Procurement, purchasing, and sourcing are all terms that are frequently used. Similarly, purchase orders and requisition documents are two other terms that are often misunderstood.
There are even more complex variations, such as buy requisitions and procurement orders. While the terminology is all related, each phrase has its meaning, and recognising the differences helps you better comprehend the procurement cycle as a whole.
Reading this article will address your inquisitiveness and your questions about purchasing, procurement and sourcing.
What Is Procurement?
Procurement refers to the process of identifying and acquiring goods and services from a third-party vendor or supplier.
Procurement managers frequently purchase goods and services with limited competitive advantages.
It implies customers must make the most informed decisions possible to obtain the optimum goods and services.
Procurement managers deal with a variety of issues daily. These types of issues include the following;
- Operational sourcing and purchasing activities
- Vendor management and negotiation
- Choosing goods and services in a strategic manner
- Approving purchasing requests from organisations
- Taking delivery of goods and services
What Is The Procurement Process?
The procurement process refers to all of the procedures that an organisation must follow to obtain the items and services it needs to operate.
A procurement process often begins with submitting a purchase request and includes locating suppliers, negotiating prices, approving invoices, and receiving the items.
It’s crucial to remember that there’s no such thing as a “one-size-fits-all” procurement process flow.
The steps in a company’s procurement process are determined by a variety of factors, including:
- Business strategy
- The scale of the business
- Business location Organizational structure
- Human resources
Some businesses are subject to strict laws and industry-specific guidelines to complicate matters, affecting the procurement process’ steps.
Practical Example of Procurement
After heavy rain, a fast-food restaurant manager finds water damage on the ceiling and suspects a leaking roof. No doubt, he needs the expertise of a roofing firm to fix the damage.
He sends the required papers to corporate headquarters for approval to take care of this, outlining the previous storm and the damage he saw.
They might engage a roofer to assess the damage, determine the source of the leak, and provide a repair quote.
Obtaining many quotes to ensure they pay a competitive price is a possibility.
If a repair is required and the cost is within budget, the corporation will hire a roofing company to complete the work.
The procurement department will communicate with the roofers to ensure that they complete the job on schedule and to obtain clearance for any difficulties that may cause the job to cost more than the initial estimate.
When the task is completed, the roofer submits an invoice to the accounts payable department, which is paid.
The Steps In The Procurement Process
Although each company’s procurement process is slightly different, a few important processes can be utilised as building blocks to develop and modify a procurement strategy over time.
The following are the main steps in the procurement procedure:
1. Discover What Is Required.
There must be a need for something before it can be obtained. As a result, recognising the requirement for a product (a brand new item or something the organisation is re-ordering) or service is the first step in procurement.
Business owners can handle this stage, executives, department leaders, employees, and procurement managers.
2. Submit Bid Or A Request For Purchase
The person who needs to buy anything sends a purchase request to the company, which is commonly done using the company’s e-procurement platform.
Procurement team members or a financial controller are usually in charge of reviewing purchase requests.
The request will be converted into a purchase order if it is granted. If the request is denied, the employee receives a letter explaining why the request was denied.
3. Vendor Evaluation and Selection
Every company must decide where to obtain its supplies. Some businesses have an approved vendor catalog, a list of suppliers who have passed the purchaser’s selection criteria and contract negotiations, while others are still figuring out who the ideal vendors are.
Once a supplier has been selected, businesses should build a long-term relationship with them to acquire the best value, get the best pricing, and save time on prospective procurement operations.
4. Negotiate Price and Terms
The procurement team will negotiate the best pricing and particular parameters (such as delivery periods) for the purchase after selecting a supplier.
5. Create a Purchase Order
A purchase order is an official entity that is used to purchase goods. The purchase order specifies the product or service’s pricing, specs, and terms and conditions, as well as any other commitments.
You send the purchase order to the seller after you’ve signed the contract. When a seller accepts and acknowledges a purchase order, a legally enforceable contract is formed.
6. Receive And Inspect The Delivered Goods
The receiving company is responsible for checking the product and accepting the receipt once it has been delivered. If the product isn’t up to par, the organisation can refuse the delivery (e.g. damaged or missing product). A defective product is nearly often the reason for rejection.
7. Conduct A 3-way Matching
The procurement team will utilise 3-way matching to reconcile three essential documents and ensure that the transaction is accurate at the point of the procurement process:
i. Purchase Order
ii. Slips in the packaging (these will arrive with the order)
iii. Invoices from vendors
Three-way matching can detect and avoid differences that result in significant revenue losses. Therefore, if one is discovered, it should be corrected immediately.
8. Confirm The Invoice And Make Payment Arrangements
When everything looks perfect and the 3-way match is complete, confirm the invoice. After that, make payment arrangements.
9. Keeping Track Of Things
For bookkeeping and accounting purposes, the receiving (purchasing) company must retain accurate records.
It means that for each completed purchase, you should save all required paperwork. You can find yourself in hot water during an audit if you skip this step.
What Is Purchasing?
Purchasing refers to the process of buying products and services. Ordering, raising buy orders, receiving, and arranging payments are all part of the purchasing process.
Important Purchase Making Steps
Purchasing is a subset of procurement. As a result, the purchase process is enclosed within the procurement process.
Unlike the procurement-related responsibilities described above, however, purchasing methods should not be adapted to each vendor’s size and complexity.
It is a crucial step in the effective purchase, and it streamlines your procedure. Finally, across all providers, your purchasing process should utilise habitual best practices.
