The purchasing process explained: Definition, steps, and best practices

The purchasing process is a structured sequence of steps that transforms a request for a business purchase into an approved transaction. Unlike ad hoc buying, where employees make purchases without oversight, a formal purchasing process creates accountability, controls costs, and ensures you get what you need when you need it.

What is the purchasing process?

The purchasing process is a standardized series of steps that a business takes when acquiring goods or services. It ensures proper approval, vendor selection, and payment, transforming random buying decisions into a controlled workflow.

Think of purchasing as the tactical execution of buying what your business needs. While individual employees might prefer the freedom of ad hoc purchasing, this approach leads to overspending, compliance issues, and missed volume discounts. A structured purchasing process creates consistency across your organization, whether you're buying laptops or legal services.

The purchasing process goes beyond simply approving transactions. It encompasses everything from identifying needs to evaluating supplier performance after delivery, creating a complete cycle that improves over time.

Key steps in the purchasing process

The step-by-step purchasing process creates a framework that guides every business transaction, from initial request to final payment. While specific details vary by company size and industry, these nine steps form the foundation of organizational buying:

1. Identify business needs

First, a team identifies a need for goods or services to support their operations. This might be a marketing team needing new software, maintenance requesting replacement parts, or HR requiring recruiting services.

The key is transforming vague requests into specific requirements. Instead of "we need new computers," the specification becomes "15 laptops with a minimum of 16GB RAM, 512GB SSD, and a 3-year warranty." Clear specifications prevent misunderstandings and ensure you get quotes for comparable products.

2. Submit a purchase requisition

A purchase requisition formalizes the request and starts the official purchasing process. This document captures essential information, including quantities needed, detailed specifications, suggested vendors, required delivery date, and budget allocation.

Purchase requisitions create accountability by documenting who requested what and why. They also give finance teams visibility into upcoming expenses before making formal commitments, helping prevent budget overruns.

3. Approve the purchase request

Clear approval workflows help route purchase requisitions to the right decision-makers based on the amount and type of purchase. A $500 office supply order might need only a department manager's approval, for example, while a $50,000 annual SaaS contract may require executive sign-off.

These approval hierarchies help companies control spending, ensuring purchases align with budgets and strategic priorities. Digital approval systems speed up this process by automatically routing requests and sending reminders to approvers.

4. Select the supplier

Supplier selection involves researching potential vendors, comparing offerings, and evaluating their ability to meet your requirements. For routine purchases, you might select from a pre-approved vendor list. Complex or high-value purchases often require formal procurement documents like requests for proposals (RFPs) or requests for quotes (RFQs).

Due diligence during supplier selection includes verifying business licenses, checking references, and assessing financial stability. You're not just buying a product; you're entering into a business relationship that could last years.

5. Negotiate terms

Negotiation extends beyond price to include payment terms, delivery schedules, warranty conditions, and service level agreements (SLAs). Even small improvements in terms can significantly impact your cash flow and operational efficiency.

Clear agreements prevent disputes later. Document all negotiated terms, including volume discounts, return policies, and penalties for late delivery. These details become part of your purchase order and protect both parties.

6. Issue a purchase order

A purchase order (PO) finalizes your terms, creating a legally binding commitment to buy. This document specifies exactly what you're purchasing, including detailed item descriptions, quantities, prices, delivery details, and payment terms.

POs protect your company by establishing clear expectations before goods or services are delivered. They also create a reference point for receiving, invoicing, and payment processes, reducing errors and disputes.

7. Receive goods and match documents

Receiving involves more than accepting delivery; it requires verifying that what arrived matches what you ordered. Quality inspection ensures products meet specifications, while quantity checks confirm you received the right amount.

Three-way matching compares the PO, receiving report, and supplier invoice to identify discrepancies before payment. This critical process catches errors like incorrect pricing, wrong quantities, or unauthorized additions that could cost thousands if left unchecked.

