Optimizing the Purchasing Process: A Blueprint for Modern Businesses

As organizations grow, procurement and finance responsibilities naturally become more complex. From having a small number of vendors and purchases to manage in a small business, procurement and finance managers oversee purchasing and partnership activities addressing various business needs for many departments and teams in a growing company. 

When purchasing operations become so complex that bottlenecks and frustration begin to characterize them, businesses awaken to the urgent need to transform and modernize how they handle purchase requisitions and purchase orders in the procurement process. The goal: Making purchasing easier and faster for buyers and giving approvers more control and involvement in the purchasing process. 

Here’s a glimpse of how an outdated, inefficient, and cumbersome purchasing looks vs a more efficient operation:

The ideal purchasing process for a fast-growing company must be seamless for requesters and approvers and connected to your organization’s ERP and other systems.

How Purchasing Differs from Procurement

Purchasing is a subset of procurement related to the tactical intake-to-procure process. In contrast, procurement is a comprehensive process covering procurement strategy, risk management, strategic sourcing, supply chain management, contract negotiations and adherence, value optimization, building supplier relationships, and monitoring supplier performance. 

Common Obstacles in the Purchasing Process

Common obstacles or problems in the purchasing process include:

1. Supply chain disruptions
2. Inaccurate systems data from manual data entry without digital transformation and automation
3. Supplier management and relationship issues
4. Inadequate spend visibility for decision-making 
5. Delays in purchase requisition and PO approvals requiring followup
6. Late deliveries, backorders, and defective goods received from suppliers
7. Lack of metrics for monitoring purchasing and vendor performance and taking actions
8. Too many suppliers and parts for cost-effectiveness
9. Excessive maverick spend
10. Non-compliance issues for suppliers and purchasing policies 

The Steps of a Modern Purchasing Process

Purchasing process diagram

When broken down into steps, the ideal requisition and purchasing cycle process looks like this:

1. Purchase request intake
2. Supplier or vendor sourcing, selection, and onboarding
3. Purchase request approval
4. PO (purchase order) creation
5. Goods received 
6. Monitoring and improving the purchasing process

Purchase Request Intake

First, a requester needing a product or a service submits a purchase request (a.k.a. purchase requisition or requisition order). The purchase request used in the requisition process is a simple form containing all the information needed to trigger the proper approval process.

Note that letting employees submit purchase requisitions—even if they don’t know which vendor they should work with—is an excellent way for finance and procurement teams to get involved on time and break the siloed communication happening on emails and Slack messages (capturing the entire process and all related data). 

Supplier or Vendor Sourcing, Selection, and Onboarding

Before supplier selection relating to high-cost purchases, as part of the procurement cycle for sourcing, the procurement department may create a structured RFQ (request for quote) document and an RFP (request for proposal). The RFQ enables the company to obtain requested detailed vendor information from potential suppliers covering their qualifications and ability to meet specifications. The RFQ is a formal document enabling qualified suppliers to submit bids. Some E-procurement systems provide efficient electronic RFQ, RFP, and access to bidding systems. 

The requester can request to onboard a new supplier or vendor if the one they want to work with isn’t already registered with the company and included in its vendor master file. The central value here is that onboarding a newly selected supplier is triggered during the request stage and is faster and better tracked. 

Purchase Request Approval

Once the purchase request is submitted, approvers are notified via email and can then log into a system where they can see all the relevant information needed to approve the request. In this system, they can easily check up-to-date budget statuses and make sure the need and the terms are good-to-go on their end. If they’re uncertain about whether or not to approve the request, they can return the request to the requester in order to ask a question, or consult with another stakeholder (often another one of the approvers). Approvers need to be accountable, so the system should remind them when they’re taking too long to address an open item.

PO (purchase order) Creation

Once approved, a PO based on the purchase request should be generated. The purchase order should live in the company’s ERP. Generating a PO in your ERP has two main benefits. First, it saves a ton of manual work for the AP team, since flipping the PO into an invoice/bill is much simpler than typing all of the purchase request information into the system manually. Second, it makes your budget planning that much better, since you can plan in advance before an invoice is received. 

