Procedure is action oriented. It indicates series of steps to be taken to accomplish a desired task. Since efficiency in purchasing is partly influenced by the procedures established to procure materials, purchasing procedures need to be developed very carefully.
Procedure for purchasing should be simple and definite. It must specify definite responsibility for accomplishing each of its steps. Procedures should also spare purchase manager of routine affairs so that he can concentrate more on policy matters.
Purchasing function in medium sized and big companies normally passes through the following procedures :
1. Origin of purchase requisition and its communication
2. Scrutiny of the indent;
3. Selection of source of supply;
4. Request for quotation and making comparative statement
5. Placement of order and its follow up;
6. Receipt and inspection; and
7. Approval of payment.
1. Origin of Purchase Requisition and its Communication: Need for purchasing originates in the operating departments or in the inventory control section. Thus, production manager needs materials to maintain production schedule. In the same way, when stock of a particular material has depleted to the minimum reorder level, the store-keeper or the inventory control manager may forward his purchase requirements to the purchasing department. Requisition for purchase should be complete in all respects like quality and quantity of materials needed, and the time when supply is desired. Materials requirement is generally communicated by following an established requisition procedure. Usually printed requisition forms are used.
2. Scrutiny of the Indent : After receiving purchase requisition from operating departments or inventory control section, the purchasing department should carefully examine indents as to the description and identification of materials. It will be better if requisitions are drawn on the basis of standardized specifications.
3. Selection of Source of Supply : Scrutiny of the indent identifies the purchase need in definite terms. Having gained complete knowledge of the kind of materials required, the buyer should then proceed to discover different sources of supply and select those which are most suitable. For regular and routine items, sources are already established and selection in this case does not present a serious problem. However, even in this situation attempts should be made to discover new sources and evaluate performance of existing sources. Purchase of new or high-value items, on the other hand, will require a lengthy procedure to discover and select vendors.
4. Request for quotation and making comparative statement: You have to request and collect the quotations from validated vendors. Make a comparative statement on the quoted prices and be ready for ordering goods or services from the lowest bidder.
5. Placement of Order and its Follow up : Having selected the vendor/s for procurement of materials, the purchasing department should proceed with the next step of preparing and placing the purchase order for supply of goods.
Companies usually develop their own purchase order form which specifies the terms and conditions of purchase. Since after its acceptance by the supplier purchase order is a legal document, details regarding quantity, price, quality, and time for delivery of goods should be carefully inserted and thoroughly checked. A number of copies of the purchase order are prepared for submission to different parties. Thus, two copies may be sent to the vendor, one to be retained by him and the other to the buyer after confirmation.
Similarly, copies are forwarded to the accounts department to prepare for payment, to the store-keeper to prepare for receiving the goods, to the costing department to maintain necessary record of material cost, and to the operating department that submitted the requisition. One or two copies are kept in the purchasing department for reference and record, and for necessary expediting process. Copies to be sent to different parties may be printed in different colors.
Acceptance of purchase order by the vendor does not always mean that goods will be supplied in time. Responsibility of the purchasing department, therefore, does not terminate merely with the placing of purchase order, but continues till goods are received, inspected, and accepted.
After accepting the purchase order, vendor may find it inconvenient or difficult to meet his commitment. Buyer in the purchasing department should thus keep himself well informed about the progress of supply of goods according to delivery schedule. Corrective actions should be initiated before the emergency arises. There is need to expedite every purchase order, though it is more so in situations when delivery dates are critical.
6. Receipt and Inspection : Physical handling of incoming materials, their identification, verification of quantities ordered and supplied, inspection of quality of material to test its fitness, and its routing to the place of use or storage are the responsibilities of the receiving section which is supplied with a copy of the purchase order.
After performing these functions the receiving clerk prepares a report about the general condition of material and quantity of goods received by him. Usually printed forms are used to prepare a receiving report. A number of copies of receiving report form are prepared for delivery to purchase department informing it about receipt of materials ordered, to the accounts department to process payment to the suppliers, and one copy to be kept in the record file of the receiving section.
7. Approval of Payment : Before approving payment to the vendor in respect of goods already received by the purchaser, it is desirable to scrutinize the invoice with the help of the purchase order and the receiving report.
The basic objective of such an examination is to check the arithmetic accuracy of the invoice, to ensure that materials of right quality are received, and that payment to be made in respect of materials received by the purchaser is at the price and according to terms contained in the purchase order.
Since approval of payment is essentially an accounts job, it is sometimes suggested that this should better the left to the accounts department. However, for certain complex and technical materials, approval of payment should preferably be centralized in purchasing department which is better equipped to verify technical aspects of the invoice.
