Having grown sufficiently, you may find your SME business now has the need for a dedicated purchasing manager – and perhaps even a purchasing department. And while this is an exciting step, we understand it can also be a tad overwhelming.
So if you’re a business owner who is wondering how to run a purchasing department, then check out our practical guide below. We’ll cover:
- The role of a purchasing department
- Goals of purchasing
- 6 steps in the purchasing process
- How to set up a purchasing department
- What to look for in a purchasing manager
- Purchasing software
What is the role of a purchasing department?
The role of a purchasing department is varied, as it can depend on the type of business you have, but most of them cover these common tasks:
- Strategic and operational purchasing
- Ordering, managing stock and inventory
- Liaising with suppliers and negotiating with new suppliers
- Adhering to budgets and performing needs analysis
- Creating procurement policies and procedures
- Product compliance and quality control
- Coordinating deliveries
- Managing storage facilities and warehouse operations
Before you consider setting up a purchasing department, you may be wondering what would necessitate the need for one. And aside from the glaring — that it is beginning to dominate your working hours – there are eight other reasons that might signal it’s time to establish an assigned purchasing manager.
- Your business is growing
- The expenses of your business are rising
- Employee numbers are increasing and/or new locations for the business
- Time is limited when it comes to sourcing, tendering and negotiating with suppliers
- Contract renewals occur automatically without a review policy in place
- Limitations in the business due to lack of product supply
- Stock isn’t being managed correctly – leading to significant cost issues
- There’s no analysis for spending
So if you recognise some (or all?) of the above points – and it’s starting to ring alarm bells – here’s the next steps to think about on your journey to establishing a purchasing department.
Don’t miss these eight red flags or you risk straining your bottom line
What are the goals of purchasing?
One of the first things to uncover when putting processes in place for purchasing is to understand the goals you’re aiming to achieve. That way everything which follows will be aligned to meeting those goals.
So, if you’re not quite sure, here are a few places to start:
1. Lower costs
With a dedicated purchasing manager or department, they will be able to pursue any number of cost reductions. However it isn’t necessarily about getting the lowest price on products and services – this also includes negotiating better terms, building relationships to receive loyalty discounts and also helping your business to have greater transparency of where it spends its money.
2. Secure the supply chain
The last year and a half has taught us a lot, including how easily a supply chain can break and the flow-on effects from that. By maintaining stock security of the products you require for your business, you will be able to minimise risk when it comes to manufacturing and/or delivery to customers.
3. Meet budgetary requirements
The responsibility of purchasing is built on the foundation of adhering to business budgets, which probably makes it the gold standard of goals for the purchasing department.
4. Quality control & deliverables
Depending on your business, quality control may play a huge part in your success. So setting standards, monitoring compliance and establishing performance levels is crucial. And this could also include maintaining timely delivery of the products and/or services – another important link in the supply chain.
5. Research & development
By forming relationships with key suppliers, the purchasing department has the potential to assist with innovation for your business, as well as help gain a competitive advantage over others in the industry through better pricing, quality or consumer satisfaction of the product and/or service.
6. Source the right technology
There are a lot of options out there when it comes to IT in businesses and a purchasing department will be able to choose the best fit to help save you time and money, as well as continue to monitor and adopt the right technology as requirements change.
Again, needs and goals will differ depending on the type of business and industry you’re in, but what’s vital is ensuring your strategic management objectives are closely linked to the goals of your purchasing department (and vice versa) – as neither of these operate in isolation.
What are the major steps in the purchasing process?
There are six major steps in the purchasing process – however, you may find your business requires one or two in addition, or the below will be in a slightly different order, depending on what it is you produce and sell.
- Identify a need
- Review requests
- Select a supplier
- Order using a purchase order
- Fulfilment and delivery
- Make payment
1. Identify a need
This is rather self-explanatory, but still an important step to start with. There are many different needs a business has, from simple operational requests, such as a renewal for software – to the more complex, like the procurement of parts in order to manufacture a new product. At this stage, it is also a good idea to be clear on quantities required, time frame and where products need to be delivered to.
