https://studylib.

net/doc/15362489/importance-of-purchase-management

https://www.shareyouressays.com/knowledge/13-important-function-of-purchasing-department-of-an-
organisation/116403

https://www.scribd.com/doc/25340404/Q-Explain-the-Importance-of-Purchasing-In

https://www.yourarticlelibrary.com/material-management/purchasing-its-meaning-definition-
importance-and-objectives-material-management/27936

https://www.knowledgiate.com/5-main-objectives-of-purchasing-function/

https://blog.sievo.com/purchase-order-process-steps-and-procedures-simply-explained

https://www.slideshare.net/kittypawws/purchase-procedure

https://www.slideshare.net/shahrukhakash/procurement-and-purchasing-of-a-product

https://www.slideshare.net/sancusindia/purchase-process-26267552

https://eli.ctas.tennessee.edu/reference/types-purchasing-specifications

13 Important Function of
Purchasing Department of an
Organisation
Article shared by  <="" div="">

The purchasing department is an organisational unit of a firm whose duties include

some part or all of the purchasing function. This disconnection between function and,
department is not always appreciated or understood by top management.

The purchasing function is usually performed most economically and efficiently by a

specialised, centralised purchasing department, directed by a skilled purchasing
manager.

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However, the purchasing function does not have to be performed in such a manner. In
theory, it can be performed, and in practice, it sometimes is performed by any number
of different company officers or departments.
The functions of purchasing department are varied and wide which are based upon
different approaches. The purchasing activities may be divided into those that are
always assigned to the purchasing department and those that are sometimes assigned
to some other department. The followings are some of the important functions which are
necessary to be performed.

1. Receiving indents

2. Assessment of demand or description of need

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3. Selection of sources of supply

4. Receiving of quotation

5. Placing order

6. Making delivery at the proper time by following up the orders.

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7. Verification of invoices

8. Inspection of incoming materials

9. Meeting transport requirements of incoming and outgoing materials

10. Maintaining purchasing records and files

11. Reporting to top management

12. Developing coordination among other departments

13. Creating goodwill of the organisation in the eyes of the suppliers.

1. Receiving indents:
The first and foremost function of purchasing is receiving demand/requisition of material
from different departments of the organisation, such as from production, stores,
maintenance, administrative, drawing office, planning, tool room, packing, painting, heat
treatment etc.

After receiving the indent from users’ departments it examines in details and takes
action according to the need and urgency of any item. This is called ‘recognition of
need’. Sometimes, needs can be met by transfer of a stock of one department to
another department. In other cases, the reserve stock or the stocks kept in bank can be
utilized i.e., pledged stock with bank.

2. Assessment of demand or description of need:

After recognising the need with appropriate description, i.e., qualitative as well as
quantitative, is necessary for the sound and successful purchasing. An improperly
described demand can cost heavily money-wise as well as time-wise.

The real problem arises when the order is placed for want of preciseness in the
description of goods needed, the items are received and these are not acceptable to the
user department and it also becomes difficult to convince the suppliers to return the
goods in case of faulty supplies. Therefore, purchasing department must have adequate
knowledge of items being purchased to be able to secure full description.

The purchasing department should not have such alternative purchases of

commodities, which are not available easily, on their own responsibility or at a lower
cost unless and until it gets the consent from the user department.

In a nutshell, it is recommended that the description of items for purchase on the part of
indenter, purchaser and seller should be quite clear and without ambiguity to promote
harmony in an organisation.

3. Selection of sources of supply:

Most important function of a purchasing department or officer is the selection of the

sources for the requisitioned items of stores. There are different sources of supply
which have no similarity between them.
For majority of items, selection of one of the vendors should be made. While selecting
the item, the purchase officer has to see whether the item to be purchased is on a
regular basis i.e., it is being purchased time and again or it is a seldom purchase on
non-recurring basis.

Whenever the items are to be bought from single manufacturer, such as branded or
patented item, there is no difficulty in the selection of the sources of supply; the order
can be placed with the party according to terms and conditions of their sale.

Selection of source of supply requires the services of shrewd purchasing officer who
can keep pace with policies of the organisation and market from where the materials
have to be purchased.

4. Receiving of quotation:

As soon as the purchase requisition is received in the purchase division, sources of

supply will be located; a decision is then taken in respect of the method of
tendering/limitation of quotations from prospective suppliers.

Prices are also ascertained by preparing a comparative statement with the help of either
of the following documents supplied either by the supplier or taken from the previous
records of advertisements, like:

(a) Catalogues, price lists etc.

