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Managing Your Materials

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What is Purchasing?

Purchasing is the process of sourcing and ordering materials, services, and equipment. It is sometimes referred to as Procurement. Its main objective is to procure materials at the lowest possible cost consistent with the quality and service required. Aside from ensuring that the firm has continuous supply of materials, it is the function of purchasing to ensure that there is a balance between materials supply and inventory levels so that it can maintain its profit position as far as materials costs are concerned.

What is an effective purchasing procedure?

 The purchasing procedure is discussed below:

Step 1 - Receipt and analysis of the Purchase Requisition (PR)

The purchasing department receives and analyses the material or supply requirements from the requesting department. Such requests are found in the Purchase Requisition form which contains the details of the requests such as quantity and product specifications.

 Step 2 - Selection of the potentials sources of supply

If the material or supply being requested is not a new item, the purchasing staff will look into their files for records on existing suppliers of such requests, otherwise, they will have to check either the yellow pages or the internet or other possible sources to look for possible suppliers.

Step 3 - Issuance of Requests for Quotations

If there is no regular supplier for the material or supply being requested and there is no intent to look for new ones, then the existing supplier will be contacted. However, new or potential suppliers will be asked to submit price quotations for evaluation by the purchasing department.

Step 4 - Selection of the Right Source

Once quotations have been received, the suppliers will then be evaluated. Criteria for evaluation include the following:

•  Price quotations

•  Specifications

•  Delivery capability

•  Supplier reliability and dependability

•  Supplier reputation

•  Possibility of volume discounts

•  Possibility to establish long-term relationship with the supplier

Selection of the appropriate supplier depends on the type of item and the importance of the item being procured.

Step 5 - Determination of the Right Price

Once the supplier has been selected, then both parties will have to agree on the right price. Negotiations for price or volume discounts and other arrangements can occur during this step.

Step 6 - Issuance of the Purchase Order ( PO )

Once the price has been agreed upon and approved, then a Purchase Order will be issued to the supplier confirming the details presented in the Purchase Requisition form. It is the function of purchasing to follow up on the supplier not only for compliance on the content of the PO but on the agreed delivery schedule.

Step 7 - Analysis of the Receiving Reports and Approval of Vendor's Invoice for payment

Prior to approval of the vendor's invoice for payment, it is the responsibility of purchasing, through its Receiving Department, to evaluate the content of the delivery as presented in the Receiving Report vis-à-vis the PO and PR. Random sampling of the goods may be conducted to determine veracity of the content as reported in the Receiving Report. Strict quality monitoring is critical at this stage.

What are the different purchasing approaches?

Purchasing approaches differ depending on whether the item is a low value or high value item or whether it has a high or low impact on business (refer to Figure 1) .

Figure 1 - Specific Purchasing Approaches

Business Impact

     

High

 

LV , HBI Items

Cost – Based Purchasing

HV, HBI Items

Supplier Partnerships

Low

LV , LBI Items

Commodity Purchasing

HV, LBI Items

Bidding Process

 

 

Low

High

Total Product Value

A description of the different purchasing approaches is described below:

Items

Classification of Items

Description

Purchasing Approaches

Routine Items

Low Value, Low Business Impact Items

Items that can be procured anywhere like office supplies,

Commodity purchasing

Leverage Items

Low Value, High Business Impact Items

Low value items but need continuous replenishment

Cost – based purchasing

Bottleneck

High Value, Low Business Impact Items

Items which do not have a direct impact on company operations but are expensive items (cars, computers)

Bidding process; supplier accreditation program

Critical Items

High Value, High Business Impact Items

Items that are critical for the business operations in terms of impact and product value

Supplier partnerships / purchasing agreements

REFERENCES:

•  Stanley E. Fawcett and Steven R. Clinton, Enhancing Logistics Performance to Improve Competitiveness of Manufacturing Organizations, Production and Inventory Management Journal , 1 st Quarter 1996, pages 40-46.

•  Joseph R. Carter and Ram Narasimhan, Is Purchasing Really Strategic? International Journal of Purchasing and Materials Management , Winter 1996, pages 20-28.

•  Lisa M. Ellram and Owen R. Edis, A Case Study of Successful Partnering Implementation, International Journal of Purchasing Materials Management , November 1996, pages 20-28.

•  Richard B. Chase and Nicholas J. Aquilano. Chapter 17 – Materials Management and Purchasing, Production and Operations Management: Manufacturing and Services , 7 th edition, 1995, pages 694-732.

•  Wim G. Biemans and Maryse J. Brand, Reverse Marketing: A Synergy of Purchasing and Relationship Marketing, International Journal of Purchasing and Materials Management , Summer 1995, pages 29-37.

•  Charles A. Watts, Kee Young Kim, and Chan K. Hahn, Linking Purchasing to Competitive Strategy, International Journal of Purchasing and Materials Management , Spring 1995, pages 3-8.

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