Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture products. Purchasing procedures are “the series of activities designed to obtain products of the right quality and quantity at the right price and time and from the right source.―
Traditional Purchasing Procedures:
In this traditional model, purchasing was seen as essentially a clerical function. Each transaction generated its own paper trail, and the same process had to be followed whether the item being purchased was a box of paper clips or a new bulldozer. It was focused on getting the right quantity and quality of
goods to the right place at the right time at a decent cost. The typical buyer was a shrewd negotiator whose primary responsibility was to obtain the best possible price from suppliers and ensure that minimum quality standards were met.
Instead of using one supplier, the purchaser would usually take a divide-and-conquer approach to purchasing—buying small amounts from many suppliers and playing one against the other to gain price concessions. Purchasing simply was not considered to be a high-profile or career fast-track position—when surveys were taken of organizational stature, purchasing routinely rated in the lowest
quartile. Senior management’s interests historically have focused on marketing, research and development, finance and operations while purchasing and materials management have all frequently
been subordinated. This has now changed with purchasing being a strategic function in many organizations.
The Basic Purchasing Cycle
Purchasing procedures and policies vary widely from one organization to another. The stages that almost any purchasing transaction will have to progress through are:-
- Recognition of the need
- Description of the need
- Investigation and selection of potential suppliers
- Preparation and issue of the purchase order
- Follow-up of the order
- Processing discrepancies and rejections
- Auditing the transaction
- Closing the transaction
- Maintenance of files and records
- Recognition of the need
Before any purchasing transaction occurs, someone must notice that something is needed. E.g. user department or storekeeper. At this stage, the concerned department issues a requisition. Requisition is forwarded to stores or purchasing as appropriate
2. Description of the need
The requisition/bill of materials issued must contain details/specification of the required material. Purchasing does not act on the description without inquiry of past purchases and without involvement of user department for clarification if unclear or to suggest alternatives that offer better quality/lower price (neither should purchasing accept requisition without question)
3. Investigation and selection of potential suppliers
The purchaser narrows down suppliers from the large list following appropriate procedure. If the item is standard/routine, the procedure is simple. For a non-standard item, proper investigation is required to establish price & availability. They then solicit for quotations and engage in negotiations.
4. Preparation and issue of the purchase order
The buyer makes a formal purchase order which is usually a standard form produced within the organization. This form creates legal obligations hence legal terms are included.
5. Follow-up of the order
The buyer shouldn’t assume anything. He/she may need to chase the supplier to check if delivery will be made on schedule. The supplier should issue an order acknowledgement on receipt.
6. Processing discrepancies and rejections
Once the sending company delivers the product, the recipient accepts or rejects the items. Acceptance of the items obligates the company to pay for them.
7. Auditing and Closing the transaction
Three documents must match when an invoice requests payment – the invoice itself, the receiving document and the original purchase order. The agreement of these documents provides confirmation from both the receiver and supplier. Any discrepancies must be resolved before the recipient pays the bill. Usually, payment is made in the form of cash, check, bank transfers, credit letters or other types of electronic transfers.
8. Maintenance of files and records
In the case of audits, the company must maintain proper records. These include purchase records to verify any tax information and purchase orders to confirm warranty information. Purchase records reference future purchases as well.
Authorization of Need
Buyers spend huge sums of money on purchases hence care must be taken to avoid inappropriate or irresponsible requisitions. This is achieved through authorization procedures at three main points in the purchasing cycle:
- A requisition must be signed by an authorized individual before being passed to purchasing.
- A Purchase Order must be signed by an authorized person within the purchasing/finance department (requisition must be there)
- On receipt of suppliers invoice, it is not passed for payment to Accounts department until after inspection and purchasing/finance/user staff have carried out checks.
Inefficiencies of Traditional Purchasing
- A sequence of non-value adding clerical activities
- Excessive documentation – for a new buy a minimum of 7 documents i.e. requisition inquiry, quotation, purchase order, acknowledgment, delivery note, goods received note & invoice.
- Excessive time in processing orders both internally & externally
- Excessive cost of purely transactional activities
- Traditional Purchasing Procedures have come to be increasingly regarded as unacceptably slow, expensive, and labor intensive.