Purchasing Channels Explained

Here's the thing…

Your category strategy and operational requirements should dictate your downstream channel. Not the other way around.

But most organizations get this backwards…

They inherit a set of system configurations, then try to force every transaction through whatever channels happen to exist… Regardless of whether those channels make sense for what they're actually buying.

The result? Wasted time. Wasted effort. Frustrated requesters. And procurement teams stuck maintaining item masters, MRP parameters, pricing records, and inventory data for parts that don't need any of it.

I kid you not, I once saw an MRP-managed pencil. A pencil. With an item record, reorder points, pricing records and safety stock calculations… 😅

Let's fix this.

A purchasing channel (also called a Buying Channel) is the end-to-end series of steps your organization uses to request, approve, purchase, receive, and pay for goods and services.

Think of it as the "route" a purchasing requirement takes from the moment someone identifies a need to the moment the supplier gets paid.

Different channels have different characteristics:

The key insight is this: The nature of what you buy should determine how you buy it:

When you match the channel to the purchase, transactions flow smoothly. When you don't, you're manually squaring circles all day long.

Let me walk you through the major purchasing channel types. For each one, I'll explain what it is, when to use it, the system requirements, and the document flow (the sequence of transactions that move through your systems).

Once you understand what's available, we'll cover how to choose the right channel for each situation.

What it is: A standard purchase order for catalog items from preferred suppliers.

Best used for: Repetitive purchases of materials with human-generated requirements. Think office supplies, standard MRO items, or any goods where someone browsing a catalog is the trigger.

MRP Generated? No — these are human-initiated.

Item Master Required? Can work with or without. Having an item master enables better spend tracking on the item but involves overhead effort and costs. For example, you need to find a way to map your item identifiers (numbers) to the vendor’s catalog items… This can be a pain depending on your setup.

Kept in Inventory? Only if an item master exists and you're doing goods receipts.

Upstream Data Object: Requirements can be tied to a work order (maintenance), project (WBS element), cost center, or other account assignment. This links the purchase to the consuming activity for cost tracking and planning.

Document Flow:

Vendor Catalog (Checkout) → Requisition → Approval → Purchase Order → Supplier Confirmation → Goods Receipt → Supplier Invoice → Payment

*Goods Receipts are optional in this flow.

Document Flow (Work Order/Project-Linked):

Work Order / Project → Vendor Catalog (Checkout) → Requisition → Approval → Purchase Order → Supplier Confirmation → Goods Receipt (to WO/Project) → Supplier Invoice → Payment

What it is: A purchase order for frequently used materials that are central to operations (often direct materials for production or critical MRO parts).

Best used for: Very high-frequency items where you need precise tracking, manufacturer information, and potentially MRP-driven automation.

MRP Generated? Can be. If you set up MRP parameters, the system can auto-generate requisitions when stock hits reorder points/safety stock levels.

Item Master Required? Yes, that's the whole point.

Kept in Inventory? Yes, if configured for inventory management.

Upstream Data Object: Requirements are often indirectly tied to a work order (for maintenance), production order (for manufacturing), or project (WBS element). The item master enables MRP to calculate inventory and reordering requirements based on these upstream demands without having them directly linked to the object.

Document Flow (Manual):

Requisition (Item Master Lookup) → Approval → Purchase Order → Supplier Confirmation → Goods Receipt → Supplier Invoice → 3-Way Match → Payment

Document Flow (MRP-Driven):

MRP Run (Considers upstream data objects) → Purchase Requisition (Auto) → Purchase Order → Supplier Confirmation → Goods Receipt (to inventory) → Supplier Invoice → 3-Way Match → Payment

Document Flow (Directly Linked to Work Order/Project):

Work Order / Production Order / Project Material Requirement → Linked Purchase Requisition → Purchase Order → Supplier Confirmation → Goods Receipt (to WO/Project or Stock) → Supplier Invoice → 3-Way Match → Payment

What it is: A purchase order where the requester manually describes what they need in free-form text, without selecting from a catalog or item master (These are horrible to deal with).

Best used for: Never… But if you must, One-off purchases, non-standard items, or situations where no catalog or item master exists. Common for indirect spend, project-based purchases, or early-stage categories not yet formalized. Actively work to minimize the use of this purchasing channel.

MRP Generated? No, these are entirely human-initiated and described.

Item Master Required? No, that's the point. The requester types the description manually.

