Purchasing is a process made up of all activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance. These steps are highlighted in Exhibit.
Following procurement process description is often referred to as the procure-to-pay cycle. This term includes all of the steps required, from the initial identification of requirements, to the procurement/purchasing of the item, through the receipt of the goods, and finally, to the payment of the supplier once the goods are received.
There are two things to keep in mind as we describe the purchasing workflow:
- How much effort a company spends on these activities will differ greatly from one situation to another. The purchasing process leading to a $30 billion contract for military jets is very different from that for a routine purchase of office supplies!
- As you look at the steps in the procure-to-pay cycle shown in Exhibit, recognize that companies can often gain a competitive advantage by performing these activities better than their competitors. Many organizations, for example, use information systems to automate routine purchase order preparation, whereas others use sourcing management teams to improve the outcome of supplier evaluation and selection efforts.
This section presents the purchasing workflow as a cycle consisting of six major stages:
1. Forecast and plan requirement;
2. Need clarification (requisition);
3. Supplier identification or selection;
4. Contract generation or purchase order generation;
5. Receipt of material or service and documents;
6. Settlement, payment, and measurement of performance.
These stages may vary in different organizations, depending on whether purchasing is sourcing a new or a repetitively purchased item, and also whether there is a detailed approval process for purchases that exceed a specific dollar amount. New items require that purchasing spend much more time up front evaluating potential sources.
Repeat items usually have approved sources already available. Exhibit illustrates a typical purchasing process used in many enterprises, with some typical contingency elements shown.
The process flow shown in Exhibit is often called the procure-to-pay process, as it documents all of the stages from the initiation of a need, through to the payment element. A document flow accompanies the movement of orders and material throughout the procure-to-pay process. Historically, preparing and managing the proper purchasing documents has been a time-consuming process.
Most firms have streamlined the document flow process to reduce the paperwork and handling required for each purchase. The suite of tools used to achieve efficiency in purchasing transactions is broadly defined as e-procurement. Companies are using e-procurement tools to manage the flow of documents by automating the document generation process and electronically transmitting purchase documents to suppliers.
The benefits of electronically generating and transmitting purchasing-related documents include the following:
- Virtual elimination of paperwork and its handling;
- Time reduction;
- Error elimination;
- Improved communication both within the company and suppliers;
- Reduction in overhead costs in the purchasing area.