Operating Procedure

Planning governs the survival, and progress of any organization in a competitive and ever-changing environment. Further managers at every level of management perform the planning function. However we should not induct from this view that planning is an isolated activity required in the beginning only. It is really a continuous and unending process to keep the organization as a going concern and other functions are also performed simultaneously. Managerial operations in organizing, staffing, leading and controlling are designed to support the accomplishment of enterprise objectives. Planning logically proceeded  all other managerial functions.

Procedures are plans that establish required methods of handling future activities. They are guides to action rather than to thinking and they detail the exact manner in which certain activities must be accomplished. They are chronological sequence of required actions.

Procedures often at across departmental levels for example, in a manufacturing company, the procedure for handling orders will almost certainly involve the sales department (for the original order), the finance department (for acknowledgement of receipt of funds and for customer credit approval), the accounting department (for recording the transaction), the production department (for the order to produce goods or authority to release them from stock) and the traffic department (for determination of shipping means and rates).

 

The process of purchasing starts when the material requisitioned is not available at stores.  That is, the requesting department - be it finance, production, marketing, etc. will request for the supply of materials from stores.  If the material requisitioned is available at stores, the storekeeper issues the material to the requested department.  The form used in connection with issue, requisition, transfer, return, etc. of materials is as illustrated below:-

ABC COMPANY LTD.

STORES REQUISITION

 

Requesting Dept.: _________________________________            No.____________________

Purpose:            _________________________________    Date:___________________

 

SR.	Item		Unit of
No.	No.	Description	Measures	Quantity	Remark

Prepared by _______________________                  Chief of Stores _________________ Approved by ______________________                Recipient's name _______________

Distribution:-

White - Accounts                   Yellow - Stores recording & control    Blue - Stores  

Pink - Requesting unit                        Green - Pad

 

ABC COMPANY LTD.

STORES ISSUE VOUCHER

Requesting Department: ___________________________  No.____________________

Classification of Goods                                                         Date:___________________

Consumables _______________ Spare parts ___________  ST.R.No________________

Fixed Assets ________________

 

SR.	Item	Description	Unit of		Unit	Total
No.	No.	(Item issued)	Measure	Quantity	Price	Price	Reasons

 

Issued by _________________ Approved by ______________ Received by __________

Distribution:-

White - Accounts                               Yellow - Stores recording & control

Pink - Requesting or Gate passes        Blue - Stores   Green - pad

A purchasing department buys many different types of materials and services, and the procedures used in completing a total transaction normally vary among the different types of purchases.  However, the general cycle of activities in purchasing most operating materials and supplies is fairly standardized.  The following steps constitute the typical purchasing cycle.

1. Recognize, define and describe the need
2. Transmit the need
3. Investigate, qualify and select the supplier
4. Prepare and issue the purchase order
5. Follow up the order (including expediting and de-expediting)
6. Receive and inspect the material (except in the case of some JIT systems and some partnering agreements)
7. Audit the invoice
8. Close the order

 

The need for a purchase typically originates in one of a firm’s operating departments or in its inventory control section.  The purchasing department is usually notified of the need by one of the basic methods.

i)          Standard purchase requisition or

ii)         A material requirements planning (MRP) schedule.  If the need is one time purchase, then an engineering bill of materials is sometimes used.

 

  a.  Standard Purchase Requisition

The purchase requisition is an internal document, in contrast with the purchase order, which is basically an external document.  Most companies used a standard, serially numbered purchase requisition form for requests originating in the operating departments.  The user generally makes a minimum of two copies.

 

ABC COMPANY LTD.