Kept in Inventory? No, though goods receipts can still be performed for delivery confirmation.

Document Flow:

Requisition (Free Text Entry) → Approval → Purchase Order → Supplier Confirmation → Goods Receipt (optional) → Supplier Invoice → Payment

Key benefit: Flexibility for non-standard purchases. Gets the job done when no other channel fits.

Watch out for: Free text POs are a data quality nightmare. No standardization means poor spend visibility, difficult supplier consolidation analysis, and duplicate purchasing. If you see high volumes here, it's a sign your catalogs and item masters have gaps that need addressing.

What it is: A purchase order for services rather than physical goods.

Best used for: Consulting, maintenance, repairs, professional services (anything where you're buying labor or expertise).

Key characteristics: Matched to milestones or timesheets, not physical receipts (2 different types of service POs)

MRP Generated? No.

Item Master Required? No, services don't go into inventory. However, you can create service items or activity types for repeated structured/simple services.

Document Flow:

Requisition → Approval → Service Purchase Order → Supplier Confirmation → Milestone Approval / Timesheet(s) → Supplier Invoice → 3-Way Match → Payment

Critical note: If you can help it, don't force services through goods PO channels. You'll end up with nonsensical goods receipts and frustrated AP teams. If services is a large part of your spend, look at dedicated Service Purchasing systems for optimal performance (sometimes called Contingent Workforce Management systems).

What it is: A long-term agreement with set terms and pricing, against which you make individual releases or call-offs.

Best used for: High-volume, simple repeat purchases where you've negotiated master terms.

MRP Generated? Possible, MRP can generate releases against the blanket if setup correctly.

Document Flow:

Framework Agreement (One-Time Setup) → Release/Call-Off Request → Approval (if required) → Release Order → Supplier Confirmation → Goods Receipt → Supplier Invoice → Payment

Key benefit: Negotiate once, release many times. Reduces transactional overhead dramatically.

Alternatively, some businesses set up Framework/Blanket POs without releases, approvals, order or receipts so that invoices can simply be posted against them repeatedly for tracking purposes. In this scenario, the Framework/Blanket channel is used to mimic the Contract Invoice (up next).

What it is: Direct invoicing against a pre-negotiated contract without issuing individual purchase orders.

Best used for: Large purchases with little logistics complexity (Capex, software licenses, subscriptions, pre-agreed service retainers).

Document Flow:

Contract (One-Time Setup) → Supplier Invoice (references Contract) → Contract Match → Approval (if required) → Payment

Key benefit: Streamlines payment for known, recurring obligations. No PO overhead per transaction while keeping control/compliance on spend.

What it is: An ad-hoc invoice for unplanned or emergency purchases that bypasses the normal PO process.

Best used for: True exceptions only. Emergency repairs, unexpected charges, situations where getting a PO would cause unacceptable delay. You should also use this for certain addressable categories of spend (charitable donations, postage, utilities, taxes, etc.).

Document Flow:

Supplier Invoice (No PO Reference) → Coding & Cost Assignment → Invoice Approval → Payment

Key warning: Use sparingly with special approval. Non-PO invoices bypass most controls and put you in front of committed spend without prior approval. High volumes here signal broken channels elsewhere.

What it is: Corporate card transactions for low-value, high-frequency purchases within spending limits.

Best used for: Low-value items that don't warrant PO overhead. Also excellent as a "transitional" channel while setting up better options. Avoid use as a purchasing channel when possible.

Document Flow:

PCard Transaction (at Point of Sale) → Transaction Feed Import → Cardholder Coding & Receipt Attachment → Approver Review → Statement Reconciliation → Payment (to Card Provider)

Key benefit: Speed and simplicity.

Watch out for: PCard programs need strong governance. Without it, you lose visibility and maverick spending creeps in. Similar to a Non-PO Invoice, spend is committed to without prior approval… It’s also very hard to control whether a purchase could have gone through another, better channel. If you can, reduce this as a purchasing channel and simply use it as a payment method for your treasury strategy.

What it is: Direct buying through supplier e-commerce platforms, outside your procurement systems.

Best used for: Avoid unless absolutely necessary. This channel sacrifices visibility, control, and consolidated invoicing.

