What Is Purchase Management? (With Best Practices)
By Indeed Editorial Team
Published July 13, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Purchasing is a vital business operation that can influence other activities in a company. Effective purchasing managers ensure that the company has enough materials required to continue normal business operations at all times. Understanding the importance of an efficient purchasing system can help you learn how to maintain a professional relationship with the company's vendor or supplier. In this article, we answer the question “What is purchase management?” explain how the process works, review the stages of a purchasing cycle, highlight a few best practices for purchase management, and list the skills of a purchasing manager.
What is purchase management?
The answer to the question “What is purchase management?” can help you understand how companies can maintain a stable operation. Purchase management is a business process of buying products from external vendors. This includes market research, negotiating with suppliers, placing orders, receiving orders, reviewing orders, and approving ordered products.
Apart from order placing and fulfilment, a healthy relationship with suppliers is vital to purchase management. Building a professional relationship with regular and potential suppliers can help to make the entire purchase process seamless. For example, when you have a good relationship with suppliers, they can inform you when the quality you want is unavailable instead of selling substandard products.
How does purchase management work?
Purchasing managers work with team members in the purchasing department to perform all purchase-related activities. Below are the purchase management processes:
Researching is usually the first stage of a purchase process. Purchasing managers and team members gather information about vendors for a particular product and compare quality and prices to select a suitable option. During market research, examining customer reviews can help you make the right decision when choosing a supplier. After your research, you can contact the best two vendors to start the purchasing process. It's advisable to contact multiple vendors to compare their services and build a professional network.
Purchasing strategy development
Purchasing managers require an approach to conduct the process efficiently and get quality products from suppliers. To develop an effective purchasing strategy, you can examine the company's previous ones and evaluate how to improve them for future operations. You can develop a strategy that helps the company save time and money.
A company's inventory is a list of the products the company has to improve production or resell. When purchasing managers monitor the company's inventory, they discover when it requires restocking to help ensure normal business operations. Inventory management also includes examining the inventory to discover outdated items that require replacements.
Negotiation is an essential aspect of purchasing because it can help both parties broker a good deal. Purchasing managers who understand how to negotiate can express the company's expectations to suppliers effectively. In this role, you conduct contract negotiations with suppliers where you set the terms for the contract of sale. During the negotiation, purchasing managers agree on the product's price, quantity, quality, and other essential factors with suppliers.
Purchase team management
Purchasing managers coordinate a team of purchasing professionals. You may participate in recruiting and interviewing team members in the purchasing department. Purchasing team members follow the instructions of their team leader and work together toward achieving departmental goals.
Stages in a purchasing cycle
There's a common pattern that purchasing managers follow during the purchase process. Consider the stages in a purchasing cycle below:
Prepare a purchase requisition
A purchase requisition is a document that team members in a company send to team leaders or executive stakeholders to request the purchase of goods or services. In the purchase requisition, include the department that requires the purchase, quantity of the product, price, and date of the request. The requisition form can prove that a department requested a particular good and service.
Submit a budget for approval
A budget is the total amount of money you allocate to purchase a good or pay for a service. The budget serves as a guide during the negotiation process. When you prepare the budget for purchasing a product or service, the next step is to submit it to executive stakeholders in the company for approval.
Send a request for proposals
If executive stakeholders in the company approve the purchase budget, you can send a request for proposals to interested suppliers. In the request, highlight the product that the company wants to purchase and ask for suppliers' rates. When you receive bids from suppliers, you can examine the different bids to select ones within the company's budget.
Choose a suitable supplier
Examine all the proposals from different suppliers and shortlist suppliers ready to work within the company's budget. When choosing one to work with, you can consider other factors, like business policy and product quality. You can proceed to negotiate the contract of sale terms with suppliers with strategic alignment with the company.
Prepare a purchase order
After reaching a consensus with the selected supplier on the contract terms, the next step is to prepare a purchase order. A purchase order is a formal document containing the terms of the negotiation and other agreements during the negotiations. The purchase order also includes the mode of payment and details. You send the purchase order before the purchase.
Submit the contract for approval
Review the purchase order before submitting it to executive stakeholders for their signature. Compare the terms on the document with the company's budget and the supplier's proposal. Ensure that all essential terms are in the document. If the transaction may be a recurring plan or long-term, ensure that you include it in the contract. Once the company's executive stakeholders and the supplier sign the contract of sale, it becomes legally binding.
Best practices for purchase management
Developing effective purchasing strategies can help you deliver quality products for team members in a company to use in executing their responsibilities. Consider these purchase management best practices to increase efficiency in the company:
Single supplier system
You can use the single supplier system, especially when the supplier provides quality products to the company. Purchasing managers that use the single supplier system accept only one supplier to produce specific products in the company. If you're sure that the supplier is reliable and motivated to work with the company, you can keep them. Using this system can help you avoid the process of supplier selection.
You can follow the stages in the purchasing cycle to build a network with various suppliers you can work with in the future. Having a list of suppliers allows you to select one that suits the company's operations effectively. You also have alternatives you can patronize if the preferred supplier is unavailable.
You can use the total quality management (TQM) approach to discover products that provide satisfaction to consumers. For example, in a restaurant where consumers prefer a particular type of rice, you can focus on patronizing suppliers that offer the type consumers love. Purchasing products that satisfy consumers' interests can help you improve the company's operations.
Purchasing manager skills
Here's a list of skills that can help purchasing managers conduct the company's purchasing process effectively:
Purchasing managers require leadership skills to coordinate team members in the company's purchasing department. These skills can help you create a cohesive team that's ready to research potential suppliers for the company. Setting departmental goals for team members is an effective way to monitor their operations.
If you want to get the best purchasing deal for the company, you require effective negotiation skills. You may also require an adept understanding of the field's operations and effective communication skills to convince suppliers to agree to the company's terms. Purchasing managers with negotiation skills can structure a contract of sale that benefits both the company and the vendor.
Purchasing managers may make significant decisions during the purchasing process. Decision-making skills can help you consider different factors, predict the result of making certain decisions, and evaluate the benefits before deciding. Suppliers may require that you select between available options immediately. In that case, you can apply logic and critical thinking to make beneficial choices.
Purchasing managers require research skills to conduct market research to discover suitable suppliers to patronize. Your research skills can help you gather sufficient information to identify the best supplier from the list of potential suppliers. There are software applications that purchasing managers can use to conduct supplier research.
Purchasing managers require strong mathematical skills to perform their duties efficiently. One responsibility of a purchasing manager is preparing budgets. Mathematical skills can help you create a purchase budget and compare supplier bids. Evaluating these bids can help you choose the best supplier within the company's budget. Strong mathematical skills can make you a proactive purchasing manager.
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