The Purchase Cycle in ERP

Every manufactured product begins with a purchase. Before a single component is machined, welded, or assembled, someone must procure the raw materials, spare parts, consumables, and services that keep the factory running. Steel sheets from a distributor, bearings from an SKF dealer, cutting oil from a chemical supplier, annual maintenance contracts for CNC machines — all of these flow through the purchase cycle.

In a manual environment, purchases are handled through phone calls, handwritten orders, and paper invoices filed in cabinets. Price histories are lost, vendor comparisons are impossible, TDS compliance is an afterthought, and payment scheduling is a guessing game. An ERP system transforms purchasing into a structured, auditable, and compliant process where every rupee spent is tracked from requisition to payment.

This chapter introduces the complete purchase cycle, explains the key concepts that govern procurement in Indian manufacturing, and sets the stage for the detailed chapters that follow.

What You Will Learn

• The end-to-end purchase cycle from requisition to payment
• Why ERP matters for purchase management
• The three-way matching concept and how it prevents overpayment
• The difference between a purchase and an expense
• How vendor credit management works
• The types of procurement in a manufacturing business

Prerequisites

• A basic understanding of ERP concepts (covered in Chapter 1)
• Familiarity with the Udyamo ERP Lite interface (covered in Chapter 4)
• Understanding of inventory and item management (covered in Part 2)

The Purchase Cycle — End to End

The purchase cycle in a manufacturing ERP follows a well-defined sequence. Each step creates a document that links to the next, forming a complete audit trail from the moment a need is identified to the moment the vendor is paid.

Identify Need (indent / requisition)
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    v
Create Purchase Order (PO)
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    v
Receive Goods (goods receipt / GRN)
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    v
Record Bill (vendor invoice)
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    v
Verify & Approve Bill
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    v
Make Payment to Vendor

Step 1 — Identify the need. A production order requires 500 kg of MS flat bar. The stock ledger shows only 120 kg on hand. The production supervisor or the ERP's low-stock alert flags the shortage. This is the trigger for procurement.

Step 2 — Create a Purchase Order. The purchase team creates a PO specifying the vendor, items, quantities, prices, tax rates, and expected delivery date. The PO is a formal authorization to buy — it commits the organization to a purchase and sets expectations with the vendor.

Step 3 — Receive goods. When the vendor delivers, the warehouse team inspects and accepts the shipment. The goods receipt note (GRN) records what was actually received — which may differ from what was ordered. Stock increases in the inventory ledger.

Step 4 — Record the bill. The vendor sends an invoice (called a "bill" in Udyamo ERP Lite to distinguish it from your sales invoices). The accounts team enters the bill, linking it to the PO. If TDS is applicable, the system calculates the deduction.

Step 5 — Verify and approve. The bill is checked against the PO and the GRN. Quantities, prices, and tax amounts must match. Once verified, the bill is approved, and an accounting journal entry is automatically created.

Step 6 — Make payment. Payment is made to the vendor — individually or as part of a payment batch. The payment clears the outstanding balance on the bill and updates the vendor's account.

Why ERP Matters for Purchases

Without an ERP, each of these steps is a disconnected activity. With an ERP, they form an integrated chain where data flows automatically.

Price tracking. Every PO records the price paid for each item. Over months, you build a price history that reveals trends, helps negotiate better rates, and flags unusual price increases.

Vendor comparison. When multiple vendors supply the same item, the ERP lets you compare prices, delivery performance, and quality across vendors — data that is impossible to assemble from paper files.

TDS compliance. Indian businesses must deduct TDS on payments to contractors (Section 194C), professionals (Section 194J), commission agents (Section 194H), and others. The ERP calculates TDS automatically based on the vendor's TDS section and the applicable rate, ensuring compliance without manual lookup.

Payment scheduling. Vendor credit terms — 30 days, 45 days, 60 days — determine when bills fall due. The ERP tracks due dates, highlights overdue bills, and enables payment planning based on cash flow.

Audit trail. Every document — PO, GRN, bill, payment — is numbered, dated, and linked. Auditors can trace any payment back to the original purchase order and verify that the organization received what it paid for.

Three-Way Matching

Three-way matching is the cornerstone of purchase control. It compares three documents before approving a payment:

If all three match, the bill is approved for payment. If they do not match — the vendor shipped fewer items than ordered, or the bill price differs from the PO price — the discrepancy must be resolved before payment.

In Udyamo ERP Lite, the link between PO and bill is maintained through the purchase_order_id on the bill and the billed_quantity tracking on each PO line item. This allows the system to track partially billed POs and flag fully billed ones.

Tip: Three-way matching prevents common procurement problems: paying for goods not received, paying more than the agreed price, and duplicate payments. Enforce this discipline from the start.

Purchase vs. Expense

Not every outgoing payment is a purchase in the ERP sense. Understanding the distinction matters for accurate accounting and reporting.

Purchases of raw materials increase your inventory asset. Expenses reduce your profit directly. In Udyamo ERP Lite, the purchase module handles vendor-related procurement — items that you receive, stock, and consume. Direct expenses that do not involve inventory are handled through accounting journal entries.

Vendor Credit Management

Most business-to-business purchases in India operate on credit. The vendor delivers goods and sends an invoice; you pay after an agreed number of days. Managing this credit effectively is critical for working capital.

Credit days. Each vendor record in Udyamo ERP Lite includes a credit_days field. When a bill is created for that vendor, the system calculates the due date automatically: bill date plus credit days.

Payment terms. Beyond simple credit days, payment terms may include early payment discounts, milestone-based payments, or advance payment requirements. These are captured in the vendor's payment_terms field.

Aging analysis. Over time, the ERP builds an accounts payable aging report showing how much you owe, to whom, and how overdue each amount is. This is the foundation for payment planning.

Manufacturing Procurement Context

A manufacturing business procures several categories of items, each with different purchasing patterns:

Raw materials — The primary inputs to production. MS plates, round bars, aluminum sheets, copper wire, chemicals. These are high-value, high-volume purchases that are directly linked to production orders through BOMs. Price fluctuations in raw materials directly affect product cost.

Consumables — Items consumed during production but not part of the finished product. Cutting tools, welding rods, lubricant oil, sandpaper, safety equipment. These are purchased regularly but in smaller quantities than raw materials.

Spare parts — Replacement parts for machinery. Bearings, belts, filters, electrical components. Procurement is driven by maintenance schedules and breakdown events. Lead times can be long, especially for imported or specialized parts.

Services — Annual maintenance contracts for machines, calibration services, testing lab fees, transport and logistics. Service purchases do not involve physical goods receipt but still require POs, bills, and payment tracking. TDS is frequently applicable on service payments.

Capital goods — Machinery, equipment, and tooling. These are infrequent but high-value purchases that are capitalized as fixed assets rather than expensed. The purchase module handles procurement; the asset module handles capitalization and depreciation.

Tips & Best Practices

Tip: Establish a policy that no purchase above a defined threshold is made without a Purchase Order in the ERP. This single discipline prevents unauthorized spending and ensures every purchase is tracked.

Tip: Maintain accurate vendor bank details from the start. When you move to bulk payment processing using payment batches and bank export, incomplete bank details will delay payments.

Warning: Do not bypass the purchase cycle by recording payments directly without bills. Every vendor payment should be linked to a bill, and every bill should reference a PO where applicable. This discipline is what makes three-way matching and audit trails possible.

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