by martieLast Updated : Jun-03-2023
Are you struggling with an inefficient purchasing process and lacking a central place to track your purchasing data? As per Hackett’s research, an inefficient purchasing process within a procurement department costs companies 30-40% more than companies that effectively manage their managing purchasing process.
In this article, we will show you how to make your purchasing process more efficient and reduce the overall cost of your purchasing process. We will also show you how other companies have achieved similar success.
Ultimately, I will show you how you can start improving your purchasing process today!
Let’s get started.
A purchasing process enables a company to purchase products or services that a company needs to run its operations. This could be raw materials required to manufacture the final product (Direct procurement) or office supplies required in an office (Indirect procurement).
The purchasing process enables a company to obtain the products or services to operate effectively. It involves several steps, including identifying needs, selecting vendors, negotiating terms, placing orders, and receiving and inspecting products or services.
Each company might follow a different purchasing process that suits the needs of its supply chain. The formal purchasing process could be very different for an indirect procurement as compared to direct procurement.
One is focused on vetting the vendors and having a tight quality control process, and the other is a commodity purchase that you can buy from any vendor that provides the best price.
That is why companies must document their purchasing process and ensure that their employees document and follow unique requirements.
As we mentioned before, the purchasing process could vary from company to company, but here are the core steps in a typical purchasing process:
The first step is to identify the purpose of the purchase. For example, you need to order more raw materials to support the product schedule – that is an example of direct procurement.
Suppose a company needs a better system to track its customer data. So the company is now looking for a CRM(Customer relationship management) system.
Need identification answers the question of what the company is trying to achieve and what product or service the need to acquire to fulfill that objective.
The next step in this formal process is to select a supplier for purchase. This step is not required if the company already has a list of preferred suppliers.
If a company is trying to purchase something new, for example – a CRM system, then thorough market research is required to identify the top vendors. The research might include reading industry analysts’ reports or searching online suppliers’ directories. The research process would vary depending on the type of purchase.
The next step is to get bids from different suppliers.
In the procurement world, getting and evaluating bids is crucial to ensure you get the best bang for your buck.
First, to get bids, you’ll need to put together a request for proposal (RFP) or an RFQ (Request for Quote). The RFP process is suitable when you don’t know the specific solution, while RFQ is commonly used for commodity items – for example – paper.
Your RFP should detail what work needs to be done, what you want to achieve, and how you’ll assess the bids. Then, you can send the RFP to vendors with the qualifications to meet your needs.
Once the bids start coming in, you’ll need to review them carefully. This means comparing them to the evaluation criteria you laid out in your RFP. From there, you can decide which bid fits your needs the best.
Once you have decided on the vendor, a contract is negotiated, and a purchase order is issued.
A contract might not be required if the vendor is already an existing vendor with set terms or if it is a one-time small commodity purchase.
A purchase order documents what is being purchased and from whom. The purchase order also documents the key terms and conditions for the purchase.
An approval process ensures that the finance or management team has reviewed the purchase and that it is required, and appropriate budgets have been set up.
The number of approvals required for purchase depends on the company’s purchasing policy.
Some companies have at least one approval requirement, and some allow for without approval if the purchase is within a certain amount.
Once the purchase order is approved and sent to the vendor for acceptance. Once the vendor accepts the purchase order becomes a legally binding contract.
A purchase can be sent to the vendor via email, fax, or EDI(Electronic Data Interchange) methods like cXMl. Electronic methods improve the efficiency of the purchase order by eliminating the need to send and track purchase orders manually.
Once you have selected a vendor and made the purchase, keeping track of the delivery and receipt of the goods or services is important. This involves monitoring the shipment and delivery status and inspecting the goods or services upon receipt to ensure they meet the agreed-upon specifications and quality standards.
You can achieve this by implementing a Good receipt note (GRN) process.
Do you have a purchasing policy defined for your company?
If not, that there is where you should start first. That is the first step towards implementing a scalable and effective purchasing process.
We have covered purchasing policy topics in detail.
If you don’t know where to start, click the link below and download the purchasing policy template.
A purchasing policy provides a common language for the entire company when purchasing products or services that the team needs to purchase.
