Purchasin Full Flowchart

BHARATI VIDYAPEETH’S COLLEGE OF ENGINEERING, KOLHAPUR

CASE STUDY: PURCHASING ACTIVITIES

Introduction

Purchase Management is a function of materials management in a company. Their basic

function is procuring the inputs for production function. This function encompasses suppliers

in the market external to the organization and several internal to the organization.

Till recently, the purchasing process simply involved placing an order with the supplier who

offered the lowest price. Nowadays, increase in competition and market demand and scarcity

of resources have forced organizations to reexamine their purchasing activities. The

purchasing department functions have expanded considerably and include activities such as

verifying the credentials of suppliers, inspecting the quality of the material to be purchased,

ensuring the timely delivery of the material, etc.

While the value of purchased items varies from industry to industry, it adds up to more than

fifty percent of sales in all industries. Purchase management is regarded as a significant

activity in many organizations because of the high cost involved in carrying out purchasing

activities, increasing quality benchmarks, and increasing global competition. Purchase

departments buy raw materials, parts, machinery, and services used by production systems.

The objective of purchase management is to procure the right equipment, materials, supplies

and services in the right quantity, of the right quality, from the right suppliers, at the right

time, at the lowest price.

OBJECTIVES OR GOALS OF PURCHASING

Primary objective or goal of purchasing function is making inputs available to the conversion

process at minimum cost to the final output of the company. Thus focus is on system output

rather than on micro level objectives.

The inputs to be made available are raw materials, semi finished items, bought out items etc.

There are certain parameters to be monitored for fulfilling the system objectives. We can call

them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right

Case Study: Purchasing Activities Page 1


price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs

are achieved primary objective is fulfilled:-

Right Price: Right price is determined by costing the production process of the supplier.

Right price is determined by allowing reasonable profit for the supplier and insisting and

helping to reduce cost. Tender system should be used to identify lowest responsible

bidder rather than lowest bidder. Principles normally used to ensure right price are cost

structure and learning curve.

Right Quantity: Right quantity of purchase is the one that ensures no excess and no

shortage. High priority items are subjected to determine the right quantity for purchase.

This ensures overall minimum cost for inventory.

Right Quality: In an item purchased should ensure adhering to mutually accepted

standard by supplier and customer at the time of finalizing the purchase order. The

accepted standard may be a drawing, a sample, a grade or a universal standard like DIN,

IS, BS, ASTM etc.

Right Place: is the one where the item is going to enter the value stream. If the item is

not available here, when needed, it is in short supply for the process.

Right Time: is as decided by production schedule for meeting customer’s requirements.

THE PROCESS OF PURCHASINGThe purchasing process mainly carried out in three segments.

Pre purchasing Purchase order Post purchasing

Steps involved in PurchasingA. Pre-Purchase activities:

1. Recognizing need2. Purchase requisition(PR)3. Make copies of PR as per department requirement4. Identifying a supplier.5. Send copies of PR to supplier6. Getting the quotations from supplier



7. Analyzing the quotations8. Finalize the quotations

B. Purchase Order 9. Qualifying and placing an Purchase Order(PO)10. Getting Order Acceptance(OA).

C. Post Purchase Activities11. Follow up procedures12. Receipt13. Invoice checking14. Monitoring and managing delivery process.

Detailed Analysis of Purchasing activityRecognizing the need:All departments need to buy something or the other. So first need can be recognized for placing the order. Whenever a department needs an item (material), it informs the purchasing department.

Purchase requisition:1. A form called as “purchase requisition” is filled by the production/planning

department and forward to the purchasing department.2. The purchasing requisition contains the following:

- Name of requestor- The planned use of the item.- The specification of the item.- Number of units.- Tentative price per unit.- Expected of purchase.


Requisition No…………………. Date……………………Shop: ………………………………Required for

1. (a)Work order no: ………………………..(b) Department use: ……………………(c)To stock: ……………………………………

Sr.no DescriptionOf material

Specification

Quantity Approx cost

Remarks if any

Delivery Required by ………………….. (Date), at ……………………. (place)Address of probable supplier …………………………………………………………

Signature

Production/Planning Manager ……………………………………………………………………………………………………………………………………………………………

2. Report Of store Keeper

Signature

StoreManager ……………………………………………………………………………………………………………………………………………………………3. For the use of Purchase/Inspection section

Signature

Chief Buyer


Same copy is also Sent to the supplier. Hence 3-6 copies are made as per department requirement.

Part I is filled by the production or planning department. For quick purchasing and monitoring the work of purchase section should maintain the addresses of probable suppliers who can supply these materials.

Part II is for storekeeper for onward transmission, it is filled by storekeeper in remaining 2 copies and he reports on it whether the required material is available in the store or not. If the storekeeper also wants this material for stocking in store he adds demand also.

