Purchase Systems and Importance of Source

In an organization all activities are carried out according to systems and procedures for reducing variations and errors arising out of individuality. This makes performing the function simple and less prone to errors. Purchase organization also consists of such systems established for smooth running of purchasing function. These systems are pre purchase system, ordering system, post purchase system.

Pre Purchase System: This system lays down how purchase activity is initiated. Various activities controlled by this system are requisitioning, selection of suppliers and obtaining & evaluating quotations.

  • Requisitions: Requisition for an item may be made by anyone in the organization. Pre purchase system prescribes separate requisition form for capital equipment as this purchase activity is controlled by a separate system. Requisition for an item shall be made in a standard format. This format ensures that indenting person furnishes all relevant information like quantity, specifications, etc. and gets the purchase authorized by competent authority in the organization. Thereby making purchase activity easier and less time consuming. This system shall identify the hierarchical level competent to authorize the purchase depending on the nature and value of the item.
  • Traveling requisitions: In an inventory system where an item is made a stock item to be perpetually maintained at a minimum level, purchase activity is triggered by stores function based on ROL. The requisition is a permanent document with specification, authorization and quantity required permanently marked on it. The traveling requisition returns to indenting department after purchase is initiated.
  • Inquiries: Pre-purchasing system prescribes standard formats for making inquiries in the market for supply of a particular product. These are standard forms boldly declaring that they are not explicit or implicit purchase orders.

Ordering System: Purchase order is the most important element in ordering system. Purchase manager releases the purchase order after selecting the supplier and finalizing the price and other conditions of sale. Once the purchase order is raised and accepted it becomes a legal document.

Contents of the purchase order are:-

  • Purchase order reference number
  • Description of materials and specifications
  • Quantity required and delivery schedule
  • Price and discounts
  • Shipping instructions
  • Location where the material is to be shipped
  • Signature of the authorized officer
  • Detailed terms and conditions:-

a)  Several numbers of copies made to be forwarded to various recipients. Many companies color code the copies making the color destination specific.

b) Original and a copy is sent to the supplier for acknowledgment of the original order. This acknowledgment is acceptance of terms and conditions of purchase order.

c) One copy is sent to the receiving department for making necessary receiving arrangement

d) One copy is sent to the indenting department for information.

e) One copy is sent to finance department for organizing payment to the supplier.

Post Purchase System: This system includes follow up procedures, receipt and checking invoices.

  • Follow up procedures: Follow up is an expensive activity for an organization. Hence this should be minimized and made more effective. A sound procedure for follow up is required to eliminate duplication and ineffectiveness. After conducting FSN analysis follow up frequency should be fixed for follow up according to FSN status so that follow up doesn’t become wasteful. Follow up responsibility is assigned to buyers responsible for areas in which suppliers are situated.
  • Receipt: Receipt system should ensure that defects in receipt process are eliminated proactively. A systematic record of all receipts, carrier details and descriptions is maintained. This record is in chronological sequence of arrival of supplies. The system ensures that inspection of consignments received is arranged in time and payment to suppliers for accepted consignments is organized. In many organizations a receipt section handles this activity centrally.
  • Invoice checking: supplier sends his invoice to customer’s finance department for payment for the goods supplied. Invoice checking system ensures that the invoice is checked against the PO terms, receipt details, quantity received, inspection reports [accepted quantity and rejected quantity], losses, damages etc. this system helps materials management to coordinate with finance department for payment to suppliers.

Importance of Source

Source is the place from where we procure our inputs. These inputs may be in the form of raw materials, out sourced components or semi finished items. Manufacturing companies outsource large number of items as they slim down processes.

Following reasons are considered to be making source an important element in materials management:-

  • Source of market intelligence: source is a window through which the buyer organization looks at the world outside. Source provides access to the real time information about the phenomenon. Information about current trends and industrial climate is obtained from the sources.
  • Crucial for product quality: buyer organizations depend on out sourced components for producing the product which central to the objectives business. Reliance on capabilities of supplier to meet tough quality standards is very high in current business environment.
  • Member in the value chain: supply source is an important element in the value chain. Any cost added to the value chain reaches the end user as price. Hence effectiveness and efficiency of the source becomes vital to business.
  • Import substitution, cost reduction, value improvement: as indigenization of sub assemblies, components and spare parts is necessary to reduce the cost of product in competition, buyer organizations turn to supply sources to develop these items. Several trials and corrections may be required to finalize the substitute. In house capacity is generally not available for this kind of trials. A resourceful supplier is very useful in this process. Same logic holds good in other exercises for cost reduction and value improvement. It is quite logical that entire process is not outsourced but isolated developmental activities are invariably done. It is common knowledge that many small scale companies do not have full-fledged tool rooms but rely on sources for all tool room activities.

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