Optimizing Your Purchasing Process in 2024 – A Practical Guide
Key takeaways
- The purchasing process includes several entities including – creation of purchase requisitions and purchase orders, receiving items and services, and recording invoices for vendors.
- Fraud and duplication is the main challenge faced by the manual purchasing process.
- Purchasing activities play a pivotal role in determining the company’s profitability and overall performance.
- Frauds in the invoicing process happen due to lack of visibility and reliability in manual purchasing workflows.
- Automating repetitive, mundane tasks in the purchasing process saves time and prevents fraud and duplication.
- A no code workflow automation solution like Cflow can automate purchasing tasks effectively.
What is the Purchasing Process?
Purchasing process involves all the steps a business goes through to complete a purchase. Most businesses have a formal purchasing process for buying goods or services required for their daily operations. The purchasing process at the enterprise level involves complex operations that require attention to detail and are data intensive.
Table of Contents
We engage in the purchasing process almost every day – from buying our morning coffee to negotiating the price of a new car to ordering your favorite dress online. Now imagine this at an enterprise level. Purchasing things on a small scale seems like a walk in the park but at a large enterprise level, it can be daunting to manage the different approval stages and meet customer needs.
Understanding the purchasing process is key to overall business growth, and profitability, reducing unnecessary costs, and maximizing profits.
This blog will serve as a practical guide to help you modernize your purchasing process in 2024.
Details of the Purchasing Process
The purchasing process includes creating purchase requisitions and purchase orders, receiving items and services, and recording invoices for vendors. Both procurement and purchasing are used synonymously but purchasing is a transactional process while procurement is the umbrella term where purchasing is a part of it.
There are 6Rs in the purchasing process –
a) Right quality
b) Right materials
c) Right quantity
d) Right time
e) Right source
f) Right price
h) Right place.
Purchasing encompasses the strategic and operational processes that businesses make to fulfill customer needs.
Having a solid purchasing process is of utmost importance as it gives businesses a standard way of addressing their needs. It enables efficient financial planning and it not only regulates compliance but also prevents procurement bypass and avoids unregulated spending.
Steps in the Purchasing Process
The ideal concept for the purchasing process is exchanging information and approval stages to complete the purchase. Though each business has its own set of purchasing procedures all businesses, small or big have the following steps which are tried, tested, and well-seasoned.
1. Intensive assessment
This is the first step in the purchasing process where you will conduct an in-depth analysis of needs from different departments. Recognizing specific needs for goods and services will eliminate maverick spending and boost organizational profits. The procurement team works with different departments, finds the needs, and sends purchase orders to vendors to acquire the items.
2. Purchase Request
The requisition form is submitted to relevant departments. These are the internal documents employees use to purchase goods and services on behalf of the organization. They are created and approved internally within the organization. The purchase requisition form should include all the information related to the needed goods and services in detail.
The requisition form goes through different stages of approval and is approved or rejected based on the cost and other financial factors of the organization. If all the purchase requisition meets all the financial criteria, then it is approved, turned into a purchase order, and preferred vendors are notified.
3. Purchase Authorization
In this step, the accounting team receives the approved purchase orders. They review it again to determine whether to approve or reject it. Once approved, they will allocate a budget for procuring the requested goods and services.
4. Preliminary Evaluation
Pre-screening is an essential step and performing this can prove to be an excellent cost-cutting measure. Here experts will analyze growth projections based on data to see if they can eliminate certain goods or services and replace them with more cost-effective ones. Pre-screening the goods and services will have a huge impact on the organization’s finances.
5. Meticulous evaluation of each proposal
Before sending the purchase order it is important to precisely analyze them for optimal performance. If those goods and services are brought regularly then the time of delivery, product cost, vendor’s reputation, and geographical location play an important role. It is best to ask the supplier to send the payment information before to see if the terms and conditions are acceptable.
