PROCUREMENT

The purchasing (procurement) department of an organization is responsible for

obtaining the materials, parts, supplies, and services needed to produce a product
or provide a service. Each of the above mentioned things are guided by the
purchasing policy of the organization which is different for different industries based
on their specific requirements.

Importance of Purchasing:
In manufacturing organizations, more than 60 percent of the cost of finished goods
comes from purchased parts and materials. Furthermore, the percentages for
purchased inventories are even higher for retail and wholesale companies,
sometimes exceeding 90 percent.

The importance of purchasing is more than just the cost of goods purchased; other
important factors include the quality of goods and services and the timing of
deliveries of goods or services, both of which can have a significant impact on
operations.

Duties of Purchaser:
Among the duties of purchasing are;
o identifying sources of supply
o negotiating contracts
o maintaining a database of suppliers
o managing suppliers.
o obtaining goods and services that meet or exceed operations requirements in
a timely and cost-efficient manner Confirming Pages

PURCHASING INTERFACES
Purchasing has interfaces with a number of other departments, as well as with
outside suppliers. It is the connecting link between the organization and its673
Chapter Fifteen Supply Chain Management
suppliers as it is demonstrated in the following figure.
The firm FIGURE 15.3
Purchasing interfaces
Legal

Operations Accounting

Data
Purchasing processing

Design
Suppliers
Receiving

purchase orders, which often involve annual negotiation of prices with deliveries subject
to request throughout the year. Moderate-volume items may also have blanket purchase
orders, or they may be handled on an individual basis. Small purchases may be handled
directly between the operating unit requesting a purchased item and the supplier, although
some control should be exercised over those purchases so they don’t get out of hand.
It exchanges information with suppliers and functional areas. The interactions
between purchasing and these other areas are briefly summarized in the following
text.

Operations:
The main department that generates requests for purchasing raw materials. Close
cooperation between these units and the purchasing department is vital if quality,
quantity, and delivery goals are to be met. Cancellations, changes in specifications,
or changes in quantity or delivery times must be communicated immediately for
purchasing to be effective.

Legal Department:
The purchasing department may require the assistance of the legal department in
contract negotiations and in drawing up bid specifications.

Accounting:
Accounting is responsible for handling payments to suppliers and must be notified
promptly when goods are received in order to take advantage of possible discounts.

In many firms, data processing is handled by the accounting department, which

keeps inventory records, checks invoices, and monitors vendor performance.

Design and engineering:

Usually prepare material specifications, which must be communicated to
purchasing. Because of its contacts with suppliers, purchasing is often in a position
to pass information about new products and materials improvements on to design
department.

Receiving:
Checks incoming shipments of purchased items to determine whether quality,
quantity, and timing objectives have been met, and it moves the goods to temporary
storage.

Purchasing must be notified when shipments are late; accounting must be notified
when shipments are received so that payments can be made.

Suppliers:
Vendors (suppliers) work closely with purchasing to learn what materials will be
purchased and what kinds of specifications will be required in terms of quality,
quantity, and deliveries.

Good supplier relations can be important on rush orders and changes, and vendors
provide a good source of information on product and material improvements.
 THE PURCHASING CYCLE
The purchasing cycle begins when a request from within the organization is
generated to purchase material from outside the organization, and the cycle ends
when the purchasing department is notified that a shipment has been received in
satisfactory condition. The main steps in the cycle are following:

1. Purchasing receives the requisition. The requisition (request) includes (a) a

description of the material needed, (b) the quantity and quality required, (c)
desired delivery dates, and (d) who is requesting the purchase.

2. Purchasing selects a supplier. The purchasing department must identify

suppliers who have the capability of supplying the desired goods. If no suppliers
are currently listed in the files, new ones must be sought. Vendor ratings may be
helpful here.

3. Purchasing places the order with a supplier. If the order involves a large
expenditure, particularly for a one-time purchase of equipment, for example,
vendors will usually be asked to bid on the job.

Large-volume, continuous-usage items may be covered by blanket purchase

orders, which often involve annual negotiation of prices with deliveries subject
to request throughout the year.

Moderate-volume items may also have blanket purchase orders, or they may be
handled on an individual basis. Small purchases may be handled directly
between the operating unit requesting a purchased item and the supplier.

4. Monitoring orders. Purchasing department monitors the progress on each order,

specially for large quantity orders to forecast any delays.

Conversely, the purchasing department must communicate changes in quantities

on time, if any.

5. Receiving orders. Receiving must check incoming shipments for quality and
quantity. It must notify purchasing, accounting, and the operating unit that
requested the goods. If the goods are not satisfactory, they may have to be
returned to the supplier or subjected to further inspection.

CENTRALIZED VERSUS DECENTRALIZED PURCHASING

Centralized Purchasing: Centralized purchasing is handled by one special
department.

Decentralized Purchasing:
Individual departments or separate locations handle their own purchasing
requirements.