Goods Received 

The next step is for the requester (or the person for whom the request was opened) to ensure they received the goods or services they asked for. This step is important because it ensures that you only pay for what you received. It’s needless to say that in fast-moving organizations, a lot of spend can “disappear” this way.

The requester should be notified on the expected arrival date and the receiving team mark the receival, either full or partial, and this should in turn be transmitted to the PO’s line item in the ERP. (For good internal control, a separate receiving department (not the requester) , should perform this step.) This allows the AP team to achieve a 3-way match without needing to manually forward the invoice to the requester or approver. 

Beyond these (purchasing lifecycle) steps in the purchasing process to acquire goods and services, your business needs to make the entire procure-to-pay process more efficient. Procure-to-pay extends beyond purchasing to accounts payable supplier invoice processing through making global payments and reconciling those payments. 

Making the Procure-to-Pay Process More Efficient

After purchased goods or services are provided, the supplier invoices your business through accounts payable, with payment terms negotiated in the PO or contract. The invoice references the PO number for matching. Your business should pay for the raw material items or other goods received that are accepted within quality specifications. 

In the accounts payable process (which can be automated with Tipalti AP automation software):

• Suppliers are onboarded and validated. 
• Invoices are verified with payment rules and recalculation.
• Three-way matching of the invoice to the purchase order issued by the procurement department and the goods received notice (GRN) occurs, with discrepancies notifications requiring follow-up.
• Global regulatory compliance and tax compliance preparation are automated.
• Invoices are approved for payment.
• Global payments are made as batch payments during the payment process.
• Payment reconciliation to the general ledger is performed. 

Monitoring and Improving the Purchasing Process

An additional step in the modern purchasing process involves monitoring and improving. This is done by measuring and optimizing for the most critical parameters of the organization. Besides using KPIs or metrics, your business should conduct ongoing vendor performance analysis and scoring. Vendors should be assessed based on the value provided, competitiveness, delivery time or percentage of on-time deliveries, quality, and required returns. 

Regularly evaluate purchasing department employee performance and procurement or purchasing systems to enable peak performance. In a formal process, purchasing policies should be reassessed for improvement opportunities through periodic revisions. 

Once your modern purchasing process is in full motion, you’ll see huge benefits across every part of your organization. Beyond accelerated operations, you and your procurement or purchasing team will have achieved much-needed visibility into every stage of the procurement and purchasing process for making better purchasing decisions. 

The finance team will gain the ability to create an accurate budget forecast at any time, giving your company a firm handle on its spending activities. Budget owners across departments can access real-time budget and spending information to conduct more informed decision-making. With oversight, your business can better control spend to improve its gross margin, bottom-line profitability, and cash flow. 

Best Practices for Modernizing Your Purchasing Process

Best practices for modernizing your purchasing process include:

• Developing and complying with company purchasing policy
• Strategic sourcing 
• Digitizing and automating procurement and purchasing systems
• Making purchase requisition intake easy, with adequate stakeholder visibility for approval
• Communications and actions that build supplier relationships
• Ensuring regulatory compliance 
• Supplier performance metrics
• Real-time spend management 
• Reducing the number of suppliers and parts to the extent possible 

Company Purchasing Policy

The company’s purchasing policy should be reviewed periodically for improvement opportunities, and policy compliance metrics should be monitored. 

Strategic Sourcing

Strategic sourcing involves getting the highest value for purchasing dollars by applying strategies related to supplier development, strategic planning, contract negotiation, outsourcing dollars, and supply chain infrastructure. 

Digitizing and Automating Procurement and Purchasing Systems

Procurement automation systems integrating with your ERP system incorporate best practices, eliminate paper-based, manual processes, save staff time, and reduce costs. The procurement system should include centralized electronic document management for purchasing forms and contracts. 

Easy Purchase Requisition Intake

Employees should use a procurement system that simplifies preparing a digital purchase requisition and gives relevant stakeholders early views of purchase requisitions for decision-making and spend control through approval, modification, or rejection of PRs. 

