Purchasing Cycle

For companies of all sizes, from local small businesses to global Megacorps, the purchasing cycle begins with needs analysis and ends with payment and record keeping. In between, they may generate a purchase order, pay for goods directly, or invite tenders (also known as bids) to encourage more aggressive and price-effective competition between suppliers wishing to fulfill a specific need. Most companies have a quirk or two, but in general the process follows a fairly straightforward series of events:

1. Needs Analysis

This stage of the purchase cycle is dedicated to identifying the need to be met, whether it’s a reorder, raw materials for a new product produced by the company, or office supplies.

2. Needs Clarification

Once the need’s been identified, the variety (e.g., brand), amount required, and delivery schedule need to be established.

3. Purchase Requisition and/or Purchase Order

With the details settled, the requesting party has a couple of options. Generally, those without the authority to approve direct purchase orders will first create and submit a purchase requisition, which is an internal document requesting that approved parties obtain goods and services. Upon approval, the purchase requisition is used to create a purchase order, which is the actual order sent to the supplier for the goods and services required.

4. Authorization

The purchase order (generated from a purchase requisition or not) must also be approved. The purchase order process benefits from automation and artificial intelligence (AI), usually through the use of purchase order software that’s part of a comprehensive procurement software package.

Not only does automation permit role assignments and automatic routing and tracking of all purchase orders and approvals/rejections/revisions, but it allows for real-time adjustments and transparent communication between all parties involved. In addition, automatic reminders can be created to ensure no PR or PO is left to languish.

5. Supplier Review

If you’ve already integrated an automated procurement solution into your workflow, chances are the list of approved and available suppliers will obviate this step in the process especially for repeat orders. But if you’re adding new products, or new suppliers for existing products to the system, then each candidate must be reviewed for compliance, performance, and reliability.

6. Supplier Selection

At this stage, the purchaser chooses the supplier who’ll be filling the order, either from the pre-vetted list in their software catalog or through other means.

7. Price and Term Negotiations

This step is also made infinitely easier if your workflow is built around procurement software automation. Centralized contract and document management and information sharing means previously-negotiated contract terms and best price are already available for each vendor on the approved list. New vendors being added to the system will have this information added as your legal team completes and certifies your company’s agreement(s) with the vendor.

If your company doesn’t use automation, then your team will need to sit down with the vendor to negotiate payment terms and conditions.

8. Order Placement

At this point, the buyer officially places the order and creates a binding purchase agreement between your business and the vendor.

9. Receiving and Inspection

For material goods, arriving shipments are inspected for completeness and integrity, with any shortages and broken goods marked to be credited back to the buyer. The invoice is either included with the goods or sent separately by the vendor.

Inventory management is either manually updated or handled automatically by the procurement software, which links the shipping documentation to the original purchase order, invoice, related correspondence, and other documents for data analysis and auditing purposes.

10. Payment

The invoice is reviewed for accuracy against the purchase order, invoice, and other documentation. Depending on the terms established for the supplier and the approval of the reviewing party, payment is issued (usually within 30, 60, or 90 days).

11. Records Management

Businesses still using manual systems follow up by updating their inventory totals and purchasing ledger. Purchasing software automates this step, as documents are cross-connected and update automatically across all departments.