Understanding Purchasing Process & Purchase Order Processes

Purchasing Process - An Introduction

Businesses and organizations, like individuals, spend a significant portion of their budget to buy certain goods and services that cater to their needs. This purchasing process needs to be highly strategic for the businesses and organizations to get the maximum value for every cent they spend in procuring such goods and services.

An excellent strategic purchasing process plan can significantly impact an organization's overall growth, profitability, and outreach. To reduce waste, maximize profits, and eliminate unnecessary expenses, a business or organization must understand and use best purchasing process practices. 

We will examine how to implement the best purchasing process steps that can significantly help your business grow through this blog. You can also learn about the different ways to reshape procurement to maximize profits.

What Is a Purchase Order Process?

The Purchasing Order process or PO process is a part of a more extensive procurement process that involves categorizing and specifying the actual requirement for goods and services before going into the purchase journey. The purchasing process begins as soon as the procurement team has identified its needs. The requirements may be for any physical service or a particular inventory.

Let us first understand what a purchase order is. A purchase order is a document that is legally binding on all contracted parties. It is proof of confirmation of a transaction of goods or services between a buyer and a seller.

This purchase goes through multiple stages, from creating a purchase requisition to the supplier approving the purchase order, to filing the purchase order by the buyer, to the approval and payment stage. All these stages together are what is known as the purchasing order process. Read here about the  procurement process for a better understanding of the purchasing process.

4 Major Types of Purchases under Purchasing Process

Under the purchasing process, purchases can be categorized into four major types. Let us have a look at them:

Individual or Personal Purchases

Individual or personal purchases refer to the purchases made by individual consumers. They are significant as the volume of such purchases indicates how a region's economy is faring. They are an indicator of the purchasing power parity of the people. More individual purchases result in more business growth, which results in more job creation and more wealth creation. Hence, personal purchases are vital in purchasing process planning.

Commercial Purchases

This purchasing process involves transactions of goods and services by retailers, wholesalers, and distributors. These middlemen play a significant role in distributing goods and services from the manufacturers to the customers.

Industrial Purchases

Industrial purchases refer to the purchases made by the manufacturers or producers to turn raw materials into finished goods for the final consumer. Industrial purchases include office equipment, factory machinery, spare parts, and tools.

Government Purchases

When government institutions buy or invest in public utilities, it is called government purchases. This purchasing process includes the procurement of consultancy services, advisory services, maintenance services, etc. In addition to such services, government purchases also comprise public utility works such as building rail lines, roadways, dams, bridges, shipping ports, etc.

You could also refer to our purchasing approval workflows to learn to optimize your purchasing process.

Different Purchase Orders

There are different kinds of purchase orders and purchase order procedures. Let us dive into it:

Standard Purchase Orders (PO)

A standard purchase order is usually a one-time procurement of goods or services. This type of purchase order contains a detailed specification of the purchase. The specifications include the procurement price, the quantity of the goods, and the dates of payment and delivery of such goods or services.

Planned Purchase Orders (PPO)

A Planned Purchase Order (PPO) has almost all the characteristics of a standard purchase order barring the delivery information. Apart from all the order details, a PPO contains the delivery and payment dates, but these dates are tentative. When all the details of the order, like the quantity, price, etc., are confirmed, a 'release' is issued against the planned purchase order to confirm the delivery date and payment details.

Blanket Purchase Orders/Standing Purchase Order

When the buyer agrees to purchase specific goods or services from a vendor but does not specify the exact quantity, the transaction is referred to as a blanket purchase order or standing purchase order. The price of the goods or services doesn't need to be mentioned in a blanket purchase order. Usually, this type of order is used when the buyer makes repetitive purchases for a specific item.

Contract Purchase Orders (CPO)

When a purchaser and a vendor have an ongoing, trustworthy, transactional relationship, an order may be made specifying the payment and delivery details without purchasing specific items. This type of pre-agreement is called a contract purchase order. The purchaser can refer to the contract purchase offer at a future date while opting to make a standard purchase offer to the vendor.

Find out more about the Procurement Solution That Every Customer Wants and make the right decisions about your organization's purchasing process.

Procurement Process vs. Purchasing Process

Procurement is a highly expertized process of identifying suitable goods or services from a vendor, shortlisting them, and acquiring them by making a direct purchase or competitive bidding. The main aim of the procurement process is to ensure prompt delivery of high-quality goods or services.

