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The success of any business is dependent on a range of factors. One of the most important of these is how much your company spends to run its operations and how often it spends it.
Converting the business cash into goods and services is called the purchasing cycle and it forms the core of the procurement cycle. It can have a significant impact on the productivity as well as the profitability of the business in the long run.
Developing a better understanding of your company’s purchasing cycle is one of the first steps toward optimizing it. The best way to do this is to leverage technology and implement better process improvements to ensure that your purchasing department functions smoothly and builds value for your company while also reducing costs at the same time.
In this blog, we will delve deeper into the purchasing cycle, the steps involved in the process, associated challenges, and more, to help you navigate your purchase orders skillfully.
The purchasing cycle refers to the steps involved in processing a purchase order from beginning to end. It is the main part of the procurement cycle and one of the key performance indicators that help you measure both the productivity and capabilities of your procurement team.
Also known as the procurement cycle or procure-to-pay (P2P), the purchase order system allows you to smoothly order, obtain, and pay for the goods and services that your business needs.
Further Read: What is Purchase Order Cycle - Meaning, Steps, Why Automate It
The purchasing cycle involves various steps that businesses need to take to order and pay for products that they require. These steps are discussed below:
A purchasing cycle begins with a purchase order. Any purchase request for a business first needs to be approved by the procurement manager, followed by moving to the status of a purchase order. If multiple goods are in the same category, each of them will be assigned to a fresh purchase order.
It is important to keep in mind that while employees of the business can raise purchase requests, only the procurement team has the authority to create purchase orders in an organization.
In the case of small businesses, this authority of creating a purchase order lies with the head of finance or the owner of the business.
In the next step, a budget check is done by the finance team after the purchase order is created. This is usually followed by a search to see if any purchase contracts are already available in the organization.
If active purchase contracts are available with proven vendors, the purchase order will be given to that particular vendor. If none are available, the procurement team will send fresh requests for proposals (RFPs) to prospective vendors.
The aim of this exercise is to get competitive quotes for goods or services.
After getting quotes from different suppliers, the purchasing team performs a comparison of their respective business requirements with that of the vendor proposals.
The procurement team, at this stage, will conduct a detailed investigation and seek input from various stakeholders to arrive at a unified vendor selection decision that is in the best interest of the overall organization.
The next step after vendor selection is contract negotiation, where both parties get to discuss, negotiate, and address concerns for a smooth transaction.
In general, purchasing negotiations cover aspects such as quality expectations, quality benchmarks, time constraints, potential risks/liabilities, terms of payment, resolution of disputes, and confidentiality of the purchase.
For major purchases, issuing a quotation request is recommended. The quotation is nothing but an inquiry sent to various suppliers to ensure receipt of the best quotations.
It is important to keep in mind that this is different from the sales order. Once the suppliers are done with the quotations, they are analyzed for multiple factors, including price, compliance to specification, payment terms, and delivery.
Post quotations, purchasing departments work on finding the right price. Apart from this, the purchasing department also conducts price negotiations (as discussed above) to get the best possible prices from the supplier.
Post negotiation, a purchase order is sent to the respective vendor for their approval. The vendor’s written (or digitally signed) approval is vital as it will activate a valid and legally enforceable contract between the two parties involved.
As soon as the supplier accepts the purchasing order, it becomes a legally binding contract for goods delivery as per the specified terms and conditions of the purchase agreement.
The procurement teams prepare purchase orders from the purchase requisition/quotations, then send a copy of the same to the supplier and various other departments such as accounting, receivables, and more.
While delivering the items on time is the main responsibility of suppliers, the purchasing department’s job is to ensure that suppliers maintain their time commitments and deliver goods on time.
In case of any doubt that there will be a delay in delivery, purchasing teams must be in charge of the situation and take necessary corrective actions such as rescheduling production, expediting transportation, and more.
Upon the receipt of goods, a thorough inspection of the goods is done by the receiving department/team to check different aspects, such as the accuracy of the order, the quantity, and the bills generated by the supplier.
This is followed by the receiving department preparing a report highlighting any variance. If there are differences noticed, details of the same are sent to the purchasing department highlighting the discrepancy of the same from the purchase order.
If the order is as per the details mentioned and is complete in all respects, it is considered closed by the receiving team, and a copy of the purchase order is then sent to purchasing department as well.
If the purchase order is considered incomplete, it is kept open for some time to wait for its completion, and the purchasing department is informed accordingly.