2. Review the request
Once a purchase order has been requested, the purchasing manager will review it and ensure there is budget availability. It may also be necessary to communicate with various other managers to check whether the need for procurement is vital for business operations. If the purchase order is approved, it then turns into PO with a corresponding number for account and processing purposes.
3. Select a supplier
The next step is to acquire the product or service through a supplier. If there are already arrangements in place, this is pretty straight forward. But if the PO requires engagement with a new supplier, your business will need to request a quote, or put out a bid for tender. It’s best practice to review at least three potential suppliers, comparing things such as price, delivery time and reputation.
In some businesses, it is the department or individual making the request who liaises with the suppliers for information. In others, it is the role of the purchasing manager/department to go through this process.
4. Finalise PO
Once the PO has been approved and the supplier has been chosen, an order request will be sent through to the supplier to inform them of the intent to purchase. This may be done electronically, or manually with appropriate paperwork.
The supplier then fulfils the order, delivering it to the requested address by the deadline that was agreed in step 3. Here it is important for whoever is receiving the goods or services to check that the order is in full and that it’s what was stipulated by the supplier – in terms of quantity, quality etc. If any discrepancies, this is when issues need to be raised.
6. Make payment
Once the goods/services have been received and accepted, the supplier will send an invoice so payment can be made and the transaction can be complete.
It’s important to note that these steps could vary depending on what side of the business the purchasing falls under. This is because procurement can be separated into two functions – strategic and operational – with the operational side broken down into three sub-functions, direct, indirect and service procurement.
In a smaller business, these distinctions may not be as obvious. Basically, the strategic side is about focusing on the needs and objectives of the organisation, with responsibility for the high-level decision making. And operational is the day-to-day administration of the purchasing department – processing orders, receiving stock and handling invoices.
Direct procurement relates to raw materials required for manufacture and goods for production, indirect relates to the daily operations of a business – such as printers and office supplies – and service procurement relates to engaging the services of another business to assist with things such as recruitment, advertising, research or IT.
How do you setup a purchasing department
Creating a purchasing department is just like setting up any other part of your business – it requires planning, strategy and processes. Here are some of the things you need to include:
- Assign those in the business who can make purchases, sign PO’s, approve business expenditure and set limits for various requirements. Centralise all purchasing and structure budget controls and spend management.
- Establish policies and procedures for the purchasing department – consider including an operational flowchart to assist with the decision-making process.
- Select supply chain management and/or purchasing management software.
- Set up a purchase order system to allow authorisation and tracking of expenditure.
- Create a ‘receiving department’ with a process for receiving products with a PO.
- Lay the foundations for maintaining accurate inventory levels, as well as scheduling purchasing if required.
- Establish a preferred vendor list based on key selection criteria.
- Develop a risk management strategy.
- Allocate adequate resources to the department, or plan to when it reaches a nominated milestone.
- Align business goals with measurable metrics of the purchasing department.
Once your purchasing department is in place, there will always be ways you can improve and build on its capabilities – delivering greater value for your business and maximising cost savings.
What to look for in a purchasing manager
When looking for a purchasing manager to take on the responsibility of procurement for your business, you’re ideally after someone who has experience and knowledge of the supply chain and how it works. They need to possess skills such as being able to research the market, have a confident negotiating ability, be good with numbers and the basics of accounting, able to methodically follow processes and can use their initiative to make the right decisions. You also want them to be capable of building solid relationships, communicate effectively, manage staff and maintain a high level of organisation in their department.
Unleashed Software’s BI module helps purchasing managers keep track of their POs and drive costs down
Here’s the golden rule of how to set up and run a purchasing department – throw out the paperwork. Burn it, shred it — we don’t care. Just don’t rely on physical paper as part of your process. We live in a day and age where technology can make our lives so much easier, stress-free and straightforward. Unleashed Software and other inventory management apps help manage procurement process. Most good inventory management software and purchasing management software will allow you to create purchase orders, add costs, manage supplier returns, receipt part purchases and more.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.