Purchasing Process with its formal documents:

What is the Purchasing Process?

It’s often considered interchangeable with the term procurement process, but the purchasing
process itself is more confined to actually obtaining goods and services, while procurement
refers to the overall framework established to optimize that purchasing for maximum value,
savings, and efficiency.
A better synonym for the purchasing process is the procure-to-pay (P2P) process. The purchasing
process is, at its most basic, as simple as conducting a transaction. Much in the same way a
consumer might research and purchase the best appliance for their home, your procurement team
uses the purchasing process to requisition goods and services through your supply chain.
The primary benefit of a formal process for purchasing is avoiding waste due to fraud, rogue
spend, theft, and other financial pitfalls that accompany undocumented, non-optimized buying
habits. But because procurement sits at the heart of the value creation process for your company,
formalizing and optimizing your purchasing process is also important to:

 Creating and efficient and effective buying process for not just direct spend (e.g., raw
materials) but indirect spend (e.g., office supplies, IT services, etc.).
 Successful supplier relationship management.
 Optimal supply chain management and strategic sourcing (for both cost savings and
value)
 Streamlining the procurement cycle and all its sub-processes.
 Providing a solid audit trail for internal and external review.
 Establishing a model for business process management that can be applied across your
entire organization.
Purchase Requisition:
A purchase requisition is a request that is made to the purchasing organization to procure a
certain list of materials. It is an internal document and remains within the organization. Purchase
requisition needs approval from the purchasing organization.

Purchase Order (PO):

A purchase order can be raised favoring a supplier for regular purchases. Generally, an
organization will have a list of selected and preferred suppliers with a master agreement. For
example, an organization has 2 selected suppliers for laptops and other electronic hardware with
negotiated rates for the year. In such cases, there is no need for fresh bidding. The buyer can
simply raise a purchase order favoring the supplier for the quantity of items to be purchased. PO
is referred as a unilateral contract which is raised by buyer. It becomes binding to the seller once
the seller accepts it.

RFQ/RFI/RFP:

Request for Proposal (RFP) – RFP is a formal document which is used by the buyer to clearly
specify their purchasing needs and the supporting requirements which will enable prospective
sellers to understand the needs of the buyer. For example, if the buyer wishes to get an ERP
system implemented in their organization, they will look for capable technical partners who can
fully implement the ERP for them. In such case, the buyer will prepare a document which will
detail out their requirements of the ERP system. This document is referred as an RFP. Based on
the RFP, the prospective technical implementation agencies will provide a detailed proposal
explaining their solution, implementation timeline, pricing etc.

Request for Quotation (RFQ) - RFP is a formal document which is used to specify clearly the
requirements of certain purchases and requesting for a price quotation. RFQ is used for standard
purchases such as hardware, off-the-shelve software product, laptops or any other equipment.
RFQ is relatively very small document vis-à-vis a RFP, only providing the specification of the
items to be purchased and requesting for a quotation. The seller will submit a price quotation and
other terms in response to a RFQ.

