selection decisions
However, you should make every attempt to explain the intent behind the policy whether in writing or verbal communication.
For example, the intent behind the bidding policy is to enable an objective evaluation of the suppliers to get the best deal for the business and company. We achieve this by running a formal evaluation process. Our process is agile to adapt to your needs so that we can enable you to make faster and better vendor selection decisions.
Now let’s talk about control, by control, we mean methods, procedures, tools, etc. which would use to implement and track compliance with the purchasing policy.
Let’s continue with the above example of the bidding policy.
You explained the intent to employees but you have control to ensure they follow the policy.
If you have a purchasing system that is required to be used for purchasing anything in the company, then you can build an approval workflow to ensure that all purchases are reviewed by purchasing to enforce compliance.
The other control mechanism is No purchase, No pay policy. This will ensure that a purchase order is always created. We assume that you have controls to review all purchase orders before it is sent to the supplier.
Intent and control go hand in hand. You might be able to explain the intent but without a compensating control, you would not achieve 100% purchasing compliance.
By implementing a purchasing policy, you get the following benefits:
To get started, download the purchasing policy template that is designed after studying best practices for 100’s of companies.
The key to an effective purchasing policy is to clearly define the intent behind the policy and the control mechanism.
Then it is easy to come to define a simple policy that is free of jargon and easy to understand for your employees.
There is no use of a purchasing policy that has low or no adoption.
Focus on adoption first and compliance will follow.
If you are wondering how a purchasing automation system can help automate the purchasing policy implementation then click on the button below to schedule a strategy session with one of our product specialists.
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