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Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.
Purchasing is part of the wider procurement process, which typically also includes expediting, supplier quality, transportation, and logistics.
Purchasing managers/directors, procurement managers/directors, or staff based in an organization's purchasing office,Keene State College, Purchasing Manual: 1.1 Introductory Letter from the Purchasing Office, updated 30 October 2017, accessed 24 May 2023 guide the organization's Procurement procedures and standards and operational purchasing activities.
Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process. The three departments do not all report to the same senior manager, to prevent Marketing ethics and lend credibility to the process. These departments can be purchasing, receiving and accounts payable; or engineering, purchasing and accounts payable; or a plant manager, purchasing and accounts payable. Combinations can vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved. Organizations typically have simpler procedures in place for low value purchasing, for example the UK's Ministry of Defence has a separate internal policy for low value purchasing valued below £10,000.United Kingdom Ministry of Defence, The Ministry of Defence Procurement process, updated 15 February 2021, accessed 10 February 2023 When the receiving department is not involved, it is typically called a two-way check or two-way purchase order. In this situation, the purchasing department issues the purchase order receipt not required. When an invoice arrives against the order, the accounts payable department will then go directly to the requestor of the purchase order to verify that the goods or services were received. This is typically what is done for goods and services that will bypass the receiving department. A few examples are software delivered electronically, NRE work (non-reoccurring engineering services), consulting hours, etc.
Historically, the purchasing department issued for supplies, services, equipment, and . Then, in an effort to decrease the administrative costs associated with the repetitive ordering of basic Consumables, "blanket" or "master" agreements were put into place. These types of agreements typically have a longer duration and increased scope to maximize the quantities of scale concept. When additional supplies were required, a simple release would be issued to the supplier to provide the goods or services.
Another method of decreasing administrative costs associated with repetitive contracts for common material, is the use of company credit cards, also known as "" or simply "P-Cards". P-card programs vary, but all of them have internal checks and audits to ensure appropriate use. Purchasing managers realized once contracts for the low dollar value consumables are in place, procurement can take a smaller role in the operation and use of the contracts. There is still oversight in the forms of and monthly statement reviews, but most of their time is now available to negotiate major purchases and setting up of other long-term contracts. These contracts are typically renewable annually.
This trend away from the daily procurement function (tactical purchasing) resulted in several changes in the industry. The first was the reduction of personnel: purchasing departments were now smaller. There was no need for the army of clerks processing orders for individual parts as in the past. Another change was the focus on negotiating contracts and procurement of large capital equipment. Both of these functions permitted purchasing departments to make the biggest financial contribution to the organization. A new term and a new job title emerged, strategic sourcing and Sourcing Manager. These professionals not only focused on the bidding process and negotiating with Supply chain, but the entire supply function. In these roles they were able to add value and maximize savings for organizations. This value was manifested in lower inventories, fewer personnel, and getting the end product to the consumer quicker. Purchasing managers' success in these roles resulted in new assignments outside to the traditional purchasing function – logistics, materials management, distribution, and warehousing. More and more purchasing managers were becoming Supply Chain Managers handling additional functions of their organization's operation. Purchasing managers were not the only ones to become Supply Chain Managers. Logistic managers, material managers, distribution managers, etc. all rose to the broader function and some had responsibility for the purchasing functions now.
In accounting, purchases is the amount of goods a company bought throughout this year. It also refers to information as to the kind, quality, quantity, and cost of goods bought that should be maintained. They are added to inventory. Purchases are offset by purchase discounts and Purchase Returns and Allowances. When it should be added depends on the Free On Board (FOB) policy of the trade. For the purchaser, this new inventory is added on shipment if the policy was FOB shipping point, and the seller remove this item from its inventory. On the other hand, the purchaser added this inventory on receipt if the policy was FOB destination, and the seller remove this item from its inventory when it was delivered.
Goods bought for purposes other than direct selling, such as for research and development, are added to inventory and allocated to Research and Development expense as they are used. On a side note, equipment bought for research and development is not added to inventory, but is capitalized as .
