Chapter five

Purchasing procedure
Definition of procedure
Any activity or tasks we perform day after day either for individual or
organizational purpose have their own steps or Sequences to be followed so as to
accomplish them successfully and satisfactorily. Business and non-business
organizations perform activities that range from minor task to large projects with
significant investment in terms of money, time and level of effort to be made.
Likewise, purchasing department has a number of tasks to be done with in
prescribed steps or procedures.
What is a procedure?
Procedures are detailed outlines of a specific action to be taken to accomplish a
given task, with in the guide lines of any applicable policy. In short, procedures
establish the way of doing things.
Generally, procurement procedures and the document they utilize serve for two
fundamental purposes with in organization/importance
1. They provide the frame work and direction for accomplishing the supply and
materials managing activities effectively and efficiently. i.e. procedures are
designed to indicate from where to start a given task, what to do at specific
stage of the task and where to end with accurate and safe factory performance.
2. They provide the means for processing information input from out side the
dep’t to produce out put communication needed by individuals in other dep’ts
to do their jobs in a coordinated and timely manner.
In addition to the above purposes procurement procedures, have the following importance
 They clarify tasks
 Ensure uniformity of purchasing activity
 Assign authority and responsibility at different level of a given task
 Enhance documentation and control
Objectives of operating procedures
Generally speaking properly designed procedures should accomplish four objectives
 To accomplish each task satisfactorily with minimum of time, effort and paper
work
 Effectively communicate and coordinate the effort of one work group with other
 Minimize overlapping effort and group conflicts by clearly designating
responsibility for each step to the procedure
 Permit effective management by exception

Justification for the existence of accurate purchasing procedure or reasons

for developing sound purchasing procedure
This is to mean that following each procedure for every item or purchase may not
be necessary. Because, the value of the purchase may not justify the cost that the
organization incurs in terms of money and time, while strictly following each
procedures. There fore the under listed situations are some of the reasons that why
firms use purchasing procedure
A. The large number of materials purchased
B. The high amount of dollar/birr volume involvement

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 C. Their essentiality for auditing purpose
D. The sever consequences of unsatisfactory (poor) performance and
E. Their contributions for accurate and satisfactory performance are the five
major reasons for developing a sound system/procedure. Even though
purchasing procedures differ from organization to organization, the value and
types of materials to be bought, the following are the most commonly used
procedures.

1) Recognition of need
Since purchasing is a need based activity, the user dep’t has to clearly identify
and transmit its weekly, monthly or semi-annually requirements in a written and
formal way. In advanced procurement system, the purchasing dep’t goes to
recognize or identify needs ahead of time by working in coordination with the
user dep’t. Any purchase originates with the recognition of a defined need by
some units or persons in the organization. Recognition of need involves
determining, what materials are needs, how much are needed and when they are
needed. The need for a purchase typically originates in one of firms operating
dep’t or in its inventory control section. Purchasing dep’t usually informed or
notified by one of the two basic methods
a. a standard purchase requisition
b. a materials requirement planning (MRP) schedule

Steps in need recognitions for industrial firm

I. the organization needs would be established based on customers need
II. needs would be determined based on what the market can supply
III. conclusions will be made / reached on what constitutes a best value
under a given circumstances
IV. Cost benefit analysis will be made concerning filling the needs either
from internal source or external source. Internal sources include
surplus in other department and warehouse of the organization
Categories of need
Manufacturing organizations, those engaged in changing inputs of raw material
in to out or consumable products need different types of materials which
generally classified as
I. External/ direct production:- these are materials that directly form part
on the end product of the organization. Eg. Raw materials, spare parts,
semi finished products and packing and components
II. Internal/indirect production: these are materials which do not appear in
the final product. Such types of materials are used to facilitate the
smooth running of the organizations activity. E.g. stationary, MOR
items, equipments, or machineries

