Material, Purchase and Store Management - Purchase Management
Purchasing is the first phase of Materials Management.
Purchasing means procurement of goods and services from some external agencies.
The object of purchase department is to arrange the supply of materials, spare
parts and services or semi-finished goods, required by the organization to
produce the desired product, from some agency or source outside the
organization.
Purchase management streamlines the purchasing and inventory control process of an organization for greater efficiency and
lower costs.
Purchasing
or purchase management basically is a function in any enterprise that works to
save money and enhance profits. Hence, it becomes one of the most important
departments or functions in a manufacturing company. Organizations have
realized that cost savings can be achieved if the purchasing decisions are
effective. The main function of this department is to procure the material or
inputs that are needed for production.
Importance of Purchasing:
1. Purchasing function provides materials
to the factory without which wheels of machines cannot move.
2. A one percent saving in materials cost
is equivalent to a 10 percent increase in turnover. Efficient buying can
achieve this.
3. Purchasing manager is the custodian of
his firm’s is purse as he spends more than 50 per cent of his company’s
earnings on purchases.
4. Increasing
proportion of one’s requirements are now bought instead of being made as was
the practice in the earlier days. Buying, therefore, assumes significance.
5. Purchasing
can contribute to import substitution and save foreign exchange.
6. Purchasing
is the main factor in timely execution of industrial projects.
7. Materials
management organisations that exist now have evolved out or purchasing
departments.
Objectives of Purchasing
Department:
The purchasing objective is sometimes
understood as buying materials of the right quality, in the right quantity, at
the right time, at the right price, and from the right source. This is a broad
generalisation, indicating the scope of purchasing function, which involves
policy decisions and analysis of various alternative possibilities prior to
their act of purchase.
The specific objectives are:
1. To pay reasonably low prices for the
best values obtainable, negotiating and executing all company commitments.
2. To keep inventories as low as is
consistent with maintaining production.
3. To develop satisfactory sources of
supply and maintain good relations with suppliers.
4. To secure good vendor performance
including prompt deliveries and acceptable quality.
5. To locate new materials or products as
required.
6. To develop good procedures, together
with adequate controls and purchasing policy.
7. To implement such programmes as value
analysis, cost analysis, and make-or-buy to reduce cost of purchases.
8. To secure high calibre personnel and
allow each to develop to his maximum ability.
9. To maintain as economical a department
as is possible, commensurate with good performance.
10. To keep top management informed of
material development which could affect company profit or performance.
11. To achieve a high degree of
co-operation and co-ordination with other departments in the organisation.
Buying Techniques
Effective
purchasing management and professional buying works better when a good
strategic framework exists. Commonly, relationships between suppliers and
customers are driven by personalities, or the needs of the moment, whereas
relationships and purchasing strategy should ideally be based on a combination
of factors reflecting the nature of each purchasing area, including: risk,
complexity, value, the market and basic matters of supply and demand.
7 purchasing strategies that
most of them implement.
1. Supplier Optimization &
Relationship Building
The
company chooses an optimum mix of vendors who can provide the best prices and
terms. This process usually means that
the less able suppliers who cannot provide a quality service at the terms and
prices required are discarded. This is
by far the most common of the various purchasing strategies.
2. Total Qualify Methods (TQM)
Total
Quality Methods, require the vendors to provide an ever-increasing quality
service with zero errors. The supplier ensures purchasing best practices using
a number of tools such as six sigma.
3. Risk Management
As
more companies obtain their supplies from countries such as China and India,
they are more concerned with the risk management of this supply chain. Whilst
these countries can supply products at very advantageous prices, these
advantages can be soon negated by a natural or human disaster.
4. Global Sourcing
Large
multinational companies see the world as one large market and source from many
vendors, regardless of their country of origin.
Implementing
a global strategic sourcing strategy means efficiently sourcing goods and
services from any country that can manufacture the goods or provide the service
more economically.
