All businesses purchase goods and services.
From office equipment to utilities to the components that go into the products they manufacture, every existing company has had to purchase one thing or another to function.
But not all companies have a dedicated purchasing department, or even a person responsible for this task.
For some businesses, purchasing is a critical part of reducing costs and keeping supply chains healthy. For others, it is simply a nice to have, and there may well be other better ways to spend your profits.
In this article, we’re going to help you determine which camp you’re in by diving deep into the world of purchasing. We’ll discuss:
What is purchasing?
Purchasing is the term associated with the acquisition of goods, services, and assets from third-party services.
While it can be loosely thought of as “buying stuff” for your business, effective purchasing involves a series of important processes and procedures, such as placing a purchase order and getting a purchase request approved.
Purchasing is not the same as procurement
Purchasing and procurement are two terms that occasionally get used interchangeably. While they are related, they aren’t synonyms.
Procurement is the overarching process that starts with needs identification and vendor sourcing, progresses through risk assessments and negotiations, encompasses purchasing tasks, and also includes ongoing supplier management activities.
It's strategic, proactive, and focused on the long term.
Purchasing is the set of activities related to ordering goods and services from approved vendors as and when they are required. This includes tasks like raising a purchase order and routing it through an approvals workflow.
Purchasing is tactical, reactive, and more focused on short-term needs.
What activities are involved in purchasing?
Some of the activities that may be considered part of the purchasing process include:
- Searching a database of existing suppliers to find one that fulfills your current needs
- Raising a purchase order
- Obtaining a purchase requisition
- Prepare and issue an RFP (request for proposal) to qualified suppliers
- Administering closed-end contracts
- Seeking approval for purchase orders using automated workflows
- Receiving orders and confirming them against purchase orders
- Performing quality checks on received orders
- Orchestrating payment to vendors for received goods and services
What is purchasing’s role in business operations?
In many organizations, purchasing is simply a transactional activity. You need something, and you buy it.
But while purchasing is the tactical and shorter-term component of procurement, that doesn’t mean it is any less strategic.
Effective purchasing policies and procedures can play a strategic role in business operations, contributing to:
- Cost savings through effective identification of appropriate vendors
- Quality improvement through supplier relationship management
- Reduced risk through effective approvals processes and risk management functions
- Better inventory management through greater control over supply chains
- Compliance with financial legislation through enforced purchasing practices
What does the purchasing process involve?
While every company’s purchasing process differs slightly, based on that organization’s needs related to security, control, autonomy, and efficiency, most follow some variation of the same steps.
Here’s what the purchasing process typically looks like when a vendor still needs to be sourced (such as for a one-off marketing project or a fit-out for a new branch):
- Purchase requisition. A request to purchase is raised by the person who wants to procure goods or services. It is approved or denied by the appropriate authority, usually a department or purchasing team leader.
- RFX. An RFP (Request for Proposal), RFI (Request for Information), or RFQ (Request for Quotation), depending on the organization’s needs, is created and put forward to the vendors in consideration for the purchase.
- Negotiation and selection. Negotiation takes place with one or more vendors, and a deal is struck.
- Purchase order created. The person responsible for procuring the goods or services required then raises a purchase order in their PO system.
- Approval. A senior approving authority signs off on the deal and allows the purchase to proceed. This is often routed using workflow automation software.
- Purchase order sent. The PO is sent to the vendor.
- Goods or services received. The vendor then supplies the goods or services as required.
- Quality check. Usually, the company then checks that the goods that arrived matched what was ordered and meet quality standards as set out in the supplier contract.
- Payment. Once the order is approved, the vendor sends an invoice, and the accounts payable process kicks off.
In many cases, a vendor is already established for a given purchasing need. For example, if you’re purchasing cell phones for a round of new sales hires, you likely already have a supplier in place from whom to buy.
In this case, your purchasing process can begin at point 4 in the above workflow (creating a purchase order.
Common challenges related to purchasing
Often, purchasing is a simple and straightforward process. You select a vendor, raise a PO, and receive the goods or services ordered.
But this isn’t always the case. Some businesses face a number of challenges when it comes to purchasing.
The first step in avoiding these challenges is understanding what they are (we’ll cover best practices for avoiding them shortly).
Here’s a quick rundown on the most common issues SMBs face when implementing purchasing workflows:
- Limited bargaining power. As a small business, you’re going to be buying in smaller quantities, meaning you have limited power to negotiate.
- Shadow spending. Shadow spending occurs when employees purchase goods and services outside of established procedures.
- Managing relationships. Enterprise companies can afford dedicated vendor relationship managers. SMBs don’t always have this luxury.
- Balancing cost-effectiveness and quality. SMBs need to stay lean and keep costs low, but they also don’t want to sacrifice quality. Finding a vendor that services both needs, especially when bargaining power is limited, can be tricky.
- Measuring the performance of the purchasing process. Understanding where to start to understand how well current purchasing processes are working is often a sticking point for small and medium-sized organizations.
Best practices for improving purchasing operations
Whether you’re about to set up your first purchasing team, or simply looking for a few ways to work more efficiently, consider implementing these five best practices.
Develop and distribute clear purchasing policies
Begin by creating clear policy and procedure documents that outline and illustrate your expectations when it comes to purchasing.
These should cover, for instance:
- Who has the authority to make purchase decisions, and when
- In what scenarios additional approval is required
- How a purchase requisition or purchase order should be completed
Then, once you’ve created these documents, ensure they are kept updated and accessible to all. A good practice here is to use an online document-sharing platform like Notion or Google Docs.
Use tools to save time
There are a number of easy-to-use software tools that can support the purchasing process.
For example, tools like BILL can help manage and automate tasks like vendor payment and matching invoices to purchase orders using automated invoice matching.
Conduct regular supplier evaluations
Effective supplier selection is important, but so is cultivating a positive and fruitful relationship with your existing vendors.
This requires a bit of relationship management, and can even involve difficult conversations when you have to hold suppliers accountable to the terms set out in your purchase agreement.
A helpful practice here is to conduct regular evaluations of supplier performance, perhaps on a quarterly basis.
This gives you an opportunity to stack vendors up against each other, confirm that contractual obligations are being met, and raise smaller concerns before they become big issues.
Take advantage of group buying options
One of the challenges many SMBs face when it comes to purchasing is the fact that they don’t have a lot of leverage or negotiation power.
But by leveraging group buying options (where several organizations get together and purchase the same thing together at the same time), you can access the same economies of scale that your enterprise competitors do, reducing your overall costs and upping profit margins.
Stay up to date with market trends
Finally, it’s a good practice to keep abreast of market trends.
You’ll want to know, for example, if supply chain issues are impacting any of your vendors’ abilities to deliver on time.
Part of this comes from maintaining regular contact with suppliers, but you should also consider subscribing to publications, email newsletters, and social media groups that are relevant to procurement and purchasing in your industry.
Streamlining purchasing
Effective purchasing processes are crucial for maintaining compliance with internal policies, speeding up vendor payments, and strengthening relationships with suppliers.
Modern tools like BILL can help streamline and improve various aspects of the purchasing process, such as:
- Placing purchase orders
- Matching invoices against PO numbers
- Automating and managing approval workflows
- Orchestrating payments to suppliers
Streamline your procurement and purchasing workflows. Start using BILL today.
