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1.2. Purchasing Cycle

The document outlines the purchasing cycle, detailing the key steps from purchase order creation to payment processing. It highlights challenges such as lack of planning, maintaining vendor relationships, and the need for transparency and technology adoption in procurement. The document emphasizes the importance of following best practices to mitigate risks and improve efficiency in the purchasing process.

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Kandasamy Anbu
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22 views17 pages

1.2. Purchasing Cycle

The document outlines the purchasing cycle, detailing the key steps from purchase order creation to payment processing. It highlights challenges such as lack of planning, maintaining vendor relationships, and the need for transparency and technology adoption in procurement. The document emphasizes the importance of following best practices to mitigate risks and improve efficiency in the purchasing process.

Uploaded by

Kandasamy Anbu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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KMBN OM 04: PSM

1.2. Purchasing Cycle


Purchase Cycle: The purchase cycle (or) purchase order
life cycle is the set of key steps involved in processing a
purchase order.

It starts when a company finds the need to purchase


something and ends when the payment is made for the
goods purchased.

The approved purchase requisition is converted to a new


purchase order and sent through the purchase order
approval process.

The PO life cycle includes steps that range from cross-


checking budgets to PO matching and closure.
Steps in Purchase
Cycle: Listed below are
the steps involved in a
typical
purchase order life cycle:

1. Purchase order creation


2. Budget check and RFP
3. Vendor qualification
and
selection
4. Negotiation and PO
dispatch
5. Delivery and quality
check
6. PO Matching and
closure
1. Purchase Order Creation: The first step of the
purchase order life cycle is creating a purchase order.
Once a purchase request is approved and authorized, it
is converted to a purchase order.

In the case of multiple line items, each item will be


transferred to a new purchase order.

While purchase requests can be raised by employees,


purchase orders can only be created by the procurement
team in an organization.

In the case of small businesses, this authority may reside


with the finance head or the business owner/CEO.
2. Budget check and requests for proposal (RFP):
Once the procurement team creates the purchase
request, the finance team carries out a budget check.

After this, there is a standard search for existing


purchase contracts. If such a contract exists, the
purchase order will be
sent to the respective vendor.

If not, then the procurement team will have to send


request for proposals (RFP) to a list of prospective
vendors with the intention to elicit quotations for a
product or service.
3. Vendor qualification and selection: After
receiving commercial quotes from suppliers, the
purchasing team will compare their business
requirements with the vendor proposal.

To arrive at a unified vendor selection, in the best


interest of
the organization, the procurement team will conduct a
thorough investigation and also seek input from all
stakeholders.
4. Negotiation and PO dispatch: Once a vendor is
selected, it
is time for contract negotiation. This is the time when
suppliers and buyers discuss and address issues that will
forge a better business relationship. Typically, purchasing
negotiations will cover the following items:

Time constraints Potential liabilities and risks


Delivery expectations Confidentiality of purchase
Quality benchmark Dispute resolutions
Payment terms Change in requirements (if any)

Once the negotiation is complete, the purchase order is


forwarded to the vendor for approval. The vendor’s
approval and acknowledgment will activate a legally binding
contract between the vendor and the buyer.
5. Delivery and quality check: Vendors usually send
an advance shipment notice to the purchaser once the
order is shipped. This notice includes shipping date,
shipping agency details, tracking number, a copy of PO
and invoice, etc.

After receiving the product/service, the buyer checks the


packaging slip and PO information and acknowledges
the receipt.

Then, the purchaser performs a standard quality check


and notifies the vendor or rejects products in case of
damage or defect in the delivered item.
6. PO Matching and Closure: In this step, three
important purchasing documents - the purchasing
requisition, purchase order, and vendor invoice are lined
up and evaluated to make sure there are no
discrepancies, and to verify the accuracy of information.
Discrepancies need to be addressed according to the
dispute resolutions mentioned in the purchasing
contract. Once this three-way document match is
complete, the invoice is approved and forwarded to
payment processing depending on organizational norms.
Next, the purchase order is formally declared as closed
and stored for the purpose of bookkeeping or audits.
Challenges in the Purchasing Cycle : The major
challenges in purchasing process are as follows:
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 the best
practices in procurement and purchasing, prototype
planning models to better facilitate the procurement
2. Maintaining Vendor Relationships: Vendor
relation ship management is an important process to
help businesses manage relationships with vendors
who supply goods/services to the organization.

The various methodologies of vendor pre-qualification


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.

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
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.
Thank
you

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