Supplier Relationships

Building supplier relationships includes giving suppliers visibility, timely notifications, and communications access. After procurement, as part of the accounts payable process, suppliers should be able to select their preferred payment method and currency and be paid on time. 

Regulatory Compliance

Purchasing requires regulatory compliance. Procurement systems should help businesses follow their company policies and achieve regulatory compliance. 

Supplier Performance Metrics

Some procurement software includes functionality for evaluating suppliers through a performance score that covers different metrics and KPIs. 

Real-time Spend Management

The best procurement automation systems provide real-time spend management with categorization by category and vendor. This functionality aids business teams in timely decision-making. 

Reducing the Number of Suppliers and Parts

When companies simplify their supply chains by reducing the number of qualified suppliers and parts required for manufacturing, they can reduce costs and improve efficiency. Supplier visibility is required for this project. (In supplier selection, businesses still need to obtain at least three bids from competing suppliers and monitor quality and on-time delivery in addition to pricing.) 

Essential KPIs to Track Purchasing Performance

KPIs as metrics that track purchasing performance include:

1. Purchase order cycle time
2. Number of approval process steps
3. Emergency purchase ratio
4. Spend under management (SUM)
5. Number of suppliers 
6. Vendor lead time
7. Vendor defect rate
8. Backorder rate
9. Supplier compliance rate
10. Policy compliance rate 
11. Cost reduction

Purchase Order Cycle Time and Approval Metrics

The purchase order cycle time is how long it takes from submitting a purchase request to issuing the PO, which is a good metric for process efficiency. The number of ‘actions’ or steps needed in an approval process (edits, vendor changes, questions) is a good metric for purchase process quality.

Emergency Purchase Ratio

The emergency purchase ratio is the percentage of purchases not planned in time or requiring additional purchasing department workflow. These emergency purchases may require selecting a different supplier for goods not supplied by the primary vendor or costly expedited shipping fees, such as FedEx overnight delivery to get unstocked parts when immediately required for manufacturing or other activities. 

Spend Under Management (SUM)

Spend under management is the amount of spending the procurement department manages through formal processes such as POs, in contrast to its maverick spend by employees. Effective systems control spend under management by category and vendor.

Number of Suppliers 

The procurement team monitors the number of suppliers, intending to reduce the number of suppliers based on need and supplier performance to increase efficiency and get better results. 

Vendor Lead Time

Vendor lead time is a metric that tracks the time between placing the goods and the supplier shipping the order. 

Vendor Defect Rate

The vendor defect rate is a KPI for the percentage of goods from a supplier that don’t meet quality standards. 

Backorder Rate

The backorder rate is the percentage of orders that can’t be filled by all vendors immediately and require additional time for the customer to receive the items. Your company can also measure the backorder rate by each vendor to measure one element of supplier performance. 

Compliance Rate (Supplier and Policy)

Two separate KPIs are supplier compliance and policy compliance. Supplier compliance measures the extent to which vendors meet contract or PO requirements. Policy compliance measures the percentage in which company procurement policies are followed in your business. 

Cost reduction

The cost reduction KPI is the amount of cost savings implemented through procurement for the measurement period. 

Streamline Purchasing with End-to-End Automation

Tipalti Procurement is a procurement platform integrated with your ERP system. It streamlines workflows for procurement activities and procurement management and digitizes the intake-to-procure process with end-to-end automation. With Tipalti Procurement software, purchase order creation is automatic, using approved purchase requests. 

Tipalti Procurement includes centralized document management with digitized contracts, PRs, and POs. It gives stakeholders real-time visibility for review and approvals and lets your business efficiently onboard and communicate with selected suppliers. You’ll also get real-time spend visibility through a dashboard, enabling your business and its purchasing manager to control spending better. 

The procurement automation software eliminates manual data entry with its inherent human errors and the inefficiencies of paper-based systems. It produces time and cost savings for your business. Learn more about how the best modern procurement systems (working in combination with AP automation) reduce the accounts payable workload.