Request for Information (RFI) – RFI is used to seek information on various aspects from the
prospective bidders. RFI can seek information about bidders such as their financial statements
for last ten years, details of their processes in the organization, certifications they hold, list of
their clients, client references, and detail of their past accomplishments, case studies and many
more. RFI is primarily used to filter out from a huge list of bidders and select a list of potential
suppliers with whom finally an RFP or RFQ with actual requirements can be shared.
Discrepancy Report:
A discrepancy report provides details about any shipping or receiving discrepancies noted by the
receiving department. It is often the job of purchasing or material control to investigate and
resolve material discrepancies.
Procurement Organizational Structure:
All organizations have to make provision for continuing activities directed towards
the achievement of given aims. Regularities in activities such as task allocation,
supervision and coordination are developed. Such regularities constitute the
organization's structure and the fact that these activities can be arranged in various
ways means that organizations can have differing structures, formal or informal.
When an organization is very small, one or perhaps a few people will undertake all of
the necessary functions and processes, and there is no need for a formal organizational
structure. The head of the organization will give instructions to employees, and there
will most likely be no clear division of responsibilities. In Malaysia, we could find
this example in small-sized, family-owned businesses. As the organization grows,
though, it will become increasingly difficult for a single person to control it. The need
for a formal structure will then emerge.
Formal structure allows the responsibilities for different functions and processes to be
clearly allocated to different departments and employees. With this clarity of
responsibility comes the authority to control. The design of the structure should aim to
implement the organization's processes as efficiently and effectively as possible, and
to facilitate the working relationships amongst its various functions. Ideally, it must
balance the need for order as a command structure with the need for flexibility and
promoting creativity.
The size and activities of the Procurement function in a single business unit
organization will depend on a number of factors, such as the size of the organization
and the nature of its businesses. Obviously, in small and medium-sized organizations
where the supply staff consists of only one or two individuals, the staff is expected to
be flexible in terms of their capabilities and skills. In fact, in small companies, it is not
unusual to see procurement responsibilities shared by a variety of individuals for
whom procurement may even be a secondary responsibility. As the size of the
organization grows, the idea of assigning a professional the responsibility of
procurement emerges and a separate function is created. Specialization will occur as
the organization gets larger and can afford to hire additional procurement personnel.
Figure provides an example of a Procurement organization in a typical medium sized
single-business unit company staffed by procurement professionals with clearly
defined responsibilities in four general areas of specialization: sourcing, materials
management, administration and supply research.
 MORE →

Procurement Department Policies:

The term policy includes all the directives (explicit and implied) that designate the aims and ends
of an organization and the appropriate means used in their accomplishment. Purchasing Policy
and Procedures
Policy refers to the set of purpose, principles and rules of actions* that guide and organization•
Usually documented in writing*rules of actions – Standard Operating Procedures along with
rules and regulations Purchasing Policy and Procedures
Effective Policy Characteristics:
 Action-oriented
 Relevant
 Concise
 Clear and well-understood
 Timely and current
 Guides problem-solving and behavior

Policy Categories:
 Defining the role of purchasing.
Addresses the targets of the buying capacity.
Characterizes the obligations of the different purchasing levels• Serves as general or expansive
explanations which increasingly definite or explicit strategies are included Purchasing Policy and
Procedures.
  Defining the conduct of purchasing personnel.
Outline management’s commitment to ethical behavior
Guidance on ethical and questionable business practices Purchasing Policy and Procedures
Ethics Policy:
A record that characterizes the basics of how individuals inside an association will interface with
each other, just as how they will cooperate with any clients or customers they serve.
Reciprocity Policy:
A conventional strategy regularly exists itemizing the executives to complementary buy
understandings
Typically portrays the executives' resistance to the training and records the sort of conduct to
keep away from. Buying Policy and Procedures
Behaviors to avoid:
A purchaser offers inclination to providers who buy from the purchaser's association
A purchaser anticipates that providers should buy the purchasing organization's items as a
condition for making sure about a buy contract
A purchaser approves of serious offers from providers who buy the purchaser's items. Buying
Policy and Procedures
Contacts and Visits to Suppliers:
Controlling unauthorized or excessive contacts or visits
Unauthorized suppliers visit or contacts by non-purchasing personnel undermine purchasing’s
legitimate authority as the principal commercial contact with suppliers. Purchasing Policy and
Procedures
 Defining Environmental Issues.
The utilization of reused materials
Severe consistence with neighborhood, state and government guidelines
Appropriate removal of waste material, most particularly risky waste.
Understanding and evaluating the natural hazard related with the specific compound being
delivered Purchasing Policy and Procedures
 Defining buyer-supplier relationships.
The rules that manage relations with providers are frequently contained in an approach
expressing that purchaser merchant connections are basic for monetary achievement. Buying
Policy and Procedures.
 Defining operational issues.
Risky materials – Purchasers must play a functioning job controlling unsafe waste. – necessity
for an association to be International Organization for Standardization/ISO 14000 confirmed to
take part in worldwide business exchanges. – Establishing an Environmental Management
System (EMS) Purchasing Policy and Procedures.

