Purchase and Store routine

The normal process of purchasing, storing, control and issue of materials consists of the following documents:

Document 1. Bill of Materials:

Bill of Materials is a comprehensive list of materials, with specifications, material codes and quantity of each material required for a particular job, process or production unit. It will also include the details of substitute materials. It is prepared by the engineering or planning department for submission of quotation and after the receipt of work order. It is a method of documenting materials required for execution of the specified job work.

Bill of Material acts as an authorization to the Stores Department in procuring the materials and the concerned department in material requisition from the stores. It is an advance intimation to the concerned departments of the job, work order to be completed.

It is circulated to:

(a) Purchase Department,

(b) Stores Department,

(c) Cost Accounts Department, and

(d) Product Department.

Advantages:

(a) It acts as a guide in planning the execution of job, process or product units by documenting all materials required for that specified work.

(b) It is a base for action to be initiated by the Stores Department in placing the purchase requisition with the purchase department.

(c) The information mentioned in the bill of materials act as a standard with which any deviation can be detected and remedial measures are taken if deviations take places.

(d) It is a good control measure on material cost.

(e) The material cost to be charged to a particular unit, job or process can easily be determined beforehand.

(f) It helps in submission of tenders and quotations.

(g) It is a planning exercise for the proposed production or work.

(h) It serves as an advance intimation to stores department about the raw material requirement.

Document 2. Purchase Requisition:

CIMA defines Purchase Requisition as “an internal instruction to a buying office to purchase goods or services. It states their quantity and description and elicits a purchase order”.

The manager in-charge of Purchase Department should obtain requisition from the Stores in- charge, departmental head or similar person requiring goods before placing orders on suppliers. If the present stock run down to the reorder level, then the stores department send a Purchase Requisition to Purchase Department, authorizing the department to order further stock.

Document 3. Purchase Order:

If the Purchase Requisition received by the Purchasing Department is in order then it will call for tenders or quotations from the suppliers of materials. It will send enquiries to prospective suppliers giving details of requirement and requesting details of available materials, prices, terms and delivery etc. Quotations will then be compared and will place order with those suppliers who will provide the necessary goods at competitive prices.

The number of copies of routing of Purchase Orders depends on the procedure followed in the organization. Normally, the copies of the purchase orders will be sent to the Supplier, Department originating Purchase Requisition, Inspection Department, and Accounting Department.

Document 4. Material Inspection Note:

When materials are delivered, a supplier’s carrier will usually provide a document called ‘delivery note’ or ‘delivery advice’ to confirm the details of materials delivered. When materials are unloaded, the warehouse staff check the material unloaded with the delivery note. Then the warehouse staff prepares a Materials Receipt Note, a copy of which is given to the supplier’s carrier as a proof of delivery.

After receiving the materials the Inspection Department thoroughly inspects whether the quality of material is in accordance with the purchase order and the quality of material received and it prepares a note called ‘material inspection note’, copies of which are sent to the supplier and stores department.

Document 5. Goods Received Note (GRN):

Once the inspection is completed, GRN is prepared by the stores department, and copies of GRN is sent to the purchasing department, costing department, accounts department and production department, which initiated purchase requisition.

After receipt of GRN from the Stores Department and invoice from the supplier, the accounts department will check with the purchase order and take necessary steps for making payment to the supplier.

Document 6. Stores Requisition Note:

It is also called ‘materials requisition note’. When Production or other departments requires material from the stores it raises a requisition, which is an order on the stores for the material required for execution of the work order. This note is signed by the department in-charge of the concerned department. It is documents which authorize the issue of a specified quantity of materials.

It will include the cost centre or job number for which the requisition is being made, a specimen stores requisition note.

Any person who requires materials from the stores must submit stores requisition note. The store keeper should only issue materials from stores against such a properly authorized requisition and this will be entered in the bin card and stores ledger. A copy of the requisition will be sent to the costing department for recording the cost or value of materials issued to the cost centre or job.

Document 7. Material Transfer Note:

If materials are transferred from one department or job to another within the organization, then material transfer note should be raised. It is a record of the transfer of materials between stores, cost centres or cost units showing all data for making necessary accounting entries.

Document 8. Material Return Note:

If materials received from the stores are not of suitable quality or if there is surplus material remaining with the department, they are returned to stores with a note called ‘material return note’ evidencing return of material from department to stores.