Here are the specific things you must address in a purchasing policy:
Approval limits define who needs to approve a purchase. Depending on your needs, you could have a simple or complicated process.
For example – You can have a self-approval limit of $250, and any purchase over that amount must be approved.
The other benefit of defining a policy is that it ensures everyone is on the same page regarding approvals.
You must also define how employees should ensure they get the best value for the company’s money. For example, You should get 3 bids to quickly compare the cost and then figure out the appropriate vendor based on the evaluation of the bid.
Now it is not the best use of employees’ time if they have to get a quote for a $10 pen, so you must define thresholds. For example, purchases over $5,000 must go through a bidding process.
If you have a procurement team, the team can manage the bidding process.
This step defines how a purchase request should be made. It could as be as simple as sending a Slack message for approval. Or it could be as painful as printing a form, filling it up, getting physical signatures, and then submitting it to the finance team to generate a purchase order.
The average cost for issuing a purchase order is anywhere between $60 to $500.
That is the cost of creating a purchase order and getting it approved by the appropriate stakeholder. Put another way, the more complex the process, the higher the cost.
That’s why it is important to understand the cost of your efficient purchasing process to optimize it for your company.
As per the research done by Hackett Group, companies with manual purchasing process has 30-40% higher procurement costs compared to companies that use an automated purchasing process.
So how do you optimize your purchasing process?
Automate it using purchasing software and reduce the time spent creating and approving purchase order requests.
Related: We have analyzed several purchasing systems for you and identified the top 10 you can review. Review the best purchasing software for you.
A purchasing software provides the following features:
Most companies overdo their purchase approval process. You have to send the approval request to a manager, the department head, and the finance department.
That is why you need to measure the effectiveness of your purchase approval process.
By ensuring that your purchasing approval process is optimized, you save company resources and ensure the vendor gets the purchase order on time.
If you have a long purchase approval cycle time, you are probably seeing the following:
If that is the case, here is what to do:
So what to do with the remaining 80% of the transactions? It should be reviewed by the department’s purchasing manager or department head.
This approach serves two purposes:
When you think about a seamless purchasing process, you should also consider how other teams use purchase order data in their daily operations.
Accounts payable teams spend an enormous amount of time on approving invoices because:
What you should do:
Many growing companies don’t have automated purchasing processes. That means they don’t have all their purchasing data in one place.
If you have automated the purchasing process, you now have all your purchasing history in one place. You can now use this data to analyze spending patterns and identify opportunities for procurement cost savings.
Here is how you can save 5-8% of your annual purchasing cost:
Use purchasing data to determine your best suppliers to build better relationships with your best suppliers.
Here are some ideas that you can implement today:
We recently worked with a Biotech company to help them streamline their purchasing process.
They were using an email-based process to get approvals for larger purchases. Once the emails were approved, a purchasing analyst would go to their accounting system and create the purchase order. The purchase order was downloaded from their accounting system and returned to the stakeholder.
The stakeholder will then send the purchase order to the supplier.
Their challenges were multifold:
They implemented ProcureDesk to streamline their purchasing process and saw the following benefits:
Want to know more? Check out the additional reading here: How Cerebral Therapeutics Gained Improved Financial Insights With ProcureDesk
If you don’t have a purchasing process for your purchasing team today and are looking to set one shortly, here are some tips to ensure you implement it successfully.
The first step is to clearly define the goals for implementing a purchasing process. The goal could be reducing the cycle time, controlling costs, or increasing cost savings.
Whatever the company’s goal is, it is important to document it. You will use this information to track the performance of the process and report on process improvements.
Depending on how your organization is set, you can check with the company’s CFO or owner for their expectations from the purchasing process.
Document the purchasing process and ensure it is readily available to all employees. You can document this using a purchasing policy or simple instructions that you can email to your employees.
At ProcureDesk, we see that companies that implement a formal purchasing policy see better results than just communication via email. Who wants more emails?
Just make sure to don’t go overboard with the purchasing policy. We don’t want it to be too long. Ideally, 3-4 pages max.
Once you have a process, you must get feedback from key stakeholders. Otherwise, you risk launching a process that no one wants to adopt.
