Supply Chain Management –MGMT614 VU

LECTURE 3
PURCHASING
Rationale and Logic:
Lecture 3 and 4 address, the major tasks and challenges faced by the purchasing professional of today
operating, within the context of a dynamic supply chain. Purchasing Managers normally get groomed and
promoted as Supply Chain Managers. Mind you we now compare the supply chain of one enterprise
with the supply chain of its competitors.
The modules in Lecture 3 provide a basic understanding of the functional activity called purchasing. Without
a solid understanding of basic purchasing processes and organization, appreciating the important role that
purchasing has within a supply chain is difficult.
With the understanding of Purchasing, we can also elaborate on Strategic Sourcing. Strategic Sourcing,
considers how purchasing evaluates, selects, manages, and improves supplier performance. The lecture 4 very
briefly identifies the strategic sourcing activities. These activities can affect the competitiveness of an
enterprise. The ability to realize advantages from an enterprise’s purchasing and supply efforts requires
shifting (a tactical or clerically oriented activity) from the traditional view of purchasing, to one that focuses
on strategic supply management.
It would not be wrong to communicate this message to the students of Virtual University that Strategic
Sourcing Process, recognizes that purchasing professionals must play a major role in improving supply chain
performance. Again due to time limitations we only mention an assortment of tools, techniques, and
approaches for managing the procurement and sourcing process, including an understanding of contracting
and legal issues. Contract management covered as a separate module (in Lecture 7) would be contingent on
the Virtual University student’s ability to understand the modules covered in Lecture 3 and 4.
Lecture 3 and 4 address the major tasks and challenges facing the modern purchasing professional operating
within the context of a dynamic supply chain. Mind you we now compare the supply chain of one enterprise
with the supply chain of its competitors.
And last but not the least the future directions for the students of Virtual University, should be to develop a
road map for their organization, with respect to policies and procedures. This should encompass managerial
and technical expertise which should be based on collaborative sharing of knowledge, procedures between
the enterprise and its suppliers and its retailers, distributors and customers. Alignment and strength, at the
upstream and downstream of an enterprise would be a best practice and effective strategy and a means to
how best to respond, on a continuous basis to reflect the dynamic changes occurring in purchasing and supply
chain management.
Purchasing & Supply Management
This lecture discusses certain important concepts related to purchasing and supply management. It also
identifies the purchasing function in detail. It will cover the historical perspective associated with the function
of purchasing and also the important concept of supply management. This lecture would also identify the
responsibilities associated with the function of purchasing and its associated relationship with supply
management. The lecture also discusses e-procurement along with different types of purchasing. And last but
not the least it will also cover means and steps (strategies) by which any enterprise or organization can improve
its purchasing function. All these important concepts would be covered in the form of learning objectives.
What is purchasing?
Virtual University Students are requested to focus their attention on the question what is purchasing before
we can formally initiate our discussion on the modules in this lecture. The previous discussion has given us
an insight into the roles, responsibilities of the different entities of the supply chain management. You can
easily identify that certain departments or organizations are actually specifically playing the part of a
purchasing manager or purchasing personnel or even supply chain manager. Purchasing is not a new function
rather it has been identified as a key enable of business, from the early days of trade and commerce.
We have plethora of examples in business as well as government where improvement in purchasing function
actually improved the performance of the business or the government department. Students can easily identify
numerous innovative interventional purchasing programs which actually improved the functional area

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Supply Chain Management –MGMT614 VU
purchasing as well as eventually improved the supply chain performance. Thus a safe conclusion about
purchasing is that it is enjoying a very key and important position in the functioning of any enterprise. This
statement holds true both for functional organizations of yesteryears as well as matrix based enterprises of
today. At the same a point of caution for the students being that people have over the year developed a very
negative impression about purchasing both professionally and ethically speaking. Professionally it is
considered to be a stagnant and clerical assignment while ethically it is perceived as a means to carry out
corrupt practices. Students are requested to be aware of another perception where the supply chain managers
( or supply chain analysts) when informed about the purchasing personnel playing a part in the supply chain
management show reservations on the effectiveness of these individuals or at times even show resentment
on the presence of purchasing function personnel. Students are requested to show rationale and tact in
handling these reinventing the wheel kind of myopic consultants. As these type of consultants can do more
harm than good to the enterprise and its supply chain as these experts suffer from functional blindness of
carrying a perception of clerk handing the purchasing function. As a matter of fact the same barrier of
perception exists inside as well as outside the organization about the purchasing function. People did not give
value to the idea that the purchasing personnel are working towards the attainment of certain supply chain
coordination objectives while still functioning as a part of the purchasing function. Studies from the real world
actually have shown that the purchasing personnel groomed specifically on the purchasing as a part of the
admin function have played effective role in the supply chain management and implementation for various
organizations. This is true not only for Pakistan but also the mature purchasing or supply chain management
enterprises of the developed countries. It is sadly true that most of these enterprises often fail to address or
answer these problems.
Purchasing & Supply Management
Learning Objectives are covered in two fundamental modules
1. Purchasing and Supply Management
2. Difference between Purchasing and Supply Management

