Purchasing Management: What it is, its benefits, importance, and process

Purchasing management is a crucial process in retail, since the efficiency of every activity in the purchase management process begins with the accuracy of the purchase decisions made.

Purchasing the right products in the right quantity at the right time and at the lowest cost contributes to improving a business's bottom line. That said, purchasing management is a vital function that requires a diverse skillset to handle multiple activities from planning to execution.

Table of Contents

• What is purchase management?
• Why is purchase management required?
• What are the processes in purchase management?
• Benefits of purchase management
• Best practices in purchase management
• How Gofrugal helps in efficient purchase management?
• Frequently asked questions

Definition of purchase management

Purchasing management involves procuring goods from suppliers to meet inventory and customer demand. Purchase management process includes receiving purchase requests, raising orders, receiving goods, clearing invoices, processing payments, and maintaining records.

Importance of purchase management

A streamlined purchase management process helps maintain optimized inventory and run your business efficiently without stock-outs. Below are a few functions of purchase management you can explore:

Guaranteeing availability of sufficient inventory

In retail businesses, continuous availability of items in racks is vital to ensure a smooth customer shopping experience. Process of purchase management should be done at the right time, and refilling should happen before items get stocked out to ensure racks are always filled with necessary items as per customer needs.

Ensuring raw materials are ready for production

In order to ensure demand for each variant of private labeled items is met at every store, production planning should be done efficiently. For that, bulk items should be purchased from suppliers in advance and less frequently, so the items are ready for transfer when needed.

Efficient maintenance of transactions

Purchase management system can be effective only when all the transactions are recorded and available to refer to in the future. Maintaining records of purchases helps track orders, deliveries, and material inwards. These purchase transactions tracked as reports help interpret past data and predict demand better.

Assuring transparency in purchases

Transparent purchase management process reduces confusion and miscommunication between different teams in a retail business. When purchases are documented transparently with a streamlined purchase management system, all team members are aware of where the money is spent, and it enables them to plan inventory, warehouse operations, refilling, transfers, and clearance sales with discounts or offers.

Purchasing required items at best price

The primary objective of the purchase team is to source and procure top-quality items at the best possible price during the purchase management process. This is possible only when information about multiple suppliers providing the item, previous purchase history, and purchase margins are known so you can make well-informed purchase decisions.

Meeting standards and statutory needs

The purchase management process involves a mutual agreement of payment and logistics terms, discounts, taxes, delivery dates, and other terms and conditions with suppliers. During conflicts with suppliers, recorded purchase transactions can help win arguments. Purchase management helps businesses meet the statutory needs of accounting and auditing, too.

Make the relevant data available to other teams

The purchase management team is interlinked with multiple teams like warehouse, finance, and sourcing. Therefore, it's necessary for them to have easy accessibility of purchase-related data to complete their operations. Such cross functional access to purchasing management information helps them review, analyze, and control data to make important decisions for the business.

Purchase management process: 6 essential steps

1. Receiving a purchase request

A purchase request with item details, specifications, purpose, and quantity is sent by the inventory or warehouse team to the purchase management team. This document will be verified and validated before raising an actual purchase order.

2. Creating a purchase order

Once a supplier is shortlisted and items to procure are finalized, a formal purchase order for the necessary items is raised with details like item descriptions, quantities, UOM, payment terms, expected delivery dates, freight charges, and agreed terms and conditions.

3. Approval of purchase order

In order to ensure a purchase doesn't exceed the budget, purchase orders are scrutinized by the purchase manager or business owner before being sent to suppliers. They have the freedom to approve completely, approve partially, suggest changes, or reject the purchase request considering the impact the purchase will make on the business.

4. Receipt and inspection of items

After the purchase order is raised from a purchase management system, the supplier gets the items ready, does the shipment, and delivers them at the store or warehouse. The purchasing management team inspects the delivered items for adherence to the specifications and quality standards, notes down any deviations, and processes the goods receipt note (GRN) to add the items to the available inventory.

5. Invoice approval

A copy of the invoice will be sent by email, post, or physically handed over along with the shipped items by the supplier. The purchasing management team compares items and their quantities in terms of ordered versus delivered; validates the value of the PO raised and invoice value; and discusses the quality, items and quantity mismatches, and payment adjustments with the supplier.