8. Approve and pay the supplier invoice

Invoice processing starts with verifying the invoice matches your purchase order and receiving documents. Once confirmed, the invoice is routed for approval based on the amount and type of expense.

Payment authorization follows approval, triggering the actual transfer of funds according to negotiated terms. Quick, accurate payment processing maintains good supplier relationships and often qualifies you for early payment discounts.

9. Review supplier performance

Performance evaluation closes the purchasing loop by assessing how well suppliers met their obligations. Track metrics like on-time delivery, product quality, and service responsiveness to identify your best vendors and those that need improvement.

Use supplier reviews to inform future purchasing decisions. Share feedback with vendors to strengthen relationships and address issues before they become problems. This continuous improvement approach benefits both parties over time.

Types of purchasing and when to use each

Different categories of purchases require tailored approaches based on their impact on your business operations and financial statements. Understanding these distinctions helps you apply the right level of control and oversight:

• Direct purchasing: Covers goods and materials that become part of your final product. For example, manufacturing companies buy raw materials and components through direct purchasing. Direct purchases typically involve long-term contracts with strategic suppliers. You need reliable delivery, consistent quality, and competitive pricing since these costs flow directly into your cost of goods sold (COGS).
• Indirect purchasing: Covers goods and services that support operations but don't appear in final products. Office supplies, janitorial services, IT equipment, and marketing services all fall into this category. Indirect purchasing represents a significant portion of most companies’ total spend, so controlling these purchases can have a significant impact on reducing overall costs.
• Services purchasing: Covers everything from consulting engagements to freelancers to outsourced functions like payroll processing. These purchases require different evaluation criteria since you're buying expertise and outcomes rather than physical products. Service contracts need clear scope definitions, measurable deliverables, and performance standards.
• Capital expenditures: Involve purchasing assets like machinery, vehicles, and technology infrastructure that you'll use for multiple years. These high-value purchases require extensive evaluation, including ROI analysis, depreciation considerations, and potential financing options. The approval process for capital purchases typically involves executive leadership and board oversight.

Purchasing process vs. procurement process

Purchasing and procurement often get used interchangeably, but they represent different scopes of activity. Purchasing is the transactional process of buying goods and services, while procurement encompasses the entire strategic approach for acquiring goods and services, from sourcing to contract management and ongoing relationship building.

Purchasing focuses on executing transactions efficiently. Procurement takes a broader view, including market research, supplier relationship management, and strategic sourcing initiatives.

Ultimately, both functions work together: Procurement develops strategies and relationships that purchasing executes through daily transactions.

Common purchasing challenges

Even well-designed purchasing processes encounter problems. Recognizing these issues early helps you deploy fixes before they become expensive habits.

Manual errors

Data entry mistakes plague manual purchasing processes. A mistyped quantity turns a $1,000 order into a $10,000 mistake. Calculation errors in spreadsheets lead to incorrect payments, while document mismatches cause processing delays.

Manual errors impact more than just accuracy. They damage supplier relationships when payments are wrong and create audit findings when documentation doesn't match. Each error requires time to investigate and correct, multiplying the original mistake's cost.

Approval delays

Bottlenecks in approval workflows can add days or weeks to your purchasing cycle. Common causes include unclear approval policies, absent approvers who don't delegate authority, and complex hierarchies that require multiple approvals.

These delays frustrate employees who need supplies to do their jobs and suppliers who are waiting for confirmed orders. Rush orders and expedited shipping fees often result when delayed approvals create a false sense of urgency.

Maverick spend

Maverick spending happens when employees bypass established purchasing processes to buy directly from suppliers. They might use personal credit cards, set up unauthorized vendor accounts, or split purchases to avoid approval thresholds.

This off-contract spending typically costs 15–20% more than negotiated rates. It also creates compliance risks, complicates expense tracking, and undermines your negotiating power with preferred suppliers.