MODULE 1: PURCHASING AND SUPPLY MANAGEMENT

Purchasing: Purchasing refers to a business or an enterprise interested in acquiring goods or services to
accomplish the goals of its enterprise. Though there are several enterprises that attempt to set standards in
the purchasing process, processes can vary greatly between organizations.
Purchasing represents a functional group (i.e., a formal entity / department on the organization chart) as well
as a functional activity (i.e., buying goods and services), In some textbooks you will across words like
procurement, acquiring firm which may not be academically correct especially to students of purchasing,
supply management and off course supply chain management.
The word “purchasing” should not be used interchangeably with the word “procurement”, since purchasing
may be somewhat limited to buying of goods and services while procurement typically deals with Expediting,
Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing. Purchasing being static would
aim to get the product from the same identified supplier while procurement ideally would make use of a pool
of qualified suppliers and thus addresses the situation in which the primary suppliers’ inability to provide the
supplies is compensated by another readily identifiable supplier from the same selected pool of suppliers. Off
course this is all subjected to the enterprise policy. You can refer to a different module on policy and
procedures in your lecture 4. So in a nutshell, with the help of procurement you can not only expedite the
delivery of the product (or component) but also monitor the quality as well as traffic and logistical support to
ensure that you have the product before the dead line.
In other words, procurement also serves as a prerequisite to an effective supply chain as you link your
enterprise with another enterprise or network of enterprises. This would require contract management in
place. We now discuss another important concept of “Supply Management” directly linked to procurement
and covered more or less together in different text books.
Supply Management: Please remember the word “strategic” always reflect a time period that extends
beyond 5 years ideally covers 10 to 15 years. It corresponds to a long term asset, so normally strategic decision
making pertains to long term investment. Also taking this opportunity Virtual University Students are

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requested to remember from this point forward that Supply Chain for any enterprise is a Strategic Asset.
Ideally if the vision and mission statement of the enterprise is aligned with its partners it would give alignment
to the supply chain management with common benefits of increase in revenues and profits.
Supply Management is a strategic approach to: -
1. Planning for and acquiring the organization’s current needs and
2. Future needs through effectively managing the supply base, while
3. Utilizing a process orientation in conjunction with cross-functional teams to achieve the
organizational mission.
Supply management requires pursuing strategic responsibilities, which are those activities that have a major
impact on longer-term performance of the organization. These longer-term responsibilities are not pursued
in isolation, but should be aligned with the overall mission and strategies of the organization.
We will now make use of an important definition of supply management as presented by the Institute for
Supply Management (ISM). Any definition that makes use of a reference or a standard is considered to be
complete in totality, as we are using ISM as a standard for defining supply management. ISM defines Supply
Management as
The identification, acquisition, access, positioning, and management of resources and related capabilities an organization
needs or potentially needs in the attainment of its strategic objectives
Strategic objectives here relate to fulfillment of requirements like strategic orientation, cross functional groups,
process driven approach and a supply base management. Enterprises often ignore and violate the need of a
supply base management while purchasing routine commodities but this can create a big problem while
purchasing a critical commodity.
Thus Supply management is contingent to proper
strategic orientation, coordination and cooperation
amongst cross functional groups, with optimal and
pertinent supply base management with a focus on
process driven approach. This is true even if the
enterprise is not pursuing supply chain
management and focusing only on procurement
and supply management alone.
MODULE 2: HISTORICALLY ACCEPTED
PURCHASING TERMS
After defining Supply Management, a relationship
with other purchasing terms is necessary. Supply
Chain Managers working in the industry and
enterprises have often faced a situation where
purchasing and supply management is being
indirectly referred to by making use of old
commerce related trades. Even in Pakistan,
government departments and old enterprises like
Pakistan Railways have clearly defined purchasing policies, procedures and makes use of certain specific
purchasing terms. It would be pertinent for the Virtual University students to very briefly refer to the
universally accepted historical related Purchasing Terms. Some of the terms are
1. Purchasing: Obtaining merchandise, capital equipment; raw materials, services, or maintenance,
repair, and operating (MRO) supplies in exchange for money or its equivalent
2. Merchandiser: Is a professional who contributes to the sale of products to a retail consumer
3. Merchants :Wholesalers and retailers who purchase for resale
4. Industrial Buyers: Purchase raw materials for conversion, services, capital equipment, & MRO
supplies
5. Purchasing: key business function for acquiring materials, services, & equipment