Purchase requisition

 

Please supply the following materials to the ----------------------Dept     No.___________

Classification of Goods                                                          Date:___________________

Consumable __________ Spare parts ____________            S.R. No. ________________

Fixed assets _________________________________         

 

SR.	Item		Unit of	Quantity		Unit	Total
No.	No.	Description	Measure	Ordered	Received	Price	Price	Remark

 

Prepared by __________ Checked & Received by_________ Approved by ___________

 

Distribution:-

Original - General Accounts     (white)               1^st copy  - Costs & stock Accounts (Yellow)

                                               

Red - Purchasing                     Pink - Stores recording and control

Blue - Storekeeper                  Green - pad

 

  b. Material Requirements Planning Schedule

When a design engineer completes the design of a part or an assembly, he or she makes a list of all the materials (and quantity of each) required to manufacture the item.  This list is called an engineering bill of materials.  In firms using computerized production and inventory planning systems such as an MRP system, the engineering bill of materials is first reconfigured into a structured multilevel bill of materials.  This structured bill of materials for each item being manufactured can then be used in determining specific materials for each item being manufactured can then be used in determining specific material requirements for a given production schedule during a specific time period.

 

  c. Engineering Bill of Material

In firm’s that do custom manufacturing work, or for various reasons are involved in unique one-time projects, a similar but less sophisticated approach can be used.  When purchase of the required materials is a one-time affair, the engineering bill of materials, along with the production department’s need for materials.  The buyer then obtains total requirements simply by manually extending the bill of materials for the production quantity scheduled.  Thus, communications are simplified and the need for purchase requisitions is eliminated.

                                               

Bill of Material

 

          No._______________

Date of Issue: ______________________  Production / Job Order No._______________

Department Authorized _______________________________

 

				For Department use only
Serial		Code		Material		Quantity
No.	Description	No.	Quantity	Reqn. No.	Date	Demanded	Remark

 

  d) Definitions and Description of the need

Regardless of the form of transmission used, material requirements must be defined effectively and the most appropriate methods of description should be selected for the situation at hand.  The point to be understood here is that clear, complete, appropriate definition and description is a joint responsibility of the user and the buyer.  One of the reasons why every purchase authorization document should be approved by designated departmental supervisors is to ensure that qualified individuals initially review it and subsequently comes to purchasing in correct form.

 

  e) The stock check

Some companies route all requisitions for tools, supplies and production type materials to inventory control before they are sent to purchasing.  If a sizeable percentage of a firm’s requisitions involve stores-type items, this procedure expedites the supply process and reduces clerical work in the purchasing department. Supplier’s selection and preparation of the purchase order.

 

4.2.2 Supplier selection and preparation of the purchase order

The purchase of a new or a high value item, on the other hand, may require a lengthy investigation of potential suppliers.  If the item to be purchased is complex or highly technical, the firm may utilize across functional sourcing team, first to qualify potential suppliers and perhaps eventually to make a team decision about the most desirable supplier.

After qualifying a preliminary group of potential sources, the buyer may employ the techniques of competitive bidding or negotiation or both when competitive bidding is used the buyer initiates the procedure by requesting quotation from a reasonable number of firms with whom the buying group is willing to do business.  Although “request for quotation” forms vary widely among firms, typically they contain the same basic information that will subsequently be included on the purchase order.

 

a) Sources of Supply

While purchasing and supply management has the ultimate responsibility for selecting the “right” source, the process in handled in many ways.  Procedurally, the simplest approach is when the buyer alone conducts the analysis and makes the selection.  A second common approach calls for the use of a cross-functional team consisting of representatives of purchasing and supply management, design engineering, operations, quality and finance.  The third common approach is the use of a commodity team.

 

b) Commodity teams

Many progressive firms use commodity teams to source and manage a group of similar components.

Commodity teams frequently consists of buyers, materials, engineers and production planners.  Large commodity teams include a commodity manager (normally from purchasing and supply management) and representatives of materials, design and manufacturing engineering, quality and finance. Commodity teams are essentially a type of cross-functional team.  The principal difference between them is that commodity teams tend to be fairly permanent, while cross-functional teams tend to be one-time assignment.

