The Basics of Procurement, Explained in 11 Questions

Everything You Need to Know About Procurement, in 11 Questions

Jeremy Francis

March 22nd, 2019 Procurement Process  

If you’re looking for a quick primer on all things procurement, this set of common questions should help you out.
Through these questions, we’ll tackle all the essentials of procurement. You can develop a strong foundation for the practical aspects of purchasing for a business.

Question 1: What is procurement?

The term ‘procurement’ covers all strategies, guidelines, and protocols controlling the act of buying goods or services for a business. This concept covers everything from the initial purchase planning all the way to the final approval of payment.

Question 2: What’s the difference between purchasing and procurement?

Purchasing involves the act of buying goods or a service, while procurement is a superset which covers purchasing as well as the policies that control purchasing.

Procurement covers buying and receiving payment too, but it also includes other steps like vendor selection, processing POs (purchase orders), and more.

Know more about the differences between purchasing and procurement

Question 3: What is a purchase order?

A crucial part of the entire procure-to-pay cycle, purchase orders are agreements that authorize a purchase transaction. Once the seller accepts a PO, it becomes a legally binding contract. It is issued by a buyer to a vendor, and includes details like the type of product/service being purchased, the quantity, and the agreed-upon prices of the same.

Know more about a purchase order process

Question 4: What’s the difference between purchase orders and purchase requisitions?

Purchase orders are issued after the purchase has been approved, while purchase requisitions are generated for the sole purpose of obtaining this approval.

Here’s an example. Someone might raise a purchase request to their finance department to buy a printer, to replace a broken one. A purchase order is what the organization sends the printer vendor to seal the agreement, establishing the number of printers, the make, and the price that was agreed upon between the organization and the vendor.

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Question 5: What are the types of purchase orders?

  1. Standard purchase orders are the most common type, and is used when all the details (item type, make, quantity, price, delivery schedule) are known.
  2. Contract purchase orders are for a specific period of time, but the other details may change within this period. The buyer sends the vendor a contract PO for a year, for instance.
  3. Blanket purchase orders are used to order a specific item, with no delivery schedule or An organization may send a blanket PO to a paper vendor, who will send paper as and when required. The product remains the same, while delivery and quantities are based on requirements.
  4. Planned purchase orders are used when the item, quantity, and pricing are known, while delivery dates aren’t predictable. The only difference between blanket POs and planned POs is that the latter deals with a known quantity.

Question 6: How do I keep track of purchase orders?

The traditional way is to track email threads and spreadsheets to access that information. The traditional way is ineffectual, and not a great choice today.

You can use an automated system like Kissflow. It lets business users generate POs and keep track of them, and automatically routes them to the right team member. You can also access any PO that has been serviced already, is currently in progress, or has been rejected.

Your handbook to purchase order tracking is available here.

Question 7: Do small businesses need a purchase order system?

Absolutely.

In a small- to medium-sized business, team members often wear multiple hats. Your CEO may take charge of approving POs beyond a certain monetary value, and someone from HR might be in charge of sending PO emails to vendors.

Chaos threatens to break out when certain team members are unavailable, or when the number of POs increases beyond a handful each month. This is when your business ends up in desperate need of a competent PO management system.

Here are 3 great reasons why SMBs need a PO system:

  • By eliminating paperwork, you reduce operational costs
  • Tools like Kissflow offer complete transparency: every stakeholder understands how PO process is executed, and has access to the status of any PO they need
  • You can ensure that purchasing activities in your organization stay within legal guidelines

Do not deprive your business of a solution that offers such a great impact on such a crucial procurement function. To know more about implementing a purchase order system for your small business with Kissflow, check out this article.

Question 8: How does purchase order approval work?

It starts with an executive raising a purchase request. Once this purchase requisition is approved by someone in the company who makes this decision, a purchase order is raised. Then, a team member will approve the purchase order itself after verifying the details it includes.

In the next step, the vendor sends the company the goods or service requested, along with a ‘goods receipt’ and an invoice. Once the initiator is happy with the service or product that was delivered, they sign the goods receipt.

Then, something called three-way matching happens: the purchase order, goods receipt, and invoice are all checked against each other. If all three documents match, the invoice is approved.

Know more about a purchase order approval process

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Question 9: Why do we need an electronic purchase order system, instead of a paper- or email-based PO system?

A paper-based system bogs you down with reams of paperwork; retrieving a backdated purchase order can be nigh impossible. A digital email-based PO system aims to simplify this, but fails when email threads get bulkier as they are likely to do, and when someone misses an email notification.

The electronic PO system addresses these issues, making PO processing impervious to error and bringing in transparency and seamless retrieval of data.

Question 10: What is a procure-to-pay process?

The procure-to-pay process is a series of tasks that starts when a purchase request is raised, to when payments are made and accounting records are updated.

Typically, these are the steps that take place:

  • Purchase request gets raised, specifying the items needed, and as many details regarding the item as are available
  • A vendor is picked from a list, using RFPs (Requests For Proposals) to get bids from vendors, and based on certain other factors like vendor relationship, freight costs, and insurance coverage.
  • The purchase order is raised, approved, and sent to the vendor.
  • A goods receipt is signed once the goods/service has been delivered.
  • Three-way matching happens between the PO, goods receipt document, and the invoice.
  • Invoices are cleared, payments are made and recorded into accounting systems.

Here you go to know more about a procure-to-pay process.

Question 11: Is it secure to store POs on the cloud?

Yes.

On-premise solutions are more prone to web application-based attacks–61.4 instances per year, as opposed to cloud computing’s 27.8 in a study of 70,000 attacks. On-premise solutions also need manual updates to security protocol, while cloud solutions automatically get updated by the provider.

These 11 questions might not cover every last detail about procurement, but you should have a pretty solid foundation of knowledge by now! For more information on procurement-related matters, head to our more detailed blog here.

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