2) Description and transmission of the need

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 Description means writing the detail specifications (all elements/features of the
article). Once the needs of the organization or individual dep’t identified the next
task is to clearly describe / write the specification of the item and communicating
it with the purchasing dep’t. Description of materials includes types of materials,
characteristics and features of the item. Description of need is a joint
responsibility of the user and purchasing dep’t. This means description or
specification of the items to be bought should be written by user dep’t and revised
by purchasing dep’t for the accuracy and completeness of the specification. Any
change or modification on specification made by the user dep’t should be
communicated to them. A uniform terminology has to be used in writing
specification of materials. There are two forms/ways to transmit or communicate
the recognized need with purchasing section. These are
A. Purchase requisition (PR) form: it is an internal communicating
document, which originates from the user dep’t having information
regarding the item intended to be bought. The purchase requisition is an
internal document (form) filled by the requesting unit, which clearly
indicates the material requested and other related conditions. PR is a
standardized document prepared in varies copies to inform all working
unit of the organization. Information that appear on PR form may differ
from organization to organization due to the modification each firm
made on it to simplify communication problems. But any purchase
requisition form is recommended to include the following information’s
 Description of materials
 Quantity and quality of materials
 Delivery and issuing date
 Operating account to be charged
 Authorized signature
 Originating dep’t
 Date and identification of requisition
Traveling request (TR) this is special purchase requisition form, which is used for
repetitively used items. Traveling request as the name implies can be used to transfer 24-
36 needs at different time for most likely similar items by sending back and forward
between operating dep’t and purchasing section. The common responsibility of
purchasing manger after the arrival of PR are checking the accuracy and completeness of
the specification ensuring the appropriateness of the description method used and
checking the availability of the requested material on market. Inaccurate description may
cause, loss of time, loss of finance, hard feeling internally, loss of supplier respect and
trust and disruption of supply

B. Material requirement planning /MRP/: when a design engineer

completes the design of a part or an assembly, he/she makes a list of all
the materials and their quantity required to manufacture the item. This
list called an engineering bill of materials. In firms that do custom
manufacturing work, or for firms engaged in unoique one time projects,
the engineering bill of materials, along with the production schedule and
engineering drawing can be sent directly to purchasing as notification of

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 the production dep’t need for materials. The buyer then obtains total
requirement simply by manually extending the bill of materials for
production quantity scheduled. Thus, communications are simplified and
the need for purchase requisition is eliminated.

3) Selection of source of supply

As soon as a need has been established and precisely described, the buyer
begins an investigation of the market to identify potential sources of supply. In
the case of routine items for which supplier relationships have already been,
developed little additional investigation may be required. The purchase of a new
or high value item, lengthy investigation of potential supplier may be required.
Supplier selection constitutes an important part of the purchasing function that
involves searching for qualified sources of supply; analyze the capability of
suppliers to supply the right material on time. After qualifying a preliminary
group of potential source, the buyers may use the techniques of competitive
bidding or negotiation. If the companies select bidding, it has the following
procedure
1. a potential supplier submit their proposals by quantifying price and
terms
2. Supplier quotation then will be analyzed by comparing one supplier
price with the other competing suppliers. This can be done through
price analysis sheet.
3. The supplier that propose the least price and fulfilled all the condition
will be selected and order is placed to the selected supplier.

In supplier’s selection process, the purchasing dept considers whether the bids are required or not.
Bidding is competing to supply the required material. Organizations using this buying system have
policies on how to use bidding. Items requiring bidding purchase:
 Items of high value
 Items whose suppliers are not known
 Items purchased in bulk
Where as:
 Items of repetitive and routine purchase
 Items of low value
 Items of very few or only one supplier may not require bidding
Available bidding options
 Open Bid: The bid is open to all potential suppliers
 Suppliers are very often invited for bidding through mass media
 Merit: You may get supplier you don’t know but evaluation and selection of
supplier could be difficult
 Closed Bid: Inviting or calling limited suppliers. (It could be through phone or
letter contact)
 Merit: evaluation and selection of suppliers could be easy but there could be
probability to miss good suppliers.
 Competitive bidding: It is used in project related activities and price is the most
important variable used to screen suppliers. It is the most popular way by which
many government organizations and institutions make their major purchases.

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4) Purchase order preparation and issuance
Once the purchasing dep’t qualified, selected one capable supplier, the next task
that should be accomplished is, preparing and issuing purchase order for the
winner or qualified supplier.
PO is an external and legally contracting document that constitutes terms and
conditions that guide both the buyer and seller in performing the contract.
From the above definition, we have some key terms
I. External document: unlike PR form it used to communicate the buying
organization with an outside supplier, which may be either local or
foreign supplier.
II. Legally contracting document: this is to mean that once the supplier
accepts/ agreed with terms and conditions he/she would be binded by
the order, which then onwards serves as a contract or legal document.
Hence, in case either party failed to discharge its duties and obligations
it will be questionable by court or law.
III. Terms and conditions: these are any information’s written by the buyer
and accepted by the supplier to guide the performance of contract.
E.g. price, delivery date, discount, payment, mode of transportation, and
dispute resolution mechanisms.
Conditions may include specific instructions regarding price, delivery
date, discount, payment system, transportation term, warranty, etc.
E.g. 1. The cash discount period available to buyer shall commence on
the date of receipt of the merchandize or on the date of receipt of the
invoice, which ever may be the later. 2. Any deliveries beyond the
specified date and quantity will be rejected without any precondition.
3. Payment for credit purchases will normally be made by 15 th of
following the month.
Such guiding principles of a given contract stated by the party that
makes an offer are called boilerplates. They ca be changed or modified
by the will of both parties; however, any change or modification by
either party without the knowledge of the other party may cause
invalidation of a contract or rejection of an offer.
Change order: it is required when the materials specified is wanted to
be modified or changed which may arise due to change in market
condition or production line of the buying organization. The purpose of
sending change order is either to replace or to supplement the original
order.
Acknowledgement: it is a document sent by the supplier conveying that
he has accepted the order. Acknowledgement may be sent by copying
the purchase order or through a formal business letter. No purchase
contracts exist however, until the supplier accepts the buyer offer and
notify him through an acknowledgement form.
5) Follow up and expediting PO
Once the order is placed or accepted by the supplier the buying dep’t is
expected to check the progress of the order. Following and expediting an
order requires some preconditions like large and critical purchase. This is

