Purchasing & SCM

Purchasing “Musts” Right “stuff” Right price Right quality Right quantity Right time Right place Right source (?)

The Purchasing Cycle 1. The Identification of a Purchasing Need 2. Potential Supply Source Evaluation 3. Supply Source Selection 4. The Release and Receipt of Material Requirements 5. The Continuous Performance Measurement and Management of Suppliers Note: Material with Established Suppliers Consists of Steps 4&5

Steps in a Purchase 1. Recognition of need 2. Accurate description of desired commodity or service 3. Selection of possible sources of supply 4. Determination of price and terms 5. Preparation and placement of the purchase order 6. Follow up and/or expedite the order 7. Receipt and inspection of goods 8. Clear the invoice and pay the supplier 9. Maintenance of records

Typical Purchasing Cycle Using Purchasing Inventory Inspection Receiving Accounting Supplier Step Activity department department control department department department department 1 Using (or control) department issues P.R., MRPS, or B/M 1a Check to see if material is in stock File 2 Investigate and qualify potential sources; negotiate, determining price, terms, and conditions; then select supplier. Issue P.O. (This may involve a sourcing team.) 3 Supplier acknowledges order 4 Follow up activity (as needed) 5 Supplier ships material 6 Receiving department checks material against packing slip and P.O., and issues R.R. (This step is omitted in some JIT and partnership purchases.) 7 In cases requiring technical inspection, inspection department inspects material and issues I.R. 8 Purchasing department closes order 9 Supplier issues invoices in multiple copies 10 Accounting department checks invoices against P.O., R.R., and I.R. and issues voucher and/or check P.R. = purchase requisition; MRPS = materials requirements planning schedule; B/M = bill of materials; P.O. = purchase order; R.R. = receiving report; I.R. = inspection report P.R. #1 1 1a P.R. #2 P.O. #5 P.O. #1 and acknowledgment form #2 P.O. #6 Follow-up inquiry Follow-up response P.O. #7 & P.R. #1 Material and packing slip Working file Follow-up P.O. #4 R.R. #1, #2, #3 Acknowledgment form Material 2 P.O. #3 3 4 5 6 7 Use R.R. #3 and I.R. #3 to using or control dept. Closed order file 9 10 8 P.O. #6,#7 Acknowledgement R.R. #1 & I.R. #1 Other Correspondence R.R.#1 & I.R. #1 R.R.#2 & I.R. #2 I.R.#4 Invoice R.R.#2 I.R. #2 Voucher

The Purchasing System 1. Need Identification Know individual requirements: what, how much, when needed Supply department responsible for helping to anticipate needs Place forward orders Supplier can contribute more in the need-recognition stage than later in acquisition process Emergency and rush orders

The Purchasing System 1. Need Identification (continued) Small orders (Pareto’s law; Transaction costs) Handling Small Orders Standardization Hold until accumulation Establish a requisition calendar Stockless buying/systems contract Procurement credit card Blanket orders

The Purchasing System Handling Small Orders (continued) Establish electronic linkage Adjust authority levels Use integrated suppliers Low-value order placement is outsourced to 3rd party Users place orders directly

The Purchasing System 1. Need Identification (continued); Methods: Purchase Requisition - internal document completed by user that informs purchasing of a specific material need Contains: Description of material Quantity and date required Estimated unit cost Operating account to be charged Date Authorized signature

The Purchasing System Methods (continued) Traveling Purchase Requisition - Printed card filed for each item controlled in a manually operated system Contains: Description of item List of approved suppliers and addresses Last price paid to suppliers Reorder point Record of usage

The Purchasing System Methods (continued) Reorder Point System - Uses information regarding quantity and demand forecasts. When inventory is depleted to a given level, the system signals the material control department to request inventory replenishment. Stock Checks - The physical checking of inventory to verify that system records match actual on-hand inventory levels. Cross-Functional Teams - Teams to identify material purchase requirements; often for new products

The Purchasing System 2. Accurate description of desired commodity or service Information that should be included on the requisition: Date Identification number Originating department Account to be charged Complete description of material desired and quantity Date material needed Any special shipping instructions Signature of authorized requisitioner

The Purchasing System 2. Accurate Description (continued) Blanket and open-end orders – cover a variety of items Stockless Buying or Systems Contracting – more sophisticated: Periodic billing procedures Allow non-purchasing personnel to issue order releases Employ special catalogues Require suppliers to maintain minimum inventory levels Do not specify volume of contract items Improve inventory turnover rates Third-party consolidator (e.g., MRO)

The Purchasing System 3. Selection of Possible Sources of Supply Locating qualified sources Assessing performance before and after sale 4. Determination of Price and Terms Analyze bids, price list, negotiations

The Purchasing System 5. Preparation and Placement of the Purchase Order (PO) Written order should be made Form of the PO: 1. Contain provisions to guard buyer from damage suits caused by patent infringement 2. Contain provisions concerning price 3. Clause stating no charges allowed for boxing, crating, etc. 4. Acceptance is contingent on inspection and quality

The Purchasing System Form of the PO (continued): 5. Require in case of rejection that the seller receive a new order before replacement is made 6. Precisely describe quality requirements and method for quality assurance/control 7. Provide for order cancellation if deliveries not received on specified date

The Purchasing System Form of the PO (continued): 8. Contain conditions that the buyer refuses to accept drafts drawn against the buyer 9. Mention quantity (under and over-shipments) 10. Matters of special interest

The Purchasing System 6. Follow-Up and/or Expedite the Order Follow-Up - The routine tracking of an order to ensure that the supplier will be able to meet delivery promises; often by phone or computer Expediting - Application of pressure on a supplier to get it either to meet the original delivery promise, deliver ahead of schedule, or speed up delivery of a late order

The Purchasing System 7. Receipt and Inspection of Goods Receiving - very close to purchasing; may be bypassed for small purchases Purposes of Receiving: 1. Confirm order placed some time ago has arrived 2. Check that shipment has arrived in good condition 3. Ensure correct quantity 4. Forward shipment to next destination 5. Ensure proper documentation is registered and forwarded to appropriate parties

The Purchasing System 7. Receipt and Inspection of Goods (continued) Reasons to Withhold Payment Until Goods Arrive 1. Invoice does not reach buyer until late in discount period 2. Inspection 3. Date invoices as of date of shipment or receipt of invoice; whichever is later, for discount period Reasons to Process Payment Before the Goods Arrive 1. Financial consideration 2. Credit standing of buyer 3. Relationship with supplier

The Purchasing System 8. Clear the Invoice and Pay the Supplier Varies according to firm Purchasing or Accounting Why Purchasing - where original agreement was made Accounting - process where invoice mailed to accounts payable, checked, and certified for payment; refer to purchasing department if variance exists

The Purchasing System 9. Maintenance of Records 1. PO log identifies all POs by number and status 2. PO file, copy of all POs, filed numerically 3. Commodity file; by major commodity 4. Supplier history file

Purchasing Documents Purchase Requisition Request for Quotation Purchase Order Receiving Report Form Systems Contracting Blanket Purchase Order

Typical Purchase Requisition Form

Typical Request for Quotation Form

Typical Purchase Order Form

Receiving Report Form