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6. Contracting: term often used for the acquisition of services
7. Supply Management- a newer term that encompasses all acquisition activities
These terms and definitions can be same or different for different enterprises or organizations working in
different sectors. Also remember the players (suppliers, enterprise and retailers) all share the profits as per a
formula which normally is based on the idea of riskiest job getting the highest reward which also translates
into the fact that the supply chain player that is exposed to the maximum risk often faces the brunt of the
maximum loss.
THE ROLE OF PURCHASING AND SUPPLY MANAGEMENT IN AN ORGANIZATION
There are three primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.
Purchasing contributes to these objectives by:
1. Actively seeking better materials and reliable suppliers,
2. Work closely with and exploiting the expertise of strategic suppliers to improve quality and materials
3. Involving suppliers and purchasing personnel in new product design and development efforts.
It makes perfect sense that purchasing would fulfill the goals by clearly focusing on the three objectives. It is
logical to follow that the enterprise would seek a reliable supplier who can ensure the supply of as per
specification quality material on time without disrupting the flow at the lowest cost. The enterprise would
also be interested in ensuring that work closely with strategic suppliers without incurring additional cost,
additional utilization of resources and while making use of the supplier’s expertise it should result in
improvement in quality of material, whole process and off course the finished product. Also by combing the
cross functional teams, with suppliers and purchasing personnel the customer satisfaction is possible as the
new product design and new product developed would take into account the internal as well as external
customers’ requirements. By linking the important interfaces of suppliers and purchasing personnel the
decision making process becomes more financially viable.
The question that begets to answer is why we have worry about Finance, when we are discussing Purchasing
and Supply Management. The answer is more or less based on the simple proverb of “A Penny saved is a
penny earned”. Any enterprise that can ensure that there are strong purchasing and procurement procedures
in practice with minimum of gaps, leakages, wastages or pilferages would ensure that the supply chain is
financially viable.
The Financial Significance of Supply Management
If the enterprise is able to ensure uninterrupted flows of raw materials at the lowest total cost then it can
experience or register:
1. Profit-Leverage Effect: A decrease in purchasing expenditures directly increases profits before taxes
(assuming no decrease in quality or purchasing total cost).
2. Return on Assets (ROA) Effect: A high ROA indicates managerial prowess in generating profits
with lower spending (caveat- ROA ratios vary from one industry to another).
3. Inventory Turnover Effect: Increased inventory turnovers indicate optimal utilization of space and
inventory levels, increased sales, avoidance of inventory Obsolescence.
A word of request for Virtual University Student, even if you are not a Finance Major, you should at least try
to revisit these three important ratios as these would be used again and again.
MODULE 3: DIFFERENCE BETWEEN PURCHASING & SUPPLY MANAGEMENT
A supply chain manager or a supply chain analyst would always present a strong argument that there is a
difference between purchasing and supply management. You have already defined both the critical terms and
have identified their boundaries along with salient points of difference. The irony here is that the same supply
chain managers and supply chain analysts often interchangeably use the purchasing and supply management