6. RFx
Now the purchase orders are approved and the budget is allocated, the procurement department prepares and sends quotations or proposals to preferred vendors. Vendors submit bids for the proposed offers and send them to the organization for review.
The bids are analyzed based on reputation, compliance and legal regulations, performance history, and quality of goods and services. After careful consideration, the most suitable vendor is selected such that both parties benefit.
7. Contract Finalization
This is the crucial step in the purchase process where both parties settle down on a contract. Here the winning supplier will be awarded the contract where they negotiate to compromise certain terms and conditions until both the buyer and seller are satisfied. After they come to a mutual agreement, the contract is signed and neither party can further negotiate and the contract is legally bound.
8. Logistics
Once the contract is signed, the vendor should deliver the goods and services within the stipulated time mentioned in the contract. Upon receiving the products, their quality and quantity are checked to ensure that the received goods and services are as per the specifications mentioned in the contract.
9. Triangular Verification
This step is implemented to ensure that there are no frauds and that the contract is fulfilled. The three-way matching system includes – the purchase order, goods receipt note, and vendor’s invoice.
These three things are reviewed carefully before the payment is done. This step also enables businesses to save money and documents them for future use. Once reviewed the payment is released and the products are delivered.
10. Billing Authorization
In this step, the vendor receives the payment when there are no discrepancies with the received goods and services. If there are any additional charges missed in the purchase order contract or the invoice, the payment is stopped from approving until further notice.
11. Documentation
The entire purchasing process is recorded from start to finish and is stored in the company’s accounting books. Modifications are updated promptly to use the data for future prediction.
Any tax exemptions are recorded to know if the products and services brought are taxable.
Specifications on any exchange of foreign currency in the purchase order contract which need to be calculated and expressed in both the base currency and the foreign currency for reference must be provided.
Challenges in the Purchasing Process
The main challenge that the purchasing process faces is fraudulent practices. Fraud can be extremely disruptive and troublesome – it can take any form of manipulation for dishonest gain. Usually, this happens when the procurement team fails to choose the most appropriate supplier.
Mainly, the frauds in the purchasing process can be inflated invoicing, supply risk, avoiding contract review, sole-source contracting, excluding qualified vendors for personal gain, compromising on the quality of the delivered products, and dark purchasing done outside the defined standards.
The risks happen when there is a lack of visibility and reliability within the department. Sometimes, the payment happens as a favor or valued gift and direct cash payment and doesn’t follow the terms and conditions specified in the contract leading to major fraud.
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Purchasing Process Flow Chart
The main purpose of purchasing processes is to procure goods and services that your business needs to run effectively. Here is a simple purchasing process flow chart of a car manufacturing company:
Start
|
Identify Need
|
Create purchase requisition
|
Review
|
Approved? (No —- (again send for review)
|
Yes
|
Select supplier
|
Evaluate supplier
|
Qualified?
|
Send RFQ
|
Receive quotation
|
Evaluate quotation
|
Negotiate terms
|
Create PO
|
Send PO to supplier
|
Supplier accepts PO
|
Plan production
|
Receive goods
|
Inspect
|
Acceptable?
Yes
|
Process Payment
|
End
No ——> Reorder or cancel —–> End
Best Practices of Purchasing Process
Optimizing the purchasing process to the modern business trends will make a tremendous difference in your business performance which is fundamental for your success. These are some of the best practices that you should follow to modernize your purchase process.
Purchase policies
Maintaining standardized purchasing policies plays a significant role in establishing order in the procurement process. Throughout your organization, multiple departments will have different purchasing needs. They often interact with one another to identify which products and services they need.
Therefore, if your employees are unfamiliar with the purchasing policies it creates problems. Even if your business doesn’t have one, it’s time to create and define some policies.
KPIs
Key performance indicators (KPIs) measure the effectiveness of your purchasing process goals. They monitor how each department accomplishes the purchasing goals, how the cost is spent on procuring goods and services, and help with continuous improvement. Some common KPIs in the purchasing process include cost savings, risk mitigation, maverick spending, cost of PO, delivery time, purchasing cycle time, supplier lead time, etc.
