Purchasing is one of the integral aspects of material management. “Purchasing materials of right quality, right quantity at right time from right source at right price and taking delivery at right place are the six elements or principles of scientific purchasing.” These principles or elements answer the blowing questions relating to purchasing:
What to purchase? -> Right quality
When to purchase? -» Right time
How much to purchase? -> Right quantity
From where to purchase? -> Right source
At what rate? -> Right price
At what place to receive? -> Right place
The above Six Rights” are the ‘Six Rights of scientific purchasing.
Procedure of Purchasing
Purchasing is a very important work is an organisation. The basic function of the purchase department is to purchase the right quality of material from the right source, at the right price and at the right time. The purchase department follows the following procedure for-purchasing necessary materials:
A. Receiving purchase requisitions
B. Determining the sources of supply and selecting the suppliers.
C. Preparing and placing purchase order
D. Follow up of purchase order
E. receiving and inspecting purchase order
F. Checking and passing bills for payment.
Receiving Purchase Requisitions
The purchase department does not on its own initiate any action for purchase of j materials.
The store- keeper takes initiative of preparing the purchase requisition for regular supply of materials.
The Planning and Production Department prepares it for j special materials meant of special or irregular jobs. A special type of purchase requisition is called ‘Bill of Material’. The plant engineer prepares it for procurement j of capital expenditure goods (machineries) and maintenance materials. The Heads of j Departments, prepare it for indirect materials.
The purchase requisition is a formal request made to the purchase manager arrange for the purchase of materials described in the purchase requisition. Purchase requisition is also called as “Indent for materials”.
It is a statement that contains alit of material and a request to purchase them. It serves as a basis for purchasing their materials when it is signed by authorized persons. Thus purchase requisition serves the j following two purposes:
(i) It authorizes the purchase department to make a purchase, and
(ii) It provides a written proof showing specification, quantity and date of requisite of materials and supplies.
The requisition gives clearly all information that is required for initiation off purchase.
Purchase requisition contains the following information:
(a) Name and exact description of materials wanted
(b) Quantity required
(c) Date on which materials are required
(d) Statement of need
(e) The place of delivery
(f) Signature of the person initiating requisition
The purchase requisition is usually prepared in triplicate and different shade colors. The original is sent to purchase department, the duplicate is sent to production Department and triplicate is retained in the department that initiates.
Determining the sources of supply and selecting the supplier
On receiving the purchase requisition the sources of supply are to be explored. The important sources of supply of materials are: (1) Price list, (2) Advertisement, (3) Trade Directories, (4) Telephone directory, (5) Purchase periodicals, (6) News paper and magazine, (7) Exhibition and Trade shows, (8) Market survey, (9) Tenders, (10) Past experience of purchase manager, etc.
In case there is more than one supplier dealing with materials, the purchase manager has to select the best supplier with whom he has confidence.
The selection of such supplier is decided by issuing a ‘tender’ taking into account quality of materials, ability to deliver the material, the better terms of sale, lowest price, manufacturing capacity, financial condition of supplier, etc.
A tender is a written letter or an advertisement given in newspaper inviting the prospective suppliers to quote their lowest price and other terms and conditions of sale, the different methods of obtaining tenders are:
(i) Open Tender (i.e. by open advertisement),
(ii) Limited Tender (i.e. by direct invitation to limited number of firms or companies),
(iii) Single Tender (i.e. by inviting one company only).
The request for quotation should contain the following:
(1) Quantity to be ordered,
(2) Name and full specification of materials,
(3) Place of delivery of material and
(4) Other terms and conditions of sale
The sealed quotations are opened before the responsible officer after the expiry of last date of submission. The purchase manager determines the lowest quotation by preparing a comparative statement.
Then the supplier is selected to whom purchase order is to be issued. For each type of material, a separate comparative statement is prepared. It may be noted that only lowest price quoted is not the sufficient criteria to select a supplier. Other factors like quality of material, time of delivery, trade discount, credit facility, transportation cost, terms of payment, dependability of the supplier, etc have also to be considered.
After selecting the supplier, purchase department prepares an order for supply of stores.
A purchase order is thus a request made by purchaser to a supplier to supply certain goods of requisite quantity and quality at the terms and conditions agreed upon, It is the evidence of a contract between the buyer and the supplier that binds both o them to the terms under which the order is placed.
The purchase order should be carefully drafted so as to avoid future misunderstanding and minimize future correspondence. The purchase order should include the following particulars:
(a) Name of the buying concern, serial number and date of order.
(b) Name and address of supplier.
(c) Full description of material and quantity.
(d) Date and place of delivery.
(e) Price, discount and terms of payment.
(f) Packing and dispatching instructions.
(g) Signature of purchase officer.
A Specimen of Purchase Order is given below:
The number of copies of purchase order to be made depends on the size organisation. Accordingly three to five copies are made. If five copies are made, it possible use may be as follows:
The original copy is sent to supplier
One copy is sent to receiving department.
One copy is sent to accounting department.
One copy is sent to the initiating department.
The last copy is retained by purchase department for future reference.
Following up of Purchase Order
To ensure timely supply of materials, so that production process is interrupted, there should be regular follow up. For that following steps may be taken:
(i) Obtaining acknowledgement of purchase order.
(ii) Obtaining written confirmation from the supplier about giving deliver within the specified time.
(iii) Reminding the supplier over phone and taking remedial measures I delayed delivery.
Receiving and Inspecting Materials
It is very essential to receive and inspect materials so as to ensure that the exact quantity and quality of materials are being supplied by supplier. In large organisation a separate Receipt and Inspection Department is set up and receiving clerk’s are charge of receiving materials.
But in small organisation, the work of receiving the go may be entrusted to the storekeeper. Supplier dispatches the goods along Delivery Chelan in duplicate. Delivery Chelan shows the details of goods, if description, quantity, etc. Receiving officer acknowledges the Delivery Chelan receiving the delivery of goods signs it and sends back the duplicate copy to the supplier.
The functions of receipt and inspection department are:
(i) To check the incoming materials with purchase order.
(ii) To record the receipt of materials.
(iii) To inform the storekeeper about the receipt of materials.
(iv) To inform the purchase manager about the shortage or defective materials.
(v) To deliver the materials either to the department where it is required or to the store room.
After the goods have been inspected and checked, the goods receiving clerk enters the details of goods received in a Goods Received Note.
Five copies of the note should be prepared.
(a) One copy is sent to Purchase Department.
(b) One copy is sent to Accounting Department.
(c) One copy is sent to Store Keeper.
(d) One copy is sent to the department which initiated the purchase requisition.
(e) One copy is retained in the Receiving Department.
Checking and Passing the Bills for Payment
This is the last step in the purchase procedure. The invoice is checked with the purchase order and the material received report.
The rates and terms of invoice are compared with those of purchase order. The arithmetical accuracy is also checked. When there is any discrepancy or defect, the same is brought to the notice of supplier.
Finally when everything is in order, the invoice is approved by the purchase manager and sent to Accounts Department for payment.