For any organization, purchasing function assumes importance for the reason that it fulfills, to a great extent, the input needs of the organization. Whether product or service, an organization needs input of right quality, at right price, from the right source in right quantity at the right time. Often called 5 R’s (right things to do) these determine the broad parameters within which purchasing functions in any organization. Depending upon the size and nature of operation, the quantum of purchase of product and services vary. In some organizations the total purchase bill is to the tune of 60% of its annual expenditure!!
Obviously, for any organization engaged in a continuous set of activities, where inputs are processed, on a regular basis for producing outputs, formalized systems and procedures are required to run its purchasing function, to ease in operation and accountability. Formal procedures are required to be laid down for initiating purchase, selecting suppliers, placing purchase orders, follow-up, receiving materials and so on.
The whole system of purchasing, in terms of phases or grouping of related activities can be classified as follows:
Pre-purchase (Ordering) system
The salient features in each of the systems mentioned are as follows:
Pre-purchase system: Activities such as initiating the purchase through raising requisitions, requirement programs, selection of suppliers, obtaining quotations and evaluating them, are broadly the pre-purchase activities
- Requisitions: The department concerned (within the organization), in need of a material, usually presents a completed requisition form. Different types of requisitions used are:
- Standard Requisition: Also called as Indent for material (or service), Materials requisition plan etc. a requisition is made by an authorized person in the concerned department. However, it has to be countersigned by a senior officer who checks the entries made in. Normally, a requisition , in a pre printed format, contains particulars such as the detailed description of materials or services to be purchased, desired quantity, schedule for receipt of such material / service , the estimated price, possible sources and the account head, requisitioner’s identity
In any organization only a limited number of personnel are empowered to countersign the requisition as it amounts to authorization of the expenditure. Purchase department usually maintains a list of such officers so as to check the validity of the purchase requisitions. Normally, there is a delegation of power of authority for authorizing a requisition. This is expressed in terms of the financial limits up to which an officer can authorize a requisition for a capital or revenue item.
These details must also be available with the purchase department.
Traveling requisition: As the name suggests, this requisition form travels from the requisitioning department to the Purchaser directly who then only authorizes the supplier through a Purchase order to deliver the required material. This document is generally used for requisitioning items that are required frequently in bulk quantities over a long period of time. Usually, for repeat items such as in inventory a card containing the details of previous supply containing material specifications, suppliers details, last purchased price , reorder point, usage details are written permanently and provisions for entering date, quantity required, names of requisitioned and authorizer are available. On getting it, the purchaser only has to take these details for placement of order. The traveling requisition which is a permanent document of the originating department is returned to it. It reduces the paper work and eases the operation.
- Bills of materials: Bill of material is a comprehensive list of materials needed to produce a product or service. It is basically the details of materials needed, their specification, quantity, required delivery schedule etc. It is often used as a sequel to firming of a production plan, a stage where the exact material / service needs are known.
- Request for Quotation (RFQ): Also called as Tender Enquiries, an organization through its Purchase department, invites suppliers to quote rates for supply of materials / service. This is the step taken after receiving the requisition for an item. For this purpose often a standard format is used (customized also in case of large contracts). Against this document the prospective vendors quote their price and other terms and conditions of sale.
- Quotation: It is also called tender. A quotation is a proposal from a prospective vendor who has quoted in response to the RFQ sent to him by the purchaser. It contains price offered by the vendor as also the terms and conditions of sale as per the policy of the vendor.
Ordering System
After the offers (quotation / tender) are received and evaluated in respect to their fulfillment of the organizational requirement the appropriate supplier for his quoted rates is selected. This is expressed in terms of the buyer placing the formal purchase order on him. The purchase order containing suitable business terms and conditions is now a binding contract between the buyer and the supplier. A typical Purchase Order contains the following particulars:
- Purchase order reference number, as a communicating mode between the supplier and the buyer for linking of various subsequent correspondences
- Material description with detailed specifications,
- Quantity ordered
- Required Delivery schedule,
- Price, discounts, taxes and duties applicable
- Terms and conditions of purchase in details
- Destination where the materials are to be delivered (usually the name and address of the consignee),
- Shipping instructions,
- Authorization of the Materials Manager who signs the purchase order
The Purchase Order is made in multiple copies that are sent after their release from the Materials
Manager to several agencies such as:
- Supplier, with the original and a copy which the supplier is supposed to sign and return to the buyer as a mark of acceptance of the P.O.
- Indenters, as an information of order placement and for taking steps as provided for in the P.O.
- Finance, for making payment as per the provision of the P.O.
- Consignee, for receiving the material and clearing it for subsequent use by the organization
These are the indicative list and not the exhaustive one
Post-Purchasing System
Purchase orders are placed for getting material or service. As such after P.O. placement, follow-up with suppliers, receipt of material and making payment, once the materials have been received are involved.
Generally, in case of relatively big orders, many small jobs are required to be done as part of follow up with the supplier. Since after the P.O. the executive authority (usually the Indenter) comes into play, action such as receipt and clearance of drawing with supplier, clearing various doubtful issues contained in the P.O., at times, are involved. Also since the P.O. indicates a clear delivery schedule, the buyer is often required to chase up for ensuring that. In the process, the following action may be required:
- Receipt and clearance of drawing and documents submitted by the supplier
- Inspection, in part or full, of the material being manufactured by the supplier
- Handing over of site to the supplier to effect installation and commissioning
- Making available the necessary Goods carrying documents to the supplier
Inspection of the manufactured goods is often a major post purchase order activity. Large organizations usually have location offices called site offices spread across the country for carrying out inspection, ensuring dispatch of material and liasoning with many other agencies. Critical items require regular follow-up with the supplier. A few organizations operate with decentralized inspection facilities for on-the-spot inspection and acceptance. Purchase Order (P.O.) status reports are prepared so that follow-up is done where ever required. Once the material is received at the described site final inspection is carried out for its acceptance. In the process, adequate documentation is generated. On the basis of the item code, proper identification tag etc is attached. In fact, now the procedure is taken over by the Stores / Warehouse wing.
Payment release: The supplier also sends the invoice for the materials supplied for payment. On receipt of it the invoice is matched against the receipt details, quantity accepted etc so that payments can be made as per the agreed term of the P.O. Normally, invoices are sent to the finance department who releases the payment after following the procedure at its end.