SMART goals
SMART stands for specific, measurable, achievable, relevant, and time-bound. Setting SMART goals is a smart choice for enhancing your purchasing process. The set goals should align with your organization’s overall goals and objectives.
The best way to do this is by setting up supporting purchasing goals for each company goal that you accomplish. For instance, the company goal could be to increase profit margin by saving material costs and the supporting purchasing goal could be to decrease spending on tangible items by ten percent in the next financial year.
Strategic sourcing
Sourcing decisions should involve all the critical stakeholders and other important team members. They can contribute key points such as how to better negotiate, which vendor to choose and why, buy-ins, maintaining vendor relationships, etc that make a strong sourcing strategy. It also ensures that all the employees and stakeholders understand the company’s priorities.
Training and development
The employees must be trained to use the purchasing process systems and its policies to enhance productivity, continuously improve, and bring change. A training approach can be created such that:
- All employees receive in-depth training to use the SAAS systems from the vendor.
- A formal training module that contains a knowledge base, tutorials, faqs, troubleshooting, and questions on policies.
- Each department has a designated trainer and the training program is made available online.
- Each department conducts periodic training updates.
Implementing a solid training program will have an immense impact on your organization’s business performance.
Balancing centralized and decentralized purchasing
A purchasing process has two different approaches: centralized and decentralized.
The centralized approach ensures that all the purchases in the organization are handled by the central procurement team. Whereas, under a decentralized approach each department will have its leader who has the authority to purchase the needed goods and services.
Both approaches have some benefits and drawbacks. Since only a handful of people carry out the purchasing process it is wise to adopt the centralized approach as it is less riskier. However, this is a cumbersome process that leads to delays. A decentralized approach though is faster as managers don’t consult with the procurement team it is more riskier as it can lead to maverick spending and failures.
You can create a middle approach that is embedded within suitable procurement tools and relevant people to handle the purchasing and decision-making specific to each department can be beneficial.
SaaS technology
There was a time when we printed and mailed purchase orders. Manual purchase orders are difficult to maintain and are time-consuming, especially in today’s competitive digital world. Now is the time you use SaaS technology to your advantage. SaaS products are a game changer in the purchasing world.
SaaAS suppliers like Cflow, Jotform, Zapier, and Process Street offer end-to-end seamless procure-to-pay solutions that include e-procurement, contact management, advanced analytics, recording and tracking company assets, automated vendor listings, automated POs, and much more. Buying SaaS technology is a great way to take your business to the next level.
Automation
Most businesses have switched to using automation to create efficient workflows while maintaining compliance in their purchasing processes. An approval process using procurement automation tools like Cflow:
- A purchase request is raised by an employee and is sent automatically to their department head.
- The department head reviews and approves the request which is then forwarded automatically to the purchasing department.
- The purchasing department reviews and approves the request and begins the sourcing process.
- Now the purchasing department finds a suitable supplier and sends it to the original requester to seek advice.
- The requester now provides suitable feedback to the purchasing department and now the purchase request is converted into a purchase order.
Here is a List of Some of the Best Purchasing Process Tools that you Can Use:
1. Cflow
Cflow is a powerful procurement solution that offers comprehensive functionality to optimize your purchasing workflows. It’s completely cloud-based and its no-code automation makes it easy to implement. Some of its key features include visual form creation, automated PO, budget creation and validation, invoice processing, no login approvals, and much more.
2. Coupa
Coupa offers dedicated AI-driven functionality to cover every aspect of procurement. Some of its key features include PO creation and delivery, real-time budgeting, approval workflows, expense management systems, and compliance management.
3. Precoro
Precoro offers a unique automation solution for managing your procurement processes effectively. This platform enables users to easily set up automated budgeting thresholds, approval routes, and ERP that bring transparency to your organization.