• A procurement process flow includes:
• Surveying the market for high-quality goods or services
• Spotting suitable suppliers
• Approving vendors
• Drafting purchase orders
• Formulating delivery and payment details
• Establishing excellent buyer-seller relationships

On the other hand, purchasing refers to actions that lead to acquiring goods or services that a business requires. It is only a part of a more extensive procurement process. The purchasing process includes:

• Requesting proposals and reviewing equations of the seller or supplier
• Placing an order
• Receiving the said order
• Checking the quality of the delivered items
• Fulfilling the payment of such order

Also, the purchasing process focuses on the short-term goals of an organization. In contrast, the procurement process deals with long-term strategic goals like gaining a competitive advantage over rivals, increasing brand awareness, etc.

We also recommend that you read our blog on procurement for the future of financial services to better understand the practice of procurement and purchasing process.

The 11 Steps of Purchasing Process

The purchasing process for organizations and businesses requires exchanging information, analysis, and numerous approvals to move ahead. Although every organization has its unique set of ideas and purchasing process practices, the tried and tested and well-established pattern of events remains the same for all businesses, big or small. To explain purchasing procedure, we have listed 11 essential steps of the purchasing process:
 

Deep Analysis of the Needs

The first step of the purchasing process of an organization is to conduct a deep analysis of its business practices. Recognizing the need for a specific good or service to solve a particular problem within the organization to boost profits is the first step of the purchasing process. The procurement team identifies the need and then works with various vendors and suppliers to acquire the item to solve the problem.

If the organization has over-the-top travel expenses, it could invest in a more fuel-efficient transportation strategy for its employees or invest in efficient telecom software to enable remote working for its employees if possible.

Purchase Requisition to Purchase Order

The purchasing process begins when the requisition is submitted to the relevant team. The purchase requisition must have all the details of the goods or services to be acquired. The purchase requisition is approved or rejected depending on the cost of the requested items to be acquired. If it makes financial sense for the organization to make the purchase, the requisition is approved, and the preferred supplier is promptly notified.

Review & Approval of Purchase Order

In this step of the purchasing process, the approved purchase orders are sent to the organization's accounting department, who then approves the budget to be allocated for the procurement of the requested goods or items.  

Pre-Screening Process

Performing a pre-screening of a good or service is another essential step of purchasing. Expert analysis and growth projection, eliminate the requirement for specific goods or services or find an adequate replacement for them. This can prove to be an excellent cost-cutting measure.

Precise Analysis of Each Proposal

The purchasing process can be adequately optimized by performing a precise analysis of each proposal laid out by the vendor. For products bought at regular intervals, timely delivery of the product, cost of the product, and the vendor or supplier's reputation play a significant role. It is wise for the buyer to ask the supplier or vendor for the payment details. The terms of the payment must be acceptable. Geographical location also plays a key role during such analysis.

The Request for Proposal

Once the purchase orders are approved and the budget is allocated to procure the required goods or services, the procurement department sends a quotation or proposal to the relevant vendors. The suppliers or vendors then submit their bids to fulfill the proposed offer. The organization then reviews the bids based on the compliance records, reputation, and performance history. After careful consideration, the most capable vendor or supplier is selected to fulfill the order.

Agreement of Contract Negotiation & Approval

This is one of the most crucial purchase procedure steps. In this step of the purchasing process, the vendor or supplier with the winning bid is awarded a contract by the organization to fulfill the requested order. The agreement can be further negotiated to compromise and ensure that the buyer and the seller are satisfied. But once both parties sign the contract, it cannot be further negotiated by either party, and it is legally binding.

The Shipping & Receiving of Products

After the purchaser and the supplier sign the purchase order contract, the supplier or seller is bound to deliver the goods or services stipulated in the contract within the agreed-upon timeframe. After receiving the goods or services, the purchaser reviews the quality and quantity of the items to ensure that they received what was stipulated in the contract.

3-Way Matching System

In this step of the purchasing process, three-way matching is implemented to ensure that the order is fulfilled without any fraud. The purchase order, good receipts note, and the supplier's invoice are the three things reviewed, and this is called the three-way matching system.

Apart from eliminating any chances of fraud, this system also saves money for all parties involved and maintains sufficient records for future auditing. Three-way matching is generally done before the payment is issued to the supplier and after the item’s delivery is completed.

Invoice Approval & Payment

If the purchase orders are matched using the three-way system, and no discrepancies are found, the purchaser approves the payment to the vendor or supplier. If additional charges were not initially stipulated in the purchase order contract or invoice, the payment is stopped until further approval.

