Purchase Cycle

Overview

Below is a comprehensive, business-focused explanation of the Purchase Cycle, written for practical understanding and day-to-day business use in Dafater.

Purchase Cycle – Business Process Explanation

1. Overview of the Purchase Cycle

The Purchase Cycle is the end-to-end business process used to procure goods or services from suppliers, starting from identifying a need and ending with supplier payment.

This cycle ensures that: - The right items or services are purchased
- At the right price
- From the right supplier
- At the right time
- With proper approvals and documentation

A well-managed Purchase Cycle helps businesses: - Control procurement costs
- Avoid stock shortages or over-purchasing
- Maintain strong supplier relationships
- Ensure financial accuracy and compliance

2. Step-by-Step Business Process Flow

Step 1: Identify the Need (Material Request)

A department identifies a need for items or services.

Example:
The production team requests 500 units of raw material due to low stock.

This need is formally captured as a Material Request.

Step 2: Request Supplier Pricing (Request for Quotation)

Once the requirement is approved, the purchasing team asks suppliers to provide prices and terms.

Example:
The purchase team sends a Request for Quotation to three approved suppliers asking for: - Price - Delivery timeline - Payment terms

Step 3: Receive and Compare Supplier Offers (Supplier Quotation)

Suppliers respond with their quotations.

The business compares: - Price - Delivery date - Quality commitments - Payment terms

Example:
Supplier A offers the lowest price but longer delivery time.
Supplier B offers slightly higher price but faster delivery.

Management selects the most suitable supplier.

Step 4: Confirm the Purchase (Purchase Order)

Once a supplier is selected, a Purchase Order is issued.

This is a legal and commercial commitment to buy specific items or services.

Example:
A Purchase Order is sent to Supplier B for 500 units at agreed pricing and delivery terms.

Step 5: Receive Goods or Services (Purchase Receipt)

When goods arrive or services are delivered, the business verifies: - Quantity received - Quality and condition - Compliance with the Purchase Order

This confirmation is recorded as a Purchase Receipt.

Example:
Warehouse staff confirms that 500 units were received without damage.

Step 6: Receive Supplier Bill (Purchase Invoice)

The supplier sends an invoice requesting payment.

The business verifies that the invoice matches: - Purchase Order - Purchase Receipt

Once verified, the Purchase Invoice is recorded for payment processing.

Step 7: Payment to Supplier (Outside the Core Cycle)

After invoice approval, payment is made according to agreed terms.

Example:
Payment is released within 30 days as per the Purchase Order agreement.

3. Key Documents and Their Role

Document	Business Role
Material Request	Internal request identifying what needs to be purchased
Request for Quotation	Invites suppliers to submit pricing and terms
Supplier Quotation	Supplier’s commercial offer
Purchase Order	Formal order and legal commitment to buy
Purchase Receipt	Confirmation of goods or services received
Purchase Invoice	Supplier’s bill for payment
Supplier	External party providing goods or services

4. Business Prerequisites and Setup Requirements

Before running the Purchase Cycle, the business should ensure:

Suppliers are registered with correct contact and payment details
Items or services are defined with descriptions and units
Approval authority is clearly defined for requests and orders
Purchase policies are established (price limits, preferred suppliers)
Roles and responsibilities are assigned (requester, buyer, approver, receiver)

5. Common Business Scenarios and Use Cases

Scenario 1: Routine Stock Replenishment

Material Request raised automatically due to low stock
Regular supplier selected
Purchase Order issued directly without RFQ

Scenario 2: New Supplier or High-Value Purchase

RFQ sent to multiple suppliers
Detailed quotation comparison
Management approval before Purchase Order

Scenario 3: Service Procurement

Material Request raised for services (maintenance, consulting)
Purchase Order issued based on service terms
Purchase Invoice received without Purchase Receipt if no physical goods

6. Best Practices and Important Considerations

Always compare quotations for major purchases
Avoid issuing Purchase Orders without proper approvals
Ensure Purchase Receipts match actual delivery
Match Purchase Invoice with Purchase Order and Receipt to avoid overbilling
Maintain updated supplier records to avoid payment delays
Use preferred suppliers to get better pricing and reliability

7. How Documents Flow Through the Purchase Cycle

Typical Document Flow:

Material Request → Identifies need
Request for Quotation → Sent to suppliers
Supplier Quotation → Received and evaluated
Purchase Order → Issued to selected supplier
Purchase Receipt → Confirms delivery
Purchase Invoice → Recorded for payment

Alternate Flow (Direct Purchase): - Material Request → Purchase Order → Purchase Receipt → Purchase Invoice

8. Business Value of the Purchase Cycle

When properly followed, the Purchase Cycle in Dafater: - Improves procurement transparency
- Reduces financial risk
- Strengthens supplier accountability
- Supports accurate inventory and cost control

It creates a controlled, auditable, and efficient purchasing process that supports business growth and operational stability.

If you would like, I can also provide: - A visual process flow diagram - Role-based responsibilities - Approval matrix examples - Industry-specific purchase cycle variations

Just let me know.

This document describes the purchase cycle process and the related document types.

Request for Quotation
Supplier Quotation
Purchase Order
Purchase Receipt
Purchase Invoice
Supplier
- Supplier of Goods or Services.
Material Request

Process Flow

The typical flow for this cycle is:

Create Material Request (if needed)
Send Request for Quotation to suppliers
Receive Supplier Quotations
Create Purchase Order from Supplier Quotation
Receive goods and create Purchase Receipt
Create Purchase Invoice for received goods
Make Payment Entry to supplier