Once the purchasing order is complete and the supplier receives the invoice, the last step is to check the consistency and accuracy of key aspects again.
These include the purchase order, receiving reports, and the final invoice. It is important to ensure that there is no discrepancy in items and their quantities.
The purchasing department also needs to verify any discounts given and the terms and conditions of the original purchase order against the invoice and resolve differences, if any. Once the PO is approved, the invoice is sent for payment, completing the purchasing order cycle.
While the purchasing cycle challenges vary based on factors such as line of business, organization’s size, and more, some of the common challenges that businesses of all sizes face invariably include:
Purchase decisions made during the planning phase for purchase and delivery are very important as they affect both the cost and the overall schedule of the operations.
Lack of proper planning in the purchasing cycle may lead to several issues, such as cash flow problems, unnecessary delays, and material shortages or surpluses.
This makes it important for businesses to follow procurement and purchasing best practices and prototype planning models to be able to better facilitate procurement processes and improve their supply chain initiatives.
Vendor relationship management is an important process to help businesses manage relationships with vendors who supply goods/services to the organization.
The various methodologies of vendor pre-qualification in the purchasing cycle vary from business to business, but the relationships get better when procurement professionals follow agreed-upon standards to assess the performance.
Accessing and analyzing large volumes of data is something that every procurement manager has to deal with. Locating and tracing information across ERP, procurement systems, and spreadsheets can be quite overwhelming, leading to issues such as lack of transparency, security risks, and more.
Statistics also suggest that approximately 60% of business leaders consider a lack of transparency between their procurement functions and suppliers a risk to their business. Further, almost 24% of the total executives surveyed said they do not effectively evaluate supplier business practices because of manual and incomplete data entry processes.
Manual errors can further aggravate the issue with incorrect data, costing hefty deals, clients, and vendor relationships as well.
The best way to deal with this challenge is to automate your procurement process. It not only reduces costs but also improves process efficiency and overall transparency.
When it comes to the procurement or purchase order cycle, supply risk is always a key challenge that leaders have to deal with. Some of the supply risks that businesses frequently face include cost, market risks, quality, potential fraud, and delivery risks.
Apart from this, there are other challenges to navigate, including compliance risks, policy adherence challenges, and more that procurement managers have to struggle with.
One of the other common challenges in procurement or purchasing is supplier management.
Right from identifying the qualified supplier to keeping track of vendor performance and ensuring that there is a constant supply of quality products, there are several challenges in the entire cycle.
Purchase orders made outside the organization’s defined procurement process come under dark purchasing. This is a kind of uncontrolled spending that can prove costly for businesses in the long run.
In situations where items procured or purchased cannot be justified using material inventory, there is going to be a loss of revenue and control, which is a significant challenge that organizations have to deal with, irrespective of their size.
Operating a well-defined purchasing cycle allows companies to get maximum value out of it. Unfortunately, this never scales without the right technology. Managing purchasing orders manually is not simple; as companies grow, processes necessarily become elaborate, if not complex. While throwing people at the problem might seem tempting, manual management of procurement tasks eventually becomes a roadblock to efficient growth.
This is why failure to adopt technology and the inability to find a suitable software partner becomes one of the main procurement challenges in businesses creating value.
If your procurement processes are always changing and you believe the best way to manage that is with people, consider adopting no-code procurement software rather than customizing your ERP or implementing large platforms like Coupa or Ariba.
No-code gives you the flexibility to configure the business rules on which your purchasing cycle operates. Which means that you don't need constant Change Requests and lead times before the software adapts to your chosen processes.
Consider the following scenario. Your CFO wants all new SaaS spend over $5000 to be approved by the CFO. Your current software does not have a category for SaaS spend and neither does it accommodate a new approval workflow to the CFO because it stops with the Procurement Manager. Typically, customizing these in ERP would take a few weeks. With No-Code, your Procurement team can make, test, and deploy this in a few hours.
Clearly, using a no-code digital procurement software not only reduce costs but also introduces flexibility.
With Hubler, you can have an industry leading no-code procurement software to efficiently manage your purchasing cycle, create and control budgets, keep your vendors happy with a self-service portal, integrate seamlessly with your existing systems, and effortlessly track and audit your purchases for an error-free purchasing order cycle. All ready and implemented for your unique business needs within a week.
Reach out to us to learn more.
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