Typically, many sole proprietorships and small businesses do not have robust purchasing policies in place. While this may allow for proper functionality, growth of your business makes it imperative to have some sort of purchasing policy in place. Unfortunately, because purchasing policies impact so many different aspects of a business and can be a bit complicated to institute, it sometimes gets pushed aside or forgotten.
Importance of Purchasing Policies
Taking the time to define a purchasing policy can be extremely beneficial to midsize and large companies. At its core, the purchasing policy needs to set clear, definitive and transparent rules for purchasing products, equipment or services. The more your company grows, the more important this will be.
For example, if you have more than one location and no firm purchasing policy in place, each site will likely come up with its own method. Having your locations working as independent entities makes it extremely complex to consolidate their policies into one cohesive company policy. This can also make accounting difficult.
A purchasing policy also sets up acceptable behavior when it comes to interacting with vendors and procurement processes. Without a dedicated policy, you run the risk of encountering conflicts of interest, such as someone buying from his significant other regardless of the company’s best interest. Without this policy, there also isn’t a well-defined way to handle kick backs or bribes from vendors.
Purchasing Policy for a Small Business
Perhaps you are looking to build a purchasing department. If that is the case, having a firm policy will help you get the most out of that department. By defining the role of your procurement department and the policies under which it works, you will be able to share that information with the rest of your company.
Procurement or purchasing departments should also establish the standard purchasing process for the company. This standard policy should be in place for all of your locations. The policy should also include the use of your point-of-sale system.
A good purchasing policy isn’t effective only internally — strong purchasing policies will provide a standard for interaction with suppliers who work with your company. These purchasing policy examples will also keep vendors from approaching your company in a way that doesn’t work for you. What behaviors from vendors would you find unacceptable? Purchasing policies outline how a vendor can reach out and what methods your company finds acceptable for communication.
What Is a Purchasing Policy?
When you break down all of the things a purchasing policy does, you will find that four primary areas should form the base of your purchasing policy:
- Guidance for Employees: Your employees need to know your standards when it comes to requesting and making purchases. That includes things like preferred vendors, price points and how to handle and work with vendors who are not yet approved.
- Acceptable Behavior: Purchasing policies should also have clear examples of what is acceptable for your company. This includes how to handle conflicts of interest, vendor interaction and defined communication parameters.
- Purchasing Engagement: Without a good purchasing policy, you won’t have defined purchasing engagement policies. Engagement is about how the company works internally and how your company deals with outside interests.
- Universal External Engagement Policies: What is acceptable for your employees to do when they are working with those outside interests? How do you want your purchasing department to be handled when dealing with a new vendor or new project?
Keep Purchasing Plans Simple
When writing a purchasing plan, try to avoid overcomplicating things. The easier something is to follow, the easier it is to implement. This means that you should use plain, simple language that nearly everyone can understand.
Simplicity also means that your policy should only be as long as it needs to be. If you have over 10 pages of policy, most of your employees will not read it. Having a general employee read the policy as you are making it can go a long way toward ensuring that your policy is understandable to the company as a whole.
Distributing Purchasing Plans
Once your plan has been written, give employees access to a crib sheet that has all of the important highlights they will need. A chart can also help a new employee to work independently with purchasing and will save your senior employees the time of answering simple questions.
On your crib sheet, you should have the phone numbers of key purchasing employees, a template for creating purchase orders and any other important details. This sheet should be as easy to read as possible and be able to be quickly scanned for information.
Another great way to help your employees visualize what they are doing and why the policy must be implemented is to provide real-life company examples. Define the policy in simple “what, where, who and why” language. Once employees grasp your intent, they are more likely to focus on following the policy as best as they can.
Procurement Policies and Procedures
The main focus of any procurement policies and procedures is to simplify and streamline your purchasing system. While every industry and company are different, there are a few basic policies and procedures that everyone should have. These include a variety of policies surrounding vendor onboarding.
Vendor Onboarding Basics
How do you intend to set up your new vendors in your system? This is an important aspect of your purchasing plan. Depending on your industry, a vendor onboarding document could require license numbers, states in which a vendor can work, addresses, points of contact, phone numbers and any other information that your employees would need to effectively communicate with the vendor. These templates should be standard and required intake documents across all of your locations.
What sort of communication do you want with a vendor? This is highly dependent on your industry. In most cases, companies prefer email; however, some prefer orders to be faxed. In all cases, there should also be a process outlined for speaking with employees on the phone.