Sourcing:
Sourcing is the stage that comes before any purchases are made and can be considered a
subsection of the procurement department. Before you can procure materials from your
suppliers, you must first find and vet those suppliers. When you have an effective strategic
sourcing process in place, you’ll find reliable, affordable, and quality suppliers to supply the
goods you need. Good work here makes the procurement process more streamlined and efficient.
Sourcing is about finding the balance between the quality of raw materials and the affordability.
The less you can spend on materials, the more profit your business can earn. But, if you are too
cheap and buy shoddy materials, your resulting product is of lesser quality. It is important to
retain standards of quality because your customers want quality, too!
Sourcing is a balancing act. It is the process of requesting quotes for new products, obtaining
vendor information and uploading into your procurement software, determining the lead time,
pricing, minimum order quantities, and so on. Generally, this is done one time for each supplier,
with the exception of updating pricing information. However, because it’s important to have a
backup supplier or two in case one is not able to meet your needs for any reason, sourcing
departments are always busy. With global sourcing you may find a more expensive supplier may
be more reliable and able to deal with larger volumes than your preferred cheaper alternative. Or
you may need to identify alternative suppliers due to supply chain risks.
Before sourcing can begin, you must assess your purchasing needs, map out a plan, conduct
market research, and identify potential suppliers. After all this is completed, you’ll then evaluate
the suppliers, and then choose the most suitable supplier for the need. Then, the process repeats
for all other purchasing needs, until suppliers are in place for everything you must buy.
Types of competitions:
Open competition: is said to exist when there are different providers accessible to fill your
particular prerequisites and they are eager to challenge for your business
Sole-source situations: alludes to those buys where there's just a single provider that gives the
item. Typically, these are novel items that you can't discover anyplace yet just through one
provider/producer.
Single source: alludes to buys from one chose provider, despite the fact that there are different
providers that give comparable items. On the off chance that your organization chooses to
purchase just Dell PCs, at that point that is single source buying. Be that as it may, not at all like
sole source buying you and your organization have a decision to switch providers, however for
vital and perhaps cost reasons the organization chooses to utilize just a particular provider.
Technical competition: is made when just a predetermined number of providers are accessible
for a specific item because of licenses or restricted creation capacity
Partnership/joint venture: associations will frame a joint dare to make a wellspring of flexibly
when none exists or to together share the costs of growing new innovation
Multiple sources: are some of the time utilized by a similar association, either to encourage
rivalry or in light of the fact that no single provider is fit for satisfying 100 percent of the
prerequisites and furthermore various sources will be kept up to decrease the danger of
interfered with flexible
Types of sourcing (Supplier Listings)
To improve their helpfulness, provider postings are normally evolved by some type of item
classification notwithstanding the item or administration they gracefully demonstrating their
present provider status.
Approved supplier list: One kind of rundown the purchaser keeps is an ASL, which contains a
posting of providers who have met the association's consistence rules and are able to give
explicit materials or administrations to the association.
Certified suppliers: are providers that don't outfit direct materials and are, hence, not fitting for
incorporation on the ASL and might apply to providers expelling dangerous waste or uniquely
authorized advisors, just as organizations providing particular kinds of media communications or
system equipment.
Qualified suppliers: are those that have effectively finished a conventional screening process
yet may not yet have been equipped for the ASL.
Preferred supplier: posting by and large incorporates providers who have demonstrated
abilities that make them particularly important to the purchasing association and they are
providers who offer extraordinary support or positive estimating.
Disqualified suppliers: a provider will be not able to meet the association's prerequisites, have
an agreement ended for infringement, or reliably neglect to keep up satisfactory execution or
quality levels and posting might be additionally strengthened by a reference expressing "Don't
Use".
Dimensions Kraljic model:
In 1983, Peter Kraljic concocted a way to fragment the provider base in the article in HBR. In
this, he contended that gracefully things ought to be mapped against two key measurements:
hazard and productivity.
Hazard identifies with the probability for a sudden occasion in the gracefully binds to disturb
tasks. For example, in significant zones of spend, for example, tire providers for a car are
business basic, and should an interruption happen, the auto organization is likely itself to
confront generous issues.
The provider experiences a scope of dangers relying upon its geographic area, plan of action and
flexibly chain length. In the event that the merchant is situated in Switzerland, it is impossible
that political vulnerability or calculated defer will affect upon tasks. Then again, offices situated
in the creating scene might be dependent upon authoritative hazard, political change and
untrustworthy transportation courses. All such hazard factors have a direction upon the
purchasing organization.
Productivity depicts the effect of a flexibly thing upon the primary concern. For specific
territories of spend, for example, writing material, supplies have just an irrelevant impact on
benefits. In different classes, a solitary wellspring of gracefully can represent the deciding
moment a business. For Apple, a huge extent of its benefits is dictated by Foxconn's capacity to
make the size of items required to an exact detail.
Non-critical items:
These things are generally safe and have a low effect upon hierarchical gainfulness. The most
ordinarily utilized model in this fragment is office writing material. Albeit significant for
representatives to play out their obligations, pens and paper don't have a huge effect upon the
business, nor does their nonattendance speak to a genuine danger.
For purchasers, writing material is an aggravation. It stops up time with fringe concerns. In that
capacity, the sourcing methodologies conveyed here spotlight on proficiency and diminishing
regulatory weight. Strategies, for example, e-selling and lists are a superb way to divert duties
either straightforwardly to providers or to inner clients that are ordering the products.
Leverage items:
Where things have a high benefit, however a generally safe factor, purchasers have the level of
influence in the relationship and influence this solidarity to get more noteworthy returns.
Generally, acquirement experts have misused this status to bring down costs, yet progressively
further developed organizations are hoping to open the inventive capability of their providers.
The market elements of this relationship rest upon a bounty of profoundly commodified parts.
Providers can be handily subbed as their contributions are a lot of the equivalent. The main
confinement for purchasers is maybe exaggerating their hand and compelling a low-net revenue
seller into indebtedness.
Bottleneck items:
The other side of influence: hazard is high, yet productivity is low. Here, the quality is in the
possession of the provider. The market comprises of scarcely any providers that can carry on
oligopolistic partner to constrain costs upward. Acquirement Leaders found that these providers
retain a greater amount of purchasers' time contrasted with some other section. The provider
relationship is requesting, despite the fact that they have a constrained effect upon organization
productivity. The market structure powers purchasers to acknowledge an ominous arrangement.
The fundamental methodology settles upon harm restriction. Acquirement must perceive that
couple of chances will emerge from this classification. Increasingly inventive purchasers will try
to modify the terms of exchange. Imaginative interior exercises can redevelop item prerequisites
to such an extent that the material can be supplanted with another and ideally sourced from an
influence provider.
Strategic items:
In conclusion, high provider hazard and high benefit sway things spread vital providers. These
are basic to the business. These things just speak to a bunch of providers, however guaranteeing
a viable and unsurprising provider relationship is critical to the fate of the purchasing
organization.
Overseeing such providers requires a differing exhibit of abilities and can subsume a noteworthy
extent of official time in supporting and coordinating the relationship. Not at all like the non-
basic things, each agreement is one of a kind and centers upon the common picks up that
equivalent accomplices appreciate in a community-oriented relationship. Key accomplices
should look to creative both item and procedure advancement and consequently they can expect
long haul responsibility from the purchaser just as proactive turn of events.