While
Global Sourcing is here to stay, organizations need to tread carefully and have
plans in place to manage risks.
5. Vendor Development
Depending
on the scale and depth of services or goods a vendor provides, it might be
necessary to work closely with such vendors.
Helping in developing processes that assist these vendors to come with
better or cheaper products, helps companies to reduce costs.
Or
in cases where a company is dependent upon just one supplier for their products
& the supplier is unable to perform to the required standards, the
purchaser may assist the vendor in improving their service or implement
processes to improve their procurement cycle. This ultimately would help the
purchaser/buyer have a reliable supplier and product deliveries.
6. Green Purchasing
This
is one of the more common purchasing strategies for governments and local
governments. This strategy champions the need for recycling and purchasing
products that have a negative impact on the environment.
7. Building & Training
People's Procurement Skills
While
training people is the soft-side of purchasing & procurement strategies,
this is probably the most important strategy - all the other strategies above
would have to be implemented by people, and if they don't have the necessary
skills to deliver the procurement strategy, the strategy delivery will fail.
10 Techniques Purchasing Departments Use to Get a Better Deal
Purchasing
departments will…
1.
Never give any company 100% of the available
business. By maintaining two sources of supply, they can play
one against the other.
2.
Use flexibility in payment terms and the threat of
slowing payment, unless a lower price is received.
3.
Solicit bids from as many suppliers as possible,
regardless if they already know which supplier they want to use. They
often do this for no other reason than to have multiple offers they can
then leverage with the preferred supplier.
4.
Leave a few items vague on a bid to give suppliers
flexibility in their response. This will equip the purchasing
department to then use the new ideas against the other suppliers.
5.
Tell you they have a 3rd party
group that can take care of their needs at a lower price.
6.
Alter ordering quantities or supply-chain needs at
the last minute, unless payment terms are modified.
7.
Leverage orders with companies against the
supplier’s fiscal year-end. This makes it harder for a supplier to make
their sales number without offering a lower price.
8.
Just prior to receiving a proposal from a long-term
supplier, email them a copy of a competitor’s proposal asking for their
feedback. They do this as a way of simply making people feel nervous.
9.
Make comments about the supply-chain and escalating
costs and how they will be passed along to suppliers who aren’t offering
lower-price options.
10.
Simply become hard to reach, giving the impression
to suppliers what they sell is not needed.
Procedures for Purchasing Materials
Following purchasing procedure is generally
followed:
1. Determining Purchase
Budget:
Purchase Manager prepares a purchase budget
for the forthcoming financial year. Purchase budget is prepared with the help
of production planning department. It contains detailed information regarding
quantity to be purchased, quality of materials, time of purchase and the
sources of procurement. A schedule of materials and components needed for
various jobs, known as bill of materials, is also prescribed for working out
details of purchase budget. A bill of materials is also useful in exercising
control over the utilization of materials.
2. Receipt of Purchase
Requisition:
The purchase officer initiates action for
the purchase of materials only when he receives a request for the same. The
store-keeper and departmental heads send requisition slips to purchase
department giving details of materials required by their departments etc. A
purchase requisition is a form used as a formal request to the purchasing
department to purchase materials.
This form is prepared by the store keeper
for regular stock materials and by the departmental head for specific materials
not stocked as regular items. The storekeeper knows when an action or fresh
procurements is to be initiated. He will send the requisition when materials
reach re-ordering level. He retains one copy of the requisition with him for
future reference. It is on the basis of purchase requisition that orders are
placed for materials.
3. Determining Sources
of Supply:
Purchase Manager remains in touch with
various suppliers of materials. The quotations are invited for the purchase of
specific items. After receiving quotations, a comparative study is made
regarding terms and conditions offered. The factors to be considered include
price, quantity, quality, time of delivery, terms of payment, trade discount
and reputation of suppliers. After looking at various factors a final decision
is taken about the supplier of goods.