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terms. They claim that we exchange information with the senior management which has been groomed on
old purchasing terms and a subordinate who is not that business savvy.
VU Students as supply chain managers of tomorrow should be able to identify the wrong use of a terminology
as it can potentially lead to the partners of the entire supply chain receiving incorrect information, disturbing
the dynamics of the supply chain and even losing the profits associated with the supply chain. Ideally VU
students should be able to step into avoid any wrong usage that can lead to aforementioned disastrous
consequences.
So how can the Virtual University avoid this trap? We can quickly revisit what we have already discussed in
earlier modules of this lecture. We will also supplement and complement our discussion with some examples
As of today, strategic supply management activities has largely become the responsibility of the functional
group called purchasing while supply management has taken the form of a strategic responsibility. Let us take
this opportunity to clarify some of the differences while at the same time, recognizing that good purchasing
and supply management practices can have significant impact on the organization’s overall performance.
We need to recognize the differences between purchasing and supply management.
1. Purchasing is a functional group (i.e., a formal entity on the organizational chart) as well as a
functional activity (i.e., buying goods and services).
2. The purchasing group performs many activities to ensure it delivers maximum value to the
organization.
3. The purchasing group performs many activities to ensure it delivers maximum value to the
organization.
A rule of thumb (or heuristic) that can guide you in identifying which would be covered under purchasing
and which would be covered under supply management. Please remember that products, components,
consumables purchased on repetitive basis would reflect a purchasing activity, even if it relates to high volume,
price/unit, visible quality and open market purchase while supply management examples would include
certain strategic steps as mentioned below: -
Five important examples included for Supply Management would fall in the following five phases of supply
management.
a. supplier identification and selection,
b. buying, negotiation and contracting,
c. supply market research,
d. Supplier measurement and improvement, and
e. Purchasing systems development.
To some extent purchasing is also no longer favorable as with Supply Management you can benchmark the
performance of the supplier either through a Supplier Performance Index or through any other in house
developed weighted average quality base supplier evaluation. The enterprise has means to identify the good
performance of a supplier from the bad performance of the supplier. This is being actively pursued even in
Pakistan today. Interestingly consciously or unconsciously enterprises religiously follow 5 rules of purchasing.
MODULE 4: THE RIGHTS (CORRECT ACTIONS) OF PURCHASING
Purchasing has been referred to as doing “the five RIGHTS (correct actions)”. These are represented below:
1. Getting the RIGHT quality
2. In the RIGHT quantity
3. At the RIGHT time
4. For the RIGHT price
5. From the RIGHT source
Some experts add and another Right and thus also call it the 6 R’s (6 Rights) of Purchasing, they identify the
Right Internal Customer for delivery. As a student of Supply Chain Management I, can easily add another
Right which would be the 7th Right and it would be Right Information required to complete the entire process.
Thus Virtual University students can now identify 7 Rights of Purchasing.
Please remember there are four rights (privileges) of purchasing which are covered in lecture 4.
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In the conventional contextual knowledge, we often interchange the terms “purchasing” and “procurement.”
But in reality, purchasing does not incorporate the follow up, traceability or tracking or expediting as
performed in Procurement.
This is probably the best time to opt for a profession or career in purchasing as enterprises all over the world
have realized that the maximum savings in cost they can register is in the purchasing process, so are actively
seeking qualified purchasing managers who can be groomed as supply managers or supply chain managers.
POINTS TO LEARN AND REMEMBER
1. Supply management is not just a new name for purchasing but a more comprehensive concept.
2. Supply Chain Managers and Supply Chain Analysts or Supply Specialists agree that Supply
Management is a strategic approach to planning for and acquiring the organization’s current and
future needs through the earlier discussed paradigms
1. Effectively managing the supply base and
2. Utilizing a process orientation in conjunction with Cross Functional Teams (CFTs) to
achieve the organizational mission.
Supply base management reflects an external focus while Cross Functional Teams reflect an internal focus.
For optimization of supply chain and registration of long term profits, enterprises should balance and align
their external and internal focus as a strategic responsibility.
MODULE 5: SUPPLY MANAGEMENT MANAGERIAL PERSPECTIVE
Various views exist suggesting that Supply Management should be taken up and explained on the basis of
Strategic Responsibility, Broader model, Process
approach or as a Cross functional concept.
Figure depicts the key elements in our definition of
supply management.
1. Strategic Orientation (Strategic Responsibility)
2. Supply Base Management
3. Process Driven Approach
4. Cross Functional Groups
1. Supply Management as Strategic
Orientation also known as Strategic Responsibility:
Supply management requires pursuing strategic
responsibilities, which are those activities that have a
major impact on longer-term performance of the
organization.
These longer-term responsibilities are not pursued in
isolation, but should be aligned with the overall mission
and strategies of the organization. These strategies
exclude routine, simple, or day-to-day decisions that
may be part of traditional purchasing responsibilities.
The routine ordering and follow-up of basic operational
supplies is not a strategic responsibility. The
development of the systems that enable internal users to order routine supplies, however, is considerably
more important.
2. Supply Management as a Broader Model: Supply management is a broader concept than
purchasing. Supply management is a progressive approach to managing the supply base that differs from a
traditional arm’s-length or adversarial approach with sellers. SM requires purchasing professionals to work
directly with those suppliers that are capable of providing world-class performance and advantages to the
buyer. Think of supply management as a progressive and supercharged version of basic purchasing. Even if
your enterprise insists on dealing routine purchasing on the same ground as critical purchasing it is ensuring
that there is consistency in approach and total value to the enterprise and the entire supply chain is enhanced.
Also the purchasing professionals are being groomed to take up challenging assignments without incurring
any further training expense.

