Steps in the Purchasing Cycle

Steps in the Purchasing Cycle

I.Traditional Paper System Flow

1.Recognize, describe, define the need

•usually emanates from an operating department or planning/inventory

A.CLASSIFICATION OF NEEDS

1.Type of need

•RM

•purchased parts (components-semiconductor chips; semifinished castings)

•Packaging (paper, plastic)

•MRO

•Services (janitorial, travel, consultants, design)

•Capital equipment (machinery, office equipment, vehicles)

•Resale items

-Each category has its own technologies, supply base, logistics system, etc.

B.STRATEGIC OR OPERATIONAL?

•can affect process (not bidding out strategic elements)

C.REPETITIVE OR NON-REPETITIVE (rush, small)

-rush orders (minimize!): avoid oral requisitions

-standard, repeat orders

-small orders (Pareto rule--70% of orders, 10% of dollar volume; maybe less than $250 per order)

* WAYS TO MINIMIZE THE SMALL ORDER PROBLEM *

1.centralized stores: store them in inventory; best for repetitive items

2.blanket/open-end system: negotiated; no inventory

-includes description, unit price, customary contract provisions

-estimated usage

-upon receiving a requisition, the buyer sends a release to the supplier

-benefits:

fewer POs and time

releases buyers from routine work

permits volume pricing

may reduce inventory levels and speed up lead times

-requires strong internal control

3.systems contracting

-more sophisticated form of blanket system

4.telephone system

5.electronic ordering system

6.petty cash system/COD system

7.purchase order draft: includes a blank check on the PO

8.supplier stores/consignment: supplier operates store (need about $100K annually)

D.ABC ANALYSIS (Monetary value)

•Class A items normally offer the greatest opportunity to improve/add value to the process

E.SPECIFICATION OF NEED

•Can be by brand, specification, engineering drawing, market means, sample, or combination

•Opportunity for purchasing to add value through design involvement of suppliers, emphasis on standardization and simplification, and obtaining very clear, appropriate specifications

2.Transmit the need (requisitions)

A.standard requisitions: internal document. 2 copies--1 for P, 1 for user; however can include up to 9 copies.

•for orders from operating department (i.e., mfg)

should include: date and ID number, originating department, complete description, quantity and date required, estimated cost, operating account to be charged, special shipping instructions, and authorized signature.

B.traveling requisitions: for items stored in inventory

•may be a simple index card indicating date and quantity

•reduces load on normal cycle

•carries historical information

-BOM requisition: user communicates the number of end-items and purchasing explodes the BOM

•BOM simplifies the requisitioning process

-blanket orders/open-end orders

-systems contracting

3.Determine sources, investigate, and select supplier/analyze bids

-may be a simple stock check (obviously unnecessary for inventory req)

-sometimes the req. is routed through inventory before it gets to purchasing

A.If need to buy/source:

•competitive bidding (use of RFQ process)

4.Prepare and issue the PO

-serially numbered

-contains tremendous variation in format and intrafirm routings

-contains terms and conditions (boilerplate: standard for all orders)

includes contract acceptance, delivery performance, contract termination, rejections, subcontracting, warranties, and payment.

-filing/copies (minimum of 7)

Copies 1 and 2 (containing acknowledgment ) to supplier

3 to accounting (for comparison with the supplier invoice and receiving report)

4 to receiving (for ID and receipt of incoming shipment)

5 to user (mfg or IC)

6 stays in purchasing as an open order file (follow-up)

7 becomes the buyers working document

-electronic PO writing

-acceptance/acknowledge indicates contract

4.Follow-up the order (including expediting and de-expediting)

5.Receive and inspect the material (use of receiving report: purchasing, accounting, user, receiving)

-after reaching the receiving dock, it is accompanied by a packing slip which is cross referenced with the receiving clerks copy of the PO.

-if all is in order, the clerk prepares a “receiving report”, and sends a copy to

•retains one copy

•one copy to the using department

•one copy to accounting for cross referencing with the supplier’s

invoice and PO

•one copy to purchasing to acknowledge completion of cycle

6.Clearance of the invoice and payment to supplier

-simultaneously check PO, receiving report and invoice

-having accounting check the invoice allows for a check on the purchasing department

7.Close the order/records

-PO log: identifies POs by alphabetical supplier and indicates status- open (requisition, acknowledgment, follow-up and correspondence) or closed (3 yrs)

-PO file: for each major material purchased repeatedly

-commodity file

-supplier history: name, address, contact

-contract record

NOTES

•These cycles can create up to 33 documents!!

•The need for an orderly and organized filing system/IS is critical—if none, the information is useless.

1