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Basic company purchasing and approval process

- How well do you follow up from which suppliers you buy goods and services?
- How does your organization know from which supplier to buy goods and services?
- How do you secure that your organization only buy goods and services up to the amounts you have approved?

The purchasing process and approval process
The purchasing process can be broken down in two main processes: the strategic sourcing process and the operational procurement process. In the strategic sourcing process you as a buyer define your characteristics for the goods or services you want to buy, analyze the market for potential suppliers, collect information about those suppliers and send Request For Quotations to the suppliers you think would be best for your business. The next steps are negotiating and signing contracts with the selected suppliers.

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In the operational procurement process you want to secure that the organization uses a purchase requisition with an approval flow. The main interest is then the outcome as a Purchase Order.

Why? The purchase order combined with both the approval and the output sent to the supplier is a pure legal document. The purchase order can refer to General Terms and Condition or use your signed contracts and order goods or services based on those contracts.

The initial step is issue a purchase requisition. This could be a system generated document, a form with paper and pen or a simple email that is used to get approval from the owner of the budget you want to use. The budget owner will then approve or decline that you buy and the next step is to secure that you use a supplier with which you have a contract. Next step is to issue a Purchase Order to your supplier specifying product or service, quantity, price and general text from terms and conditions. Then the buyer monitors the purchase and makes sure the delivery is on time, when the delivery is made goods received is issued and the supplier will invoice the buyer. The last step is to pay the invoice.

Common pitfalls

- You have too strong trust that a system support will help to change behavior and make people follow policies. This could significantly delay the change or an implementation of a system.

- You have underestimated the power of change management and change communication to support implementation or a change of a process. By having support of Change Management you can secure the project and shorten the time of implementation.

- You underestimate the complexity of goods receipt (GR). If GR is not handled correctly by the requestor, it will affect the accounting and the value in the accounting books. It will also require time from all parties – the requestor, the buyer, the supplier, account payable and the financial department to correct the human mistakes.

- You have negotiated contracts with your suppliers but nobody uses them. If this is the case your negotiated contracts gives limited benefits to your business.

- One common pitfall is not to use Purchase Order at all for some purchases – and thereby accepting a wild spend. In a company there’s always a flow of purchases that will pass the compliance for a purchase order- of many reasons. It could be internal purchases within the company, low amount, simple items, purchases that might be approved in another way. The cost will not be compliant, not secured legally and the risk of using wrong supplier, blocked supplier or increase of non-ethical or not even controlled and checked suppliers. Another pitfall is that wild spend increase the number of suppliers, and the need of maintenance of the supplier base. Very common is when a company has got a huge tail of suppliers with lower spend – there’s a sign of :

o the focus in procurement is probably on very high strategic level

o the basic processes are not implemented

o the Sourcing department is late engaged in the contracting process

o support systems and tools such as procurement platform, electronic payment, vendor management, catalogues are not in place or not user-friendly as wanted

o change management and information management has not been used