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 because follow upping and expediting are too costly and hence, the
purchase should justify the cost that is associated with follow upping. For
that purpose purchasers will follow-up or expedite the order already
placed.
Follow–up: is checking and insuring the progress and delivery of an order
at the scheduled time by using honest and encouraging words or phrases,
through telephone, formal business letter and suppliers plant visit.
Unlike follow up, expediting needs the use of hard ship and threatening
words urge the supplier to deliver order on or before the delivery schedule,
like future business withdrawal or rejection of any delivery beyond the
original delivery schedule. Some times purchasing dep’t want to extend
deliveries beyond the scheduled time through de-expediting. In short
follow up is the routine tracking of an order to assure that the vendor is
able to meet delivery promises. And expediting is a forceful follow up,
meaning the application of pressure on the vendor to make him/her either
to meet the original delivery promise or to deliver it ahead of schedule.
The purpose is:
 To facilitate on time delivery of purchases
 Identification of suppliers’ problems and then cooperate to solve the
problems.

6) Receiving and inspection

Inspection is checking for a quantity of delivery and general condition of
shipment, holding the packing list and invoice sent from supplier and a copy of
purchase order to verify the delivered materials according to the order placed.
After materials shipments have been checked for the right quantity the next task
would be checking for quality of deliveries. Inspection for quality can be made
through different ways such as sampling (spot checking), laboratory or testing
tools for engineering and technical items. For critical items in large and
advanced industrial organizations, external inspection professionals would be
hired. Finally both receiving and inspection section should prepare their
respective report.
7) Clearing the invoice and payment
An invoice is a document that has purchase order number and itemized price for
a given article. As a formal working system, buyers are supposed to be claimed
for payment by an invoice. There are, however, two contraception arguments as
whether the purchasing dep’t or accounting dep’t has to check and clear the
invoice.
This procedure may involve a simultaneous review of the purchase order and
receiving report and the invoice.
I. The argument that favor purchasing dep’t has to check and clear the
invoice are in a position that it is the purchasing dep’t which has the know
how of the order placed.
Procedure to clear the invoice by purchasing dep’t
After being adjusted for any correction the original invoice would be sent to the
accounting dep’t that will be kept until authorize comes from purchasing dep’t.

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 When the receiving dep’t sends receiving report ratifying those goods is
received, purchasing compares the receiving report and the copy of the invoice.
If the receiving report and the purchase invoice indicate similar information
purchasing dep’t compare them with inspection report. It is after all these steps
that purchasing report to the accounting dep’t as an authorization for effecting
payment.
II. The other argument that favors, clearances to be made by accounting
dep’t are inline with the notion that the task is primarily accounting.

Procedures for clearing invoice by accounting department

There are two possibilities.
1. The supplier directly sends all invoices to accounting dep’t of the
buying firm. The accounting dep’t will check the correctness and
completeness of the invoice by comparing with the information in
the purchase order. If there is no discrepancy then accounting will
finally settle the payment.
2. If there is a variation in information in the invoice and the purchase
order, then, the invoice will be sent to purchasing for correction. In
case purchasing dep’t examines any inconsistence, the invoice will
be sent back to supplier for recheck.
However, there may be some problems that create inconsistency among the documents
that help for effecting payment. These are delivery of damaged materials, undesired
materials, delivery of materials more than or short of order/ required. Each of these
different problems can be identified or recognized at different stages.
For instance: delivery of damaged materials and delivery of quantities more than required
would be recognized at received section, where as delivery of undesired of qualities and
expired items for chemical items would be recognized at inspection stage. Such
discrepancies may cause dispute between buyer and seller there fore, accurate and clear
instructions or clause has to be written on the purchase order or on the contract document
regarding the risk taker in case materials get damaged while in transit. In addition, the
clause should contain what could be made when the supplier delivers undesired quantity
and quality. On the other hand, there has to be one representative from the supplier who
should take part in receiving and inspection process to present an eye evident. The
existence of such instructions and guidelines helps for making immediate decisions and
alleviating undesired disputes between buyers and seller. More over, such contract
instructions help to solve problems associated with discrepancy of purchase invoice,
purchase order inspection report, receiving report, which helps to effect payment.
8) Maintenance of purchasing records
The file of purchasing dep’t contains an endless flow of operating data. Despite it’s
higher volume, much of these information can be useless in daily operation unless it is
organized in a manner which makes it readily accessible. To make purchasing records
accessible both for the dep’ts operation and for any external body the following separate
documents need to be kept.
Record of open order
These outstanding documents give access to buyers to get information regarding their
on going orders. Suppliers name indexed alphabetically should identify orders. With

