Purchasing systems are ways for companies to efficiently purchase goods and services at optimum terms and the best prices. Many companies use computerized purchasing systems and even the smallest company can find a software program that will manage the more common elements that are found in the more complex purchasing systems.
You would expect the most basic purchasing systems to have the following functionality:
- Automatic generation of purchase orders.
- Managing order requisitions.
- Managing received orders.
- Invoice management.
- Management of price variances – usually by report production of anomalies
- Keeping lists of suppliers.
- Payment of vendors invoices either by printing cheques or by inter-bank transfer or BACs.
- Provision of financial reports that can be used to update the company’s general ledger.
- Forecasting future spending which helps with budgeting.
- Providing management information on spend to date, spend per product and spend per supplier.
More complex purchasing systems would also provide extra functions such as:
- Automatic ordering of the standard orders.
- Master Agreement production and management.
- Linkage to your accountancy systems so that purchases are automatically entered into your purchase ledger and balanced against your bank account.
- Automatic updating of the current stock levels. This is particularly useful in a restaurant and retail environment.
- The ability to order electronically, thus allowing for paperless ordering.
- Management of supplier contracts.
- Maintenance of supplier catalogues allowing the company to “pick” products as they need them.
- Vendor rating so that you can manage the quality of the suppliers you are using.
- Managing a tendering process from writing the RFP (request for proposal) through evaluating the responses to awarding the contract.
- Much more complex and interactive management and financial information that can drilled down into.
For any organization, purchasing function assumes importance for the reason that it fulfills , to a great extent , the input needs of the organization. Whether product or service, an organization needs input of right quality, at right price, from the right source in right quantity at the right time.
Often called 5 R’s (right things to do) these determine the broad parameters within which purchasing functions in any organization.
Depending upon the size and nature of operation, the quantum of purchase of product and services vary. In some organizations the total purchase bill is to the tune of 60% of its annual expenditure!!
Obviously, for any organization engaged in a continuous set of activities, where inputs are processed , on a regular basis for producing outputs , formalized systems and procedures are required to run its purchasing function, to ease in operation and accountability. Formal procedures are required to be laid down for initiating purchase, selecting suppliers, placing purchase orders, follow-up, receiving materials and so on.
The whole system of purchasing, in terms of phases or grouping of related activities, can be classified as follows:
(1) Pre-purchase (Ordering) system;
(2) Ordering system;
(3) Post-purchase (Ordering) system
The salient features in each of the systems mentioned are as follows:
(1) Pre-purchase system : Activities such as initiating the purchase through raising requisitions, requirement programs, selection of suppliers, obtaining quotations and evaluating them, are broadly the pre-purchase activities.
(A) Requisitions : The department concerned (within the orgnisation), in need of a material, usually presents a completed requisition form.
Different types of requisitions used are:
(I) Standard requisition :- Also called as Indent for material (or service), Materials requisition plan etc. a requisition is made by an authorized person in the concerned department. However, it has to be countersigned by a senior officer who checks the entries made in. Normally, a requisition , in a pre printed format, contains particulars such as the detailed description of materials or services to be purchased, desired quantity, schedule for receipt of such material / service , the estimated price, possible sources and the account head, requisitioner’s identity.
In any organisation only a limited number of personnel are empowered to countersign the requisition as it amounts to authorisation of the expenditure. Purchase department usually maintains a list of such officers so as to check the validity of the purchase requisitions. Normally, there is a delegation of power of authority for authorising a requisition. This is expressed in terms of the financial limits up to which an officer can authorise a requisition for a capital or revenue item. These details must also be available with the purchase department.
(II) Travelling requisition: As the name suggests, this requisition form travels from the requisitioning department to the Purchaser directly who then only authorizes the supplier through a Purchase order to deliver the required material. This document is generally used for requisitioning items that are required frequently in bulk quantities over a long period of time. Usually, for repeat items such as in inventory a card containing the details of previous supply containing material specifications, suppliers details, last purchased price , reorder point, usage details are written permanently and provisions for entering date, quantity required, names of requisitioned and authorizer are available. On getting it , the purchaser only has to take these details for placement of order. The traveling requisition which is a permanent document of the originating department is returned to it. It reduces the paper work and eases the operation.
(III) Bills of materials: Bill of material is a comprehensive list of materials needed to produce a product or service. It is basically the details of materials needed, their specification, quantity, required delivery schedule etc. It is often used as a sequel to firming of a production plan, a stage where the exact material / service needs are known.
(B) Request for Quotation (RFQ): Also called as Tender Enquiries, an organization through its Purchase department, invites suppliers to quote rates for supply of materials / service. This is the step taken after receiving the requisition for an item. For this purpose often a standard format is used (customized also in case of large contracts). Against this document the prospective vendors quote their price and other terms and conditions of sale.
C) Quotation: It is also called tender. A quotation is a proposal from a prospective vendor who has quoted in response to the RFQ sent to him by the purchaser. It contains price offered by the vendor as also the terms and conditions of sale as per the policy of the vendor.