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:
Pre-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 organization), in need of a material, usually presents a completed requisition form. Different types of requisitions used are:
(B) 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 organization only a limited number of personnel are empowered to countersign the requisition as it amounts to authorization 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 authorizing a requisition. This is expressed in terms of the financial limits up to which an officer can authorize a requisition for a capital or revenue item.
After the offers (quotation / tender) are received and evaluated in respect to their fulfillment of the organizational requirement the appropriate supplier for his quoted rates is selected. This is expressed in terms of the buyer placing the formal purchase order on him. The purchase order containing suitable business terms and conditions is now a binding contract between the buyer and the supplier.
A typical Purchase Order contains the following particulars:
(a) Purchase order reference number, as a communicating mode between the supplier and the
buyer for linking of various subsequent correspondences
(b) Material description with detailed specifications,
(c) Quantity ordered
(d) Required Delivery schedule,
(e) Price , discounts, taxes and duties applicable
(f ) Terms and conditions of purchase in details
(g) Destination where the materials are to be delivered (usually the name and address of the consignee),
(h) Shipping instructions,
(i ) Authorization of the Materials Manager who signs the purchase order
Purchase orders are placed for getting material or service. As such after P.O. placement, follow-up with suppliers, receipt of material and making payment ,once the materials have been received are involved.
Generally, in case of relatively big orders, many small jobs are required to be done as part of follow up with the supplier. Since after the P.O. the executive authority (usually the Indenter) comes into play ,action such as receipt and clearance of drawing with supplier, clearing various doubtful issues contained in the P.O., at times, are involved. Also since the P.O. indicates a clear delivery schedule, the buyer is often required to chase up for ensuring that. In the process, the following action may be required:
(i) Receipt and clearance of drawing and documents submitted by the supplier
ii) Inspection, in part or full, of the material being manufactured by the supplier
iii) Handing over of site to the supplier to effect installation and commissioning
iv) Making available the necessary Goods carrying documents to the supplier
Inspection of the manufactured goods is often a major post purchase order activity. Large organizations usually have location offices called site offices spread across the country for carrying out inspection, ensuring dispatch of material and liasoning with many other agencies. Critical items require regular follow-up with the supplier. A few organizations operate with decentralized inspection facilities for on-the-spot inspection and acceptance. Purchase Order (P.O.) status reports are prepared so that follow-up is done where ever required. Once the material is received at the described site final inspection is carried out for its acceptance. In the process, adequate documentation is generated. On the basis of the item code, proper identification tag etc is attached. In fact, now the procedure is taken over by the Stores / Warehouse wing.