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3. Supply Management as a Process Approach: Supply management often takes a process approach
to obtaining required goods and services. We can describe supply management as the process of identifying,
evaluating, selecting, managing, and developing suppliers to realize supply chain performance that is better
than that of competitors. It also takes into account the upstream and downstream boundaries of the
enterprise. Students working in purchasing and supply management fields may like to match their job
descriptions with the process approach.
You will come across interchangeably the terms “supply management” and “strategic sourcing” throughout
in text books of SCM and Purchasing.
4. Supply Management is Cross Functional: Supply management is cross-functional, meaning it
involves purchasing, engineering, supplier quality assurance, the supplier, and other related functions working
together as one team, early on, to further mutual goals.
About 30 years ago, even in mature industrial countries adversarial relationships characterized traditional
purchasing. Gone are the days when cross functional teams meant the members were of no value to the
enterprise or in their functional departments. Even if the organization is not introducing new product or
service it still makes best use of cross functional teams for improvement of its product and services like price
reduction and quality improvements. Luckily today, supply management features a long-term win-win
relationship between a buying company and specially selected suppliers. Except for ownership, the supplier
almost becomes an extension of the buying company. Supply management pertains to internal and external
relationship management and also involves concrete, on-site, and frequent help to suppliers in exchange for
dramatic and continuous performance improvements, including steady price reductions and reductions in
product development cycle time without compromising quality.
To sum up, supply management is a new way of operating, involving internal operations and external
suppliers to achieve advances in cost management, product development, cycle times, and total quality
control.
Another important concept is to briefly highlight all those milestone eras which created a strong impact on
purchasing function, purchasing processes and purchasing activities, on the supply management and finally
supply chain.
MODULE 6: THE EVOLUTION OF PURCHASING AND SUPPLY CHAIN MANAGEMENT
PERIOD SALIENT FEATURES
Period 1 The Early Years (1850–1900) including Charles Babbage (1830s) suggested the concept
of material man (purchaser or material manager) leading to organizations raising revenues
and registering profits.
Period 2 Growth of Purchasing Fundamentals (1900–1939)
Period 3 The War Years (1940–1946)
Period 4 The Quiet Years (1947–Mid-1960s)
Period 5 Materials Management Comes of Age (Mid-1960s–Late 1970s)
Period 6 The Global Era (Late 1970s–1999): The global era, and its effect on the importance,
structure, and behavior
Period 7 Integrated Supply Chain Management (Beyond 2000) is a critical concept.
You can actually identify three macro processes in it namely Supplier Relationship Management (which is
covered in Lecture 5), Internal Supply Chain Management (Which is the central theme throughout the
semester) and the third process being Customer Relationship Management i.e. CRM (which we will not cover
in this class as it is more the interest of Marketing specialization)
MODULE 7: PURCHASING PROCESS
Virtual University students, now let us focus our attention on what is purchasing process? This is one
question that is of interest to any person working in any part of the supply chain. Try to compare this with
your prior knowledge or what you have seen or experienced about the purchasing responsibilities described
earlier. The traditional adversarial purchasing process has brought little benefits to either enterprise or the
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supplier in the long run which has led to a revamped purchasing process, which improves the efficiency and
effectiveness of the entire supply chain, improve relationships and achieve supply chain surplus (profits).
This module would identify the purchasing process. Ideally this process should be used to: -
A. Identify user requirements (failure to do so would hurt internally and externally)
B. Evaluate the need effectively and efficiently,
C. Identify suppliers,
D. Ensure payment occurs promptly (this point is taken up in a separate module)
E. Ascertain that the need was effectively met, and
F. Drive continuous improvement.
Overcoming these challenges and transforming them into opportunities would ensure that this process
occurs effectively and efficiently are the prime responsibilities of Purchasing or Supply Manager or often SC
Manager.
A world-class purchasing staff must continuously work to improve the efficiency and effectiveness of what
we call the purchasing process.
Until an Enterprise can streamline the day-to-day purchasing process, it will continually delay implementing
other important strategic activities that help their organization become more competitive.
Virtual University Students are requested to explore the availability of a purchasing manual at their
enterprise. This manual will contain policies, procedures, limits of authorities and pertinent responsibilities.
If you are not working for the time being, you can access purchasing manuals available online.
Please remember the word Manual is used in two different meanings while we discuss Purchasing or Procurement.
Manual refers to Physical or hard or blue collared labour work. The same word is used as guide or procedure book, referring to
how to perform a task say for example how to purchase a common commodity or for that matter carrying out the procurement of
a critical commodity.
Let us consider both the manual purchasing (Traditional or older) system and the “e-Procurement also known
as electronic purchasing (Contemporary or current) system one by one.
THE PURCHASING PROCESS – MANUAL PURCHASING (OLDER SYSTEM)
In Manual Purchasing Process, there are three critical steps which need to be followed religiously.
Step 1: Material Requisition/Purchase Requisition: Stating product, quantity, and delivery date. It may
originate as a planned order release from the MRP system. Traveling requisition used for recurring orders.
Remember the word Material or Purchase Requisition refers to the same concept. It is only that certain
governing bodies advocate the use of the word “Material” and others recommend the use of word of
“Purchase”. The requisition once it has been approved by the authorities concerned would be communicated
to the outside supplier.
Step 2: Request for Quotation (RFQ): Buyer identifies suppliers & issues a request for quotation (RFQ)
for routine items or a Request for Proposal (RFP) for more demanding products or being requested for the
first time. Supplier Development is used to develop supplier capabilities. It may not be present in some
enterprises, but in mature supply management and purchasing enterprises it is present and plays an active
part.