Part III is for purchase section, they’ll make the necessary arrangement for purchases.

Identifying a supplier and Send copies of PR to supplier:

As per requirement prepare the list of suppliers who deal with the business of the articles to be purchased and are reliable. If the material to be purchased is of small amount and required urgently it may be purchased locally.

If necessary prepare and issue N.I.T (Notice inviting tenders) to the concerning suppliers, mentioning different terms, conditions, date and time of the opening and closing of tenders.

There are two types of tenders: 1. Open Tenders 2. Closed Tenders

Getting the quotations from supplier, Analyzing and Finalize the quotations

Open the tender/Offer/Quotation on the prescribed time on the prescribed date.



Prepare a comparative statement of the rates, terms and conditions mentioned in the tender and study them. Finalize the quotation in terms of quality, cost and other parameters.

Qualifying and placing an Purchase Order(PO)

1. Purchase order is the most important element in ordering system. Purchase manager

releases the purchase order after selecting the supplier and finalizing the price and other

conditions of sale. Once the purchase order is raised and accepted it becomes a legal

document.

Contents of the purchase order are:-

Purchase order reference number

Description of materials and specifications

Quantity required and delivery schedule

Price and discounts

Shipping instructions

Location where the material is to be shipped

Signature of the authorized officer

Detailed terms and conditions:-

It includes terms and conditions regarding payment, Transportation, warranties, limitations and liabilities, Scope of work, replies of Technical questionnaires.


COMPARATIVE STATEMENT

Date of issue of N.I.T. ………………….. Date of receipt of Tenders ………………….

Sr. no. Name of article with Specification

Quantity Reqd Firm/Vendor 1 Firm/Vendor 2

Quoted value Quoted value

Terms and conditions comparison

1.

2.


a) Several numbers of copies made to be forwarded to various recipients. Many

companies color code the copies making the color destination specific.

b) Original and a copy is sent to the supplier for acknowledgment of the original

order. This acknowledgment is acceptance of terms and conditions of purchase

order.

c) One copy is sent to the receiving department for making necessary receiving

arrangement

d) One copy is sent to the indenting department for information.

e) One copy is sent to finance department for organizing payment to the supplier.





Post Purchase Activities1. Follow up procedures2. Receipt3. Invoice checking4. Monitoring and managing delivery process.

Follow up procedures: Follow up is an expensive activity for an organization.

Hence this should be minimized and made more effective. A sound procedure for

follow up is required to eliminate duplication and ineffectiveness. Follow up

responsibility is assigned to buyers responsible for areas in which suppliers are

situated.

Receipt: Receipt system should ensure that defects in receipt process are eliminated

proactively. A systematic record of all receipts, carrier details and descriptions is

maintained. This record is in chronological sequence of arrival of supplies. The

system ensures that inspection of consignments received is arranged in time and

payment to suppliers for accepted consignments is organized. In many organizations

a receipt section handles this activity centrally.

Invoice checking: supplier sends his invoice to customer’s finance department for

payment for the goods supplied. Invoice checking system ensures that the invoice is

checked against the PO terms, receipt details, quantity received, inspection reports

[accepted quantity and rejected quantity], losses, damages etc. this system helps

materials management to coordinate with finance department for payment to

suppliers.

Delivery of Material receipt and material examination

Material supplied by the vendor is received by the receiving department which unpacks the materials received and checks the quantities and conditions of the materials. A copy of purchase order is present with the receiving department to check the materials received. A material receipt is material received report. It is prepared and is sent to purchase department to inform that these are goods received and also for them to check and compare it with the purchase order.



A material receipt form is as under

Material examination

All items, after they have been received, are inspected and sample tested to ensure that the purchase order specifications have been met or not. Results of the inspections & tests are indicated in the testing report, upon the basis of which a clearance report or rejection note is prepared and sent by the inspection department to purchase department In case of rejection, a part or whole of the consignment may be returned to the vendor with a request either for complete cancellation of the order or for replacement. A clearance report or rejection note is as under



Entire work flow from initial stage to final stage will consist of Five Toll Gates 1st Toll Gate - Work Assessment / Understanding 2nd Toll Gate - Vendor Selection / Evaluation 3rd Toll Gate- Release of Order (Clarity on Technical and Commercial conditions /requirements)4th Toll Gate - Certificate of Conformance (CoC) form QA 5th Toll Gate - Delivery, Completion of Project and Feedback from Customer Flowcharts will graphically represent the steps making up the entire process.












Purchasin Full Flowchart

Documents

right price

right quantity of purchase

purchasing activities

purchasing process

right quality

right time

right place

right suppliers