Contract Management:
Contract management is the process of managing contracts that are made as a part of legal
documentation of forging work relationships with customers, vendors or even partners. Contract
management comprises negotiating the terms and conditions in contracts. This also includes
certifying compliance with the terms and conditions, as well as documenting and agreeing on
any changes or by both the parties. Thus, it is process of managing, executing and analyzing the
management of contract efficiently.
Goods and Services:
Perhaps the most important term of all, this section specifies exactly which goods and services
the vendor will provide you. To avoid confusion and miscommunication later on, this description
should be as specific as possible.
For example, you decide to hire a software development company to create a custom business
intelligence application. In this case, it's better to include phrases such as "development, testing
and support of a custom business intelligence application," rather than the vague phrase
"software development services."
Prices and Payment:
Once you delineate what you'll be receiving, you then must agree on how to pay for it. This
section should address several important questions:
• What are the costs of the goods and services, in detail?
• How will you make the payments (cash, checks, credit cards, bank transfers)? Who will be
responsible for receiving them?
• When are the payments due? Will you pay in a lump sum or in installments?
• What are the penalties for late payments?
Confidentiality and Proprietary Information:
First, decide who will ultimately own the products that are created as a result of the partnership.
If you want to retain control, then specify that your business will take ownership of all
intellectual property created during the provision of goods and services.
Second, if you have sensitive or confidential data on hand that must be shared with the vendor,
take steps to protect yourself as much as possible. The contract should include a clause that
forbids sharing this information with third parties or using it for other purposes.
Limitation of Liability:
Nearly every contract includes a variety of "disclaimers" that limit parties' ability to bring a legal
claim against each other or to recover damages. Your vendors will likely want to limit their
liability to the costs of the products and services that they provide you, omitting any possible
indirect effects.
However, you should ensure that these clauses in your contract don't prevent you from claiming
damages in the event of severe misconduct, such as fraud and gross negligence. If your mission-
critical software has a fatal and egregious security flaw that exposes users' private information,
for example, then you'll want to be able to seek adequate compensation for such an error.
Breaches and Remediation:
Finally, you need to plan ahead for what happens if either party decides to break the terms of the
contract. If the relationship will be long-term and ongoing, then many contracts include the
ability for either party to terminate "without clause," after a certain amount of time and with an
appropriate notification in advance.
Including the five terms above in your vendor contracts will be highly important in order to
satisfy both parties and lessen the risk of a lengthy legal battle. Make sure that you go over the
terms of the contract with a fine-toothed comb before signing and beginning your partnership.