The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and would proceed through a lengthy period of technology maturation, while a system based on mature and proven technologies might enter directly into engineering development or, conceivably, even production. The process itself includes four phases of development:
Other organizations might have Minority group procurement goals to consider in selection of bidders. Organizations identify goals in the use of woman-owned or minority-owned businesses. Significant utilizing of minority suppliers may qualify the firm as a potential bidder for a contract with a company or governmental entity looking to increase their minority supplier programs.
This selection process can include or exclude international suppliers depending on organizational goals and criteria. Companies looking to increase their pacific rim supplier base may exclude suppliers from the Americas, Europe, and Australia. Other organizations may be looking to purchase domestically to ensure a quicker response to orders as well as easier collaboration on design and production.
Organizational goals will dictate the criteria for the selection process of bidders. It is also possible that the product or service being procured is so specialized that the number of bidders are limited and the criteria must be very wide to permit competition. If only one firm can meet the specifications for the product then the purchasing managers must consider utilizing a "Sole Source" option or work with engineering to broaden the specifications if the project will permit alteration in the specifications. The sole source option is the part of the selection of bidders that acknowledges there is sometimes only one reasonable supplier for some services or products. This can be because of the limited applications for the product cannot support more than one manufacturer, proximity of the service provided, or the products are newly designed or invented and competition is not yet available.
Most bid processes are multi-tiered. Acquisitions under a specified dollar amount can be "user discretion" permitting the request or to choose who ever they want. This level can be as low as $100 or as high as $10,000 depending on the organization. The rationale is the savings realized by processing these request the same as expensive items is minimal and does not justify the time and expense. Purchasing departments watch for abuses of the user discretion privilege. Acquisitions in a mid range can be processed with a slightly more formal process. This process may involve the user providing quotes from three separate suppliers. Purchasing may be asked or required to obtain the quotes. The formal bid process starts as low as $10,000 or as high as $100,000 depending on the organization. The bid usually involves a specific form the bidder fills out and must be returned by a specified deadline. Depending on the product being purchased and the organization the bid may specify a weighted evaluation criterion. Other bids would be evaluated at the discretion of purchasing or the end users. Some bids could be evaluated by a cross-functional committee. Other bids may be evaluated by the end user or the buyer in purchasing. Especially in small, private firms the bidders could be evaluated on criteria or factors that have little if anything to do with the actual bid. Examples of these factors are history of the bidder with the company, history of the bidder with the company's senior management at other firms, and bidder's breadth of products.
Technical evaluation is usually carried out against a set of pre-determined technical evaluation criteria. There are two types of criteria, general criteria (whereby scores are given if they are met) and essential criteria (failing of which shall render the bid technically disqualified).
The manufacturing location is taken into consideration during the evaluation stage primarily to calculate for Cargo costs, but also to take account of regional issues: for example, it is common in Europe for factories to close during the month of August for a summer holiday. The Economist magazine, Why Europeans slack off in August, published on 25 August 2017, accessed on 31 August 2025 Labor agreements may also be taken into consideration and may be drawn into the evaluation if the particular region is known to have frequent labor disputes.
The manufacturing lead-time is the time from the placement of the order (or time final drawings are submitted by the buyer to the seller) until the goods are manufactured and prepared for delivery. Lead-times vary by product and can range from several days to years.
Transportation time is evaluated while comparing the delivery of goods to the buyer's required use-date. If goods are shipped from a remote port, with infrequent vessel transportation, the transportation time could exceed the schedule and adjustments would need to be made.
Delivery Charges - the charge for the goods to be delivered to a stated point.
Good negotiators, those with high levels of documented "cost savings", receive a premium within the industry relative to their compensation. Depending on the employment agreement between the buyer and the employer, buyer's cost savings can result in the creation of value to the business, and may result in a flat-rate bonus, or a percentage payout to the purchasing agent of the documented cost savings.
Purchasing departments, while they can be considered as a support function of the key business, are actually revenue generating departments. For example, if the company needs to buy US$30 million of widgets and the purchasing department secures the widgets for $25M, the purchasing department would have saved the company $5M. That saving could exceed the annual budget of the department, which in effect would pay the department's overhead - the employee's salaries, computers, office space, etc.
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