FINANCIAL MANAGEMENT & COST ACCOUNTING

Lesson 41. PURCHASE PROCEDURE

Module 7. Inventory management

Lesson 41

PURCHASE PROCEDURE

41.1 Purchase Procedure

Purchasing is one of the most important functions of materials management. In only economy purchasing is an activity. Be it a manufacturing, Non - manufacturing, profit making a non - profit organization all and engaged in the activity of purchasing. Ignoring Purchase function in our organization can be very costly. Inefficient purchasing can result into increased material cost, disrupted production schedules, poor quality of finished good etc and can create havocs for the organization.

41.2 Principles of Purchasing (5 Rs. of Purchasing)

The basic principles of purchasing are popularly known as 5 Rs. of Purchasing representing

- Right Quality

- Right Quantity

- Right time

- Right price

- Right source

1. To purchase the right quality of materials.

2. To purchase right quantity of material.

3. To make materials available at right time.

4. Materials should be purchased at right price.

5. Materials should be purchased from right source.

Right Quality means the correct quality as per the requirement of the product / user. The quality should not be higher or lower than the required quality. Right Quantity means The quantity to be purchased should be decided by taking into consideration factors like EOQ,

Discounts offered from supplier supply conditions of the item, etc. Materials should be purchased at Right Time i.e. neither too early or not too late. This decision can be taken by considering the lead time and Consumption rate of the item. Materials should be purchased at Right Price means the price should be in conformation to the quality, regularity of supply, the quality regularity of supply, financial capability of supplier. Purchasing from Right Source puts emphasis on considering several factors affecting supplier selection. Apart from price and quality several factors like - financial stability, goodwill, after - sales - support, ability to give market information, market trends etc should also be given weightage.

41.3 Main Functions of Purchase Department

1. Making purchases for stores from domestic and foreign source.

2. Checking Purchase requisitions forms

3. Searching selecting a supplier

4. Sending enquiries, receiving quotation, preparing comparative statement preparing comparative statements, supplier selection.

5. Issuing purchase order checking legal conditions of a contract etc.

6. Follow - up of purchase order expediting, dealing with carriers, suppliers for shortages excess and rejection of material.

7. Receiving inspection

8. Maintains source of Purchase Recordes supplier evaluation and performance record etc.

9. Payment of the materials.

41.4 Centralized and Decentralized Purchasing

Centralized purchasing means the responsibility of purchasing bill the materials, equipments, suppliers on behalf of entire organization is given to only one Department - No individual department to given the authority to make purchases. Several Advantages of this system are

1. It eliminates the duplication of purchase effects made by individual departments and saves time and cost.

2. Due to centralized purchasing system, it is possible to consolidate the demand of various departments and place a bulk order. Due to bulk ordering these may be benefits of price discounts, cash discounts and favorable buying terms and conditions from the suppliers.

3. Centralized purchase system ensures that all the purchasing policies, records, practice etc are uniformly implemented only in the purchase department. Hence it avoids the confusion and complicity advising due to different policies and practices being adapted by different use departments.

4. It permits greater knowledge and skills of purchasing officers. This is especially important in manufacturing organization where efficient buying can reduce costs significantly.

5. There is a readily available data of surplus shortage, obsolete and scrap materials.

Decentralized purchasing means the responsibility of purchasing bill the materials, equipments, suppliers on behalf of entire organization is given to the user department. The user department has the final authority to make decisions regarding purchase.

Advantages of Decentralized purchasing

1. Decentralized purchasing given full authority and responsibility of purchasing materials to the unit manager or Departmental head or plant manager. This can be very important if material cost constitutes a major - portion of total cost.
2. The purchasing executive / manager become more familiar with the technical and functional aspects of the items being purchased.
3. The main advantages of decentralized purchasing is that is reduces the lead time of purchasing by reducing the processing and administrative times behind purchases authority and responsibility.
4. This system gives the purchasing executives and opportunity to develop local supply sources which leads to increased employee motivation
and employee satisfaction.