Poor supplier data

Incomplete vendor information creates problems throughout the purchasing process. Missing tax IDs delay payments, outdated contracts lead to pricing disputes, and absent performance records make it impossible to identify problem suppliers.

These data quality issues compound over time. Duplicate vendor records split your spending history, making it harder to negotiate volume discounts, while inconsistent coding prevents accurate spend analysis.

Siloed systems

Disconnected tools force employees to enter the same information multiple times across different systems. These silos create information gaps where critical data gets lost between systems. Finance can't see pending purchases, purchasing can't access budget information, and nobody has a complete picture of supplier relationships.

Tips to streamline the purchasing process

Optimizing your purchasing operations doesn't require a complete overhaul. These practical improvements deliver quick wins while building toward long-term efficiency:

Automate approvals and 3-way match

Software automation routes purchase requisitions to the right approvers based on predefined rules, eliminating manual handoffs and email chains. Automatic escalation ensures requests don't sit in someone's inbox while they're on vacation.

Automated 3-way matching compares POs, receipts, and invoices without human intervention. The system flags only exceptions for review, allowing clean transactions to process immediately. This reduces processing time from days to minutes while improving accuracy.

Standardize purchasing policies

Clear, documented procedures eliminate confusion about how to buy different categories of goods and services. Define spending limits for each approval level, specify when competitive bids are required, and establish preferred supplier lists for common purchases.

Train all new employees on your purchasing policy to make sure they understand procedures, and hold regular refreshers for experienced staff. This helps ensure your team doesn’t develop workarounds that undermine controls.

Integrate purchasing with accounting software

Connected systems share data automatically, eliminating duplicate entry and ensuring consistency across platforms. When purchasing creates a PO, accounting immediately sees the commitment against budgets. When invoices arrive, they automatically match to open POs.

Integration provides real-time visibility into spending and commitments. Finance can see what's been ordered but not yet invoiced, helping them manage cash flow and accrue expenses accurately.

Track spend in real time

Continuous monitoring reveals spending patterns and problems as they happen, not months later in quarterly reports. Real-time dashboards show budget consumption, highlight unusual transactions, and identify opportunities for consolidation.

Analytics tools help you spot trends like increasing prices from specific suppliers or growing spend in categories that should be declining. This visibility enables proactive management rather than reactive firefighting.

Build strong supplier relationships

Schedule regular check-ins with key suppliers to cover topics like performance, business planning, and opportunities for joint initiatives. Share forecasts to help suppliers plan capacity, and provide feedback on what's working and what needs improvement.

Strong relationships pay dividends during disruptions. Suppliers prioritize customers they value when allocating scarce inventory. They're also more likely to offer favorable terms, share cost-saving ideas, and invest in meeting your specific needs.

Metrics to track purchasing effectiveness

Set up performance tracking to measure whether your purchasing process delivers real business value. Focus on metrics that drive outcomes rather than just operational efficiency:

• Cost savings: Calculate negotiated discounts, process improvements, and demand management benefits
• Cycle time: Measure days from requisition submission to goods receipt
• Compliance rate: Monitor percentage of purchases following established policies
• Supplier performance: Evaluate on-time delivery, quality scores, and service levels

Build a better purchasing process with Ramp

Ramp's finance operations platform offers solutions to help simplify and automate your purchasing process:

• Streamline purchase requests: Effortlessly intake procurement requests using AI that captures every detail, document, and contract immediately
• Centralize and automate spend management: Build custom intake forms and issue purchase orders or virtual cards from those approved requests
• Improve collaboration across teams: Centralize procurement discussions within Ramp to keep approval processes moving
• Accelerate approval cycles: Build automated approval workflows customized to fit your business processes and integrate seamlessly with the tools your team already uses

On top of that, Ramp’s accounting and ERP integrations mean no more duplicate data entry or reconciliation headaches. Every transaction flows seamlessly from purchase request to payment, with complete visibility at each step.

Ready to see how Ramp can transform your purchasing process? Try an interactive demo to learn more.