The purchasing cycle is the sequence of events that has to be gone through before an item is finally delivered to stock. A purchasing department buys many different types of materials and services, and the procedures used in completing a total transaction normally vary among the different types of purchases. However, the general cycle of activities in purchasing most production materials is fairly standardised.
The following steps constitute the typical purchasing cycle.
(1) Recognised, define and describe the need;
(2) Transmit the need;
(3) Investigate and select the supplier;
(4) Prepare and issue the purchase order;
(5) Follow up the order;
(6) Receive and inspect the material;
(7) Audit the invoice; and
(8) Close the order
Recognition, Definition, Description, and Transmission of the Need
The need for a purchase typically originates in one of a firm’s operating departments or in its inventory control section. Transmission of the need to the purchasing department is usually
accomplished by one of three forms:
(1) a standard purchase requisition
(2) a traveling purchase requisition, or
(3) a bill of materials.
Standard Purchase Requisition
The purchase requisition is an “internal” document, in contrast with the purchase order, which is basically an external document. Most companies use a standard, serially numbered purchase requisition form for requests originating in the operating departments. The user generally makes a minimum of two copies. One copy is sent to purchasing; the other is retained in the using department’s file.
Some companies use as many as nine copies of the requisition for communication with other interested departments. Purchase requisition formats vary widely because each company designs its format to simplify its own particular communication problems.
The essential information which every requisition should contain, however, includes a description of the material, quantity and date required, estimated unit cost, operating account to be charged, the date, and an authorized signature.
Traveling Purchase Requisition
Many companies use a “traveling requisition” to communicate to purchasing the material needs that originate in the inventory control section. In a manually operated system, a traveling requisition is a simple printed card that is usually filed with the inventory control record for each item carried in inventory. The following data typically appear on a traveling requisition:
(1) a complete description of the item, including reference to applicable specifications;
(2) a numbered list of potential suppliers and their addresses;
(3) last prices paid to various suppliers;
(4) reorder point and order quantity values; and
(5) a record of usage.
If desired, the card can also include vendor performance information and other historical data.
When the stock level drops to the reorder point, an inventory clerk takes the traveling requisition from the file, notes the current stock level and the desired delivery date on the card, and sends it to the purchasing department. To indicate that the requisition has been sent to purchasing, a coloured signal clip is usually attached to the inventory record card.
This procedure eliminates the typing of a purchase requisition. Since the traveling requisition contains information the buyer would otherwise have to locate in his own files, it also conserves his time. After reviewing the requisition, the buyer pencils the small quantity of required order data in the provided columns.
The purchase order is then typed directly from the traveling requisition. After the buyer signs the purchase order, the traveling requisition is returned to the inventory control section and refiled with its respective inventory record card.
In companies using computerized inventory control systems, the work of the inventory control clerk is done automatically by a computer. In such cases, the computer typically produces a purchase requisition (in printed or punched card form) that replaces and contains essentially the same information as the traveling requisition.
Bill of Materials When a design engineer completes the design of a part or an assembly, he makes a list of all the materials and the quantity of each required to manufacture the item. This list is called a “bill of materials.” (In some cases it is possible to include the bill of
materials directly on the engineering drawing.) The bill of materials, along with a production schedule, can be sent directly to purchasing as notification of the production department’s need for materials Total requirements are obtained by simply extending the bill of materials for the production quantity scheduled.
In many companies using computerised production and inventory control systems, this entire procedure is accomplished by the computer. It produces a single print-out containing the information required by the buyer.
This procedure eliminates the necessity of typing numerous purchase requisitions and is an efficient method of transmitting the need for standard or easily described materials. It is used most effectively in situations involving special one-time projects or in firms operating on a job-shop basis.
Selecting the Source
Once the buyer has confirmed the validity and accuracy of the requisitioning document, his next task is to select the source of supply. In the case of routine items for which supplier relationship have already been developed, little additional investigation may be required to select a good source.
Very often, buyer tend to stick to the “tried and trusted” suppliers they have used for several years for the majority of the items they purchase. This may happen because there is a strong relationship with a supplier, or because of the problems involved in changing suppliers, such as the change over of tools and patterns; or because the buyer is too lazy to keep abreast of the market in which he is buying.
This could mean that the company is not getting the best deal possible. Where a ‘new’ item is required, the buyer will need to search for possible suppliers and he should use the following sources of information:
1. Advertisements
These may appear in trade or professional journals or newspapers or be sent through the post. If they are likely to be of use to the company in the future, they should be suitably indexed and filed. A good buyer always has a reference file for the goods he may be called upon to buy.
2. Sales Representatives
As with advertisement, representatives who are offering goods whe may be of interest to the company in the future can provide user information to the buyer.