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 in each suppliers sub file, orders are arranged in ascending numerical sequence. Such
record contains PR working copy of the order, acknowledgment information and
follow up data. Record of open orders (outstanding orders): all buyers need
immediate access to information concerning the status of their
outstanding order. The record system can be maintained on a computer in
hard copy or combination of two that means hard copy &soft copy. It’s
identifies by the suppliers name, record system or indexing
alphabetically. Each order record commonly contains purchase
requisition, working copy order, acknowledgement information; follow
up data, all notes & correspondence file.
Records of closed orders
The closed order files provide a historical record of all completed purchase. It
frequently serves as useful references when questions arise concerning past orders
and when certain historical data are needed to guide future decision. It is difficult to
generalize about the length of time such records be kept. While government contract
records should be kept indefinitely, most firms retain their closed from three to seven
years. Record of closed orders: the close order file provides a historical
record of all completed purchases. It serves as a useful reference; when
questions rise concerning past orders & when certain historical data are
needed to guide future decision.
Generally Purchasing dep’t is responsible to maintain records that are believed to be
important, as per the policy of the organization. The records can be the PR, RFQ, PO,
minutes of tender committee, invoices, list of suppliers, correspondence (follow- up
letters) price analysis sheet, the policy guidelines, bid documents, commodity records,
supplier records etc. However, it is advised that the records related to a specific order
should be placed together so that they can be found easily and referred to get a complete
picture of the order and serve as a legal resolution incase of conflict between contracting
parties.
5.2. Handling ‘rush orders’
Every dep’t executive tries to develop an orderly and systematic pattern of operation that
efficiently utilizes the resource of that dep’t. However, sometime there may be undesired
event that create obstacles to the orderly patterned working procedure of purchasing
dep’t. Rush orders are an urgent orders released from the user dep’t to fill an emergency
requirements. The emergency case may be resulted due to the following reasons.
1. negligence of the user dep’t in correctly identifying its requirements
2. in-appropriate inventory counting and wrongly reporting inventories available in
store
3. Unforeseen changes in market demand and production schedule of the buying
organization, and changes in style or technology.
Rush orders are by any means negatively effect t the purchasing dep’t and the whole
organization in terms of money and time. Due to
I. Errors may be committed in processing rush orders which results
undesirable cost

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 II. Since rush orders add burden on the supplier, as a means of compensation
supplier would charge higher price than normal order, deny discounts and
additional services.
III. Rush orders also increase administration costs like telephone, postages
paper work
Based on justification that user dep’t provides rush orders divided in to two
A. The real rush order: this is justifiable or reasonable orders that result due to
unforeseen changes in market condition and style or technological change,
which is beyond the capacity off the user dep’t. therefore, rush order is
tolerable
B. The so called rush orders: these are unjustifiable or unreasonable orders that
occur due to the negligent working nature of the user dep’t, ware house
operations and production planners of the organization.
Due to the undesired cost incurred in accomplishing purchasing activities through
frequent rush orders, now a days, most organization are applying different mechanisms to
discourage the use of rush order. Among these:
i. Purchasing dep’t has to work in coordination with user, ware house and
production dep’t so as tom eliminate the use of RO from the very beginning.
ii. Forcing the user dep’t to seek approval fro top level manager for every RO
iii. Leaving certain amount of services charge on the user dep’t, those come up
with frequent rush orders.

5.3. Handling Small Order

Small orders are perennial problem in every organization and a serious problem.
Examination of a typical company’s purchase order file reveals that a sizable percentage
or some times up to 80% of its purchase involves an expenditure of less than $250.
However, this purchase constitutes a small percentage or seldom more than 10% of the
firms’ annual dollar expenditure. No manager want to devote more buying and clerical
effort to the expenditure of lee than 10% of his/her fund than to expenditure of the other
90%. Because small order is costly to buyer and seller like it. In general small purchase is
not advisable for any organization.
Small order items are ordered in small quantity from time to time. If handling small
order is applied with in the organization the purchaser must use the following systems in
so as to be successful:-
- Centralize store
- Systems contracting
- Blanket order
- Telephone/ fax order
- Material requirement planning
- Electronic ordering system.