 

c) Evaluating a Potential Supplier

After developing a comprehensive list of potential suppliers, the buyer’s next step is to evaluate each prospective supplier individually.  A process of elimination develops a selected list of potential suppliers with whom the buying company may be willing to do business.  Unless a decision has been made to employ a single source of supply, the supplier list should be complete enough to bring to bear every type of competition desired, including:-

-        Technological and quality competitions, resulting from identifying potential suppliers who excel in good ideas, engineering planning, design, material quality and production techniques.

-        Price competition, resulting from identifying the lowest cost producers or distributors.

-        Service competition, resulting from identifying those suppliers that are especially anxious to get contracts and that are willing to add “plus” values over and above functional value (quality) and price.

What kind of company makes the best supplier?  It would be difficult to improve on the definition given by Professor Wilbur England of Harvard University.

A good supplier is one who is at all times honest and fair in his dealing with the customers, his own employees, and himself.  Who has adequate plant facilities, and know-how so as to be able to provide materials which meet the purchaser’s specifications, in quantities required and at the time promised, whose financial position is sound whose price are reasonable both to the buyer and to himself, whose management policies are progressive, who is alert to the need for continued improvement in both his products and his manufacturing process.  And who realizes that in the last analysis his own interests are best served when he best serves his customers.

 

d) Type of Evaluation Needed

The type of evaluation needed required determining supplier capability varies with the nature, criticality, complexity and dollar value of the purchase to be made.  It also varies with the buyer’s or buying team’s knowledge of the firms being considered for the order.  For many uncomplicated low dollar value purchases, an examination of the information already available in the department library (such as supplier information file, catalogue and brochures) is sufficient. To differentiate among those suppliers who understands the complexities of the purchase and those who do not.  By eliminating those who do not, the search for the right supplier is further narrowed.

 

1.  Preliminary surveys

If an examination of existing data indicates that a firm appears to be an attractive supplier for existing or anticipated requirements, a telephone or mail survey should be conducted to obtain additional information.  Such a survey should provide sufficient knowledge of the supplier to make a decision to include or exclude the firm from further consideration.  Clearly, this sound precedes any plant visits.

The survey is based on a series of questions, which cover the following areas:

1. The principal officers and titles
2. Bank reference
3. Credit references
4. The annual history of sales and profit for the past five years
5. A referral list of customers
6. The number of employees
7. The space currently occupied
8. Expansion plans (including sources of funds)
9. The current production defect rate for similar products
10. The number of inspection used
11. The date when statistical process control was adapted
12. A list of all equipment and tools, which would be used to manufacture, test, and inspect the purchase in question.

 

2.   Financial condition

Preliminary investigation of a potential supplier’s financial conditions often can avoid the expense of further study.  A qualified buyer or professional from the finance department conducts these investigations. A review of financial statements and credit ratings can reveal whether a supplier is clearly incapable of performing satisfactorily.  Financial stability is essential for suppliers to assure continuity of supply and reliability of product quality.  Imagine the difficulty of getting

i)       A financially weak supplier to maintain quality;

ii)      A supplier who does not have sufficient working capital to settle an expensive claim; or

iii)     A financially unsound supplier to work overtime to meet a promised delivery date.

In addition to informing a buyer or the sourcing team about a supplier’s capability to perform a contract, financial information can be useful in other ways as well.  Financially, strong firms are usually managerially strong.  Hence they generally make good suppliers.  An analysis of a firms balance sheet and operating statement is helpful in numerous ways i.e. on discovering that a firm’s financial conditions has started to deteriorate a buyer should tighter quality monitoring and consider either searching for a new supplier or reducing the size of the orders given to the distressed firms.

 

3. Quality capability

A critical factor to examine is the firm’s quality capability.  IF the prospective supplier’s process capability is less than the buying firm’s incoming quality requirements, the suppliers typically is not worthy of further investigation.  An obvious exception is the case in which no supplier possesses the required capability.

  i) Specifications are most detailed methods of describing requirements.  Various types of design specifications are the detailed descriptions of the materials, parts and components to be used in making the product.  They are verbal and written description that tell the seller exactly what the buyer wants to purchase.

In a manufacturing firm, when specification is fixed, the final design of a product is also fixed.  Then the products competitiveness and its profit potential is also fixed.

Specification is very important because the cost of materials clearly dictates that their selection is an important consideration during product design.  The costs of many materials are identified through specifications during the design stage.  This is the first and sometime the only point at which numerous costs can be reduced.  It is at the time of the original designing that the greatest cost saving obtained from both specification and standardization.

Since specifications imports the activities of engineering operations, purchasing and quality, optimum specification mainly influence the contribution made by all these departments to the firm’s success.  A good specification is to satisfy the procurement consideration of clear, concise and unambiguous communication. To meet the needs of all departments, a specification must satisfy many requirement – Design and marketing requirements for functional characteristics chemical properties, dimensions, appearance etc.

  ii) Standardization is the process of establishing agreement on uniform identifications for definite characteristics of quality, design, performance, quantity service and so on.  Standards reduce varieties and create consistencies.  Standards are usually essential in exchange of parts.  The use of standards permits a firm to purchase fewer items in large quantities and lower price.  This reduces purchasing, receiving, inspection and payment costs.  Stocking fewer items makes controlling inventories easier and less costly.  Consequently, the purchase of standardized materials saves money in four ways

 

4. Plant visit

By visiting a supplier’s plant or distribution facility, the sourcing team can obtain firsthand information concerning the adequacy of the firm’s technological capabilities, manufacturing or distribution capabilities and its management’s technical know-how and orientation.  Depending on the importance of the visit, the company may send representatives from only purchasing and engineering or it may also include some combination of representation from finance, operations, quality assurance, marketing and industrial relations.

In planning plant visits only a few outstanding potentials suppliers plants should be chosen for observation due to the time and costs involved.  The buying firm wants suppliers whose management is committed to excellence.  To make such a determination properly requires an overall appraisal.

Among the factors to be addressed are:-

1. Attitude and stability of the top and middle management teams
2. Research and Development capability
3. Appropriateness of equipment
4. Effective of the production control, quality assurance and cost control systems
5. Competence of the technical and managerial staffs.

Other important factors include

1. Morale of personnel at all levels
2. Industrial relations
3. Willingness of the potential supplier to work with the buying firm
4. Quantity of back orders
5. Effectiveness of purchasing and supply management and materials management operations

And past performance

1. Past major customers
2. General reputation
3. Letters of reference

The plant visit should be planned carefully to provide the required level of knowledge and insight into the potential supplier’s operations, capacity and orientation.  The efficiency with which the plant visit is planned and conducted reflects on the buying organization.

The prospective supplier usually is requested to provide additional information on the company’s history, current customers, sales volume and financial stability.  In the quality area, the buyer and his or her sourcing teammates should attempt to understand.

Once a supplier has been selected, the purchasing department prepares and issues a serially numbered purchase order.  In most cases the purchase order becomes a legal contract document.  For this reason, the buyer should take great care in preparing and wording the order.  Quality specifications must be described precisely.  If engineering drawings or other related documents are to be considered an integral part of the order they should be incorporated clearly by reference.  Quality requirements, price and delivery and shipping requirements must be specified accurately.  In the event of that statistical process control or sampling inspection is to be used, conditions of acceptance should be stated or referenced on the order.

Similarly, any other important factor affecting the acceptability of the product should be stated precisely.  In short, the order should include all data required to ensure a satisfactory contract and it should be worded in a manner, which leaves little room for misinterpretation by either party.

 

Purchase Order

XYZ CO.

ADDRESS

To: ABC Co.

          Address:

 

Ref: Our Tender NO XYZ/ 10/ 04 Dtd

      : Your quotation No. ABC / 01/ 04 Dtd

 

Dear Sir,

We kindly request you to supply the following items as per the following terms and conditions:

 

SR NO.	Item code	Item description	Unit of measurement	Unit price	Total price	Remark

 

Thank you,

Yours faithfully,

Terms and conditions

Summary of information contained in purchase order

I. Buying firms and document identification	i. Shipping instructions
ii. Internal identification	ii. Summary totals
iii. Purchase order identification	iii. Purchase order item number
iv. Supplier identification	iv. Item identification number
v. Specific shipping destination	v. Item description
vi. Internal information	vi. Delivery quantity
vii. Accounting change	vii. Shipping / delivery dates
viii. Payment terms	viii. Unit price and measures
ix. Additional contract inclusions	ix. Extended price x quantity
x. Point of title transfer	x. Buyer identification and date

 

4.2.3 Acknowledgement and follow-up of the order

In most cases, the original copy of the purchase order, which is sent to the supplier constitutes a legal “often” to buy.  No purchase “Contract” exists, however, until the seller “Accepts” the buyer’s offer.  The seller’s acceptance can take one of the two forms.

i)    Performance of the contract or

ii)   Formal notification that the offer is accepted.

The purpose of sending the supplier an acknowledgement form along with the purchase order is two fold.  First, it is a form that can be completed conveniently and returned to the buyer, acknowledging acceptance of the order.  At the same time, the supplier can indicate whether or not it is able to meet the desired delivery date.  If a supplier ships the ordered item immediately from stock, it frequently disregards the acknowledgement form.

Regardless of the specific system used, follow-up communication with the supplier usually takes one of the two forms.  A fax or a telephone call is typically used for most critical orders.  Mailing or faxing a preprinted enquiry to the supplier usually accomplishes routine follow-up for the less critical orders.

In some firms, the buyer handling the order conducts follow-up procedures.  In others, a separate expediting group conducts follow-up activities.  Although relatively few in number, some firms maintain a force of follow-up personnel in the field such firms typically purchase a great deal of critical material or major equipment on very tight schedules.  To ensure that all material is available when needed, these firms track critical purchases by having traveling follow-up representatives personally visits suppliers’ plants.  In some situations these field personnel have the additional responsibility of attempting to speed up (expedite) or even delay (de-expedite) delivery as the buyer’s timing requirement undergo unexpected changes.

 

4.2.4 Receipt and Inspection

The next step in the traditional purchasing cycle is receipt and inspection of the order.  When a supplier ships material, it includes in the shipping container a packing ship, which itemizes and describes the contents of the shipment.  The receiving clerk uses this packing slip in conjunction with his or her copy of the purchase order to verify that the correct material has been received.  After a shipment has been inspected for quality and for general condition of the material, the receiving clerk issues a receiving report.  In some cases, the report is prepared on separate receiving department forms.  However, the trend in most companies today is to reduce the clerical work by using an online computer based system, coupled with bar code order identification or by preparing a receiving report form during the same typing or printing operation that prepares the purchase order.

 

ABC COMPANY LTD.

INSPECTION NOTE

 

Supplier Name: _________________________________    No.____________________

Invoice No.:      _________________________________    Date:___________________

                       P.O. No. ________________

SR.	Item		Unit of	Quantity
No.	No.	Description	Measure	Received	Rejected	Reasons

 

Distribution:-

Original - General Accounts

1^st copy  - Costs & stock Accounts

2^nd copy - Purchasing

3^rd copy - Stores recording and control

4^th copy - Storekeeper

5^th copy – Pad

 

 

ABC COMPANY LTD.

GOODS RECEIVING NOTE

 

Supplier ____________________________________          No.____________________

Classification of Goods                                                          Date:___________________

Consumable __________ Spare parts ____________            P.R. No. ________________

Fixed assets _________________________________          P.O. No. ________________

                                                                                                Supplier Inv.No__________

 

SR.	Item		Unit of	Quantity		Unit	Total
No.	No.	Description	Measure	Ordered	Received	Price	Price	Remark

 

Prepared by __________ Checked & Received by_________ Approved by ___________

 

Distribution:-

Original - General Accounts     (white)               1^st copy  - Costs & stock Accounts (Yellow)                                                               

Red - Purchasing                     Pink - Stores recording and control

Blue - Storekeeper                  Green - pad

The necessity and advantages of a goods received note are:-

1. It provides a complete records of all materials received.
2. It informs the storekeeper or other interested departments of the quality of goods received.
3. It provides a means of checking the supplier's invoices.