Supplier Selection and Evaluation:

Supplier evaluation and selection is a seven-step process composed of sub-processes
Step 1: Recognize that a need exists to evaluate and select a supplier:
During new item development.
Because of poor existing Supplier performance.
Toward the finish of a current contract.
Purchasing new equipment.
Venturing into new markets or Product lines.
At the point when current Supplier have lacking capacity.
Step 2: Identify key purchasing/sourcing requirements:
What are our internal requirements in quality?
Cycle time.
Cost.
Technology.
Responsiveness.
Delivery.
Design support.
Step 3: Determine appropriate sourcing strategy:
No single strategy will satisfy the requirements of every purchase requirement.
Firms often develop strategies around commodities using a portfolio analysis approach (to be
presented later).
Various purchasing strategy considerations exist.

 Single versus multiple suppliers

 Number of suppliers to maintain in the supply base
 Domestic versus foreign
 Short-term versus longer-term purchase contracts
 Full-service suppliers versus non full-service suppliers
 Potential collaborative relationships versus traditional relationship
 Sources of power

Step 4: Identify potential supply sources:

How well existing Supplier can fulfill cost, quality, and additionally other execution objectives.
Vital significance of procurement requirement.
Specialized multifaceted nature of procurement requirement.
Step 5: Limit suppliers in selection pool:
Purchasers often perform a first cut or preliminary evaluation of potential suppliers to narrow
the list.
Time and resources prohibit in-depth evaluation of all suppliers.
Methods to reduce suppliers in the pool.
  Financial risk analysis (discussed later).
 Evaluation of previous performance.
 Evaluation of supplier provided information.

Step 6: Determine method of supplier evaluation:

Major ways to evaluate suppliers:

 From supplier-provided information (bids or product samples).

 On-site supplier visits.
 Use of preferred supplier lists.
 Current supplier scorecards.
 Internal customer surveys.
 Combination of above methods.

Cross-functional teams often evaluate suppliers directly through on-site visits.

Possible areas to evaluate during a supplier visit:

 Cost structure.
 Delivery performance.
 Quality systems and performance.
 Management capability.
 Workforce capability.
 Supplier agility and flexibility.
 Supplier’s supply chain management capabilities.

Possible areas to evaluate during a supplier visit:

 Process and technological capability.

 Environmental compliance.
 Financial capability and stability.
 Information systems capability.
 Production scheduling and control systems.
 Longer-term relationship potential.
 Supplier’s supply chain management capabilities.
 Capacity.
 Other.

Step 7: Make supplier selection decision:

Activities associated with this step vary depending on the purchase requirement.
Routine items may simply require notifying the supplier and awarding a purchase contract or
blanket order.
Other selection issues.

 Size relationship
 Distance
 Competitors as suppliers
 Countertrade requirements
 Corporate social objectives