Within Operations Management, Purchasing is one of the most ignored and least-understood areas. Because of these factors, Purchasing is a challenge for most companies that inevitably end up with arbitrary and ineffective purchasing processes.
Understanding the Purchasing Process
At a very basic level, Purchasing entails balancing quality, quantity, and pricing in a way that ensures that your company’s needs are effectively met within the budget that it has set for itself.
Before planning a revamp of your company’s purchasing process, a clear understanding of the different stages of the purchasing process is crucial.
Starting with identifying a need for something to be purchased, to deciding on the product/service, the setting up of a dedicated purchasing team, planning for the quantity and specifying the quality requirements, budgeting, selecting suppliers, logistics, performance evaluation, and then to finally implementing the actual contract, an organized and informed purchasing process needs to be created first.
Stages in The Purchasing Process
- Identifying a demand or requirement.
- Generating a requisition which includes specification for the requirement.
- Placing a request for quotation (RFQ).
- Reviewing quotations received in response to the RFQ.
- Selecting the best offer based on specified criteria such as price, availability, and quality.
- Placing a purchase order, which, once accepted by the vendor, becomes a contractual agreement including crucial terms and conditions.
- Checking the delivery of the products or service to ensure it is complete and meets the specified requirements of the buyer.
- Once this is cleared, the supplier generates an invoice.
- The invoice is cross-checked with the purchase order and the requisite documents/records are filed.
- Payment is made to the supplier.
Benefits of an Optimized Purchasing Process for Businesses
The one big question that businesses want answered is : what are the benefits of the purchasing system with regard to business revenue?
The simple answer is that while purchasing in the strictest terms is about purchasing goods to meet business requirements, its impact on business outcomes can be substantial and easily extend beyond the purchasing department. Here are some areas where purchasing can impact other areas of the business:
Operational Efficiency: An optimized purchase order system can save time, money and maximize cash flow. Easy and quick access to a purchase order, the ability to enforce budgets, and ensuring accountability across your company is key to a better purchasing process, and, in turn, savings.
Fraud Reduction: Fraud is a major challenge for any business. Instances of internal fraud are high in the absence of an organized purchasing process. However, if a company invests in building an organized purchasing process, it is assured of an audit trail for every transaction — which can be used to identify exactly who is trying to defraud the company, and deter others from engaging in fraudulent behavior.
Easy Access to Crucial Information: This not only leads to improved efficiency and accountability, but it also allows the business greater visibility into areas of improvement. For example, a business that has access to purchasing records over a period of time will be able to record purchasing trends, vendor behavior and use that information to plan and negotiate budgets for future orders.
Better Budgetary Control: This, again, is a challenge for businesses. Prior to making a purchase, it is vital to know if there are sufficient funds to pay for it. An organized purchasing process improves financial planning and management, which leads to better pricing, better planning, and, of course, better control over cash flow.
Organizing Your Purchasing Process
An organized purchasing process provides the business with a clear and detailed framework within which it can work, and enables the matching of the right solution with the exact business needs.
Make use of technology: By automating your purchasing process, you could achieve time savings, a dip in business risks, streamlined processes, and reduction in administrative costs. For example, by adopting Procure-to-Pay (P2P) function, businesses can benefit from faster processing, better visibility vis-à-vis tracking purchasing orders, and a reduction in labor-intensive investment.
Empower the Purchasing department: Connect the department with the required set of product/service specifications and order requirements in a timely manner. Information such as the pricing list, or a list of approved suppliers or even detailed information about the product/service as and when it is needed should be made easily accessible to avoid unnecessary delays.
Improve Supplier Relationships: With a focus on increasing value not just for your business but also for the supplier(s). Most suppliers don’t mind reconsidering contract terms if they believe that will garner more business from you in the future. Furthermore, risk management, with respect to damaged goods or delayed shipments, is one area which becomes easier to navigate if both parties enjoy a healthy relationship as opposed to being on adversarial terms. With a dependable and collaborative supplier on board, the need to reevaluate suppliers and terms and contracts is reduced, there is scope for price negotiations, and your purchasing department will not have to rush through last minute orders.
Establish an operating model: Focus on delegating responsibility based on the strengths of the purchasing team members for both commercial tasks and technical roles. Make sure there is a performance scorecard and a documented procurement objective, vision, and strategies which are periodically reviewed by senior management. Have your purchasing team sit in on crucial meetings relating to sales and customer satisfaction so they are connected with the workings and deliverables of the different sections of the department.
The Role of the Purchasing Department
The purchasing department of a business has several key responsibilities. Having a team that is qualified to meet these responsibilities is paramount to business success. The following are some of the key responsibilities of the purchasing department of a business:
- Coordinating purchasing needs with user departments.
- Researching and conducting market studies for procurement.
- Identifying suppliers.
- Analyzing proposals.
- Selecting suppliers.
- Issuing purchase orders.
- Meeting with sales representatives.
- Negotiating price, terms, and conditions.
- Managing contracts.
- Identifying and eliminating purchasing-related problems.
- Maintaining complete purchasing records.
Before delegating responsibilities to the purchasing department, it is important to outline a purchasing policy for your business. It can serve as a guide within the purchasing department and also be used as a knowledge tool for new team members. The scope of a purchasing policy, of course, is specific to each business. In a small business, the policy is relatively simple and easier to create and maintain. Obviously, it will need to be more detailed and extensive in a large business.
Here is a simple guide to what a purchasing policy should contain:
- Who will be the primary authority for purchasing items for the business?
- What items can that person purchase?
- What are the spending limitations/authorized budget?
- What are the business’s requirements for supplier competition?
- On what criteria will potential vendors be selected?
- Which types of contracts can the purchasing department enter into with the final bidders or vendors?
- What is the position of the business in case there is a conflict of interest?
- What is the position of the business on the issue of personal loans from suppliers?
- What is the company’s position on the acceptance of gifts?
- What kind of information will be treated as confidential by the business?
- What is the procedure for dealing with any kind of legal matters and or questions?
As mentioned above, this is a simple purchasing policy that will hold well within a small or medium-sized business. Big businesses treat the creation of a purchasing policy in a more comprehensive manner.
Evaluation of suppliers happens prior to placing an order. However, the role of a purchasing team is not limited to simply identifying the best supplier, but also to ensure that over a period of time, the value they are getting matches the costs. One of the best ways of ensuring this is by periodically evaluating supplier performance.
The following points can be used as a benchmark when evaluating a supplier’s performance:
- Delivery timelines.
- Quality of shipped items.
- Completeness of orders shipped.
- Quality of customer service.
- Financial strength.
- Earlier performance with similar orders.
- Ability to meet order/product/service specifications.
- Expertise of sales representatives and technical staff.