Practical Example of Purchasing
Let’s say company XYZ specialises in women’s clothing. Its business approach is very straightforward: they have a Tokyo-based supplier, company ABC, that supplies all of company XYZ’s items.
Company ABC is dealt with by the company’s buying department, which sets purchase orders to keep the company’s stores properly stocked.
They have a 15-day pre-negotiated credit term after the order is received.
A purchase, in the definition, is a financial transaction in which products and services are transferred for consideration.
In the example above, there are two important situations: when company XYZ issues a purchase order and when that item is paid for.
Company ABC takes custody of the items in this situation and offers Wholesalers payment in a receivable.
As a result, the transaction occurs when company XYZ receives the products.
Objectives of Purchasing
Buying materials of the right quality, in the right quantity, at the right time, at the right price, and from the appropriate source is frequently referred to as the purchasing aim.
It is a broad generalisation describing the breadth of the purchasing function, which includes policy decisions and examination of numerous alternative options before the purchase act.
The following are the specific goals of purchasing:
- Paying competitive prices for the best possible value, negotiating and carrying out all company agreements.
- Maintaining production while keeping stocks as low as possible.
- Developing satisfactory sources of supply, as well as solid working relationships with them.
- Ensuring that vendors perform well, such as timely deliveries and adequate quality.
- As needed, discovering newer supplies of goods.
- Good procedures, as well as proper controls and a purchasing policy, must be developed.
- To hire high-quality people and provide them with the freedom to develop to their full potential.
- Maintaining a department that is as cost-effective as feasible while still performing well.
- Keeping top management up to date on major developments that may affect the company’s profit or performance.
- Establishing high levels of collaboration and coordination with different departments within the company.
What Is A Purchase Order?
A purchase order, also known as PO, is a corporate source document that a purchasing department issues when placing an order with its partners or suppliers.
The document contains information about the items to be purchased, including the types of commodities, quantity, and price.
It is the contract drafted by the customer when purchasing things from the seller in basic terms.
Steps in Ordering
The following are the necessary steps in ordering goods or services from a supplier or a partner.
1. The Buyer Creates A Purchase Requisition
The first step is to prepare a buy requisition before sending the purchase order to the supplier. It is a document used by the purchasing department to keep track of the goods that have been ordered.
The purchase requisition also aids the organisation in keeping track of its expenditures. The PO is only created after the authorised manager has approved the purchase requisition.
2. The Buyer creates a Purchase Order
The purchase order is generated once the things that need to be acquired after agreement.
The PO includes the order date, Freight On Board (FOB) shipping information, discount terms, buyer and seller names, a description of the products being purchased, item number, price, quantity, and the PO number.
A Purchase Order number is a one-of-a-kind number that is associated with a certain order. It has two functions.
First off, check that the things ordered and received are the same.
Furthermore, the PO number is checked against the invoice. It is to ensure the customer is being charged the correct price for the products.
3. Purchase Order Is Accepted (Or Rejected) By The Seller.
A dotted line at the bottom of the purchase order allows the seller’s authorised management to sign off on the order.
The PO contains all of the transaction’s specifics as well as the buyer’s expectations. There is an option to reject or accept the offer when the seller receives the Purchase Order.
When a PO is accepted, however, it becomes a legally enforceable contract for both parties.
4. Purchase Order Is Documented By The Buyer.
The purchase order stays “open” after it has been placed. An open buy order is when the order has been placed, but the products have not yet arrived.
In either case, it indicates that the delivery of the item is incomplete.
Advantages of Purchase Order
Below are some of the benefits of a purchase order;
1. It Prevents Duplication Of Orders
An organisation can benefit from purchase orders in several ways. The essential benefit is that it aids in the prevention of duplicate orders.
When a business wishes to expand, POs can assist in keeping track of what has been ordered and from whom.
It can also be difficult to match invoices when a buyer requests comparable products. The PO acts like a cheque to cover any outstanding invoices.
2. Keeps Track Of All Orders That Come In.
Furthermore, POs assist in tracking incoming orders, and a well-organized buy order system can aid in the inventory and shipping processes.
3. It Can Be Used As Legal Documents.
Purchase orders are legal documents that aid in the avoidance of contract disputes over the purchase.
What Is The Supplier’s Approach to Using the Purchase Order?
In the inventory management process, purchase orders are quite important. When the supplier gets the PO, the products indicated in the PO will be removed from their inventory.
The Purchase Order helps in keeping track of inventory. It also aids identify inconsistencies between recorded values and real stock.
In addition, the PO is required by the supplier to fill the order. The supplier will additionally charge the buyer according to the payment terms specified in the PO.
What Is Sourcing?
In simple terms, sourcing is the process of evaluating, selecting, and managing suppliers who can provide an organization with the daily inputs it needs.
It connotes conducting research, developing and implementing strategy, defining quality and quantity indicators, and selecting suppliers who meet these requirements.
Sourcing maintains the business’s supply chain and ensures that the organisation always has access to the tools it requires to meet its goals.
As the term suggests, sourcing is concerned with establishing sources for an organisation’s supplies.
In contrast, procurement is primarily concerned with obtaining these supplies for the organisation’s day-to-day operations.
In the end, purchasing is a subset of the overall procurement process. Regardless, procurement and purchase are frequently confused.
Utilising similar terms in conversation or printed documents is common in the business world. However, it is often misleading and should be avoided.
Procurement is concerned with the sourcing of operations, negotiating contracts, and the strategic selection of goods and services that are important to a company.
Purchasing, on the other hand, describes the process of placing an order for products and services.
Besides, purchase refers to the transactional function of procuring products or services.