(b) Telephonic quotations.

(c) Previous purchase records.

(d) Quotation letter or tender i.e., letter of inquiry.

(e) Sample and related price cards.

(f) Negotiation between suppliers and the purchase department like catalogue, price
lists etc.

It is in the interest of purchasing department to keep this information up to date. Even

for the items which are being purchased on a regular basis, the purchasing section
should invite tenders and know full well the market price. It will ensure that prices being
paid to the existing vendor are competitive.

5. Placing order:

Placing a purchase order is the next function of purchasing officer. Since purchase
order is a legal binding between the two parties, it should always be accurate, clear and
acceptable to both. The purchase order should contain the following particulars:

(a) Description and specifications of the material.

(b) Quantity order.

(c) Transport and packing charges and shipping instructions.

(d) Name and address of the supplier.

(e) Date, time and place of delivery.

(f) Price, discount and terms of payment.

(g) Signature of the purchase manager.

(h) The name and address of the buyer.

6. Making delivery at the proper time by following up the

orders:

Since one of the objectives of successful purchasing is delivery of goods at right time so
as to ensure delivery when and where needed? In normal practice, the responsibility of
the purchasing department is upto the time the material is received in the stores and is
approved by the inspection department.

Every purchasing department has the responsibility for follow-up of the orders it places
on different suppliers. All items do not require extensive follow-up. For some less
important and low value items follow-up would be costly and wastage of money and
time only.

7. Verification of invoices:
In normal course, it is also the responsibility of purchase department to check the
invoices and accordingly advise the accounts department for clearing the payment to
the parties concerned. Contradictory statements have been given as to who should be
assigned this function.

Some are of the view that invoices should be checked by the purchase department
placed by it whereas other suggests that it should go to the accounting department. In
support of this, the experts add that it is part of the responsibility of purchase
department that orders are accurately executed and properly filled as per terms and
conditions of the contract.

If there is any error in the bills, the purchase department can get the correction done or
adjustment effected. If the invoices are checked by the stores or accounts departments,
there may be some delay in attending to the errors.

8. Inspection of incoming materials:

The purchasing department should have a close contact with inspection department. On
receipt of the materials from different suppliers, they are to be inspected as per
specifications indicated in the purchase order to verify their quality and quantity.

Uninspected materials are a burden on the economy of the organisation. If inspection is

delayed, the payments of the suppliers also are likely to be delayed, resulting in bad
relations between suppliers and purchasers.

9. Meeting transport requirements of incoming and

outgoing materials:

The purchasing officer must make goods/materials available at the right time they are
required, at the place they are needed, and at the lowest possible cost. It is a big
responsibility, and even a slight error amounts to delay in consignment required at a
particular time.

In this regard, the purchase department should have a thorough knowledge of the
means of transportation. It should make a correct choice of carriers or routes because
otherwise it may entail delay and additional transportation costs.

10. Maintaining purchasing records and files:

Purchasing involves a lot of paper work. Daily a number of letters, bills, quotations,
notes, challans, railway receipts, parcel, way bills, bills of ladings, goods received notes,
lorry receipt, goods receipt (transport delivery notes), inspection notes have to be dealt
with. It involves a lot of clerical work.

This department has to refer to previous correspondence on purchase orders, notes,

catalogues, blue prints, price lists etc. very frequently which makes it imperative to
maintain records in appropriate manner. These records are essential for making the day
to day purchase.

11. Reporting to top management:

It is also an important function of the purchasing department to prepare weekly,

monthly, quarterly, bi-annually and yearly reports regarding expenditures of this
department and send the same to top management along with details of purchases
made and suggestions or improvements, if any.

12. Developing coordination among departments:

A purchasing department has to fulfill the needs of other departments in the

organisation. It is the function of purchasing department to work in close coordination
and cooperation with other departments of the company.

To a considerable extent, the attitude and reactions of other departments towards

purchasing department extends to these other departments. Mutual trust and
cooperation is essential between the purchasing department and other departments to
secure high degree of efficiency.

13. Creating goodwill of the organisation in the eyes of the

suppliers:

Good vendor relationship has to be maintained and developed to reflect enterprise’s

image and goodwill. Maintaining such relations requires mutual trust and confidence
which grows out of dealings between the two parties over a period of time. Worth of a
purchasing department can be measured by the amount of goodwill it has with its
vendors.

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5 Important Steps in Purchasing and Receiving Procedure of Materials

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What car/automobile companies buy: Tires, Brakes leathers, Clutches, Wires, Steel
Plates, Glasses, Paint, Fabric, Aluminum sheets, Electronic components, Carpets etc.
What soft-drink producers buy: Bottles, Sweetener, Carbonation, Flavoring substances,
Caps, Cardboards, Plastic Containers, etc.
What software companies buy: Computers, Hardware, Chairs, Tables, Wires, Data
Cables, etc.
What hotels/restaurants buy: Vegetables, Utensils, Air conditioners, Gas Stoves,
Carpets, etc.
So, we see that different industries require different types of materials according to their
ritical role in shaping the customer’s experience with the organization.

PROCUREMENT OBJECTIVES AND KPI’S

OBJECTIVE 1: Support Operational Requirements

• Understand business requirements

• Buy products and services
– At the right price
– From the right source
– At the right specification that meets users’ needs
– In the right quantity
– For delivery at the right time
– To the right customer

OBJECTIVE 2: Manage the Procurement Process

and the Supply Base Efficiently and Effectively

To manage the procurement process and supply base efficiently and effectively, procurement must
follow the following key steps:
• Identify opportunities where the procurement team adds true value:

– Evaluation and selection of suppliers based on sound ethical norms and standards
a) All purchases must go through the approved procurement processes
b) Engineering and other functional inputs are part of this process
c) Contractual agreements will be done with the involvement of Procurement
d) Increased use of sourcing teams

– Review of specifications or scope of work

a) Review the requirements for the material or service being provided
b) If possible, suggest alternative standardized materials that can save the organization money
c) Periodic review of categories can allow greater leveraging of requirements

– Purchasing will act as the primary contact with the supplier

a) Manage the supply base, identification and mitigation of risks
b) Identify new potential suppliers and develop relationships
c) Improvement and development of non-competitive existing suppliers
d) Determine the method of awarding contracts
e) Support local business (local procurement) and consider social responsibilities wherever possible
without compromising objective 1

• Manage internal operations

– Management of procurement staff
– Development and maintenance of policies and processes
– Introducing and leveraging appropriate technology and systems
– Defining procurement strategy and structure
– Provide procurement leadership to the organization
– Provide professional training and growth opportunities for employees
OBJECTIVE 3: Develop strong relationships with
other groups within the organization

– Continued liaison with internal customers to achieve greater understanding of requirements and
integration
– Timely, pro-active communication with internal customers
– Sharing of information i.e. market trends, price, quality, delivery, forecast and demand
– Highlighting achievements

OBJECTIVE 4: Support organizational Goals and

Objective

– Develop purchasing strategies that support organizational strategies:

a) Monitor supply markets and trends i.e. material price increases, shortages, changes in supply and
interpret the impact these trends will have on the organization
b) Identify the critical materials and services required to support the company strategies in KPA’s
particularly during new project development
c) Support the organization’s need for a diverse and globally competitive supply base
d) Develop supply options and contingency plans that support company plans
e) Quality reporting as required and continued improved communication
f) Develop KPI’s for Procurement personnel which will support the objectives and organizational
goals

Procurement Key Performance Indicators:

1) Inventory
– Monitor spend on Stock, Direct Charge and Service spend, monthly
– Major Reagents and Consumables based on 80/20 Pareto principle – Stock on Hand сover 2-3
month on average; Purchase prices against Budget; Monitoring of the Market Trends
– Percentage of Stock Inventory covered by BPA (small value; high turnover items)
– 95% service level for normal stock and 100% service level for Critical, Insurance, major
consumables and reagents
2) Supplier performance
– Price Structure, Discount, Payment terms based on 80/20 Pareto principle
– Lead time monitoring
– Deficiency report
3) Buyer Performance
– Saving (monthly) by assigned category
– RFQ/PR processing; actual vs. target (2 weeks for regular; 1-3 work days for Urgent)
– Spend/Number of PO/Number of Items by Buyer
4) International/Local Spend Analysis
– Target to increase the local spend
– Newspaper advertisement

The Purchasing Process

Purchasing is a highly complex organizational process with objectives that reach far beyond the traditional
belief that purchasing’s primary role is to obtain goods and services in response to internal needs. The overall
goals of purchasing can be categorized in five major sections: supply continuity, manage the sourcing process
efficiently and effectively, develop supply base management, develop aligned goals with internal stakeholders,
and develop integrated purchasing strategies that support organizational goals and objectives. 28

Development of a strategic sourcing plan is driven by the recognition that tactical sourcing will not succeed in
yielding a supply base that results in the benefits of collaborative relationships and strategic alliances. The
basic steps in the strategic sourcing process follows:

1. Discover potential suppliers.

2. Evaluate potential suppliers.
3. Select suppliers.
4. Develop suppliers.
5. Manager supplier relationships.

Discovering Potential Suppliers

The ability to discover qualified and competent suppliers has increased exponentially with the introduction of
the Internet. However, purchasers should not ignore other sources of information that are available to ensure
that the supplier pool consists of the most appropriate suppliers whether domestic, nearshore, or offshore.
Following is a list of resources to use in establishing a robust list of potential suppliers:

 Supplier websites
 Supplier information files
 Supplier catalogs
 Trade registers and directories
 Trade journals
 Phone directories
 Mail advertisements
 Sales personnel
 Trade shows
 Company personnel
 Other supply management departments
 Professional organizations

Other strategic issues to consider in determining the list of potential suppliers include
  Company policy on single versus multiple sourcing
 Company policy on buyer’s share of supplier’s capacity
 Company policy on buying from minority- and women-owned business enterprises
 Company policy on environmental, health, and safety (EHS)-qualified or certified suppliers

Evaluating Potential Suppliers

After developing a comprehensive list of potential suppliers, the supply manager’s next step is to evaluate each
supplier individually. The type of evaluation varies with the nature, criticality, complexity, and dollar value of the
purchase to be made. In 1983, Peter Kraljic developed a matrix that helped to describe the type of relationship
with the supplier according to the criteria mentioned previously.  Figure 1-5 is an adaptation of this matrix.
29

Figure 1-5 Kraljic’s 1983 portfolio matrix

This step in the strategic sourcing process is key because there is a direct relationship between supplier
relationship management and supplier performance, risk management, and brand and image. Purchasing’s
relationship with the supplier depends on the classification of the commodity in the matrix. The vertical axis is
based on the importance of the purchase to the buying organization, usually talked about in terms of total
spend. However, it can be high in importance because if you can’t find the item, you cannot produce your
product or service. Complexity is determined by the number of available suppliers. Fewer available suppliers
make the purchase more complex. This matrix is discussed more in depth in Chapters 2, 3, and 4 and is used
extensively by sourcing professionals.

Many of the uncomplicated, low-dollar-value items require only a cursory evaluation process because of the
low importance and low risk to the firm. The role of the purchaser in this case is to buy at the lowest price. The
idea is to streamline the buying process for these items. Locating suppliers for items in this category may
include review of the supplier website or a look at a business database such as Mergent OnLine to gather
relevant information.

In comparison, for complex or high-dollar or other critical purchases, the evaluation process is more involved,
time-consuming, and costly. A key first step is to establish some knock-out criteria: In other words, what are
some important concerns that if the supplier doesn’t have these, they can’t do business with your organization?
Some examples include the size of facility, location of facility, past experience with similar requests, and
litigation or EHS issues. There are a number of other evaluation techniques used to assess the suppliers, as
shown in Table 1-4.

Table 1-4 Evaluation Techniques for Potential Suppliers 30

Technique Description

Supplier Surveys ask a number of questions of the supplier, including referrals, references, P&L
surveys history, defect rate, and quality management system.

Financial Financial analysis can often prevent the expense of further study. This analysis includes
condition key financial metrics and ratios that assess the financial stability of the supplier. Credit
analysis ratings can also help determine whether the supplier can meet the demands.

Third-party Trained third-party organizations are often hired to evaluate and audit suppliers or even
evaluators processes like handling of hazardous waste.

Evaluation Face-to-face discussion can help clarify specifications and determine whether a supplier
conference can meet the demands of a complex purchase.

Facility visits Many suppliers look good on paper, but visiting a site can help determine whether there
are inefficiencies. These visits usually include a crossfunctional team with both strategic
and tactical participants from the buying firm. Weighted scorecards are often used during
evaluation.

Quality The quality department and top management help to shape the quality capabilities of a
capability firm. Understanding the supplier quality philosophy and past quality performance can
 Technique Description

analysis help determine whether the supplier is in alignment with the buying company.

The supplier’s strategies must also be aligned with the strategies of the buying organization. A supplier
scorecard is usually cross-functionally developed with weights assigned to the different areas. (The scorecard
and evaluative criteria are also discussed further in Chapter 2.) The final score on the scorecard helps to
narrow the supplier pool but also allows the evaluator to focus on those things that are critically important to the
buying organization.

The four focus areas listed (early supplier involvement, ethical considerations, environmental considerations,
and social considerations) need additional consideration with each of the suppliers. It often depends on where
the commodity or service is classified on the matrix, what type of relationship you have with the supplier, and
where the supplier is geographically located because legal and cultural laws influence all these criteria.

Selecting Suppliers
When the supplier pool is reduced to a manageable level and one or more potential suppliers has passed the
initial evaluation process, the purchasing manager or sourcing team can invite potential suppliers to submit bids
or proposals. Purchasers have to decide whether to use bidding or negotiation, or some combination of both.
Reverse auctions are often utilized here (depending on the classification).

As mentioned earlier, the final selection of suppliers is often based on a supplier scorecard or weighted factor
analysis. Developing a weighted scorecard consists of four primary activities:

 Develop the factors that serve as the selection criteria and the weight that each of those factors carries
in decision making. What areas are critical to your organization for this type of commodity or service? For
example, a paper company has to buy significant quantities of starch for its manufacturing process.
Starch is truly a commodity and the primary consideration is price.
 Expand the subfactors or performance factors within the broader selection criteria and the weighting of
those factors. An example might be financial performance and key ratios of inventory turnover, return on
assets, or even profitability.
 Establish a scoring factor to evaluate potential suppliers. This is generally the scale used for
evaluation: 1 through 5, for example. The raters have to be clear on what a 1 is compared with a 5.
 Score and evaluate each supplier. This is generally done individually by those who have a relationship
with the supplier and for those who have access to the information. For example, on-time delivery may
not be known by all members, but the person responsible rates the supplier. The scores are all compiled
and totaled to get to the scorecard “number.”

Careful evaluation of the suppliers using the scorecard enables the appropriate selection of the supplier that
clearly supports the needs of the buying organization. It is possible that the highest number is not the best
supplier simply because the highest priority factor is what actually matters (for example, quality).
 Developing Suppliers
Supplier development is any activity undertaken by a buyer to improve a supplier’s performance or capabilities
to meet the buyer’s short- and long-term supply needs. There is sometimes conflict between the buying firm
and the supplying firm, especially if a supplying firm does not see the need for post-development. Also, it is
critical for purchasers to have a defined set of performance metrics that are transparent to the supplier and
established goals for development. Effective supplier development requires the commitment of financial capital
and skilled personnel, timely and accurate information sharing, and process improvement. More detail on
supplier development is provided in later chapters.

Managing Suppliers
Key performance metrics are in place to help manage the suppliers. However, purchasers must assess the
supplier’s capabilities to meet the firm’s long-term needs. The buyer must be willing to ask the supplier about
general growth plans, design capabilities, and future production capacity. An important part of managing the
supplier is building and maintaining the appropriate relationship. More detail on supplier management is
provided in later chapters.

 Search

Key steps in the purchasing process

Like any process the purchasing process is made up of several steps or activities each step takes
information, processes it and turns into an output to feed into the next step.

While the purchasing process may vary from organisation to organisation the major fundamentals
remain the same

1 Request to purchase / requisition

This phase deals with identifying the need – what to buy – how much of it – and when it is needed for –
there are two main forms of requisition – a manual one i.e. that created on a form (such as a requisition
form) or other document and that created automatically via an ERP type system. The requisition will
likely go through an approvals process whereby authorisation is given to purchase the item (or not!)

2 supplier selection

Buyers may already know which supplier to to buy the item from that is being requested. If not a tender
(or request for quote) process may be initiated to identify a supplier, price and lead time.

3 purchase order

A purchase order is despatched to the supplier (either a paper copy or electronically) to inform the
supplier of the intent to purchase. The purchase order will identify the item(s) being procured, the
quantity required and the price being paid. It will also identify delivery address and any terms and
conditions that relate to the order. Click here for our guide on how to create a Purchase Order template
using Excel
4 Fulfillment

The supplier will then despatch the goods to the buying organisation. Lead time might be required to
allow the supplier to manufacture the item or receive deliver from Mitsubishi own suppliers.

5 Goods receipt

Once the goods arrive at the buying organisation they will typically go through some form of goods
receipting process where the goods are checked to ensure that they match what was ordered and that
they are of the correct quality.

6 Supplier invoice/payment

At time of despatch the supplier will typically issue an invoice – which either accompanies the goods or
is sent separately. This will be received by the finance department – processed and paid (assuming the
goods are received and are correct).

Summary

While these are the basic steps in the purchasing process all companies are different – some will wish to
automate as much as possible replacing paper forms with electronic messages- others may have
complex approval rules – despite these variations however the fundamentals remain the same.