- The purchasing process is an integral part of a company’s success.
- The purchasing process includes a request for purchase, spend approval, purchase order, receiving, invoicing, and payment.
- Best practices like setting SMART goals and implementing relevant SaaS products can help to optimize the purchasing process.
When you think of optimizing or fine-tuning your purchasing process, what comes to mind?
The notion of optimizing the purchasing process is a broad one. It can be challenging to get your finger on the pulse of exactly what that strategy needs to be. But if you're a purchasing professional or in a buying role with your company, discovering and implementing a strategy to optimize the purchasing process will make a tremendous impact. It does more than just elevate procurement and supply chain; it positively impacts the bottom line of the entire company.
We'll share a quick overview of the purchasing process at its core and then dive into some best practices you can implement to optimize your organizational purchasing process.
What is the purchasing process?
The purchasing process is a series of transactional steps that enable businesses to get the goods and services they need to function.
In most companies, the purchasing process involves more than the Purchasing Department (or whichever department handles your company’s buying). For example, the purchase requisition step often includes Procurement unless they have already completed a request for proposal (RFP) or request for quote (RFQ) process and awarded a contract. The payment step involves Accounts Payable.
Here are the typical steps in the purchasing process and who you might see involved at each stage:
Purchasing process step
Who is involved?
Are the purchasing process and procurement process the same?
Not quite. But that can be super confusing since the procurement vs. purchasing debate is common, and many organizations call purchasing “procurement” and procurement “purchasing.” It can be even more confusing if your company doesn’t have a Purchasing or Procurement Department at all.
Here’s a quick way to remember how they’re different:
Think of procurement as a vehicle and purchasing as one of the critical mechanisms the vehicle needs to function. The purchasing process is a small but critically important subset of the procurement process.
How to use best practices to optimize your purchasing process
Execution of the purchasing process is fundamental. But what if you want to take your formal process to the next level? Here are some things you can do to make that happen.
1. Define and communicate purchasing policies
Have you ever worked with a department that frequently referenced their policies, but no one had any clue what those policies even were? Don’t let purchasing policies fall into that category. The "set it and forget it" approach does not work well when company money is involved.
Anyone in the company who will ever have any involvement directly or indirectly with purchasing goods or services needs to be familiar with purchasing policies. If there are none, now is the time to get some created and defined.
Policies play a major role in maintaining order in the purchasing process. For example, perhaps a policy states that services may not be paid for on a purchasing card, but must go through a purchase order process.
Defining the policies is crucial but communicating them is just as important. Make sure policies are published and easily accessible in relevant locations, like internal communication platforms and wikis. If you send out a purchasing-related or general internal updates newsletter, be sure to reference important policies when relevant. Also, include policies in your purchasing training program.
Whatever your method, these policies can't be hidden or invisible to those who need them.
2. Set SMART goals
SMART goals are goals that are specific, measurable, achievable, relevant, and time-bound. The goals you set for the purchasing process should be closely in line with the company's overall goals. This type of congruence is so important that I recommend listing the supporting company goal for every purchasing one you establish. For example:
Company goal: Increase profit margin by reducing material costs.
Supporting purchasing goal: Decrease costs on tangible goods by 5% within the next fiscal year.
If you have a mental block on what goals to create, go through the company's goals and list out anything Purchasing can do to help achieve them.
3. Establish and monitor KPIs
Key performance indicators (KPIs) are what you will use to measure the efficiency and effectiveness of your purchasing process and the goals you've set. These are some common purchasing KPIs:
- Cost savings
- Cost avoidance
- Maverick, rogue, and tail spend
- Average cost of purchase order processing
- Average delivery time
- Average purchasing cycle time
- Average supplier lead time
Suppose your company uses SaaS products like e-procurement or procure-to-pay to enhance the purchasing process and provide automation. In that case, there may be additional KPIs you want to track, like the number of electronic purchase orders and catalog vs. non-catalog spend.
Periodically monitoring the KPIs is practically just as important as establishing them.