41.5 Steps of Purchase Procedure

1. Purchase requisitions.

2. Selection of supplier

3. Placing the order and its follow up

4. Receiving and inspecting the material

5. Checking invoices and passing for payment

Purchase Requisitions

When there is a need to purchase a particular item, then this purchase - need should be officially brought to the attention of the purchase department. The purchase department can be officially communicate about the need to purchase are particular item in two way

(i) By filling a Purchase Requisition form or

(ii) By B.O.M. (Bill of Materials)

(I) Purchase Requisition Form

When user department are needs a item to be purchased then it should till a purchase Requisition Form. A purchase requisition form contains all the important and relevant information about the item to be purchased. A P.R.F. gives details about the dimensions, specification, quantity, and quality etc. of the material to be purchased. It may suggest names of potential suppliers. It is important for a company to specify a Standard format of P.R.F., it should also give details regarding who can authorize and countersign the P.R.Fs, so that irresponsible P.R.Fs are not generated A standard P.R.F. may be as follows:

PURCHASE REQUISITION FORM

DATE: ____________

Sr. No. : _____________

Name of Department : ___________________

Order No. : ___________________

Date of Requirement : ___________________

Present Stock : ___________________

Annual Consumption : ___________________

Please arrange to purchase the following

Sr. No.	Item Code No.	Item description / Specification	Quality	Job Code	Remarks

Signature: ____________________

Designation: ____________________

For Purchase Department:-

Purchase order No. : - Date of Purchase end: -

Name of Supplier: - Delivery Date: -

Sign. Of Purchase Officer: -

Generally, when the stores department sends purchase requisition it is called routine P.R., A P.R. F. from a user department is first sent to the stores department and if the item is not in the stock, then only the P.R.F. is send to the purchase department for necessary action.

(II) Bill of Material

A "Bill of Material" gives the list of all the components, parts and sub - assemblies which are needed to produce one unit of the product. It also shows the sequence in which the product is created from these parts, components, sub-analyze etc. hence it is nothing but the product structure - tree of the product.

(III) Selection of Supplier

The purchase department can build a list of prospective suppliers through -

· Catalogues

· Trade Journals

· Trade directions’

· Trade shows and conventions

· salesman interview

· Experience

· Requests for quotations etc.

Sometimes the organization can directly contact the potential suppliers and in some particular situation they have to invite tenders from supplier. While Selecting or particular supplier from a list of potential suppliers, price of the item is not the only criteria, rather the other relevant factors.

i. Experience of the supplier
ii. Financial capability of the supplier.
iii. Knowledge shows research and development efforts
iv. Ethical behaviors
v. Ability to stick to the agreed terms and conditions of purchase
vi. After sales service and support.
vii. Quality of the item and delivery time should be according to purchase order.
viii. Price quoted by the supplier
ix. Quantity discounts offered by the supplier
x. Geographical location of the supplier.
xi. Reserve, std rage, warehouse and transportation facilities
xii. The technological progress of the supplier
xiii. The quality measures and quality consciousness of the supplier.

Inviting Quotations from Suppliers

Different suctioning and Different methods of supplier selection are used for low - value and high value purchase in an organization, purchases of low - value are generally alone from local suppliers after ensuring that the price is seasonable. High value purchases are generally made by inviting tenders from potential/ suppliers.

There are different types of tenders

1. Single Tender: - In this type only one supplier is asked quote.

2. Restricted Tender: - A tender in which only a few firms are invited your quotations, is called restricted tenders. The firms to be invited may be selected on the basis of past performance good will.

3. Open Tender: - In this case, tenders are invited by placing advertisements in News paper, trade journals websites etc.

Analysis of Tenders

Making Comparative Statement

After receiving sealed tenders from various suppliers up to the last date, the sealed tenders are opened on a specific date and time. The opened tenders are then checked for their validity. (Checked for completeness, signature etc). The particulars from these tenders are then presented in the form of a table called Comparative Statement. The comparative Statement helps in comparing all the tenders and selecting the Appropriate Supplier. The appropriate supplier can be chosen by considering factors like- Price time of delivery .Payment terms and conditions, good will, experience etc.