Where do you want communication directed, and where are your focus areas with this vendor? You should also have an easy-to-scan chart that outlines where communication to and from the vendor can be sent. Some vendors have different departments for new customers, making new orders and dealing with old orders, and you may have a specific agent whom you need to contact.
Timelines and Vendors
When do you need to contact this vendor? Timelines are extremely important to almost every business. Sometimes, vendors — particularly small, niche vendors — need time to make or attain the item or product that you have requested. If you are aware that it takes six months to get an item from vendor A, then you have a good idea of when to place an order and how low your inventory needs to be when you order.
Deciding Which Vendors to Use
Why are you using a particular vendor? There are many times when thorough research might reveal a cheaper vendor or one who can more quickly fulfill your needs than your current vendor. When purchasing department employees encounter this sort of information, it is important for them to note it. There may be instances where a switch is therefore recommended, or you may be working with a vendor for a particular reason, like a group discount, stable relationships or tied stakeholder interest.
Having careful purchasing department documentation that speaks to why certain vendors are being used can help to eliminate the illusion of underhanded behavior, which can be an extremely damaging issue. Being clear and direct within the purchasing department and the company as a whole should always be your policy unless you are dealing with an issue such as trade secrets that would be shared only on a need-to-know basis.
Without transparency, your employees could very logically think, “Vendor A costs more than vendor B, but I have been ordered to use vendor A. When I asked for an explanation, I was told, 'We use vendor A.' That didn’t explain things to me; I wonder why my company is hiding things?” While you are not necessarily hiding anything, a logical person will want to know the reason things don’t make sense to him. While you can’t ensure that all of your employees will feel loyalty and happiness when working for your company, you can take steps to avoid problems like these, such as proper documentation within the vendor procurement process.
The Five Objectives of Purchasing
Why does your company need to purchase products? The answer should be easy for you. If you can’t purchase raw components or products, you cannot manufacture and sell your products or services. There are five main objectives on which to focus when you are sourcing all of your vendors:
Quality as a Purchasing Objective
You need to purchase good quality materials to produce good quality products, and your customers deserve the best that you can give them. To find the best quality, you should sample items from a variety of vendors. To ensure that you continue to offer the best quality, you should continuously test out new products. The most effective way to do this varies by industry, but in general, revisiting suppliers once a year is a good benchmark.
Quantity as a Purchasing Objective
To find out the quantity you should be seeking to purchase, you need to determine your regular output. After that, you should note failure rates and return rates of your products. With this, you can determine how much backstock you will need. It is also important to know how much you need to order to obtain volume discounts.
Price as a Purchasing Objective
Getting your products at the correct price to ensure your company’s profit margins is important. Approved prices and attempts at saving money are common areas where miscommunication or confusion crop up surrounding purchasing orders.
Perhaps, for instance, your employee who wondered about vendor A was only buying one or two items. However, he might not be aware that when you buy in bulk, your savings against vendor B are substantial.
Time as a Purchasing Objective
Time is a critical aspect of the purchasing process because of price fluctuation. If you are purchasing plane tickets, for example, you need to know where the “sweet spot” is to get the best price. Purchasing for your company will likely require the same approach.
Source as a Purchasing Objective
In the past, where a product was sourced didn’t mean much to the public. However, ensuring that your source is ethical can earn you more customers now, and it may be important to your company’s moral compass regardless. Where you are getting your product may be just as important as the price.
Sourcing products can also affect other objectives. How long will it take for you to get your product? Are there customs fees? These questions should be part of your purchasing policy.
Writing a Purchasing Policy
Once you have all of the information that you need, writing your purchasing policy should be a fairly straightforward process. Remember that every company and every industry has a different set of values and relevant factors.
For instance, a purchase policy for a manufacturing company will look very different from a company that offers insurance sales. Be sure to brainstorm with your team before finalizing the policy to ensure nothing specific to your company has been overlooked.
- Centenary University: Purchasing Policies
- Loyola University New Orleans: Purchasing Policies + Procedures Manual
- ProcureDesk: Purchasing Policy - A Complete Guide
- PurchaseControl: Sample Procurement Policies & Procedures
- Grand Valley State University: Purchasing Policies and Procedures
- Keene State College: Purchasing Manual
- You may wish to have an attorney review any contract document before you sign it.
- Print policies on logo paper.
- Publicly-traded companies usually have strict conflict of interest policies. Consult an attorney if you are writing a purchasing policy for a public company.
Danielle Smyth is a writer and content marketer from upstate New York. She has been writing on business-related topics for nearly 10 years. She owns her own content marketing agency, Wordsmyth Creative Content Marketing (www.wordsmythcontent.com) and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent.