Chapter 3: The purchasing and supply process

and procedures
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 LEARNING OBJECTIVES
After you have studied this chapter, you should be able to
1 describe the purchasing process as a strategic process for
organisations to gain the competitive edge
2 make a distinction between the three buying situations
3 discuss the important aspects that purchasing and supply
should consider in order to contribute to the organisation’s
performance
4 align transaction documents and parties involved to
activities in the purchasing cycle
5 illustrate and explain the activities involved in a purchasing
cycle
6 contrast the manual and automated execution of the
activities in the purchasing cycle.
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 3.1 THE PURCHASING PROCESS
 A typical purchasing process includes the flow of
information, materials, services and funds across all the
departments or functions that are involved

TYPES OF PURCHASING SITUATIONS

 Three types
 New task situation: completely new product from
unknown supplier
 Modified rebuy situation: completely new product from
known supplier
 Straight rebuy: known products from known suppliers

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 3.1 THE PURCHASING PROCESS (CONT)

 However, higher value and higher risk items will involve the
teams and all the purchasing steps will be followed
 In such situations a vigorous purchasing process should be
developed for the following reasons
 Large numbers of items are purchased

 A substantial amount is spent

 There is a need for an audit trial

 Severe consequences may result from poor performance

 Potential contribution to effective organisational

operations is inherent in the function
See Example 3.1: Weak rand means South Africa pays more for
ARVs in latest tender

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 3.1 THE PURCHASING PROCESS (CONT)

 In order for the purchasing and supply function to be

effective and contribute substantively to the organisation’s
performance, the purchasing process must take into
consideration the following aspects

1. Aligning purchasing and supply goals with organisational

goals and strategies
2. Following a process approach
3. Defining the interfaces
4. Using cross-functional sourcing teams
5. Ensuring process compliance

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3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

Figure 3.1 Steps of the purchasing cycle (pg.50)

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

ORIGIN OF THE NEED

 Originates with the user function

 User department communicates quantity, quality and time

when required to purchasing and supply function
 Purchasing and supply function follows a policy that
provides guidelines on purchasing standard items, special
or unusual orders, and urgent orders
 Authorisation by a senior executive in the relevant function

may be required
 Computer identification of needs using electronic
catalogues and supplier websites preferred

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

DESCRIPTION OR SPECIFICATIONS OF THE NEED

 Communicated to the purchasing function by means of one
of the following:
 Purchasing requisitions: full details of required material or
service
 Travelling requisitions: barcode form

 Forecasts and customer orders: market and product

forecasts signal the need for additional new material
 Reorder point systems: computerised systems that
identify purchasing needs
 Stock checks (cycle counts): physical checking of inventory

 Kanbans: information cards forming part of the JIT system,

providing supplier with clear description of and
specifications of the organisations specific needs. 8
3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

Figure 3.2 An
example of a
purchase
requisition
(pg.52)

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

SUPPLY SOURCE IDENTIFICATION

 Identifying potential sources of supply
 Information technology has contributed to efficiency:
 E-procurement
 Electronic catalogues

 Price lists, catalogues, written quotations and current lists

of approved suppliers
 For specialised products availability may be the deciding
factor
 Limited market in SA – search international suppliers

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

SELECTION OF SUPPLIERS
 When standard products in small quantities are required,
use supplier recommended on the requisition as long as
following prerequisites are met
 Supplier must be known to purchasing function
 Supplier must have a good service record

 Travelling requisitions (standard inventory items)

 3 or 4 suppliers proposed

 Negotiate an open-order contract

 Select supplier with the shortest lead time

 Highly specialised equipment:

 Written quotations submitted with the requisition
 Preference to the suppliers recommended by the user

function 11
 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

BIDDING AND NEGOTIATING

 Request formal tenders (bidding)
 Senior management approves final tender procedure
 Public sector tender process has many legal implications

 Electronic bidding – reduce time consuming tendering

process

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

PLACING THE ORDER / CONCLUDING THE CONTRACT

 Order form is the source document for many activities after
the order has been placed
 Copies to
 Supplier (original order)
 Financial function – verifying invoice and payment
 Receiving function – notification to expect delivery (also,
receipt and inspection of goods)
 Inspection function – details of specifications for planning
of inspection task
 Purchasing function – follow-up, expediting and control
measure
 Order book – permanent record of transaction
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3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

Figure 3.3 An
example of an
order form
(pg.55)

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

FOLLOWING UP AND EXPEDITING / CONTRACT

ADMINISTRATION
 Specialist group within the purchasing function follows up
and expedites orders
 IT reduces administration burden on purchasing and supply
(e.g. EDI)
 Expediting consists of constant monitoring of the supplier’s
progress with the order
 Assists with any problems that arise

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

 Follow-up comes into operation when orders are not

received on the delivery date
 Supplier reminded on a routine basis either by email, letter,
telephone
 Purpose is to determine cause of delay
 Introduction of IT has simplified the printing of standard
follow-up letters and reports

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3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

Figure 3.4
displays an
example of a
follow-up form
(pg.56)

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

RECEIPT, INSPECTION AND DISTRIBUTION

 Receiving function (depot) receives deliveries and carries
out superficial inspection
 Requires copy of order form
 Generates delivery note
 Generates inspection report
 Receiving function responsible for internal distribution of
deliveries to the user functions
 Order form sometimes provides for a certificate confirming
that the goods, as specified, have been received in good
condition
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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

HANDLING FAULTY CONSIGNMENTS AND REJECTIONS

 Purchasing function should negotiate with suppliers about
faulty consignments, because:
 Communication with the supplier base is the prime
responsibility of the purchasing function
 Purchasing function is responsible for managing long-

term supplier relations

 Purchasing function is responsible to foster and maintain

a TQM (total quality management) approach with

suppliers
 Requires diplomacy and responsible action from the

purchasing function
 May lead to serious friction and even litigation
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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

ANALYSING THE INVOICE

 Invoice is analysed and compared with official order and
delivery note either by the purchasing or financial function
 Compare invoice prices with those on the order/quotation
 Verifying calculations

 Checking discounts

 Comparing quantities received with those ordered

 Confirming that details on the invoice are in full

agreement with the terms and conditions of the original
order
 Electronic era has simplified this task

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

CLOSING THE ORDER

 All relevant documents are submitted to the financial
function under cover of a request for payment
 If it is payment vouchers they will be filed by the finance
department
 If payment is made by electronic means all the details of the
transactions are electronically saved for future reference.

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

MAINTAINING FILES AND RECORDS

 Purchasing function should have full details of every
purchasing transaction
 Keep record
 system for
 copies of orders
 receiving notes
 inspection reports
 documents for part deliveries
 a copy of the invoice
 all other related correspondence

 Electronic recordkeeping
 No need for voluminous files
 Quicker accessibility of information 22
 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

MEASURING SUPPLIER PERFORMANCE

 Evaluating supplier’s performance (see Chapter 5)
 Involves gathering information on how suppliers are
performing
 Providing feedback to them regarding their actual
performance

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 3.2 STEPS IN THE PURCHASING AND
SUPPLY MANAGEMENT PROCESS (CONT)

SUPPLIER RELATIONSHIP MANAGEMENT

 Relationships between the key stakeholders (internally and
externally) should be evaluated and managed accordingly
throughout the process
 Relationships may be developed, damaged, repaired or
even ended, depending on the situation

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 PREPARATION FOR NEXT LECTURE
 Work through Chapter 3 together with the slides, textbook
and study guide

 Read through Chapter 4 in preparation for your next lecture

 Continuous assessment test 1 22-23 September 2021

Chapters 1-6

 Group assignment 15 October

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