The procurement process in purchasing: ordering and delivery in practice

• Every ordering process follows a reference process: requisition, quotations if needed, order, order confirmation, delivery, goods receipt, invoice verification.
• Purchasing, the supplier, goods receipt, accounts payable and the warehouse are involved. Only their interplay ensures a smooth process.
• If the supplier is not yet known, purchasing first obtains quotations (request for proposal) and evaluates them.
• Automatic order proposals and EDI save manual work on both sides.

Ordering process and delivery process

The ordering process can run differently in every company. But it is always based on a fundamental reference process, and that reference process is what we want to look at more closely now. Depending on the complexity of procurement and the value of the materials, or the need for safety and quality (think aircraft construction), individual steps can be skipped or refined further.

First, it's important to know which parties are involved in carrying out the ordering process (cf. Kuhlang et al., 2010):

• the purchasing department
• the supplier
• goods receipt
• the invoice cost centre / accounts payable and
• the warehouse

Only good interplay between all these parties makes a smooth process possible.

The reference process

The process starts with a requisition. In other words, there is a specific requirement for an item in the company, and this requirement is to be met through external procurement.

We already looked at how a requirements analysis works in part 1 of this series. You'll find all the details in this video.

If the requirement has been reported and the supplier is already known, the order can be placed with the supplier directly.

Request for quotation and supplier quotation

If, however, the supplier is not yet known, it first has to be found and selected. To do this, requests for quotation (so-called RFPs, i.e. requests for proposals) are first sent to potential suppliers. They then prepare offers, which are sent back to you as a supplier quotation (a proposal). Purchasing now reviews and evaluates the suppliers' offers. The best offer wins, and the order can then be placed.

The order is created and sent to the supplier. This can be done traditionally by letter or email, or via Electronic Data Interchange (EDI for short).

Order confirmation

In the next step, the supplier processes the order and then sends an order confirmation back to purchasing. If the supplier's order confirmation matches the order from the purchasing department, a contract has already been concluded through the matching declarations of intent. However, it can happen that the supplier's order confirmation differs from purchasing's order, for example in the terms of payment or delivery. In that case, legal clarification is still needed.

After that, there may be another order confirmation from purchasing. Normally, though, this happens only rarely.

Production

The supplier then accepts the order and produces the goods ordered. When the goods are shipped from the warehouse, a delivery note is generated containing the essential information (the order, and how/which/how many items are being delivered). The delivery note usually contains no price information, because this is not needed to carry out goods receipt on the customer's side. Further documents can be attached to the delivery note, such as the invoice or a packing list recording which items in which quantities are contained in which packages.

Arrival at the customer

When the goods arrive at the customer, they are accepted and the so-called goods receipt inspection takes place. We'll look at exactly how goods receipt works in a later article.

If the goods are not OK, this has to be reported and clarified with the supplier, for example whether there should be a price reduction or a return of the goods.

If the goods are OK, a release confirmation can be issued to record this.

In a further step, purchasing posts the goods receipt in the ERP system. After that, it may still be necessary for the invoice cost centre to issue a putaway release before the receipt is posted and the item is physically put away in the warehouse.

If the invoice was not sent together with the delivery, the supplier sends the invoice to the customer after the delivery. The customer then matches the ordered, delivered and invoiced quantities and prices in the goods receipt/invoice receipt reconciliation. Finally, payment is made. If there are discrepancies between the delivered and the invoiced quantity, the supplier can, for example, issue the customer a credit note for the difference.

Now to practice: Lederhosen AG

Let's look at the whole thing using our fictional company, "Lederhosen AG". Lederhosen AG is a traditional mid-sized company that produces and sells traditional Alpine clothing such as lederhosen and dirndls. It has to supply its own shops as well as its online shop and retailers with products.

How has Lederhosen AG mapped its purchasing process?

At Lederhosen AG, the specific requirements result from a three-step inventory optimisation process run by the inventory optimisation system EazyStock.

The system forecasts the quantities needed in future from the available historical sales data and derives specific order proposals from them. In these cases, the supplier is already known and stored in Lederhosen AG's ERP system. This means that, after a brief internal approval, an order can be generated directly from the order proposals.

The generated order is then transmitted electronically to the supplier via Electronic Data Interchange (EDI for short). This saves manual working time not only on Lederhosen AG's side for printing and sending the order, but also on the supplier's side for typing the order into the system.

Since Lederhosen AG mainly works with long-standing suppliers, legal clarification of order confirmations is usually not necessary. The suppliers send the order confirmation on the same terms as already defined in the order. Since the step of an order confirmation from purchasing is omitted, the production phase already begins when the supplier sends the order confirmation.

As soon as the goods are ready for shipment to Lederhosen AG, the supplier's ERP system generates a delivery note, and the goods are packed and sent to Lederhosen AG.

When the goods arrive at Lederhosen AG, they are accepted in a central goods receipt, checked for correct quantities and quality against the delivery note, and also checked as to whether there was a corresponding order for this delivery.

If this check reveals problems, a corresponding report is created and the supplier is contacted about how to proceed, for example regarding a price reduction or a return of the goods.

If the check was OK, the goods receipt is posted in Lederhosen AG's ERP system, and the Warehouse Management module determines the storage bin in which the individual items are to be put away.