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Purchase system
- 2. WHAT IS PURCHASING? •In the narrow sense, the term ‘PURCHASING’ refers merely to the act of buying an item at a price. •Whereas, in broader sense, meaning of purchasing makes it a managerial activity, which goes beyond the simple act of buying.
- 3. IMPORTANCE OF PURCHASING •Purchasing is an important function in all types of business organizations whether it is small, medium or large. •Purchasing function provides materials to the factory without which wheels of the machines cannot move. •Without purchasing, no business can be operated. •Purchasing manager is the custodian of his/her firm’s purse as he/she spends more than 50% of his/her company’s earnings on purchases. •A 1% saving in materials cost is equivalent to a 10% increase in turnover.
- 4. OBJECTIVES OF PURCHASING •To avail the materials, suppliers and equipments at the minimum possible costs. •To ensure the continuous flow of production. •To increase the asset turnover. •To train and develop the personnel. •To achieve maximum integration with other department of the company. •To establish and maintain the good relations with the suppliers. •To develop an alternative source of supply. •Efficient record keeping and management reporting.
- 5. FUNCTIONS OF PURCHASE DEPARTMENT 1. Receiving indents. 2. Assessment of demand or description of need. 3. Selection of sources of supply. 4. Receiving of quotation. 5. Placing order. 6. Making delivery at the proper time by following up the orders. 7. Verification of invoices. 8. Inspection of incoming materials. 9. Meeting transport requirements of incoming and outgoing materials. 10. Maintaining purchasing records and files. 11. Reporting to top management. 12. Developing coordination among other departments. 13. Creating goodwill of the organisation in the eyes of the suppliers.
- 6. TYPES OF PURCHASE SYSTEMS 1. Forward buying 2. Tender buying 3. Blanket order 4. Zero stock system 5. Stockless buying
- 7. 1.Forward Buying: This special purchasing system commits an organization far into the future, usually for a year. 2. Tender Buying: This type of special buying is undertaken generally by the government departments and public sector undertakings to avoid favouritism and corruption. 3. Blanket Order: It is an agreement for a required quantity of specified items, over a period of time -at an agreed price. This economizes expenses and relieves the buyer from routine work. 4. Zero Stock System: This system functions on the basis of zero stock and the stock is held by the supplier for the firms. Such a system needs closeness of the buyer and the seller so that the raw material of one is the finished product of another. 5. System Contract: In this system, the original indent is shipped back with the items. It is invariably a simple contract. It avoids the usual documents like purchase orders, materials requisitions, expediting letters and acknowledgment, goods in words report etc..
- 9. • RECOGNITION OF THE NEED: The recognition of need refers to the means by which a needed item is officially brought to the attention of the purchasing department. Two procedures are followed that is : a) Purchase requisition b) Bill of materials •SELECTION OF THE SUPPLIER: The process of selection of supplier involves two basic aspects: searching for all possible sources and short listing out of the identified sources. The complete information about the supplier is available from various sources, such as advertisement in journals, direct mailing by the suppliers, interview with suppliers, salesmen, suggestions from business associates, visit to trade fair, etc. •PLACING THE ORDER: The legal order is placed with the supplier on a form known as a purchase order. Purchase order is a letter sent to the supplier asking to supply the said material. At least six copies of purchase order are prepared by the purchase section and each copy is separately signed by the purchase officer. •FOLLOW UP THE ORDER: Follow up is done to ensure that the items ordered are delivered by the supplier on time.
- 10. •RECEIVING AND INSPECTION OF THE MATERIALS: The receiving department receives the materials supplied by the vendor. The quantity are verified and tallied with the purchase order. The receipt of the materials is recorded on the specially designed receiving slips or forms which also specify the name of the vendor and the purchase order number. •PAYMENT OF THE INVOICE: When the goods are received in satisfactory condition, the invoice is checked before it is approved for the payment. •MAINTENANCE OF THE RECORDS: Maintenance of the records is an important part and parcel of the efficient purchase function. In the industrial firms, most of the purchases are repeat orders and hence the past records serve as a good guide for the future action. •MAINTENANCE OF VENDOR RELATIONS: The frequency of the transactions with the same key suppliers provide a platform for the purchase department to establish and maintain good relations with them. Good relations develop mutual trust and confidence in the course of the time which is beneficial to both the parties. The efficiency of the purchase department can be measured by the amount of the goodwill it has with its suppliers.