6. Processing payments

After the invoice approval, payment is initiated to the supplier as per the agreed terms and time to maintain a good relationship with the supplier. It marks the end of purchase management process. While making the payment, returns, refunds, and pending collections are considered and paid accordingly for accurate accounting and audit compliance.

Benefits of purchase management

Increased efficiency

Purchase management helps streamline the purchase process, eliminate human errors, and standardize routine tasks. Consolidated purchases with a comprehensive purchase management system help reduce the efforts, minimize planning time, assure faster execution, and improve purchase efficiency.

Reduced costs

Purchasing management reduces expenses for the business strategically through efficient negotiations, ordering with better gatekeeper margins, and getting a better price for bulk purchases. Operationally, purchase management aids in reducing waste, minimizing inventory carrying costs, avoiding duplicate purchases, and overlapping orders.

Improved compliance

Having a purchase management process ensures compliance with regulatory laws, quality standards, and ethical standards such as anti-bribery laws, shipping and packaging conditions, faulty or damaged item protection, compliance audits, theft protection, and audit trails.

Better decision-making

Tracking purchases efficiently through purchase history and insightful reports ensures only the right products are ordered, from the correct supplier, at the right time, and for the lowest price. It helps to delve further into stock movement, and make optimized purchases thereby avoiding stockouts as well as overstocking.

Better supplier control

A purchase management system allows businesses to manage multiple suppliers, monitor their service levels, provide feedback, and improve their performance. It helps to maintain and achieve the scheme targets and maintain better supplier relationships, assuring favorable pricing, better service, agreeable terms, and early access to new products.

Mitigating risk

Purchase management process helps businesses identify and mitigate risks linked to procurement, such as poor supplier performance, quality issues, supply chain disruptions, pricing hikes, and delayed deliveries by preparing contingency plans and expanding the supplier base.

Best practices in purchasing management

Define standard policies and procedures

Establish clear standard operating procedures and procurement policies as a part of purchase management process, and make them accessible to the entire purchasing management team to ensure a consistent purchase process, reduce risks, and enable a faster order generation for the processing cycle.

Finalize the purchasing power and cycle

Define budget limits for placing purchase orders based on the role and restrict excess spending by staff by having managers validate bulk purchases. Identify the supplier walk-in date, give orders as per the schedule, and streamline the purchase management process.

Analyze supplier performance regularly

Monitor purchase patterns, purchase margins, and supplier fulfillment rates to identify shortcomings early. Analyze reports and discuss poor service or item quality with suppliers to react and take actions quickly.

Centralize your purchase process

Source the demand from each store, make a central purchase order with the supplier, and receive and allocate stock centrally. This eliminates duplicate purchases, avoids overspending, reduces time, and improves productivity.

Implement smart and digital technologies

Adopt comprehensive purchase management software, mobile applications, and smart solutions to manage suppliers easily and simplify and streamline your purchases. Digital procurement management software reduces manual effort, minimize human errors, and mitigate risks.

Why is Gofrugal the best purchase management system?

Manage your purchase operations from anywhere

Enjoy the flexibility to raise purchase order, make goods receipt notes (GRN), and handle purchase returns from anywhere, at anytime through the mobile application for GRN. Allow your staff to make parcel entries at anytime from the mobile app, and convert them into GRNs later easily.

Experience three-way matching

Validate if a purchase order is raised correctly with the required items to the correct supplier; while making GRN of delivered items compare the items and quantities in the PO; and during invoice processing ensure payment is only made for received items. This three-way matching ensures strict control over all purchase operations.

Instant purchase return from the purchase

When there are damaged or expired items during delivery, purchase returns for all such items are done instantly and automatically by the POS. While making purchase entries, the inventory of damaged goods is marked in a separate column, and on submission of purchase entries, purchase returns are raised automatically for damaged items.

Handle purchases centrally

The auto indent option ensures requirements for each store are raised individually to the headquarters when stock reaches a minimum level. Classify items based on stock movement as put away or flow through, consolidate requirements from all the stores, and raise purchase orders centrally. Handle purchases and sales for perishable items from respective stores.

Experience the power of autonomous reordering

Our AI/ML-based autonomous reordering solution, The Eye, enables you to raise purchase orders to suppliers with an 85% reduction in purchase planning and execution. Handle inventory efficiently and eliminate stockouts with intelligent boosts in purchases during festivals, events, and for seasonal items.