Document 9. Bin Card:

A ‘bin card’ indicates the level of each particular item of stock at any point of time. It is attached to the concerned bin, rack or place where the raw material is stored. It records all the receipts of a particular item of materials and its issues. It gives all the basic information relating to physical movements. It is a record of receipts, issues and balance of the quantity of an item of stock handled by a store.

Document 10. Stores Ledger:

Stores department will maintain a record called ‘stores ledger’ in which a separate folio is kept for each individual item of stock. It records not only the quantity details of stock movements but also record the rates and values of stock movements.

With the information available in the stores ledger, it is easier to ascertain the value of any stock item at any point of time. The minimum, maximum and reorder levels of stock are also mentioned for taking action to replenish the stock position.

Store Keeping

After materials purchased have been received and checked, the next step in the process of material control is the storing of materials or store keeping.

A storehouse is a building provided for preserving materials, stores and finished goods. The in-charge of store is called storekeeper or stores manager. The organisation of the stores department depends upon the size and layout of the factory, nature of the materials stored and frequency of purchases and issue of materials.

According to Alford and Beatty “storekeeping is that aspect of material control concerned with the physical storage of goods.” In other words, storekeeping relates to art of preserving raw materials, work-in-progress and finished goods in the stores.

Objectives of storekeeping:

• To prevent overstocking and understocking of materials.
• To ensure uninterrupted supply of materials and stores without delay to various production and service departments of the organisation.
• To protect materials from pilferage, theft fire and other risks.
• To ensure proper and continuous control over materials.
• To minimise the storage costs.
• To ensure most effective utilisation of available storage space and workers engaged in the process of storekeeping.

Functions of Store Keeping

The principal functions of store-keeping to be performed by the Stores Department in an organization, are as follows:

• Receiving purchased stores from the Receiving Department and verifying that every lot of stores is supported by an indent, a purchase order and an inspection note.
• Issuing purchase requisitions as and when material is required.
• Preparing ‘Goods Received Note’ in accordance with the different stores lots received.
• Placing and arranging stores received at proper and appropriate places and adhering to the golden principle of store keeping i.e., ‘A place for everything in its place. ‘
• Minimizing the storage, handling and maintaining costs by preserving and handling the materials in the most economical and efficient manner.
• Ensuring that all the Goods Received Notes are regularly posted to the Bin Card.
• Issuing stores to various departments of the business and ensuring that all issues are properly authenticated and accounted for.
• Ensuring the adherence to the proper issuing procedure and system followed in the organization.
• Taking a periodical review of inventory by initiating various inventory control systems viz., perpetual inventory control system and ABC system of inventory control.
• Disclosing fullest and up-to-date information about the availability of stores whenever required, by maintaining proper stores records with the help of Bin Cards and Stores Ledger.
• Ensuring proper safety of materials against theft, pilferage and fire, etc.
• Supervising and co-ordinating the duties of different types of staff working under the headship of the store-keeper.
• Preventing entry of unauthorized persons in the stores.
• Maintaining proper stock-levels fixed in respect of every item of stores and replenishing them as and when necessary.

Location of Stores

‘Location’ means the site for the store. The location of the stores should be carefully planned. An important factor to be considered when establishing a store set up is the question of locating it in the most appropriate place. The stores must be set up at a convenient and safe place, near to Receiving Department, easily accessible from all parts of the factory and by means of transport and free from the risk of fire, theft, etc. The general principle in determining the location of stores is to minimize the total kg. km. cost of transportation of materials.

Factors determining the location of stores

• Nature of the Materials: The nature of the materials to be stored also affects the location of the store. Material that is not damaged by weather can be stored out of doors in a shed. But materials such as cement, plaster, etc., must not only be protected from the weather but must also be stored in a dry place.
• Minimization of Material Handling Efforts: Minimisation of material handling efforts implies location of raw material store near the production shops and location of finished goods store and packing materials store near the assembly shop. The stores should be easily accessible by means of transport.
• Quantity, Weight, etc., of the Materials: The quantity of each of the goods to be stored must be taken into account for determining the location. When the quantities are known, adequate provision may be made for immediate and future storage needs.
• Free from Risk of Loss: Store must be set up at a safe place which is free from the risk of loss due to fire, theft, moisture, etc.
• Flow of Materials: Location of store should be convenient which allows for steady and regular flow of store items without any obstruction.
• Flexibility: The location of store must be such which provides for its future expansion.