The best way to get buy-in from key stakeholders is to call for a meeting and present it all of them together. Depending upon the size of the company, it could be just the controller and owner of the company, or it could be all the key stakeholders from different departments.
Make sure you present the “Why” of the new process before presenting the new process. Everyone must agree on the need for it before deciding on the process.
We recommend that you automate your purchasing process from day one. No one wants to fill in forms or chase their department managers for approval.
The more automated the process, the higher the chances of adopting it.
A purchase order system automates purchasing and provides greater visibility into spending.
Related: Thinking of implementing a purchase order system? Here is complete information on implementing a purchase order system.
Tracking the performance of the process helps reinforce the importance of the process but also helps the process owners to take corrective action and improve the process.
At a bare minimum, you should track the key goals you want to achieve by implementing a purchasing process. For example – improved cost controls.
Here is what we recommend to track:
If you decide to automate your purchasing process, here are the key benefits you can expect from the purchasing process.
Automated purchasing processes improve cycle times by expediting various stages of purchasing. Users can electronically initiate purchase requests, eliminating manual paperwork and delays. Approval workflows are streamlined, with requests routed to the right stakeholders for quick approval. Vendor selection becomes efficient through database integration, while purchase orders are generated swiftly by auto-populating information. Real-time order tracking and communication provide visibility and proactive decision-making. Invoice processing is streamlined through automated matching, reducing manual effort and speeding up payments. Automated systems optimize data analysis and reporting, enhancing efficiency and accelerating the procurement cycle.
Automated purchasing processes enhance cost control by streamlining and optimizing procurement activities. Managers or finance teams can review the expenses before a purchase order is issued to the vendor.
This allows the respective teams to review if the Spend is required or can be delayed or completely avoided.
Companies that have implemented cost controls report a 2-3% reduction in their annual spending.
Automating the purchasing process can boost cost savings.
Firstly, it lets you review all your spending in one place, making it easier to spot areas where you’re overspending or wasting money.
Secondly, it gives you more bargaining power when negotiating with suppliers. You can negotiate better prices and terms with a centralized location for data and better insights, ultimately saving more.
Lastly, automation helps streamline procurement tasks, reducing errors and saving time. You can focus on more strategic activities by eliminating manual processes and making smarter purchasing decisions. All in all, automated purchasing processes lead to significant cost savings for businesses.
An automated purchasing process helps reduce fraud and manual errors by giving us better control over how people make major purchases and ensuring compliance with purchasing policies.
With automation, we can set up safeguards and checks to verify the legitimacy of transactions, reducing the chances of fraudulent activities slipping through. Manual errors can be minimized as automation streamlines the purchasing process and eliminates the need for repetitive manual tasks.
By enforcing purchasing policies automatically, we can ensure that every purchase follows the approved guidelines, reducing the risk of unauthorized or non-compliant purchases. Overall, automation makes purchasing more secure and accurate, protecting against fraud and human errors.
When we automate our purchasing process, it helps us build better relationships with our suppliers.
You can easily keep track of deliveries, rate the vendors, give them feedback, and have honest conversations. This transparency and objectivity make your connections stronger.
With automation, we can stay on top of deliveries and quickly resolve any issues. You can rate and give feedback based on real-time info, which leads to useful discussions and improvements. This simplifies your interactions and makes the procurement process more efficient and effective.
A purchase cycle, or the procurement cycle, refers to the steps involved in acquiring goods or services for a business or organization. It typically consists of identifying the need for a product, researching and selecting potential suppliers, negotiating terms and pricing, placing the order, receiving and inspecting the goods, processing payment, and evaluating supplier performance. The purchase cycle is designed to ensure a systematic and efficient approach to procurement, allowing businesses to meet their needs while optimizing cost, quality, and supplier relationships.
A purchasing process example usually consists of several steps. First, there’s the identification of the need for a product or service.
Then, market research is conducted to find potential suppliers. Quotes or proposals are requested and compared to choose the best based on price, quality, and delivery terms.
Next, negotiations are held to finalize the purchase terms. Once everything is agreed upon, a purchase order or contract is issued. The goods or services are received and inspected, followed by reconciling invoices and making the payment. These steps ensure a smooth and effective procurement process within an organization.
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.