4. Procurify
Procurify is mainly a procure-to-pay tool that aims to eliminate manual processing. It helps organizations to streamline procurement processes so that employees can focus on other critical tasks. It offers seamless integration, vendor management, contract management, and invoice processing that efficiently manage your purchasing workflows.
5. Responsive, formerly RFPIO
Responsive is a strategic management tool that transforms the way organizations exchange information. It offers unique functions such as efficiently managing RFPs, RFIs, security questionnaires, due diligence questionnaires, risk assessments, contract management, and other complex processes involved in the purchasing process.
Purchase Process Trends 2024
Following are some of the strategies and trends that are capable of shaping the face of the purchasing process in 2024. Knowing these trends will help you to be ready to navigate your purchasing process toward efficiency.
Low code applications
Risk is inevitable when it comes to the purchasing process and it can be mitigated if you use proper software. Procurement professionals should reap the benefits of low-code/no-code SAAS tools to successfully continue their digital transformation. Globally it is estimated that two-thirds of the enterprises have adopted low-code automation tools that can enable users to set up the systems with little technical knowledge.
Procurement resilience
We mentioned earlier about different types of frauds that can happen in the absence of a standard procurement system. Procurement resilience refers to the ability of the company to anticipate, adapt, and overcome any kinds of disruptions. Businesses come up with resilience strategies to maintain consistency in sourcing as well as delivering goods and services to customers.
Supplier relationships
Supplier development and relationships should be at the top of every purchasing professional agenda. The key to navigating the disruption process would be to plan proactively to ride the waves of disruption. Here, technological solutions like AI, natural language processing (NLP), ML, and data analytics play an integral role.
Cybersecurity
While the rise in technology can provide immense benefits it equally comes with many challenges. Organizations continue to invest in cybersecurity to keep up with the latest trends to prevent data breaches and strengthen data security.
Mobile procurement
In recent times, mobile procurement has brought the convenience of optimizing workflows from your smartphones. Most of the SaaS tools provide mobile applications that can enable remote working, integrated payment solutions, real-time analytics, compliance, and enhanced user experience.
Social and digital procurement
Social and digital procurement have become a transformative trend in recent times and shaped procurement management completely. Businesses tapped the new avenues of potential supplier discovery, relationship building, supplier engagement, harnessing data, and decision-making using dynamic digital tools.
Compliance
In 2024 procurement professionals continue to grapple with the changing regulations and procedures. Automating compliance is vital for staying ahead of the competition. You could benefit from AI and cloud automation.
Use of AI
AI is taking the world by storm and procurement is one of the industries that is quickly adopting to using potential generative AI functionalities. AI is expected to make a significant leap forward in the world of procurement by delivering notable benefits, risk management techniques, actionable insights, vendor evaluation, compliance, predictive models, and anomaly detection.
Optimize your purchase process with no-code automation
Cflow is one of the leading procurement automation tools that is designed to efficiently help your business save dollars and spend better through its automation. It is completely cloud-based and has no code which enables users with non-technical backgrounds to understand and implement it effortlessly.
Cflow’s key features of procurement include an easy-to-operate mobile interface, seamless communication, drag and drop interface, efficient supplier management, compliance, and risk management, cost and time-saving automation, approval workflows, and seamless integration.
Cflow offers a comprehensive procurement platform with end-to-end processing, supply chain management, visibility, execution, and collaboration capabilities that will enhance your business performance. Built on a foundation of cognitive technologies Cflow stands firm in transforming your business supply chains on a global level to gain a competitive advantage.
Conclusion
The core of the purchasing process is systematic and transactional but that shouldn’t stop you from exploring and using expert strategies using advanced technology. Adapting to the technological trend will create a positive impact on your company’s purchasing process. Using the best practices we’ve discussed here your purchasing process should have a big transformation in terms of spending and saving in the coming business years.
Why wait? Get Cflow today! Visit our site for more information and sign up for a free demo.
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