What is purchasing management
Purchasing management is the process that makes sure the plant receives the right material, in the right quantity, at the right time and at the lowest total cost, from the internal request through to paying the supplier. It is tracked with a few KPIs: savings, on-time-in-full (OTIF) delivery, emergency buys and payment terms.
Buying well is not the same as buying cheap. A low price with late delivery, defects or high freight costs more than an average price. That is why the function works with total cost, not just the invoice value. For the total cost calculation, see TCO in machine purchasing.
Purchasing management visual map
The map shows the steps from requisition to payment, the KPIs and the numerical example in this article.
The purchasing cycle: from requisition to payment
The basic cycle has six steps. In companies with an ERP, each step creates a document and a timestamp, so the time of each step can be measured. See industrial ERP to understand how the modules connect.
| Step | What happens | Document | Owner |
|---|---|---|---|
| 1. Requisition | The need is recorded with specification, quantity and date | Purchase requisition | Planning, maintenance, production |
| 2. Quotation | Price request to at least 3 qualified suppliers | Quote comparison sheet | Purchasing |
| 3. Selection and negotiation | Comparison by price, lead time, payment terms and quality | Decision sheet | Purchasing and requester |
| 4. Purchase order | Terms formalized with the supplier | Purchase order (PO) | Purchasing |
| 5. Receiving | Check of quantity, quality and invoice | Goods receipt | Receiving and quality |
| 6. Payment | Match of PO, receipt and invoice, then release | Payment approval | Finance |
Requisitions for production items usually come from MRP, which calculates what to buy and when. Maintenance and consumable items follow the reorder point.
Purchasing KPIs
A few KPIs are enough to control the function. Each one needs a defined formula and target.
| KPI | Formula | What it shows |
|---|---|---|
| Savings | (reference price − negotiated price) × quantity | Gain from negotiation |
| Supplier OTIF | orders delivered on time and in full ÷ orders received × 100 | Delivery reliability |
| Emergency buys | urgent orders ÷ total orders × 100 | Planning failure |
| Purchasing lead time | receipt date − requisition date | Cycle speed |
| Days payable outstanding (DPO) | accounts payable ÷ purchases in period × days in period | Supplier financing |
| Cost per PO | purchasing department cost ÷ number of POs | Administrative efficiency |
Savings only count if the baseline is honest: use the last price paid or the average quote, never an inflated list price. To rate suppliers in a structured way, use supplier evaluation (IQF).
Worked example: one month of purchasing
Fictional example of a metal components plant. 240 purchase orders were issued in the month, totaling spend of R$ 1,850,000 (Brazilian reais).
Savings on one item. Steel sheet: reference R$ 12.50/kg, negotiated R$ 11.80/kg, 8,000 kg.
Savings = (12.50 − 11.80) × 8,000 = R$ 5,600 (5.6% of R$ 100,000)
Month result, all items combined:
| KPI | Calculation | Result |
|---|---|---|
| Monthly savings | R$ 74,000 ÷ R$ 1,850,000 | 4.0% |
| OTIF | 204 ÷ 240 | 85% |
| Emergency buys | 24 ÷ 240 | 10% |
| Purchasing lead time | 3 days (requisition to PO) + 12 days (PO to receipt) | 15 days |
| Days payable outstanding | R$ 2,775,000 ÷ R$ 1,850,000 × 30 | 45 days |
| Cost per PO | R$ 48,000 ÷ 240 | R$ 200 |
Reading: 4% savings looks good, but 15% of orders arrived late or short and 10% were urgent. Expedited freight and line stoppages can eat the savings. The action is to attack the cause of the rush orders (planning and safety stock), not only to negotiate price.
Three-way match before paying
The three-way match compares the purchase order, the goods receipt and the invoice. You pay only what agrees across all three documents.
Example: PO for 100 units at R$ 25.00 (R$ 2,500). 95 units were received and the invoice shows 100.
Amount to pay = 95 × 25.00 = R$ 2,375 (R$ 125 difference to claim or deduct)
Without this rule, accounts payable pays the invoice and the difference is never recovered.
Classify items to set the sourcing strategy
Not every item deserves the same effort. Start with ABC analysis: A items hold most of the value and call for negotiation and long-term contracts; C items call for a simple process, catalogs or automatic ordering. The make or buy decision is also part of sourcing strategy. For international purchases, set freight and risk with Incoterms.
Common mistakes
- Deciding on lowest price only, ignoring lead time, quality and freight.
- Inflated savings: an artificial baseline and gains that never show in real cost.
- No formal requisition: buying by phone with no record or approval.
- Single source with no plan B for critical items.
- Measuring only price and ignoring OTIF, rush orders and invoice mismatches.
- No segregation of duties: the same person requests, approves, receives and pays.
Frequently asked questions
What is purchasing management?
It is the process of planning, quoting, negotiating, buying, receiving and paying for materials and services, aiming for the lowest total cost with the right quality and lead time.
What are the steps of the purchasing process?
Requisition, quotation, selection and negotiation, purchase order, receiving and payment.
Which purchasing KPIs should I track?
Savings, supplier OTIF, share of emergency buys, purchasing lead time, days payable outstanding and cost per PO.
How do you calculate savings?
(Reference price − negotiated price) × quantity. In the example, (12.50 − 11.80) × 8,000 kg = R$ 5,600.
How many quotes are needed?
Usually at least three qualified suppliers, except for single-source items, which should be justified and documented.
What is a three-way match?
It is the comparison of purchase order, goods receipt and invoice before payment is released.
Sources
- MONCZKA, R. M. et al. Purchasing and Supply Chain Management. Cengage Learning.
- CHOPRA, S.; MEINDL, P. Supply Chain Management: Strategy, Planning, and Operation. Pearson.
- BAILY, P. et al. Procurement, Principles and Management. Pearson.
Keep studying: trusted sources and links
- ILOS: Instituto de Logística e Supply Chain (in Portuguese)
- CSCMP: Council of Supply Chain Management Professionals
- Wikipedia: Performance indicator
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About the author
Lean Manufacturing & Behavioral Management Specialist
Over 20 years in the automotive and metalworking industries (GM and Dana), Lean Manufacturing practitioner since 2006. SENAI instructor and mentor in Brazil’s Brasil Mais Produtivo program, delivering consulting, training and audits for 50+ companies, combining quality, productivity and people development.
