Purchases Cycle - Everything You Need to Know

September 1, 2022
Alok Suman
Procurement Management

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 the operations and how often it spends the same.

Converting the business cash into goods and services or the purchasing cycle forms the core of the procurement cycle here. 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 process of the purchasing order cycle, including what it is, the steps involved in the process, associated challenges, and more, to help you navigate your purchase orders skillfully.

Understanding the Purchase Cycle

The purchase cycle refers to the overall process of processing a purchase order from start 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

Steps in the Purchase Cycle 

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:

1. Creating a Purchase Order 

The creation of a purchase cycle starts with a purchase order. It's the foremost step in this process. 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.

2. Budget Checking 

In the next step, a budget check is done by the finance team after purchase order creation is completed. This is usually followed by a search to see if any purchase contracts are already available in the organization.

If existing ones are available, the purchase order will be given to that particular vendor. If none are available, managers from the procurement team will send fresh requests for proposals (RFPs) to various prospective vendors.

The aim of this exercise is to raise the best quotations for the goods or products.

3. Selection of Vendors Based on Qualification

After getting quotes from different suppliers, a comparison will be performed by purchasing teams of their respective business requirements with that of a vendor proposal. 

For new items purchased by the business before, the procurement teams maintain a complete list of approved suppliers. In case of new ones where there is no acceptable supplier from the previous buying, a thorough search is done. 

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.

4. Negotiation of the Quotations Given and Purchase Order Dispatch

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. 

Post negotiation, a purchase order is sent to the respective vendor for their approval. The importance of the vendor’s approval here is immense as it will activate a valid and legally enforceable contract between the two parties involved.

5. Finding the Right Price

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 negotiation (as discussed above) and focus on getting the best price possible from the supplier.

6. Issuing a Procuring or Purchasing Order

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.

7. Follow-Up and Delivery

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.

8. Receiving the Ordered Goods

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

9. Approving Invoice for Payment 

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.

Challenges in the Purchasing Cycle

While procurement or 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:

1. Lack of Planning

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.

2. Maintaining Vendor Relationships

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 prequalification in the purchase order cycle vary from business to business, but the relationships get better when procurement professionals follow agreed-upon standards to assess the performance.

3. Lack of Transparency

Managing and accessing large volumes of data is something that every procurement manager has to deal with. Locating and tracing information across 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.  

4. Risk Mitigation 

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.

5. Supplier-Related Challenges 

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. 

6. Dark Purchasing

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. 

7. Failure to Adopt New Technology

Managing purchasing orders manually is not as simple as it seems. With the growing complexity of processes, manual management of procurement tasks has become the major roadblock to success.

This is why failure to adopt technology and the inability to find a suitable software partner who helps businesses create value becomes one of the main procurement challenges.

Leveraging automation and digital procurement solutions not only reduce costs but also fosters innovation.

How Hubler Helps You Manage the PO Cycle

Mastering your purchase order cycle allows you to get maximum value out of it.

Coupled with powerful automation software, formalizing your purchasing cycle lets you streamline various stages of the procurement process, thus helping you reduce your workload, eliminate errors/delays, and simplify everything from materials management and inventory to financial forecasting for the business.

Hubler is a leading name in the procurement management space that can help you manage your purchase orders more efficiently. A fully customizable procure-to-pay solution, Hubler works without compromising on your internal processes and helps you meet your business objectives while maintaining spending in the most optimal way possible.

With Hubler, you can 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.

Reach out to us to learn more.

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