What Is a Purchase Process? (With Steps and Helpful Tips)
Updated September 30, 2022
Businesses often require products or services from suppliers to facilitate successful operations. If you work in a business's purchase or procurement department, consider understanding the purchasing process extensively. Learning about the purchasing process and its steps can help you manage a business's spending better, save costs, and ensure efficient business transactions. In this article, we explain what a purchase process is, discuss why it's essential, describe the steps in a purchasing process, and present helpful tips for effective purchasing.
What is a purchase process?
A purchase process is a part of the procurement process that entails buying products and services. It involves the transactional activities between an organization and its vendor in the process of product acquisition. These activities may include submitting purchase orders to suppliers, receiving invoices, making orders, and completing payments. Unlike consumers, businesses usually pass through a formal process to purchase goods or services. Purchasing for a company may require inputs from several departments, preparing invoices, and extensive market research. It typically begins when a procurement team defines a business's needs or customers' demands.
The purchasing process differs slightly from the procurement process. While the purchasing process focuses solely on buying products and services, the procurement process is the overall framework a business establishes to ensure optimal value, efficiency, and savings when making a purchase. The procurement process also focuses on strategies to improve a business process, such as negotiating, researching, and maintaining a positive relationship with suppliers.
Why is the purchasing process essential?
The purchasing process is essential because it provides a structured method for a business to address its unique needs. It can help prevent theft, fraud, or inaccurate accounting because the process entails documenting all the transactions an organization makes. It can also enable a company to plan its finances efficiently by reducing operational costs. Companies can purchase raw materials at affordable prices and take advantage of suppliers' warranties, discounts, and incentives with a formal purchasing process.
10 steps in a purchasing process
While the steps in a purchasing process can vary depending on a business's requirements and objectives, here are the typical steps to take:
1. Identify a need
The first step is recognizing the need for a product or service to solve a particular problem or enhance company operations. The procurement team describes the business requirement and works with other teams to determine the best way to address it. The team communicates with the department heads and company management to understand the urgent company requirements. Depending on the feedback from researchers, managers, and employees, the team can analyze the company's purchase history and customers' consumption patterns to make a good decision.
For example, suppose a company faces an increase in the cost of raw materials that may affect planned finances. In that case, the company can search for other solutions or find cheaper alternative materials suitable for the intended product.
2. Specify the requirements
Next, the team lead can investigate the identified need further to develop an effective plan for it. They can collaborate with the specific team member or employee who recognizes the need to choose the right solution that can cater to the unique requirement. This step is essential, especially when dealing with larger purchases, to ensure you're making the right decision.
3. Find and select a supplier
After specifying the requirement with a proposed solution, you can find potential suppliers that can provide the particular producer or service you want. Consider researching online or seeking advice from your professional network to get great recommendations. At this stage, you can consider various supplies and compare their attributes to select the most appropriate vendor for your needs. Factors to consider when considering suppliers include delivery time, cost, and reliability.
4. Send a proposal request
Next, you can send a proposal request to the selected supplier. The procurement department usually receives the purchase orders that get budget approval. Companies use purchase orders to create a request for proposals (RFPs) or requests for quotations (RFQs). The supplier receives the RFPs to solicit bids and fulfill orders. Potential suppliers submit bids and choose companies based on characteristics, compliance records, and performance reports.
5. Negotiate the contract and price
Companies often negotiate contracts and prices with suppliers, especially when placing orders expected to recur or high-priced offerings. You can contact the selected supplier and ask if they're open to price negotiations. You can also request details on the negotiation contact's terms and conditions. Suppliers can negotiate if they can secure a long-term contract for their business. Once both parties sign the agreement, the purchase order legally binds the supplier and purchasing company's transactions.
6. Get order approval
Before initiating a transaction, it's essential to get the necessary order approval. This step may include working with higher company management and the accounting department to ensure there's enough funding available for the purchase. Sometimes, businesses may also establish a line of credit with suppliers. The purchasing manager explains the necessity of the asset to higher management and how they negotiated a more affordable price from a supplier.
7. Place the order
Once the company management and selected suppliers form a transaction agreement, the purchasing manager can place the order formally. Consider ensuring both parties agree to specific contract details, such as costs, installations, and delivery times. The purchasing manager documents all agreement terms with relevant signatures from the respective organization representatives. Each party usually keeps a copy of the contract for possible future reference.
8. Receive and check the order
After placing the order, the supplier delivers it to the agreed location. Once the order arrives, you can receive it and thoroughly check to ensure it meets the specified standard. Consider checking for any issues or missing parts immediately to report the defects to the supplier. If there are any problems with the products or services delivered, it's vital to address them on time before final approvals and payment.
9. Complete invoice approval and payment
The purchasing manager approves the payment once the company confirms that the orders match the contract's terms and conditions. If the order requires any changes or modifications, the supplier can submit another approval with a new invoice before receiving payments. The supplier receives the due payment upon approval of the invoice. Many businesses approve invoices and make payments early to get incentives and early pay discounts. Paying early can also help avoid late payment fees.
10. Review the supplier performance
Whether a business works with a supplier once or performs recurring transactions, it's essential to review the supplier's performance for timeliness and quality. Recording the reviews can help identify issues that may later arise during the contract term. The record can also help you decide whether to continue working with a particular supplier or choose a different one for the next purchase. Businesses often maintain relationships with suppliers that provide excellent services and standard quality.
Tips for effective purchasing
Here are a few tips you can apply to ensure an effective purchasing process:
Regularly review business requirements
Business requirements change over time. A business may require an entirely new offering to grow, or an improved version of an already existing offering. You can regularly review the business to analyze the most vital needs and determine whether your purchases are satisfying those needs. By constantly checking these requirements, you can recognize and address needs sooner, helping you make better financial decisions and foster rapid business growth.
Keep reliable records
You can ensure an effective purchasing process by keeping reliable records. Maintaining records of all purchase transactions can help you reduce possible workload issues in the future, especially if disagreements occur with your current supplier. Consider keeping records of all negotiations, sales returns, other potential suppliers, and any other relevant transaction details that can support the business later.
Consider automating the purchasing process
Many businesses implement process automation in their operations to ensure an effective purchasing process. Process automation software can help shorten the purchasing process cycle, reduce employees' workload, limit paperwork, and minimize errors. The software is highly beneficial for businesses that make recurring purchases from a particular supplier.
Conduct quality assurance
Conducting quality assurance can enable you to determine whether to reorder a product or continue employing the services of a particular supplier. Reviewing your experiences and assessing the quality can help you make more informed decisions for a business's development and enhance consumer satisfaction. The results you get from quality assurance testing can increase your confidence in your current supplier and promote healthier business relationships or help you realize you need a different supplier to achieve set business goals.
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