What is Purchasing?
Purchasing is the process of sourcing and ordering materials, services, and equipment. It is sometimes referred to as Procurement. Its main objective is to procure materials at the lowest possible cost consistent with the quality and service required. Aside from ensuring that the firm has continuous supply of materials, it is the function of purchasing to ensure that there is a balance between materials supply and inventory levels so that it can maintain its profit position as far as materials costs are concerned.
What is an effective purchasing procedure?
The purchasing procedure is discussed below:
Step 1 - Receipt and analysis of the Purchase Requisition (PR)
The purchasing department receives and analyses the material or supply requirements from the requesting department. Such requests are found in the Purchase Requisition form which contains the details of the requests such as quantity and product specifications.
Step 2 - Selection of the potentials sources of supply
If the material or supply being requested is not a new item, the purchasing staff will look into their files for records on existing suppliers of such requests, otherwise, they will have to check either the yellow pages or the internet or other possible sources to look for possible suppliers.
Step 3 - Issuance of Requests for Quotations
If there is no regular supplier for the material or supply being requested and there is no intent to look for new ones, then the existing supplier will be contacted. However, new or potential suppliers will be asked to submit price quotations for evaluation by the purchasing department.
Step 4 - Selection of the Right Source
Once quotations have been received, the suppliers will then be evaluated. Criteria for evaluation include the following:
• Price quotations
• Specifications
• Delivery capability
• Supplier reliability and dependability
• Supplier reputation
• Possibility of volume discounts
• Possibility to establish long-term relationship with the supplier
Selection of the appropriate supplier depends on the type of item and the importance of the item being procured.
Step 5 - Determination of the Right Price
Once the supplier has been selected, then both parties will have to agree on the right price. Negotiations for price or volume discounts and other arrangements can occur during this step.
Step 6 - Issuance of the Purchase Order (PO)
Once the price has been agreed upon and approved, then a Purchase Order will be issued to the supplier confirming the details presented in the Purchase Requisition form. It is the function of purchasing to follow up on the supplier not only for compliance on the content of the PO but on the agreed delivery schedule.
Step 7 - Analysis of the Receiving Reports and Approval of Vendor's Invoice for payment
Prior to approval of the vendor's invoice for payment, it is the responsibility of purchasing, through its Receiving Department, to evaluate the content of the delivery as presented in the Receiving Report vis-à-vis the PO and PR. Random sampling of the goods may be conducted to determine veracity of the content as reported in the Receiving Report. Strict quality monitoring is critical at this stage.
What are the different purchasing approaches?
Purchasing approaches differ depending on whether the item is a low value or high value item or whether it has a high or low impact on business (refer to Figure 1) .
Figure 1 - Specific Purchasing Approaches
Business Impact |
|
|
High
|
LV , HBI Items
Cost – Based Purchasing |
HV, HBI Items
Supplier Partnerships |
Low |
LV , LBI Items
Commodity Purchasing |
HV, LBI Items
Bidding Process |
|
Low |
High |
|
Total Product Value
A description of the different purchasing approaches is described below:
Items |
Classification of Items |
Description |
Purchasing Approaches |
Routine Items |
Low Value, Low Business Impact Items |
Items that can be procured anywhere like office supplies, |
Commodity purchasing |
Leverage Items |
Low Value, High Business Impact Items |
Low value items but need continuous replenishment |
Cost – based purchasing |
Bottleneck |
High Value, Low Business Impact Items |
Items which do not have a direct impact on company operations but are expensive items (cars, computers) |
Bidding process; supplier accreditation program |
Critical Items |
High Value, High Business Impact Items |
Items that are critical for the business operations in terms of impact and product value |
Supplier partnerships / purchasing agreements |
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