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Suppliers Purchasing Storage/Warehouse Users/Requisition Accounting
START
Materials Materials
Requisition Materials Requisition
No
MR 1 Available? MR 1
MR 2 MR 2
MR 3
Yes

Issue PO
Materials
Requisition
Purchase Purchase MR 1
Order Order MR 2
PO 1 PO 1 Accounting
PO 2 PO 2
PO 3 MR 2 Information
MR File Issue for charging the
PO 4
Materials
Materials + appropriate
department
DO 3
DO 2

Delivery PO File
Order PO 3
DO 1 MR File
DO 2

MR 2

Ship
Materials
MR 2
DO 2 + Accounts Payable
PO 2
Materials Materials +
PO 2
Delivery
Order Delivery
DO 1 Order
DO 1
INV 2

Invoice
INV 1 Invoice
INV 1

Step 3: Purchase Order (PO): It is one of the most critical documents in the purchasing. It is the buyer’s
offer and becomes a binding contract when accepted by supplier. The requirements put forward by the buyer
once agreed by the supplier can lead to disputes and court arbitrations if the supplier fails to comply with the
material specifications or deadline. When initiated by the supplier on their own terms, the document is a sales
order. Often in purchasing document files, the purchase order is either attached to a sales order or it has been
replaced by a sales order altogether. The Uniform Commercial Code (UCC) governs transactions in the U.S.,
except the state of Louisiana.
Purchase Requisition & Purchase Order are shown separately to represent Manual Systems

NOTE TO JOURNAL: DIFFERENT COLORS USED FOR DIFFERENT DEPARTMENTS FOR

BOTH PURCHASE REQUISITION AND PURCHASE ORDERS.
Normally there were three different colored copies for a Purchase Requisition, some companies for the sake
of ready identification used altogether different colors for local purchase and foreign purchase.