For example, let's say you measure catalog vs. non-catalog spend annually. You decide to check the KPI quarterly and notice the non-catalog spend is much higher than it should be. As a Purchasing Manager, you know that sometimes business processes change. For example, your company may have made some non-recurring new product purchases this quarter that they could not purchase from a catalog. If so, you can make a note of the reason for the variance.
But if you can’t account for this increase otherwise, it's time to look into things like training processes and contract availability. Is your Purchasing team offering the training users need to use the marketplace or procure-to-pay system effectively? Are there important things the business needs that you do not have catalogs available for in the company’s marketplace?
4. Engage in cohesive team-based strategic sourcing
Team-based strategic sourcing simply means involving all key stakeholders in sourcing decisions. In addition to the fact that people generally like to be included in important decisions that affect them, this type of sourcing results in better contracts, better relationships, and better buy-in. It also helps to ensure all stakeholders understand the company’s internal priorities.
For example, are you sourcing a new SaaS product? Be sure to involve IT as they’ll almost certainly be involved in implementation.
5. Use SaaS technology to your advantage
Once upon a time, we printed and mailed purchase orders (yeah, that happened). And let’s not even talk about the years of carbonless copy paper POs.
Later, products hit the market to help streamline the purchase order to payment process, but even then, multiple solutions were needed to achieve the necessary tasks, and there were still many manual processes.
Fast forward to today. Today’s SaaS technology has changed the purchasing game in a big way. SaaS suppliers like Unimarket and JAGGAER now offer seamless procure-to-pay solutions, some including worldwide B2B marketplaces, e-procurement, and contract management. Asset management systems, like Oracle’s NetSuite, help record and track company assets.You can even find analytics solutions, like SAP Ariba and Corcentric, that help you track spend and other metrics.
In a nutshell, if you can dream of a particular purchasing or procurement SaaS solution, you can almost certainly find it on the market today. Buying SaaS technology is a great way to take your purchasing process from manual to magical.
6. Make purchasing cards your friend
Even with procure-to-pay solutions, certain types of purchases do not justify the cost of processing a PO, invoice and check, wire, or direct deposit payment. For those purchases, purchasing cards are an excellent way to optimize the process.
The National Association of Purchasing Card Professionals reported that the savings from using a purchasing card process compared to a traditional purchasing process is anywhere from 55% to 80%. That equates to a typical savings of $63 per purchasing card transaction.
Are there low-cost, raw materials, or contract goods from preferred suppliers that your company is purchasing through the traditional purchasing process that would be more effective on purchasing cards? If so, consider implementing a purchasing card program. As an added perk, look for a credit card provider that will offer your company yearly rebates on the credit card spend.
7. Train the trainer
We can all agree that training company employees to use purchasing systems and understand purchasing policies is vital. However, the train-the-trainer approach takes training a step further by creating a continuous process that changes as technologies change, employees change, and the business changes.
Here’s what the train-the-trainer approach looks like, in this case:
- Purchasing receives in-depth training from SaaS suppliers on purchasing systems.
- Purchasing develops a formal training program of all purchasing systems and policies.
- Purchasing creates an online knowledge base of tutorials, troubleshooting, and frequently asked questions.
- Purchasing trainers work with each department to establish a designated trainer.
- Purchasing trainers offer in-person or online training programs.
- Purchasing trainers offer periodic training updates.
The idea with this training approach is that after one person receives training, they can then train others, and then the cycle continues.
Think about this scenario. Someone in your company needs to order a software license for their office desktop computer. That software is available for purchase by catalog in the Purchasing procure-to-pay system. But this person has not been trained. So, they ask around in their department, but no one knows how to order the software. To get what they need, they go to the software provider's website and order it at a higher-than-contract price.
If this scenario or something similar has ever happened in your company, you may be able to benefit the company tremendously by implementing a solid training program.
The purchasing process: Taking your company to the next level
The core of the purchasing process is systematic and transactional, but don’t let that stop you from using expert strategies to create an even more positive impact for your company. Using the best practices we’ve revealed here, your Purchasing team will create a domino effect of savings and efficiency throughout the business for years to come.
Are you ready to take your company to the next level with SaaS technology but don’t have the time or resources to manage a growing SaaS stack? Contact Vendr today to talk about how to level up your tech stack.