Chapter 12

The Purchasing Process

Accounting Information Systems 8e

Ulric J. Gelinas and Richard Dull

C 2009 South-Western, a part of Cengage Learning

 Learning Objectives
• Describe the relationship between the purchasing process and its business
environment, including the organization’s supply chain.
• Summarize how enterprise systems, e-business and other technologies can
improve the effectiveness of the purchasing process.
• Assess the implications of implementing a supply chain management (SCM)
system in a global business environment.
• Depict the logical and physical characteristics of a typical purchasing process.
• Prepare a control matrix for a typical purchasing process including an
explanation of how business process control plans can accomplish operations
and information process control goals.

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Process Definitions and Functions
The purchasing process is an interacting
structure of people, equipment, methods, and
controls that is designed to accomplish the
following primary functions:
– Handle the repetitive work routines of the
purchasing department and the receiving
department.
– Support the decision needs of those who
manage the purchasing and receiving
departments.
– Assist in the preparation of internal and
external reports.

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Internal Perspective of
Purchasing Process

1. Purchase
requisition
sent from
inventory
control (or
various
department)
to purchasing
department.

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Internal Perspective of
Purchasing Process
2. Purchase
order sent to
vendor (2a),
inventory
control (or
various
departments)
, (2b),
receiving
(2c), and
accounts
payable (2d).
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Internal Perspective of
Purchasing Process

3.Packing
slip (with
goods)
received
from
vendor .

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Internal Perspective of
Purchasing Process

4. Stock
notice
(with
goods)
sent to
ware-
house.

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Internal Perspective of
Purchasing Process
5. Notice of
receipt sent
to accounts
payable
(5a),
general
ledger (5b),
and
purchasing
(5c).

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Organization’s Supply Chain

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 Goal Conflicts and Ambiguities
in the Organization
• Individual managers’ goals may not be in congruence with
organizational objectives.
– Purchasing may buy large quantities to reduce ordering costs and
increase discounts. This increases costs of receiving, inspecting, and
carrying inventory.
• Ambiguity often exists in defining goals and success in meeting goals.
– A purchasing goals might be to select a vendor who will provide the best
quality at the lowest price by the promised delivery date. Realistically, one
vendor may not satisfy all three conditions.
• Prioritization of goals is necessary in choosing the best solution given
the various conflicts and constraints placed on the process.
– Trade-offs are made in prioritizing among the goals that conflict.
– If the market is sensitive to satisfying customer needs, the company may
pay higher prices to ensure that it can obtain the highest quality goods on
a timely basis.
10
Purchasing and the Supply Chain
• The supply chain is the system of adding value
beginning with acquiring raw materials and
ending with product field support.
• Organizations attempt to achieve maximum value
added in all the supply chain activities.
• Internet purchases are driving down purchasing
costs.
• Supply chain management (SCM) software
assists with demand planning, one of the most
important areas of supply chain management.

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 Categories of SCM Software
1. Supply chain planning software
• Accumulates data about orders from retail customers,
sales from retail outlets, and data about manufacturing
and delivery capability to assist in planning for each of the
SCM steps.
2. Supply chain execution software
• Automates the SCM steps.
• Includes ERP software as it receives and routes orders,
and executes invoices.
• Many connections in the supply chain are B2B automated
interfaces. For example, the sourcing step may be
implemented through an automatic order sent via the
Internet.

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 Benefits of SCM
• Lower costs to the customer.
• Higher availability of product.
• Higher response to customer requests.
• Reduced inventories along the supply chain.
• Improved relationships between buyers and sellers.
• Smooth workloads due to planned goods arrivals
and departures, leading to reduced overtime costs.
• Reduced item costs as a result of planned purchases
through contracts and other arrangements.
• Increased customer orders due to improved customer
responsiveness.
• Reduced product defects through specifying quality
during planning and sharing defect information with
suppliers during execution.

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 Potential Problems with SCM
Initiatives
• Data not collected or not shared across functional boundaries.
• Lack of information sharing between supply chain partners.
• Inaccurate data in the supply chain negatively affects the
entire chain.
• Over-reliance on demand forecasting that may be inaccurate.
– Good demand forecasting requires an intelligent
combination of software tools and human experience.
• Competing objectives can lead to unrealistic forecasts.
– Marketing may want an unrealistically high demand
forecast to ensure a successful product, leading to
inaccurate promotion and production budgets.
– Sales wants a lower demand forecast as it will be
evaluated on its ability to meet sales quotas.
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 Mitigating Problems with SCM
Initiatives
Types of Collaboration in the Supply Chain
– CRP: Continuous Replenishment also called:
• VMI Vendor Managed Inventory
• SMI Supplier Managed Inventory
– Co-managed Inventory (a form of CRP)
– CFAR: Collaborative Forecasting and Replenishment
(precursor to CPFR)
– CPFR: Collaborative Planning Forecasting and
Replenishment
Technology Summary 12.2 discusses these method

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Mitigating Problems with SCM
Initiatives
Technology Summary 12.3: CPFR Process

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Purchasing Process—
Context Diagram

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 Inventory Reorder Methods
• Reorder point analysis (ROP)
– each item is assigned a reorder point based on its
sales rate
• Economic order quantity (EOQ)
– order quantity based on costs of ordering and
carrying inventory
• ABC analysis
– technique for ranking items in a group based on the
output of the items
– can be used to categorize inventory items according
to their importance
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Purchasing Process—Level 0 Diagram

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Purchasing Process— Diagram 1

20
Sample Purchase Requisition

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Purchasing Process—Diagram 2

22
Sample Purchase Order

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Purchasing Process—Diagram 3

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 Data Stores Used in the
Purchasing Process
• Inventory master data
– Record of each item stocked or regularly ordered

• Vendor master data

– Stores information about approved vendors including
vendor performance
• Purchase requisition data
– Data on all purchase requisitions
• Purchase order master data
– Open PO information including status of items on order
• Purchase receipts data
– Lists items received
25
 ER
Diagram-
Purchasing

26
Purchasing Process Flowchart

27
Purchasing Process Flowchart (cont’d.)

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 Fraud and the Purchasing
Function
• Because it involves the payment of cash, manipulation of
purchasing is involved in many frauds.
• Typical cases include:
– An employee (e.g., a buyer or purchasing manager)
places purchase orders with a particular vendor in
exchange for a kickback, secret commission, or other
form of inducement from the vendor.
– An employee has a conflict of interest between his
responsibilities to his employer and his financial interest
—direct or indirect—in a company with whom the
employer does business.
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Purchasing Control Matrix

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Control Matrix, Cont’d.

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