Frequently asked questions (FAQ)

What do you mean by purchasing management?

Purchasing management refers to the strategic process of procuring items from the supplier at the best possible price and at the right time to stock necessary items with sufficient inventory in order to meet customer demand. A purchase management process involves activities such as sourcing requests from staff, validating the need, selecting the best supplier, raising purchase orders, receiving items, clearing invoices, and processing payments.

What are the five principles of purchasing?

Purchase management is an art that requires careful consideration of various impacts and results that can occur in the future because of the decisions you make now. Purchase management requires an understanding of the basic principles of purchasing. These principles, commonly called the 5Rs of purchasing, are:

1. Right quality
The items should be in good condition with a longer shelf life for customers to use as needed. It should not get damaged or expire quickly as it will result in higher returns and poor customer feedback.

2. Right quantity
Either overstocking or understocking can result in poor inventory management. Purchasing the right quantity of items will help maintain sufficient inventory to meet customers' needs.

3. Right price
Purchasing is the first step in your business where you can save your costs and improve your bottom-line. Procuring from a supplier who offers the best possible price without compromising on the quality is very important.

4. Right time and place
Excessively ordering items even when there is no demand and transporting them wastes money. Remember, for each dormant item in your store, there is an increasing inventory carrying cost. To limit this, purchase the right items at the right time and receive them in the right place.

5. Right source
Supplier selection plays a key role in overall purchase management. Identify the supplier who provides the best price, agreeable terms, and on-time delivery. Provide feedback and change the supplier in case of poor supplier service.

What is PO and types of PO?

PO is the abbreviation of "purchase order." This is a legally binding document generated by the buyer consisting of details such as the item list, price, quantity, tax rates, delivery terms, terms and conditions, and more that are mutually agreed upon with the seller (supplier).

There are five types of purchase orders. They are:

1. Standard purchase order
2. Planned purchase order
3. Blanket purchase order
4. Contract purchase order
5. Digital purchase order

To learn more about types of purchase order templates and factors that make a good PO template, read our detailed blog on purchase order templates.

What is the difference between purchasing and procurement?

There is a vast difference between purchasing and procurement in terms of operation, the processes involved, goals, objectives, and more. Below are a few differences between purchasing and procurement:

What are the types of purchasing?

Centralized purchasing: In a centralized purchasing model, the inventory requirement from all outlets is accumulated in a central place, and only a single purchase order is raised to the supplier. Upon receipt of items, they are distributed to the outlets based on the requirements raised by respective outlets.

This model centralizes data, reduces manpower, and optimizes inventory, but takes longer than usual due to the multiple steps involved. This is useful for multi-outlet chain retail businesses that can use a common purchase team to handle all purchases.

Decentralized purchasing: Here, the purchase requests are raised to the suppliers directly from the individual outlets. The items are received at the outlet directly, and material inward is made against the order easily.

There will be a dedicated purchase team at each outlet to evaluate the stock level, understand the inventory needs, and raise purchase orders. This model can have excessive spend when compared to the previous model since staff can raise orders beyond the actual need. This model is useful in retail franchise businesses where operations are handled at the outlet-level individually.

Hybrid purchasing: In a hybrid purchasing model, the purchase requests are handled both at the outlet level as well as a centralized place based on the need. This model is more flexibility than the two previous models because the purchase team can decide on the kind of purchase they want to make based on the type of items needed and the timeline given.

What are the types of procurement?

There are four types of procurement. Companies can adopt any one of the procurement models based on their business type, requirements, and objectives.

1. Direct procurement
2. Indirect procurement
3. Goods procurement
4. Services procurement

To learn in detail about these different types of procurement, read our detailed blog on procurement.

Why is purchase management important?

Purchase management plays a key role in retail business as it provides the following benefits:

• Assures sufficient inventory
• Provides better supplier control
• Improves purchase decisions
• Increases transparency
• Ensures better compliance
• Mitigates supply chain risks
   

The overall business performance begins with the right purchase decisions. Efficient purchasing management enables you to run your business with minimum inventory, optimized resources, and yield maximum profits. Are you suffering from inaccurate and inefficient purchase management process? Get a personalized consultation now.