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Procurement 101
Reading time:
5 minute read
Written by
Majdi Sleimen
Before reading this guide, there are a few important things you should be aware of.
Purchasing in a business environment is a complicated process to master.
While the steps involved in processing a purchase order (PO) are similar between businesses, the exact procedures used for each step of the purchasing process vary based on different company policies and practices.
In other words, as you research different procedures and policies, always be sure to orient your understanding in a way that will be beneficial to the way your own particular business operates.
By the end of this guide, you’ll gain a comprehensive understanding of how a PO is processed in most businesses by using a procedural method for each step of the document’s life cycle.
Make sure you’re in the right place before getting started. This guide contains a wealth of information and links to educational resources that will benefit you if:
If you’re already a purchasing pro, you can also skip straight to this guide’s section that focuses on how to make a digital transformation within a business (and the advantages of doing so).
Understanding purchase order management doesn’t offer any favours in the form of a simple description, due to the misleading terminology commonly used to describe it.
First and foremost, let’s clarify any confusion surrounding a popular abbreviation within the procurement and purchasing profession: “P2P”.
“P2P” can either stand for “Procure to Pay” or “Purchase to Pay”.
That’s right, one abbreviation can mean two similar sounding but different things. Go figure.
An available resource for understanding the difference between the two is available in this blog on purchasing vs procurement.
To further clarify what “X to Pay” is really trying to convey with the way it’s phrased, these abbreviations seek to concisely refer to the entire process (either procurement or purchasing) in completion, while also referring to the point at which something “is paid for”, and the procedures associated with paying for something in either process.
In other words, one can interpret and read these phrases as saying “Procurement Process to Payment Process” and “Purchasing Process to Payment Process”.
If you’d like to expand your understanding of the procure to pay process specifically, you may want to check out this Techopedia article, or read up on the definition of procure to pay from Wikipedia.
To learn more about the purchase to pay process in particular, continue reading!
As covered, the complete PO management life cycle is often referred to as the “purchase to pay” or the “P2P” cycle.
A traditional purchase to pay cycle usually involves six primary steps which can be managed in different ways depending on the policies of the business creating (or “raising”) the PO.
While this is the core set of procedural steps in the purchase to pay process, additional steps may sometimes be added, typically before or after the purchasing process begins or concludes.
Depending on the size of a business, the P2P process can include one or more additional steps.
While these steps increase the processing time of a standard purchase order, they also provide increased planning and cost control options for the business that uses them.
For larger businesses that purchase goods and services regularly, the increased processing time is worth the monetary savings and other efficiency advantages gained by using these procedures:
Further variations within the purchase order process can be found in organisations depending on what type of purchase order is being raised.
That’s right, there’s more than one type of purchase order.
Sorry to be the bearer of additional complexity.
While the core of the purchase order process remains the same for most of these purchase order variants, certain procedures may be adjusted to accommodate the specific functions of each document type.
Here's a full list of the four different types of purchase orders with their functions explained in detail.
Once the purchase order process is understood, it’s time to put the procedure to work to begin generating value for your company.
Beyond simply cutting costs, a well established purchase order procedure reduces purchasing process time, improves data accuracy to enhance cost forecasting, and can indicate where supplier adjustments can be made to receive better quality goods and services.
Establishing a new purchase order procedure requires careful planning - especially in mid sized organisations where procedural updates can take several months to roll out. To unlock the benefits of a fully optimised P2P cycle, consider the following guidelines in relation to your particular company (while keeping in mind things like team size, industry, frequency of purchasing, and existing policies and procedures).
Creating a purchase order process is one thing - ensuring it operates smoothly is another.
It’s important to understand how much value a purchase order system can generate for your business when paired with well structured procedures for managing POs.
As an additional benefit to financial departments, purchase order systems typically offer integration connections with accounts payable software like Sage and QuickBooks.
Tradogram is an online purchasing system that provides complete P2P coverage for both procurement and purchasing needs. You can schedule a demo for free to learn more about how a purchasing system can support your PO process.
Curious about the difference between a “procurement system” and a “purchase order system”?
PO systems focus on PO procedures and steps (mentioned earlier in this guide), while procurement systems include sourcing, negotiation, contract management, and other functions that fall outside the scope of purchasing.
Efficient purchasing often requires many, if not all departments and team members within an organisation to communicate with one another clearly and effectively.
Depending on the scope of purchasing requirements for different teams, and whether a centralised or decentralised purchasing strategy is being used, a lot of involvement from different department managers may be required for the planning of an effective P2P process.
One of the biggest mistakes organisations make when restructuring their procedures is not involving all of the necessary stakeholders in the process.
Even non-executive team members can sometimes have valuable contributions to make to a procurement and purchasing transformation process, so be sure to evaluate and plan your discussions accordingly.
Like most aspects of establishing purchasing procedures, purchase order approval processes can range from being very simple (or even non-existent in some cases, which is not always a bad thing depending on the situation to highly involved multi-step workflows.
To add to the palette of available options, some companies even employ the use of both simple and complicated approval processes, based on factors like the category of items being purchased, specific price thresholds, and which department is raising the PO.
While smaller companies tend to lean towards streamlined processes, large companies can benefit by specialising their processes based on the needs of specific departments.
Determine which types of purchase order approval processes make sense for your company by asking these questions:
It’s a lot to take into consideration for just one step of the purchase order procedure, but spending the time to ensure that documents are routed correctly for approval is a must-take measure for ensuring the P2P process operates smoothly within the business.
Unnecessary bureaucracy can sometimes lead to slowdowns in operational efficiency, but when it comes to purchasing, the use of beneficial policies can prevent financial disputes from occurring in the long term.
An example of one practical policy related to purchase orders is the “No PO No Pay Policy”, which is used by businesses to protect themselves against unsolicited invoices sent to their company.
In general, purchasing policies should be avoided unless they provide a well defined and specific benefit to the overall purchasing process.
Otherwise, you’ll just be adding unnecessary slowdowns to your operations!
For more tips on creating custom policies to support your PO process, check out this great article on the topic - how to write a purchasing policy.
Purchasing procedures evolve as the capacity and requirements of a company expand.
By understanding the basic requirements and steps involved in your business’s processes, you’ll be able to implement a flexible strategy that remains relevant as your company’s purchasing needs develop over time.
Interested in learning additional procurement tips? Check out these procurement best practices to prepare for the future. And be sure to learn why it’s so important to undertake a digital procurement transformation.
Here are additional suggestions on further reading if you're interested in learning more about different aspects of the purchasing process:
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