 

4.2.5 The invoice audit and completion of the order

Occasionally, a supplier’s billing department makes an error in preparing an invoice or its shipping department makes an incorrect or incomplete shipment.  To ensure that the purchased makes proper payment for the materials actually received, sound accounting practice dictates that some types of review procedure precede payment to the supplier.

 

The files of a purchasing department contain an endless flow of operating data.  Despite its huge volume, much of this information can be useless in daily operations unless it is organized in a manner, which makes it readily accessible.  The following basic records are essential for the effective operation of most purchasing departments.

• A record of open order
• A record of Closed orders           
• Purchase log –
• Commodity record
• Supplier record    
• Contract record   
• Special tool record

 

4.3.1 Record of Open Orders

All buyers need immediate access to information concerning the status of their outstanding orders.  The record system can be maintained on a computer, in hard copy form, or as a combination of the two.

 

4.3.2 Record of Closed Orders

The closed order file provides a historical record of all completed purchases.  It frequently serves as a useful reference when questions arise concerning past orders and when certain historical data are needed to guide future decisions.

 

4.3.3 Purchase Log

Every purchasing department should maintain an ongoing record, in numerical sequence, of all purchase orders issued.  The record not be elaborate, but it should contain the purchase order number, the status of the order, the supplier’s name, a brief description of the material purchased and the total value of the order. Such a record summarizes the commitments for, which the purchasing executive is responsible.  In the event that the working copy of an order is lost, basic data concerning the purchase can be found in the log.  The log further serves as a convenient record from which summary administrative data can be extracted concerning such matters as the number of small orders, rush orders, and total orders issued.   The volume of purchases from various suppliers the value of outstanding commitments; and so forth.

 

4.3.4 Commodity Records

The file of commodity records constitutes a vast reservoir of materials data that makes efficient “mass production purchasing” possible.  A commodity record card or computer file should be maintained for each major material and service that is purchased repetitively.  Typically included in the record is a complete description of the material or service, with full reference to necessary engineering drawings and specification, which might be filled elsewhere.  Also included should be a list of approved suppliers and their price schedules.  Competitive quotations may be included in the file, although it is more common to summarize bid data in the record, note a cross reference to the original quotation and place all quotations in a separate file.

 

4.3.5 Supplier Record

To provide quick access to information about suppliers, most companies centralize such information in a single record file.  A separate card or computer record is maintained for each major supplier.  In this record is recorded the address, telephone number and the names of personnel to contact on a specific matters of inquiry.  Selling terms and routing instructions for shipping purposes also usually are included.  Although the practice varies, many firms additionally summarize in this record the suppliers delivery and quality performance, as well as the annual volume of materials purchased from the supplier.

 

4.3.6 Contract Record

Today most firms are purchasing an increasing number of items on a long-term contractual basis.  In such cases, it is usually convenient to consolidate all contracts in a separate file.  In addition to providing immediate access to all contract documents, the file also apprises all buying personnel of the materials that are purchased in this manner.  If the number of contracts is large, it is desirable also to list them in summary form to provide a bird’s eye view of all contract purchases and their expiration dates.

 

4.3.7 Special Tool Record

Many companies have no need for this record.  However, such a record is essential to those firms that purchase many items requiring special tooling for their manufacture.  On some orders the purchaser buys the required dies, figs, fixtures, and patterns.  On others the supplier owns them.  By maintaining a record of special tools, the buyer can summarize for quick reference the special tools owned, the age and location of each and the essential mounting and operating characteristics of each.

 

Every department executive tries to develop an orderly and systematic pattern of operation that efficiently utilizes the resources of that department.  In a well run purchasing department systematic analysis and processing of most orders is completed in two to four days after the purchase request is received.