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PURCHASE ORDER

Enterprises use purchase orders for more than a few reasons but nearly all companies will agree that
Purchase orders allow buyers to clearly and explicitly communicate their intentions to sellers. And at the
same time the Sellers are protected in case of a buyer's refusal to pay for goods or services
Purchase orders help a purchasing agent to manage incoming orders and pending orders. Also, Purchase
orders provide economies in that they streamline the purchasing process to a standard procedure.
Please refer to a standard purchase order shown.
Note there are five (or more in some cases) different colored copies for a Purchase order.
The availability of the internet has also given us an opportunity to leverage its power and utility to our
purchasing process. Enterprises are opting for electronic procurement also known as e-Procurement systems
and processes these days. This is a very important concept.
THE PURCHASING PROCESS E-PROCUREMENT
Potentially speaking with in the domain of contractual agreements and cyber laws all the suppliers of the
world are available to Pakistani companies barring the issues like tax or tariffs or political sanctions. E-
Procurement has attained prominence because of the visibility and tracking through Global Positioning
Systems and UCC tags. This feature makes it easy to follow up and make necessary modifications to have the
critical commodity shipped or air lifted in case of urgent need. There are four important steps which need to
be followed for e-Procurement process.
Step 1: Material user inputs a materials requisition: Relevant information such as quantity and date needed.
Step 2: Materials requisition submitted to buyer: At purchasing department (hardcopy or electronically).
Step 3: Buyer assigns qualified suppliers to bid: Product description, closing date, & conditions are given.
Step 4: Buyer reviews closed bids & selects a supplier.
Advantages of the e-Procurement System
The widespread advantages obtained through the utilization of e-Procurement is savings in time and cost,
accuracy, real time process, mobility, traceability and continuous audit of the system and process. Also
management can extend the benefits to the suppliers.
Some of the enterprises even having e-Procurement systems in place avoid small Value Purchase Orders
through e-Procurement. These enterprises hold the view that the purchasing departments can minimize
processing costs for small value purchases through:
1. Procurement Credit Card/Corporate Purchasing Card (P-card)
2. Blanket or Open-End Purchase Orders
3. Blank Check Purchase Orders

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4. Stockless Buying or System Contracting
5. Petty Cash
6. Standardization & Simplification of Materials & Components
7. Accumulating Small Orders to Create a Large Order
8. Using a Fixed Order Interval
The Purchasing Process e-Procurement

PURCHASING PROCESS
The Purchasing Process more or less makes use of various ideas associated with purchasing from multiple
industries:
1. Purchasing objectives
2. Purchasing responsibilities
3. E-procurement and the procure to pay process
4. Types of purchases
5. Purchasing process improvements
1. Purchasing Objectives
Purchasing objectives sooner or later help the enterprise and its strategic partners. Experts agree up on the
Supply continuity, managing the purchasing process efficiently and effectively, developing supply base
management, developing strong relationships with other functional stakeholders, supporting organizational
goals and objectives and developing integrated purchasing strategies that support organizational strategies
A. Supply Continuity
This relates to 6 R’s which includes buy products/services at the right price, buy them from the right source,
buy them at the right specification that meets users’ needs, buy them in the right quantity, arrange for delivery
at the right time and require delivery to the right internal customer. This ensures supply continuity which
ensures supply chain attaining its performance metrics.
B. Manage the Purchasing Process
This critical process involves determining staff levels, developing and adhering to budgets, providing
professional training and growth opportunities.
Purchasing process has gained universal acceptance and it would be pertinent to introduce procure to pay
systems. Students are requested to look for more details in the dedicated module. Procure to Pay Systems not
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only improve spending visibility but implement and religiously follow an efficient invoicing and payment. All
this contributes to user satisfaction.
C. Develop Supply Base Management
This practice includes selecting competitive suppliers, identifying new suppliers with high potential and build
closer relationships and improving existing suppliers. Supplier Relationship Management savvy enterprises
also develop new suppliers who are not currently competitive
D. Develop Strong Internal Relationships
This important method focuses on the concept that internal customers are important stakeholders and in
some cases the most important stakeholders. This method encourages strong two-way communication and
cross-functional coordination as well as collaboration. A visible benefit is that this method results in positive,
problem-solving relationships
E. Support Goals and Objectives
This practice encourages congruency of functional goals with organizational goals and mutually-supportive,
not counter-productive aims and objectives. This is the process which ensures that there is purchasing
substantial impact on the organization’s bottom line. Enterprises often make use of this when they perceive
purchasing as a strategic core competency
F. Develop Integrated Approach
This course of action is all about monitoring supply markets and trends. This normally helps the Supply Chain
enterprise in identifying critical materials and services, supporting new product development and developing
supply options and contingency plans. This results in developing, sustaining and supporting a diverse and
globally competitive supply base.
Reasons for Not Being Strategic
There are some commonly observed reasons for being non-strategic; some of the more popular ones include
purchasing personnel having not historically participated in senior-level corporate planning and Executive
management unable to recognize the benefits of world-class purchasing
MODULE 8: PURCHASE TO PAY PROCESS ALSO KNOWN AS PROCURE TO PAY
Consider a high level process map which represents a collected plan of smaller activities. We identify the three
important entities in the abstract sense that is the ongoing projects, internal customers and operations. Sooner
or later all these entities would be involved in activities that would incorporate making purchases and thus
would be responsible to make payments. The figure on the next page illustrates the “Procure to Pay” concept.

