The Purchasing Cycle Explained

How much your company spends to do business, and how often, plays an
important role in your overall success. Transforming cash into goods and services,
the purchasing cycle is at the core of procurement and can have a major impact
on your productivity, competitiveness, and profitability.

Understanding your company’s purchasing cycle is the first step toward

optimizing it. With the help of technology and process improvements, you can
ensure your purchasing department is building value for your company while
reducing costs due to wasted time, energy, and resources.

What is the Purchasing Cycle?

The purchasing cycle—also called the procurement cycle or procure-to-pay
(P2P)—is the process by which you order, obtain, and pay for the goods and
services your business needs.

https://planergy.com/blog/purchasing-cycle/
1/8
 For companies of all sizes, from local small businesses to global megacorps, the
purchasing cycle begins with needs analysis and ends with payment and record
keeping. In between, they may generate a purchase order, pay for goods
directly, or invite tenders (also known as bids) to encourage more aggressive
and price-effective competition between suppliers wishing to fulfill a specific
need.

The Purchasing Cycle, Step By Step

For companies of all sizes, from local small businesses to global megacorps, the
purchasing cycle begins with needs analysis and ends with payment and record
keeping. In between, they may generate a purchase order, pay for goods directly,
or invite tenders (also known as bids) to encourage more aggressive and price-
effective competition between suppliers wishing to fulfill a specific need. Most
companies have a quirk or two, but in general the process follows a fairly
straightforward series of events:

1. Needs Analysis
This stage of the purchase cycle is dedicated to identifying the need to be
met, whether it’s a reorder, raw materials for a new product produced by
the company, or office supplies.

2. Needs Clarification
Once the need’s been identified, the variety (e.g., brand), amount
required, and delivery schedule need to be established.

https://planergy.com/blog/purchasing-cycle/
2/8
3. Purchase Requisition and/or Purchase Order
With the details settled, the requesting party has a couple of options.
Generally, those without the authority to approve direct purchase orders
will first create and submit a purchase requisition, which is an internal
document requesting that approved parties obtain goods and services.
Upon approval, the purchase requisition is used to create a purchase
order, which is the actual order sent to the supplier for the goods and
services required.

4. Authorization
The purchase order (generated from a purchase requisition or not) must
also be approved. The purchase order process benefits from automation
and artificial intelligence (AI), usually through the use of purchase order
software that’s part of a comprehensive procurement software package.

Not only does automation permit role assignments and automatic routing
and tracking of all purchase orders and approvals/rejections/revisions, but
it allows for real-time adjustments and transparent communication
between all parties involved. In addition, automatic reminders can be
created to ensure no PR or PO is left to languish.

5. Supplier Review
If you’ve already integrated an automated procurement solution into your
workflow, chances are the list of approved and available suppliers will
obviate this step in the process—especially for repeat orders. But if you’re
adding new products, or new suppliers for existing products to the
system, then each candidate must be reviewed for compliance,
performance, and reliability.

https://planergy.com/blog/purchasing-cycle/
3/8
6. Supplier Selection
At this stage, the purchaser chooses the supplier who’ll be filling the
order, either from the pre-vetted list in their software catalog or through
other means.

7. Price and Term Negotiations

This step is also made infinitely easier if your workflow is built around
procurement software automation. Centralized contract and document
management and information sharing means previously-negotiated
contract terms and best price are already available for each vendor on the
approved list. New vendors being added to the system will have this
information added as your legal team completes and certifies your
company’s agreement(s) with the vendor.

If your company doesn’t use automation, then your team will need to sit
down with the vendor to negotiate payment terms and conditions.

8. Order Placement
At this point, the buyer officially places the order and creates a binding
purchase agreement between your business and the vendor.

9. Receiving and Inspection

For material goods, arriving shipments are inspected for completeness
and integrity, with any shortages and broken goods marked to be credited
back to the buyer. The invoice is either included with the goods or sent
separately by the vendor.

Inventory management is either manually updated or handled

https://planergy.com/blog/purchasing-cycle/
4/8
 automatically by the procurement software, which links the shipping
documentation to the original purchase order, invoice, related
correspondence, and other documents for data analysis and auditing
purposes.

10. Payment
The invoice is reviewed for accuracy against the purchase order, invoice,
and other documentation. Depending on the terms established for the
supplier and the approval of the reviewing party, payment is issued
(usually within 30, 60, or 90 days).

11. Records Management

Businesses still using manual systems follow up by updating their
inventory totals and purchasing ledger. Purchasing software automates
this step, as documents are cross-connected and update automatically
across all departments.

What About Tenders?

The purchasing process when using tenders is very similar to the standard
purchasing cycle, with a few important changes:

1. Needs Analysis is much more narrowly defined at inception, and often

supported by a business case.
2. The Approval Process requires more review and may be granted by
departmental or even C-level management.
3. The Tender Process is used instead of the PR/PO model, and involves:
A very specific Request for Proposal (RFP), written to formally

https://planergy.com/blog/purchasing-cycle/
5/8
 outline the goods and services needed and request approval.
Tender invitations, which are posts made to the public (either
online or in print) inviting vendors to bid for the right to fulfill the
request.
Pre-Qualification Questionnaires (PQQs) are sent to each of the
most promising candidates to provide greater detail about their
capacity, history, and operations.
Tenders (i.e., bids) arrive from the pre-qualified candidates within
the specified period.
Each bid is reviewed, and the candidates interviewed to further
qualify them for consideration.
All valid tenders are carefully reviewed over the course of days or
even weeks. The winning bidder is granted the contract, based on
their credentials.
4. Negotiation brings the winning supplier and the buyer together to
hammer out the terms and conditions (in general, price is already locked
in during the tender process). The legal contract is formally awarded to
the bidder when negotiations conclude.
5. Contract Management is handled by the company’s procurement,
financial, and legal staff. During the management period, goods are
received and reviewed, and fulfillment of the required terms and
conditions verified.
6. Review, Approval, and Payment all rely on complete, accurate, and on-
time fulfillment of the contract. Any exceptions are noted and the buyer is
compensated according to the terms negotiated. Once the contract terms
are confirmed, payment is made and the relationship either ends, or the
supplier is added to the company’s vendor management system as a pre-
approved candidate for future tenders.
7. Records Management is identical to the standard procurement cycle.

https://planergy.com/blog/purchasing-cycle/
6/8
Take Control of Your Purchasing Cycle
Having mastered the purchase cycle, you’re ready to squeeze maximum value
from it. Combined with machine-learning-enabled software and automation,
formalizing your purchasing cycle lets you fine-tune all the stages of the
procurement process to reduce your workload, eliminate delays and errors, and
simplify everything from inventory to materials management to financial
forecasting.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts
payable
We’ve helped save billions of dollars for our clients through better spend
management, process automation in purchasing and finance, and reducing
financial risks. To discover how we can help grow your business:

Read our case studies, client success stories, and testimonials.

Visit our “Solutions” page to see the areas of your business we can help
improve to see if we’re a good fit for each other.
Learn about us, and our long history of helping companies just like yours.

Book a Live Demo

2. Download our guide “Indirect Spend Guide”

Download a free copy of our guide to better manage and make savings on your
indirect spend. You’ll also be subscribed to our email newsletter and notified
about new articles or if have something interesting to share.

https://planergy.com/blog/purchasing-cycle/
7/8
download a free copy of our guide

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools,
techniques, and best practices. Many readers tell us they would have paid
consultants for the advice in these articles.

Related Posts

https://planergy.com/blog/purchasing-cycle/
8/8