Document Flow:

Document Flow (Payment at Checkout): Vendor Website Order → Payment (Credit Card at Checkout) → Order Confirmation → Delivery → Goods Receipt (often missed) → [Manual Expense Report or PCard Reconciliation if required]

Document Flow (Periodic Invoicing): Vendor Website Order → Order Confirmation → Delivery → Goods Receipt (often missed) → Periodic Consolidated Invoice from Vendor → Invoice Coding & Approval → Payment

Key risk: Data doesn't flow into your systems automatically. You lose spend visibility and contract compliance enforcement. Nightmare when huge invoices hit the AP department. Lots of sand in the processing gears…

What it is: An arrangement where the supplier stores inventory at your facility, and you only pay when items are consumed.

Best used for: High-value or high-criticality items where you need them immediately available but don't want to tie up capital.

Item Master Required? Yes, you need to track what's in consignment.

Kept in inventory? Yes, consignment stock is tracked separately until consumption.

Document Flow:

Consignment Agreement (One-Time Setup) → Consignment PO → Supplier Delivery → Goods Receipt to Consignment Stock → Consumption Posting (triggers ownership transfer) → Periodic Settlement Invoice → Payment

Key benefit: Cash flow optimization. The supplier carries the inventory cost until you actually use the material.

Key challenge: You must physically manage items that can exist as both consignment stock and own stock at the same time. This means tagging items, keeping them in separate bin locations, or using other physical segregation methods.

Most consignment agreements also include an "expiry date". If you don't consume the material within a set period (e.g., 90 days), ownership automatically transfers to you and you owe the supplier regardless. Between the physical tracking requirements and the expiry management, consignment can be a nightmare to manage operationally. Only use it when the cash flow benefits clearly outweigh the administrative overhead.

What it is: A PO where you provide materials to a supplier who performs work on them (plating, heat treatment, assembly) before returning them to you.

Best used for: Outsourced manufacturing operations where you supply the raw material and the supplier adds value.

Item Master Required? Yes, for both the input material and the output component.

Kept in Inventory? Yes, both sent and received materials are tracked.

Document Flow:

Subcontracting PO → Components Issue to Supplier (Goods Issue) → Supplier Processing → Finished Goods Receipt (Goods Receipt) → Supplier Invoice (for processing services) → 3-Way Match → Payment

Key complexity: Requires tracking materials sent to the supplier AND received back. Your ERP needs proper subcontracting functionality. The supplier might also not consume all materials you sent every time so you need to manage these differences as well.

Now that you know what channels are available, how do you decide which one to use?

Work through these four questions:

→ Service (consulting, maintenance, professional services, contingent labor)

Use Service POs or Contract Invoices. Services can't be inventoried… They're confirmed via service entry sheets, timesheets, or milestone acceptances.

Skip to Question 4. Services can benefit from service items for repeated purchases, where appropriate.

→ Good (physical materials, equipment, supplies)

Continue to Question 2.

→ Direct to expense (consumed immediately, low value, immaterial)

Lighter channels work best: PCard, Goods PO (Vendor Catalog), or Goods PO (Free Text). No inventory tracking needed.

→ Through inventory (held for later use, material value, needs quantity tracking)

Use Goods PO (With Item Master) or Framework/Blanket PO with release.

You'll need goods receipts and likely an item master to track quantities and values. For high-value items where you want supplier-held stock, consider Consignment PO. For outsourced processing, use Subcontracting PO.

→ Direct to project/work order/asset (consumed by a specific activity)

Use Goods PO (Vendor Catalog) or Goods PO (With Item Master) with account assignment to the WBS element, work order, or asset.

See "Inventory vs. Expense" below for guidance on making the call on these 3 options.

→ Yes

Use Goods PO (With Item Master) with MRP parameters, or Framework/Blanket PO with MRP-driven releases.

You'll need an item master, pricing agreements/info records, and planning parameters (reorder points, safety stock, min/max, Kanban triggers, or project/WO-driven requirements).

→ No

Manual, human-initiated requisitions work fine. Use Goods PO (Vendor Catalog), Goods PO (Free Text), or PCard depending on your control and tracking needs.

→ Yes

Create an item master (for goods) or service item/activity type (for services). For goods, use Goods PO (With Item Master) or Goods PO (Vendor Catalog) with catalog items linked to your item master.

For services, use Service PO with standardized service items where possible.

For contracted spend, Framework/Blanket PO or Contract Invoice reduce transaction overhead.

Multi-source nuance: If there are multiple or changing sources of supply, create an item master AND map it to multiple vendor catalog items (e.g. via a Marketplace tool). You get standardization (consistent part numbers, specifications, spend tracking) plus sourcing flexibility (requesters choose from approved suppliers with current pricing).