3. Registers or Directories
Trade ‘directories or classified telephone directories provide lists of potential suppliers which can be compared in term of geographical location or size or, in some cases, financial status. They only provide basis for further enquiries.
4. Exhibitions
Periodical trade fair or exhibition enable buyer to see what is available and to compare the products of a number of potential suppliers all at one time. They are an excellent way for the buyer to keep up-to-date on the goods he buys. Exhibition catalogues usually provide details of the main suppliers in a particular field and should be retained for reference purposes.
5. Company Purchase Records
These can normally give details of former suppliers and indicate their previous performances in terms of quality and delivery
6. Colleagues in the Organisation
People in the sales department may be particularly helpful in suggesting potential suppliers but the buyer must not be unduly influenced just because it comes from a colleague.
7. Professional Associates
These may alrendy have experience of certain suppliers and can give more detailed information about them.
8. Data bases
Data bases can provide up-to-date information and may he space saving substitutes for large reference collections
9. Chambers of Commerce
These always comprise of member organisations dealing in various businesses and the chamber always has up-to-date details of its members and their various products or services
10. Suppliers Catalogues
To obtain more detailed information about certain suppliers one can send for specific brochures or catalogues giving technical specifications, prices, trading terms eteWhere these are received through the post, they can be indexed and filed.
11. Trade Journals
The text of these journals provides the buyer with information as regards new products, substitute materials ele. While trade gossip keeps the buyer informed of changes in the policies of suppliers and in their personnel
12. Embassies
Many countries maintain embassies in the buyer’s country. They usually have a trade or commercial attache whose task is specifically to encourage trade between the countries concerned. He is likely therefore, to have detailed information of manufacturers in his home land.If he hasn’t he should be able to get addresses through his contact.
(a) Identify Potential Suppliers
This is the first major responsibility of a purchasing manager. If the right suppliers is identified and selected, this will confer the benefits of competitive pricing, reliable, quality, timely delivery, good technical service and other benefits on the organisation
(b) Enquiry Procedure
After making out a list of possible suppliers, preliminary enquiries of “requests for information (RFI) will be sent to each supplier to furnish information about the possibility of supplying the quality and quantity of the requirements, their financial status, technical facilities or services, their past performance records, etc. If the information required is on construction contracts, then: “pre-qualification questionnaires” rather than RFI is sent to each contractor. The aim is to pre-qualify or make a preliminary selection of potential suppliers who will likely undertake the contract.
The form of this enquiry or questionnaire will depend on such factors as: nature of supplies or services required, purchase volume and value, extent of technical information, legality of the transactions, the limited authority of the purchase, etc
(c) Request for Quotation or Tender
After short-listing all possible suppliers out of enquiry feedback, the buyer then sends out formal enquiries or whate referred to as “request for quotation” (RFQ) or tender for the short listed suppliers. The purchaser should;
1. Use ordinary letter of enquiry or relatively simple neats
2. Use a formal enquiry document for relatively complex or detailed needs
3. Give a notice in the presa especially where large value orders are involved or where this is the practice as found in public sector organisations. The closing date for the submission of the tenders should he specified. The formal enquiry form should be detailed to pricing information, submission closing date. items required, and information-relating to delivery, etc.
(d) Evaluation of Supplier’s Quotations and Tenders
A quotation is a document which is issued by a supplier in response to an “enquiry”, offering goods and services for a given consideration, and which is hoped to be delivered in a given delivery period or time.
A tender is an offer for the supply of goods and services and is usually made in response to a request for tenders. Tendering is widely used in the public sector to ensure observance of the principles of public accountability
In short, quotations and tenders are the means through which the buyer obtains information regarding a particular product, material, service or contract. Such information represents the conditions and terms of trade between the supplier and the buyer. Such terms include information related to price, quality and other delivery conditions terms and legal qualifications such as warranties.
When the buyer receives this quotation/tender from the supplier he checks them to ensure that they conform to what the organisation requested for and to see whether the supplier’s correctly interpreted the organisation’s needs accurately,
The buyer then compares the resume from all suppliers, on quotation/tender comparism sheet to select the supplier with the most promising and acceptable offer in terms of delivery time, quality, quantity, price, discounts, warrantees, ete combined
Other issues worthy of assessment will include:
Continuity of supply, whether the supplier is strike prone, or whether he faces liquidation at short interval. Buyers must pursue suppliers’ balance sheet as a guide and sometimes visit the plant of the supplier where doubts exist. Also, samples may be requested for from suppliers or other organisations who are supplier’s customers may be asked to stand as referees. If the buyer is satisfied with the conditions of a supplier, he may then issue a local purchase order (LPO) to the supplier to supply.