4. Placing Order:
After selecting a supplier, a formal
purchase order is sent for the supply of goods. A purchase order is sent on a
printed form and is duly authorized by the purchase manager. This order should
contain details about the quantity, quality, price, mode of delivery, terms of
payment etc. The purchase order authorizes the vendor to despatch goods
specified in it. It establishes a contractual relation between the buyer and
the vendor.
5. Follow-Up of
Purchase Order:
A purchase order normally bears a date by
which the goods must be delivered It is in the interest of the organization
that goods are received in time for keeping uninterrupted flow of materials.
The suppliers may be reminded of the date of delivery of goods. A follow-up of
purchase order is necessary to receive stocks in time.
6. Receipt and
Inspection of Materials:
In big concerns the task of receiving
materials is assigned to the purchase department whereas in small concerns this
work is done by the store keeper. After unpacking goods their quantity is
compared to that given in delivery challans. Any discrepancy in items is
reported to the purchase department. The specifications and quality of goods is
also checked at this stage.
7. Checking Invoices:
Lastly, purchase department checks the
invoices supplied by the vendor with that of its own records. The quantity,
quality, price, terms etc. are compared with those given in purchase order.
After making full checking the invoices are sent to accounts department for
payment.
The
Purchasing Process
Traditionally, the purchasing process is
a cycle, with each step requiring the exchange of information and various
approvals to move forward. Every business will have its own unique touches to
add, but generally speaking, the purchasing process follows a well-established
pattern of events.
1. Needs Analysis
At this stage, the company recognizes and
documents a need for goods or services to solve a particular problem. The
procurement team describes the need to be met, and works with others to
determine how best to do so.
2. Purchase
Requisition to Purchase Order
The “purchasing” portion of the
purchasing process kicks off with a purchase requisition submitted to the
purchasing department or purchasing manager by the individual, team, or
department requesting the goods or services. The purchase requisition contains
full details on the items or services to be obtained.
3. Purchase Order Review and Approval
Approved purchase orders are sent to
accounting to verify the funds exist in the appropriate budget to cover the
requested goods and services.
4. Requests for Proposal
Purchase Orders that receive budget
approval are returned to the procurement department and, as required, used to
create requests for proposal (RFPs), also
known as request for quotation, or RFQs.
These are dispatched to vendors to solicit bids to fulfil the order for goods
or services.
Potential suppliers submit their bids,
and are carefully reviewed based on their performance history, compliance
records, and important characteristics such as average lead times, reputation,
and price.
5. Contract
Negotiation and Approval
The vendor with the winning bid is then
awarded a contract, which is further refined before signing to ensure optimal
terms and conditions and to ensure a mutually satisfactory arrangement for both
parties.
Once the contract is signed, the purchase
order is a legally binding agreement between buyer and seller.
6. Shipping and
Receiving
The supplier delivers the goods or
services within the agreed-upon timeframe. Once they’ve been received (in the
case of goods) or performed (in the case of services), the purchaser carefully
reviews the goods and services to ensure they’ve received what was promised,
and notifies the vendor of any issues.
7. Three-Way Matching
A cornerstone of spend management,
three-way-matching is the comparison of shipping documents/packing slips with
the original purchase order and the invoice issued by the supplier. This
comparison is used to ensure all the information related to the transaction is
accurate.
Discrepancies must be rectified as soon
as possible to avoid additional charges, delays in production and payment, or
damage to supplier relationships.
8. Invoice Approval
and Payment
Successfully matched orders are approved
for payment. Any modifications or additional charges may require another layer
of approvals before payment can be issued. Once approved, payment is issued to
the vendor. Ideally, such payments are made with the goal of capturing early
payment discounts and other incentives while avoiding late payment fees.
9. Accounting Records
Update
Completed orders are recorded in the
company’s books, and all documents related to the transaction are securely
stored in a centralized location.
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