Record Updates

The final step of the purchasing process is to record and securely store the purchase order updates in the organization’s accounting books.

The above steps clearly illustrate the purchasing process flow from start to finish. You could also read how the Procurement Process for Educational Institutes helps improve and modernize our education system.

Best Practices in The Purchasing Process

The ability of an organization to analyze and eliminate inefficiencies promptly results in a more efficient purchasing process. Here is how an organization can optimize its purchasing process:

Automate Procurement Processes

The purchasing process is incredibly vital for an organization's growth and profits. Yet, the procurement team is often left to work with outdated and inefficient tools.

Talent and resources are wasted on tasks that do not need to be done manually. That is why automation is a game-changer. Automation eliminates the need for the purchase process to be done manually.

Repetitive tasks like record updates, data entry, and approvals can be easily and efficiently automated to free up members of the procurement team, who can instead work on more creative tasks. This ensures the purchasing process becomes faster and almost error-free. This, in turn, results in more productivity and profits.

Time-Saving

Through automation, workers in the procurement team could save an incredible number of hours every year by not spending time on data entry, processing purchase orders, and doing various approval and invoice-related follow-ups. These tasks can easily be automated, which allows the employees to be free to do other things that boost the company’s productivity levels.

Low Human Error

Again, automating your purchasing process can almost get rid of human errors in the overall purchase order process. Automation drastically reduces any room for mistakes during data entry, updation of records, etc.

Low Processing Cost

Lowering the processing cost of purchase orders is gravely important. By automating the purchasing process, tasks like data entry, transaction updates, and approvals do not need to be performed by employees, who can instead focus on more productive tasks.

This automation process drastically lowers the purchase orders processing expenses. No new employees need to be hired for tasks automatically performed by the software. Plus, employees being used for more productive tasks can lead to more growth and profits.

A Well-Defined Purchasing Process

Purchasing processes of organizations must be efficient and strategic to boost profits and reduce costs. Without a clearly-defined process, profit accumulation and cost reduction are not possible.

A lack of a well-defined purchasing process makes the procurement team unsure of their priorities. The team also struggles to have clear communications with the stakeholders involved. This chaos leads to delays and payment issues, increasing costs and reducing profits.

Process Transparency

Transparency in the purchasing process is the most effective way to guarantee a smooth transaction of goods or services. Transparency allows all the stakeholders to have access to all relevant documentation and details of the order, which helps all parties to perform their tasks smoothly and deliver the product or service promptly.

The benefits of transparency in the purchasing process include fast processing of orders, cost reductions, accountability, and long-lasting buyer-seller relationships. Also, transparency reduces errors and fraudulent acts.

Centralized Contract and Documentation

A centralized contract and documentation hub allows employees to access and retrieve relevant contracts and documents when needed. This process also removes the possibility of inconsistencies and complications within the supply chain.

Just by having a centralized contract and documentation hub, the consistency of contracts increases, errors are minimized, and time is not wasted.

Inventory Optimization using Data

Optimizing the organization's inventory is essential as it helps reduce operating costs. An organization must ensure that the stock quantity is optimal. Less stock means not meeting the customers' demands, while excess stock leads to wastage, as supply outweighs the demand. Having too much stock also increases logistic fees.

A Multi-Sourcing Strategy

Another critical purchasing process practice is always relying on more than one supplier or vendor. Suppose you are purchasing goods or services from only one supplier. In that case, there is a risk of delay in the delivery of items due to unforeseen events like natural disasters, conflicts, etc. This can cause enormous losses. In such cases, if you have more than more suppliers, you can reach out to another supplier if there is a delay from the other one.

Strong Supplier Relationship Building

Maintaining a solid relationship with the supplier can be essential for the purchasing process as it helps reduce disruptions in the supply chain. A strong relationship can be built by being transparent.

Transparency allows the supplier or vendor to be aware of any issues or changes in the purchase order. This gives the supplier or vendor time to make necessary changes to ensure a smooth transaction of goods or services. Having a strong relationship with the supplier also reduces the amount of payment-related issues.

Training The Procurement Team

The procurement leader or manager of an organization must ensure that the procurement team is well versed in all matters relating to the purchase process and company policies. When the procurement team is well-trained, they will be better positioned to deal with any obstacles that lie ahead of them.