The “Procure to Pay”, presents the purchasing process as a cycle consisting of 6 major stages:
1. Forecast and plan requirement
2. Need clarification/ requisition
3. Supplier identification/selection
5. Contract Approval /purchase order generation
6. Receipt of material or service and documents
7. Settlement, payment, and measurement of performance
Ideally speaking these high level six stages are being utilized in government as well as business enterprises,
along with NGO’s even in Pakistan. This would be refined or fine-tuned in different enterprises like for
instance government may recommend the use of bidding, as they are spending public’s money.
Purchase to Pay Process
There are two things to keep in mind as we describe the purchasing process. First, how much effort a
company spends on these activities will differ greatly from one situation to the next.
The purchasing process leading to a Trillion Rupees contract for a capital asset is very different from that for a routine purchase
of office supplies

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Second, as you look at the steps in “the procure to pay cycle” shown before, recognize that companies can
often gain a competitive advantage by performing these activities better than their competitors. E.g., use
information systems to automate routine purchase order preparation, whereas others use sourcing
management teams to improve the outcome of supplier evaluation and selection efforts.
The figure below shows the same P 2 P with the help of an ERP Software
The Purchase Order: should capture the following important information

1. Quantity

2. Material specification
3. Quality requirements
4. Price

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5. Delivery date
6. Method of delivery Ship-to address
7. P.O. number
8. Order due date
9. P.O. Form
PURCHASE ORDER (P.O.) VISIBILITY:
Virtual University students are encouraged to
appreciate that for any enterprise the importance of
meeting customer service at a reduce cost is
contingent upon whether its vendors’ shipments are
complete and on time.
A purchase Order (P.O) is said to possess visibility
or is visible if it fulfills the criteria of traceability,
track ability, pertinent information for the
accounting systems and provides a visible audit trail.
In short, an active Purchase order identifies and
provides information about Accounts Payable,
Requisitioner, receiving, traffic management,
purchasing and quality control.
Enterprises have successfully save millions of
Rupees with the help of Purchase Order visibility.
BLANKET PURCHASE ORDER (P.O):
If a company uses a purchase order system of any kind, it
has the option of utilizing blanket purchase orders for the
purchase of frequently purchased items or services. Blanket
purchase orders are designed to make procurement
processes more efficient whenever possible. The Blanket
P.O is normally:
1. Used for ongoing purchases of an item.
2. Release materials as needed vs. issuing a new P.O. each
time
3. P.O. remains open during the time specified
4. Blanket P.O. Form
The value to the supply chain is made possible if there is a
clear understanding on the part of the enterprise about its
responsibilities towards purchasing as well as supply
management. A transparent purchasing or procurement or
supply management process would help in improving
relations with suppliers as well as retailers and would
ultimately increase the long term profits of the supply
chain.
Please refer to lecture supplement that captures some important
information on contracts, Types of purchases, how to improve
purchasing, benefits related to e Procurement and assessment of
purchasing function.

END OF LECTURE 3: GIST AND CRUX:

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1. Purchasing as a functional entity and Supply Management as a Strategic entity can both add value to the Supply
Chain.
2. The rights (correct actions) of purchasing ensure that ethically and professionally an enterprise can ensure a
transparent procurement process and subsequently a translucent supply chain process.
3. Importance of Purchase Requisition and Purchase Order Visibility helps enterprises to improve their supply chain
performance in terms of efficiency and effectiveness along with improvement in relationships with the suppliers and the
retailers.
4. Manual and Electronic Purchasing processes more or less require a robust and reliable pay to purchase process as this
leads to competitive advantage over the competitors.
5. Ideally, after successful completion of this lecture, the Virtual University Students should find themselves in a position
to carry out audits of Purchasing function and department and enhance the overall value associated with the
Purchasing Process.

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