How should purchasing handle the emergency needs that inevitably arise in any business operation?  Clearly, a special procedure for processing rush requisition is needed.  The key elements of such a procedure are discussed in the following paragraphs.

Even in the case of emergencies, it is unwise to accept oral requisitions – in person or over the telephone.  Too much chance for erroneous interpretation of the requirement exists.  The requisitioned should state the need in writing and preferably, deliver to the buyer in person.  For purposes of identification, emergency requisitions can be printed on paper of a different color or they can be identified with a visible emergency sticker.  Typically, the buyer should process these requisitions and telephone emergency orders to the supplier.  In no case, however, should an order be placed without assigning it a purchase order number.  For most purchases, a confirming purchase order subsequently should be mailed to the supplier.  In cases where the emergency is less urgent, the buyer may process such requisitions at appointed times twice daily (say at 10:30 am and 2:30 pm).

Rush orders always cost more than if they were handled through the normal purchasing system.  Higher prices frequently are paid because rush purchases are not investigated as thoroughly as those handled in the normal routine and of a buyer’s scheduled work by the emergency request invariably produce inefficiency in normal purchasing department activity.

Consequently, steps should be taken to discourage all rush orders that arise because of poor planning in the using departments.  In practice, three approaches have proved successful.  The first involves a concerted effort to coordinate the activities of the using group of production scheduling and purchasing.  Some companies require that realistic order points for inventory materials be established jointly by production scheduling and purchasing is required to issue periodic lead time reports to users for all major classes of materials.  A second approach, designed to reduce unjustifiable requests, requires the requisitioned to obtain approval from a general management executive for all emergency requisitions.  A modification of this approach requires an after-the fact review of all rush orders by top management.  Still another approach assesses the requisitioning department a predetermined service charge for each emergency requisition processed.

 

Small orders are a serious problem in every organization. Examination of a typical company’s purchase order file reveals that a sizable percentage (sometimes up to 80 percent) of its purchases involve in an expenditure of less that 250.

In total, however, these purchase constitute a small percentage (seldom more than 10 percent) of the firm’s annual dollar expenditure.

Clearly no manager wants to devote more buying and clerical effort to the expenditure of less than 10 percent of his or her funds than to the expenditure of the other 90 percent.

The very nature of business requires the purchase of many low-value items. Nevertheless, small orders are costly to buyer and seller alike.

The various methods used by purchasing manager to deviate the small order problem can be as illustrated below.

 

4.5.1. Centralized Store System

A stores system is the first approach typically used to reduce the volume of small-order purchasing activity. When expenditure shows that the same supply items are ordered in small quantities time after time, the logical solution is to order these items in larger quantities and place them in a centralized inventory for withdraws as needed. An analysis of repetitively used production materials leads to the same action for the multitude of low-value items. If usage of an item is reasonably stable, an optimum order quantity can be computed using a basic economic order quantity approach.

 

4.5.2. Blanket Order System

A store system solves the small-order problem only for items that are used repetitively. A blanket order system helps solve the problem for the thousands of items a firm cannot carry is inventory, as well as some that it does carry.

Briefly, the general procedure used for this type of purchase is as follows. On the basis of an analysis of past purchases, the buyer determines which materials should be handled in this manner. After bidding or negotiation, the buyer selects a supplier for each item, or family of items, and issues a blanket order to each supplier. The order includes a description of each item, a unit price for each item when possible, and the other customary contract provisions. However, no specific order quantities are noted. The blanket order typically indicates only an estimated usage during the period of coverage (usually one to three years). It also states that all requirements are to be delivered up on receipt of a release from the buyer or other authorized person. On receiving a requisition for one of the materials, the buyer merely sends a brief release form to the supplier. On the release form are noted the blanket order number, the item number, and the quantity to be delivered. Receiving reports are filed with the original order, and at the end of the month are checked against the suppliers monthly invoice. At the end of the period, the order may be reviewed or placed with another firm, depending on the suppliers performance record.