Format of comparative statement

Sr. No.	Mater lac /Item work	Name of Supplier	Quality	Rate per Unit	Delivery Date	_____ of delivery	Others

(III) Placing the Purchase Order with the Supplier and its Follow-up

After the negotiations with the prospective suppliers are over an appropriate supplier is finally chosen, the next step is to place a Purchase order to the chose apply. The format of Purchase order may be as follow.

PURCHASE ORDER

No. : __________________ Date: __________________

Ref. No.: __________________

To,

Name and Address of Supplier

Sub: Your Quotation for_____________________ dated___________

This is to inform you that your Quotation No. ________________for _______________ dated_______________ was been accepted.

Now you are requested to supplier the following materials subject to terms and conditions mentioned herein.

Sr. No.	Item Code	Description / Specification	Quality	Rate	Value	Delivery Date	Remarks

Purchase order may be made in 3 to 5 days. The Original copy of Purchase Order is sent to the supplier. Some time two copies may be sent, out of which one copy is returned by supplier after signing on it, indicating his acceptance of purchase order

One copy is sent to each user department Accounts, Dispatch, Purchase Department, stores department

Follow up

The purchase Department was the responsibility to ensure that the purchase orders are regularly followed up and ensure that the delivery of material is within stipulated time. Follow - up may be done by e - mails phone calls or by letters.

(IV) Receiving and Inspecting the Material

The goods supplied by the supplier are received by the Receiving Department. The receiving department carries out following Prepares the Statement of Good received

This statement / slip / form contains data like

· Verification of received quantity with the purchase order

· It records any discrepantly damage condition of consignment, variation in material of goods etc.

· Information the purchase department

· Information the user department

· It may put an identification mark or identification number on the consignment so that it can be easily related to a particular purchase order No.

· If the materials are required to undergo any Quality Control or Inspection they come be sent to the Inspection department. Sometimes of Goods Inspection Report can also be made:

GOODS / MATERIAL INSPECTION REPORT

No. : __________________________________________

Date : _________________ Supplier : _________________

Good Received No. : _________________

Purchase order No. : _________________

Item Code	Description			Rejected	Remarks

Inspection done by :___________________ (NAME)

(V) Checking Invoices and Making Payment

After the goods have been inspected and received the supplier's invoice is verified and checked for making his payment. The bill is passed for payment after ensuring the following points.

· The rate and quantity mentioned in purchase order should match with rate and quantity mentioned in the supplier invoice.

· The actual quantity received from the supplier should be verified with goods received note.

· The stock - entry and inspection certificate should be mentioned in the bill-body by the store’s manager.

The officer competent to sanction the expenditure should also sign on the bill - body sent to accounts department. If the invoice is checked and found correct in all manual then it is sent to accounts department for making the payment.

Treatment you Defective / Rejected / Shortage of goods from supplier

When the goods are found to be defective or not upto the standards / specification they are rejected. In such situation a debit note is sent to the supplier indicating the amount being debited into his account and also citing the reason you debiting it. A debit note is sent to supplier when the Material received is Less than the material required in the purchase order.A debit note may be of the following format:

Jayesh Gems Ltd

Date: ______________

GOODS INSPECTION REPORT

DEBIT NOTE

Ref.: - Purchase Order No.

G.R.N.:- ________________

Supplier's Invoice No. :- ________________________

This is to inform you that we are debiting your account due to following reasons and materials :-

Sr. No.	Item Code	Description / Specification	Quality REJECTED	Value (Rs.)	Reason / Remarks

Sign. : __________________

A credit note can be sent when the material supplied by the supplier is more than quantity required in the purchase order (and this additional quantity is actually accepted by the buying firm.)

In Treatment of discrepancies between two supplier's invoice and Purchase Order the supplier's invoice should be compared with the purchase order and Goods Received note. If there is any discrepancy should be brought to the notice of the seller and he is asked to make necessary convections.