Maggie Bendis November 16 2016 3 min read What's in this article? Importance of Establishing a Purchasing ProcessPurchase OptimizationNext Steps to Optimize your Purchasing Process The terms “purchasing” and “procurement” have become confused in the modern business lexicon; in fact, the terms refer to two discrete processes. Procurement refers to the overall strategy of obtaining goods and services, and purchasing is a small subset of the procurement process. Procurement refers to the company policy and functions that surround obtaining goods and services while the purchasing process is the act of buying goods and services itself. Stages of the Purchasing Process Identifying a need for a purchase and analyzing relevant data to determine what to purchase are some of the first steps of the procurement process. The stages of purchasing start once a purchase order is sent to a supplier. Stages of purchasing include: Acknowledgement of a Purchase Order This is where the supplier acknowledges the price, quantity, and delivery date of the goods; any negotiations between the buyer and supplier take place at this point. Advance Shipment Notification The supplier notifies the buyer of the details of the delivery and confirms the agreement made through the purchase order. Goods Receipt This is the physical act of receiving the delivery of goods and storing them in the warehouse. The quantity and type of goods are checked against the purchasing order to ensure the delivery is as agreed, and then an acknowledgement of successful receipt of goods is sent to the supplier. Recording the Invoice The invoice is recorded until payment is due – it later forms part of the accounting and reconciliation process. 3-Way Reconciliation The purchasing order is compared with the acknowledgement and invoice to ensure these match, and payment will not take place unless the three are reconciled. Payment for Goods After reconciling the order, acknowledgement and invoice, payment is made upon expiration of the agreed credit terms. Importance of Establishing a Purchasing Process There are multiple benefits from establishing a purchasing process business strategy including: Developing a Master Service Agreement Setting up a standard template with each supplier for procuring goods simplifies the purchasing process. When the terms are agreed upon for each order in advance, it eliminates the need for renegotiation with each supplier for each transaction saving tons of time. Improved Purchasing Inventory Management Negotiating supplier lead times through a master agreement and standardizing the purchasing process ensure that the goods are in the warehouse ready for customer order fulfillment. This reduces the likelihood of stock outages and delays. This helps to retain customer loyalty, increasing customer satisfaction and ensuring future repeat business. Developing a reputation for reliability means that word of mouth recommendations will help to create new business. Improved Forecasting Standardizing the process for purchasing enables records to be kept of the purchasing history. This helps with forecasting by establishing past trends that can be used to predict spikes and troughs in orders. Analyzing past trends makes it easier to see what caused certain trends. Knowing causes of trends helps facilitate proactive purchasing that follows the business strategy by streamlining the entire supply chain. This ensures future purchasing can be kept at an optimum level to ensure profitability while maintaining high levels of order fulfillment. Purchase Optimization There are a number of techniques to further optimize purchasing that will result in improved forecasting, developed master service agreements, and better purchase inventory management among other benefits; check out the ways you can see these results for your business! Supplier Optimization Creating a standard template by which negotiations with suppliers take place means that the best prices and terms can be agreed from the outset. The template allows suppliers to compete for business by aligning their service with the terms of the purchasing strategy. This ensures that the business can obtain the best mix of suppliers with the cheapest prices and best terms. Total Quality Management (TQM) Adding on to supplier optimization, the master service agreement can include a clause relating to TQM. In order to retain your business’ loyalty, suppliers must constantly improve their service levels without errors. Risk Management While there is an expectation towards excellent service from suppliers, the business will need to make allowances for “black swan” events that will affect supplier reliability in areas prone to natural and human disasters. Where normal service cannot be reasonably expected, the organization will need to have a contingency plan to ensure normal operations continue. Next Steps to Optimize your Purchasing Process Establishing a reliable purchasing process for replenishment of your warehouse will keep your business competitive and streamlined. By putting a routine in place for each supplier, you cut back drastically on long lead times from suppliers as well as nasty surprises like incorrect orders stemming from human error. Not only do you make purchasing easier from start to finish, but you also set your company up for success by keeping track of purchases. Therefore, it is also important to have some core metrics in place, where it can be kept track of the purchasing and supply chain performance. In the end, you should exactly know what to reorder at which time and in which quantities. More information about this crucial topic for purchasers is covered in this free guidebook: Share Maggie Bendis November 16 2016 3 min read Sign up for the EazyStock Newsletter Stay on Top of the Latest News, Trends, Tips, and Best Practices for Supply Chain Management, Inventory Optimization, Replenishment & Purchasing, and Demand Forecasting with Our EazyStock Newsletter.