The blanket order system offers six important benefits:

1. It requires many fewer purchase orders and reduces clerical work in purchasing, accounting and receiving.
2. It releases buyers from routine work, giving them more time to concentrate on major problems.
3. It permits volume pricing by consolidating and grouping requirements.
4. It can improve the flow of feedback information, because of the grouping of materials and suppliers.
5. Because of some suppliers will stock material for prompt delivery, this system may reduce the buyer’s lead times and inventory levels.
6. It develops longer-term and improved buyer supplier relationships.

To function effectively in the long run, however, any blankets order systems must provide adequate internal control. Absence of the control element encourages petty fraud and poor supplier performance.

 

4.5.3. Systems Contracting

Systems contracting is simply an extinction and more sophisticated development of the blanket order purchasing concept. Some firms call it “stockless” purchasing.

As its name implies, systems contracting involves the development of a corporate wide agreement, often a one-to five year requirements contract, with a supplier to purchase a large group or “family” of related materials. The items to be purchased are usually described in detail is a “catalog” that belongs part of the contract. Estimated usage usually is included, a long with a fixed price for each item and an agreement by the supplier to carry a stock of each item adequate to meet the buyer’s needs. Various types of supplies and commonly used operating items, typically purchased from distributors, are the materials most often covered by these types of agreement.

 

4.5.4. Telephone/Fax Order Systems

Most companies now use a telephone or fax ordering system to reduce the paperwork associated with small-order purchasing. Under this system, when the purchasing department receives a requisition, it does not prepare a formal purchase order. Instead, the order is placed by telephone or fax, and the requisition is used in the receiving procedure.

 

4.5.5. Petty Cash and C.O.D

Most firms today use a petty cash fund for making small one-time purchases. For this purpose, many firms define “small” as under $ 100. it is often less expensive for an individual user to buy minor items personally and pay for them from a petty cash fund than it is to buy them through the conventional purchasing system.

Some firms also find it economical to make small one-time purchase on a C.O.D basis. Material can be ordered by telephone and paid for an arrival. Payment can be made using petty cash or a departmental check written on an account set up for such purchases.  

 

4.5.6. Supplier Stores/Consignment System

It a purchaser buys a large enough volume of certain materials from a single supplier, the supplier sometimes can afford to start a small “store” at the purchaser’s plant and operate it on a consignment basis. Users then simply go to the store and sign for their purchases. At the end of the month the company is billed for its purchases just as if the user had “gone downtown” to buy the material.

This system clearly is not a short-term arrangement. The purchaser, therefore, must take great care is selecting the supplier and in negotiating the terms of the agreement.

 

4.5.7. Supplier Delivery System

The supplier delivery system is somewhat similar to a supplier stores system, but it is more feasible for firms with a smaller volume of purchases. Many suppliers who are not willing to set up a store at the buyer’s plant are willing to stock numerous miscellaneous materials and make daily or semiweekly deliveries. The buyer typically reviews and accumulates purchase requisitions for such materials. The suppliers delivery person them pecks them up on the specified day, and at the same time delivers the material ordered on the preceding batch of requisitions.

 

Every business units develops a series of procedures to assist operating personnel in carrying out the polices and plans of the unit. In total these procedures establish the ground rules for the daily activities of the department.

The specific procedures employed by each firm should be designed to meet the unique needs of that firm. Generally speaking properly designed procedures should accomplish four objectives:

1. Accomplish each task satisfactorily with a minimum of time, effort and paperwork
2. Effectively communicate and coordinate the efforts of one work group with another.
3. Minimizing overlapping efforts and group conflicts by clearly designating responsibility for each step of the procedure.
4. Permit effective management by exception.

It is important too, to consider the external dimension of the procedures issue. The nature of the procedural interface that is established units a supplier is defined by the form of relationship that is developed with the firm.

This area is undergoing a rapid evolutionary change as acquisition needs of purchasing firms become more dynamic.