Purchasing Function and Procedure

Purchasing function

The purchasing function used to be part of the production function and enjoyed very little status in the organisation.

Over the past few decades, however, the purchasing activity has grown in stature through recognition of the contribution it makes to the success of any enterprise and it is now recognised as a separate function in its own right.

1. It is interesting to consider the enormous impact efficient purchasing (or procurement as it is often called) has on the costs of an organisation. By rational buying the purchasing department can generate profit immediately.

The huge responsibility falling on those concerned with purchasing, therefore, is clearly visible. This has come about because of the increasing size of organisations, the increasing complexity of materials and components and the extreme competi­tion met in the modern market.

2. The purchasing function differs from most others in that those carrying out this work are to a large extent tied to their own industry. However, there are many activities within the purchasing function that are common to many industries and other types of enterprise.

Activities common to most industries are:

(a) All buyers will need to have a wide knowledge of the markets from which they have to make their purchases, whether these are raw materials, manu­factured components or as in wholesale and retail trading finished goods. The knowledge will extend to how the suppliers perform in regard to reliability and delivery performance.

(b) In most manufacturing industries buyers will have to interact closely with the production department to ascertain their precise requirements. In retail selling the buyer has a key role in the success of the enterprise in that he (or she) must closely watch consumer behaviour and attitude their taste and demand.

(c) Though inventory control may or may not be the direct responsibility of the purchasing officer, he is primarily responsible for ensuring that sufficient supplies of materials or components are available to maintain continuity of production or sales. The buyer may do this by contracts with suppliers for regular deliveries or by building up stocks to be used as and when required.

The former keeps a minimum of capital tied up in store but there is always the risk of suppliers not keeping to delivery undertakings. The suppliers in their turn try to ensure that materials or components are readily available.

(d) In most organisations the purchasing department is responsible for negoti­ating purchase prices and terms of credit.

(e) Purchasing is also generally responsible for ensuring that the goods ordered and invoiced are actually received and that the price charged are those quoted. To mimimise risk, necessary checks are to be carried out by people not directly involved in placing the orders.

(f) Purchasing will constantly monitor expected deliveries to ensure that sup­pliers fulfil their commitments regarding quality and delivery dates.

(g) Purchasing will constantly investigate the market

(i) To seek better products, prices, terms or deliveries;

(ii) To find out alternative suppliers to ensure continuity of deliveries in case the main source suddenly fails for any reason.

Purchasing procedure

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.