→ No

Use Goods PO (Vendor Catalog) for browsing supplier catalogs (e.g. on a Marketplace tool), Goods PO (Free Text) for one-off descriptions, PCard for low-value purchases, or Non-PO Invoice for true exceptions.

The "how will this be consumed" question is fundamentally about materiality, usage patterns, and the matching principle.

The practical test: If I expense this entire purchase today, does it meaningfully misrepresent this period's profitability? A $50,000 purchase of packaging materials used over 8 months? That argues for inventory. $500 of printer paper? Expense it… Nobody cares.

Gray areas: Spare parts create debates. A $15,000 critical pump might warrant capitalization even if unused for years. Routine consumables don't. For procurement, the key is to automate whatever rule you decide on so buyers aren't overthinking every PO.

Here's a scenario I see far too often…

A sourcing team spends months negotiating a comprehensive professional services contract. They run a rigorous RFP. They benchmark rates against market data. They nail down favorable terms. They get the contract signed with great fanfare.

And then… nothing happens.

Why? Because the organization doesn't have a proper Service PO channel to execute against that contract. Requesters don't know how to call off work. The system can't handle milestone-based payments. Nobody set up integrated timesheets.

So what do people do? They route requests through goods PO channels (creating phantom inventory), use PCards (bypassing the negotiated rates entirely), or just submit non-PO invoices (losing all visibility).

The negotiated savings never materialize because there's no proper tool (or purchasing channel) to capture them.

This is the end-to-end alignment problem.

Your purchasing channels don't exist in isolation. They're the execution layer of a chain that starts much earlier:

If any link in this chain is broken or misaligned, value leaks out of your procurement spend funnel.

In most organizations, these functions operate in silos:

The result is a patchwork of workarounds, exceptions, and frustrated users (especially AP who has to figure out how to pay suppliers with all the spaghetti created ahead of them…).

The fix is to design your purchasing channels as an intentional extension of your category strategy… Not as an afterthought.

For each major category, ask:

Strategy without execution capability is just a PowerPoint deck… And if your category strategy requires regular and high volumes of sourcing/negotiation (e.g. 3 bids and a buy), then you’ll need to weave sourcing capabilities in to the purchasing channels listed in this article… But that’s for another article.

Services don't behave like goods... When you force them through goods channels, you create goods receipt nightmares, confuse your three-way match, and frustrate everyone involved.

Fix: Use Service POs or Contract Invoices for services.

Not every purchase needs an item master, MRP parameters, pricing records, and inventory tracking. This is expensive overhead that should be used sparingly.

Fix: Use Goods PO (Vendor Catalog), Goods PO (Free Text), or PCard for sporadic purchases.

If you're buying the same critical item hundreds of times per year and still processing it as free-text POs, you're leaving money and efficiency on the table.

Fix: Invest in Goods PO (With Item Master) with proper MRP automation, or set up a Framework/Blanket PO for high-volume items.

Many organizations configure their ERP with limited channel options, then force all transactions through whatever exists.

Fix: Define your target channel strategy BEFORE system configuration. Ensure you have Service PO, Framework/Blanket PO, and other channels configured for your category needs.

Your sourcing team closes a great deal, but there's no channel configured to transact against it. Everyone scrambles to find workarounds, and the negotiated value evaporates.

Fix: Make channel readiness a gate in your sourcing process. Before signing a contract, confirm: How will users actually buy against this? Is the Service PO or Framework/Blanket PO configured? Are requesters trained?

Purchasing is more complex (and more fun) than most people think.

But when you take the time to get it right, boy is it satisfying.

The key is matching your purchasing channels to your actual operational requirements and ensuring they align with your procurement policy, category strategy, and sourcing outcomes:

Get this right, and transactions flow. Get it wrong, and you're fighting your systems every day.

Want to go deeper on how technology can help direct requesters to the right purchasing channels without any need for training?

Check out our 3-part series on Intake and Orchestation Technology.

👀 In Case You Missed It…
The Last 3 Sunday Night Notes:

1/ The Supplier Master Data "Single Source of Truth" Myth
2/ SAP Ariba Just Killed the Legacy Source-to-Pay Suite
3/ Stop Waiting for Perfect Data: AI Sourcing Examples

See you next week,

— Joël Collin-Demers

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