In 1969, people were shocked (but likely secretly bought) a how-to book called Everything You Always Wanted to Know About Sex* (*But Were Afraid to Ask). A topic much less taboo, but one that can still be intimidating, is purchasing. While procurement workers may have learned what they need to know to get by, some basic terms and concepts can still be confusing. This can make for some embarrassing situations in the workplace. To spare you from those moments, we’ve assembled a few things you might not know, but definitely should, about purchasing.
1. What the Heck is Purchasing?
Let’s start with the basics. While purchasing in layman’s terms could refer to the act of buying an item, officially it’s defined as “the activity of acquiring goods or services to accomplish the goals of an organization.”
2. What’s the Difference Between Purchasing and Procurement?
On the job, procurement is used interchangeably with purchasing, but there are some specific differences between the two terms. Purchasing refers to the buying, receiving and payment of goods and services. Procurement includes those elements and adds other steps such as approval of order, negotiation, vendor selection, processing of purchase and shipping orders and invoices and three-way matching.
3. What is a Purchase Order?
These are the lifeblood of your procurement department. A purchase order is a document authorizing a transaction that includes information such as descriptions, prices, quantities, payment terms, shipment and other terms and conditions. These documents are important for companies of all shapes and sizes, so make sure you know how they work for you.
4. What Does P2P Stand for?
P2P is the abbreviation for purchase-to-pay, which is essentially the entire life cycle of a procurement process, from the time a purchase order is filled out, approved and sent to the supplier to when that supplier is eventually paid.
5. What’s a Blanket Order?
A blanket order is a type of purchase involving several different delivery dates where goods are slated to arrive at your warehouse. The customer makes this kind of agreement with a supplier to take advantage of predetermined prices. It also benefits the supplier, who has guaranteed work down the line.
6. How Does a Contract Order Differ from Other Purchases?
In the case of a contract order, you first strike an agreement with a supplier regarding the terms or conditions of sale—without placing an order. When you do get around to purchasing from the same supplier, you reference those terms and conditions, saving you time and effort.
7. What Orders Does Purchasing Handle?
In a word, anything. But most business purchases and requisitions involve items related to manufacturing and retail. For product-related goods, purchases include raw materials for production, semi-finished items, components for assembly or finished goods for reselling. Anything related to generating revenue, such as maintenance and repairs, packaging, transportation, outsourced services and capital expenditures (from machinery to buildings) are also under the purchasing umbrella.
8. Why do We Need Accounts Payable?
If every company could pay cash on the spot for everything needed for their business, we wouldn’t need an accounts payable. In the real world, most companies don’t have that kind of cash handy, but will be able to pay for a purchase in the future. That’s where credit comes in. When you use credit for a purchase, the transaction is referred to as an accounts payable or a liability and is recorded as such until the balance is paid.
9. What’s Needed for a Purchase Order to be Approved?
For a purchase order to be approved, a company first has to identify a need for an item. Once that’s established, the manager will signal the green light to a procurement agent who can select the best vendor. After informing the manager of their decision, who provides approval to go ahead, the agent completes the purchase order and sends it to the supplier. For more details on the entire process, read about the key components of purchase orders.
10. What’s Needed Before an Invoice is Approved for Payment?
While this is among the final steps of a procurement cycle, invoice approval has several components. You have to determine whether the goods arrived undamaged and unchanged, confirm that the purchase and shipping orders details match the invoice and, most importantly, that there is a signature of consent from the responsible authority in your company.
Hopefully these answers have eased your potential embarrassment somewhat. If you still feel sheepish for having had to ask these questions, take heart. Chances are, many of your colleagues have the same ones.
Photos: bahri altay / Shutterstock, Negative Space, Marc Chouinard, seiki14 / Shutterstock