Vendor Collaboration & Communication

As discussed earlier, maintaining a good relationship and collaborating with the vendors can help remove any obstacles in the supply chain. In addition, collaborating with the vendor or supplier will allow you to discover new markets for innovative products and help you get discounts and exclusive contracts, thereby reducing costs.

TCO Trumps Price

Change in perspective, i.e., moving on from focusing only on the price of goods and services to be procured to concentrating on the Total Cost of Ownership (TCO), can transform your organization and bring profits in the long run.

Building Social Responsibility

Perhaps, one of the most important purchasing process practices is to put the organization’s corporate policies in line with CSR or Corporate Social Responsibility.

Analyze the supplier or vendor’s performance history, ethical practices, and reputation before signing a contract with them. Ensure that the supplier’s values are in line with yours and that you do not put your organization’s reputation at risk just by associating with them.

Always consider the social, environmental, and economic impacts your procurement process is causing. Prioritize these values, along with the price and quality of the product.

Main Disadvantages of Using Manual Purchase Order Process

Most organizations have switched to automation of their purchasing process in areas where it is possible. Automation has proved to guarantee growth and profits. They have many advantages over the manual purchase order process. Some of the significant disadvantages of using the manual purchase order process are:

Lacks Visibility

In the manual purchase order process, numerous teams like the procurement department, approvers, financiers, and suppliers, are involved in the purchasing process. This makes the process lack visibility as there is less control in the purchasing process.

Spikes Organizational Expenses

Delays, errors, more employees in the procurement department, more resources for the employees of the procurement department, etc., drive up the organization’s operating costs.

Drags PO Processing Cycle

The manual purchasing process takes up significantly more time than automated purchasing processes. Also, more resources are required for the manual purchasing process. Errors and inconsistencies are more frequent too, and this can affect all the stakeholders who expect timely delivery of the items meant to be procured.

Depends On Human Intervention

The manual purchase order process requires human intervention in every purchasing process step. This can cause unnecessary delays in ordering and delivering the requested items, which increases costs and a decrease in profits.

Has Process Bottlenecks and Compliance Issues

Another major disadvantage of using the manual purchase order process is that it gives rise to frequent inconsistencies and compliance issues. Unlike an automated purchasing process, a manual one often has errors related to data entry, maintaining purchase records, etc., leading to disagreements between the buyer and the seller or supplier.

Issues with purchase orders, invoices, and delivery details often arise. This leads to further delay in delivering the requested items and subsequent financial loss for the stakeholders.

Involves Endless Loops of Emails & People

Miscommunication is common when an organization uses the manual purchase order process instead of an automated one. Due to various teams looking into the purchasing process, inconsistencies are bound to rise. This causes unnecessary delays, which gives rise to an endless loop of sending emails to end the miscommunication and ensure prompt delivery.

Manual Purchase Order Process Is Cumbersome, Inaccurate, And Error-prone

In the long run, this process becomes unsustainable and results in a loss of profits. Human errors during data entry, recording purchase order details, etc., and inaccuracies and inconsistencies in communication with the vendors can become cumbersome.

Frequent rechecks for data entry and purchase order record-keeping are done, contracts are reexamined, emails are sent out to prevent further miscommunication. This results in financial loss for all stakeholders and increased costs for the procurement team.

How Is a Purchase Order Different from An Invoice?

Conclusion

It is essential to carefully structure an organization's purchasing process as a poorly planned purchasing process can negatively impact its profitability, growth, and outreach. Maintaining trust and building on-lasting relationships with the vendors and other stakeholders is vital. Transparency and automation are equally important.

At Amazon Business, we enable completely risk-free procurement options that help businesses cut costs, maintain profits and grow strategically. Being one of the largest online wholesalers, we are uniquely positioned to cater to our customers' requirements, build trust, and maintain long-lasting relationships.

Amazon Business guarantees a GST Invoice for every product sold from our website for utmost transparency and customer convenience. Buyers can save almost 28% on GST Claim input tax credit and claim other discounts and cashback offers on bulk purchases. Check out our suggestions for the Best Office Chairs, Best Projectors for Home & Office Use, Best Monitors for Home & Office Use, and much more by making an Amazon Business account now.

Explore our Buying Guides

• Best Laptops for students in 2021
• Best Printers for Home & Office use
• Best Monitors for Home & Office use     
  
• Best Wi-fi range extenders
• Best offfice chairs
• Networking Devices List 2021

Also Explore

• Best Projectors for Home & Office use
• Best Bluetooth speaker with mic 2021
• Best Earphones with mic
• Best Home Theater system to consider