Many organizations are beginning to re-evaluate their purchasing processes, and identify new types of e-procurement tools that will meet their needs. This summer, Karl Mundt and Mark Benson have been working with PPD to map out their purchasing process, and identify discrepancies in the process that may exist.
The purchasing process basically involves the following elements:
- Identify or anticipate material or service needs.
- Evaluate potential suppliers.
- Select suppliers.
- Release and receive purchase requirements.
- Continuously measure and manage supplier performance.
These stages may vary in different organizations, depending on whether purchasing is sourcing a new or 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. The Exhibit illustrates a typical purchasing process used in many enterprises with some typical contingency elements shown. This diagram also shows how supplier evaluation and selection involves the purchase of new items or services, or during a review of existing purchase contracts.
A document flow accompanies the movement of orders and material throughput the purchasing 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 (1) automating the document generation process and (2) electronically transmitting purchase documents to suppliers. The benefits of electronically generating and transmitting purchasing-related documents include
- A virtual elimination of paperwork and paperwork handling
- A reduction in the time between need recognition and the release and receipt of an order
- Improved communication both within the company and with suppliers
- A reduction in errors
- Lower overhead costs in the purchasing area
- Purchasing personnel spend less time on processing of purchase orders and invoices, and more time on strategic value-added purchasing activities.
The electronic documents often used in the process are represented in the Exhibit by boxes with cross-hatches.
1. User Need for Product or Service
The purchasing process begins with identifying or anticipating a material or service needed by a user, and electronic documents may be used in any of the following forms:
- Purchase requisitions from internal users
- Forecasts and customer orders (electronically)
- Routine reordering systems (barcodes)
- Stock checks
- Material requirements identified during new product development
2. Purchase Approval and Supplier Evaluation
As shown in the exhibit, there may be various steps in the process required, depending on the size of the purchase, as well as whether the company has purchased form the supplier before. Once the user need has been recognized, the system will check to see if an approved supplier has already been entered into the database. In many cases, for a repetitive purchase, purchasing may have already negotiated a contract with the supplier, with established terms for delivery, pricing, quality, etc., and the supplier has already been entered into the accounting system. If the purchase requisition requests an item which is a very small dollar amount, the system may allow the user to purchase the item with no approval required through a system such as a e-procurement system, online catalog, or purchasing card (such as VISA or America Express). In cases when the dollar amount exceeds the users’ permission to generate a purchase order, the purchase must then go through an approval process, to review the requisition, approve it, and allow a purchase order to be created.
If the requisition requests an item for a higher dollar amount with no existing supplier, then purchasing may obtain quotes or bids from potential suppliers. Purchasing forwards a request for quotation (RFQ) to suppliers inviting them to submit a bid for a purchase contract.
When the size of the purchase dictates that a detailed evaluation is required for a new purchase, supplier evaluation may be required. The potential evaluation of suppliers begins after determining that a purchase need exists (or is likely to exist) and the development of material specifications occurs. For routine or standard product requirements with established or selected suppliers, further supplier evaluation and selection is not necessary, and the approval process may be generated. However, potential sources for new items, especially those of a complex nature, require thorough investigation to be sure that purchasing evaluates only qualified suppliers.
3. Bidding, Negotiation, and Supplier Selection
Final supplier selection occurs once purchasing completes the activities required during the supplier evaluation process. Selecting suppliers is perhaps one of the most important activities performed by companies. Errors made during this part of the purchasing cycle can be damaging and long-lasting. After bids have been received, and/or the negotiation has taken place, the sourcing team will select a supplier, and then move on to authorize the purchase through the purchase approval process.
4. Purchase Approval
After the supplier is selected or a requisition for a standard item is received, purchasing grants an approval to purchase the product or service. This is accomplished through an electronic drafting of a purchase order (PO), sometimes called a purchase agreement, after supplier selection is complete. Purchasing must take great care when wording a purchase agreement because it is a legally binding document. Almost all purchase orders include the standard legal conditions that the order (i.e., the contract) is subject to on the reverse side of the agreement. The purchase order details critical information about the purchase: quantity, material specification, quality requirements, price, delivery date, method of delivery, ship-to address, purchase order number, and order due date. Note that firms are increasingly using computerized databases to perform these processes, and are moving toward a “paperless” office.
5. Release and Receive Purchase Requirements
This phase of the purchasing cycle involves the physical transmittal of purchase requirements. This should be a fairly routine, although not necessarily the most efficient, part of the purchasing cycle. Some organizations transmit orders electronically, while others send material releases through the mail or by fax. Electronic data interchange (EDI), which involves the electronic transfer of purchase documents between the buyer and seller, can help shorten order cycle time. EDI transactions, particularly through the Internet, will increase over the next several years. The shipping and receiving processes require several other important documents (which also can be electronic), including the material packing slip, the bill of lading, and the receiving discrepancy report.
6. Continuously Measure and Manage Supplier Performance
One way to identify the best suppliers is to track performance after awarding a contract. Supplier measurement and management is a key part of the purchasing cycle. As shown in the exhibit, buyers should not assume that the purchasing cycle ends with the receipt of an ordered item or the selection of a supplier. Continuous measurement is necessary to identify improvement opportunities or supplier nonperformance.
A desired outcome from performance measurement is improved supplier performance. If no formal evaluation takes place, a buyer has little insight into supplier performance over time, and tracking any performance improvement that results from supplier development efforts is not possible. Without a measurement and evaluation system, a buyer lacks the quantitative data necessary to support future purchase decisions.