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The Purchasing Process: Accounting Information Systems 7e
The Purchasing Process: Accounting Information Systems 7e
Copyright © 2008 Thomson Southwestern, a part of The Thomson Corporation. Thomson, the Star logo, and
South-Western are trademarks used herein under license.
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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 technology can improve the
effectiveness of the purchasing process.
• Assess the implications of implementing a supply
chain management 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 explanation of how business
process control plans can accomplish operations
and information process control goals.
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:
1. Handle the repetitive work routines of the
purchasing department and the receiving
department
2. Support the decision needs of those who
manage the purchasing and receiving
departments
3. Assist in the preparation of internal and
external reports
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Internal Perspective of
Purchasing Process
Inventory
control, VP logistics VP finance Vendor
various Controller
departments
2c. PO
2a. Purchase
order 1. Purchase
requisition
1. Purchase notice
requisition
Accounts payable
department to
5c. Receipt
notice
Purchasing
5b. Receipt
notice
purchasing
department
General ledger
4. Stock notice
(with goods)
Warehouse
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Internal Perspective of
Purchasing Process
Inventory
control, VP logistics VP finance Vendor
various Controller 2. Purchase order
departments 2a. Purchase
1. Purchase
2c. PO
notice
order
sent to vendor
requisition
Warehouse
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Internal Perspective of
Purchasing Process
Inventory
control, VP logistics VP finance Vendor
various Controller
departments
1. Purchase
2c. PO
notice
2a. Purchase
order
3. Packing slip
(with goods)
requisition
Accounts payable
5c. Receipt
notice
Purchasing
5b. Receipt
notice
General ledger
4. Stock notice
(with goods)
Warehouse
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Internal Perspective of
Purchasing Process
Inventory
control, VP logistics VP finance Vendor
various
departments
Controller
2a. Purchase
4. Stock notice
(with goods)
order
2c. PO
1. Purchase notice
requisition
2b. PO
notice
Purchasing 3. Packing slip
(with goods) sent to
warehouse
5a. Receipt
notice
Receiving
2d. PO
notice
Accounts payable
5c. Receipt
notice
Purchasing
5b. Receipt
notice
General ledger
4. Stock notice
(with goods)
Warehouse
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Internal Perspective of
Purchasing Process
Inventory
control, VP logistics VP finance Vendor
various Controller
departments
1. Purchase
2c. PO
notice
2a. Purchase
order
5. Notice of
receipt sent to
requisition
Accounts payable
general ledger
(5b), and
notice
Purchasing
5b. Receipt
notice
General ledger
purchasing (5c)
4. Stock notice
(with goods)
Warehouse
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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 of inventory for quantity discounts
and to reduce ordering costs
– This may drive up 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 probably will 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 is procuring the best quality goods and
obtaining them when needed
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Purchasing and the Supply Chain
• The supply chain is the system of adding value
beginning with acquiring raw materials
(purchasing) 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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2 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.
• ERP software is assigned to this category as it receives
customer orders, routes orders to an appropriate
warehouse, and executes the invoice for the sale.
• Many of the connections between players in the supply
chain are B2B automated interfaces.
• For example, the sourcing step may be implemented
through an automatic order sent to a supplier via the
Internet.
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Benefits of Managing the Supply
Chain
• Lower costs to the customer
• Higher availability of product
• Higher response to customer request for product
customization and other specifications
• 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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Things that can go wrong in SCM initiatives
• Data not collected or not shared across functional
boundaries
• Lack of sharing of information 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 a high target to ensure a successful product
– This may be unrealistic
– Therefore promotion and production budgets will be inaccurate
– Sales, on the other hand, will be evaluated on its ability to meet
sales quotas and wants a lower demand forecast.
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Mitigating problems with SCM
Initiatives
Technology Summary 12.2
• 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
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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
– each item is assigned a reorder point based on its
sales rate
• Economic order quantity
– order quantity based on costs of ordering and
carrying inventory
• ABC analysis a technique for ranking items in
a group based on the output of the items
– ABC analysis 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
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Sample Purchase Requisition
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Purchasing Process—Diagram 2
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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
– A 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
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ER diagram -
Purchasing
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Purchasing Process Systems Flow Chart
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Purchasing Process Systems Flow
Chart, Cont’d.
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Fraud and the Purchasing
Function
• Many frauds involve manipulation of purchasing
because it involves the payment of cash
– The typical cases included in this category of process
exploitation are instances in which:
• An employee (e.g., a buyer, purchasing manager, or other
person) 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
Control Goals of the Purchasing Business Process
Control Goals of the Operations Process Control Goals of the Information Process
Ensure effectiveness of Ensure Ensure For purchase order For purchase For vendor packing slip For purchase order
operations: efficient security of inputs (i.e., order and inputs, ensure: and inventory
employ- resources requisitions), inventory master master data, ensure:
ment of ensure: data, ensure:
resources
Present Controls
P-9: Create audit trail for receipts P-9 P-9 P-9 P-9
Missing Controls
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Control Matrix, Cont’d.
Control Goals of the Purchasing Business Process
P-9: Create audit trail for receipts P-9 P-9 P-9 P-9
Missing Controls
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