BHARATI VIDYAPEETH’S COLLEGE OF ENGINEERING,

KOLHAPUR

CASE STUDY: PURCHASING ACTIVITIES

Introduction
Purchase Management is a function of materials management in a company. Their basic function
is procuring the inputs for production function. This function encompasses suppliers in the
market external to the organization and several internal to the organization.
Till recently, the purchasing process simply involved placing an order with the supplier who
offered the lowest price. Nowadays, increase in competition and market demand and scarcity of
resources have forced organizations to reexamine their purchasing activities. The purchasing
department functions have expanded considerably and include activities such as verifying the
credentials of suppliers, inspecting the quality of the material to be purchased, ensuring the timely
delivery of the material, etc.

While the value of purchased items varies from industry to industry, it adds up to more than fifty
percent of sales in all industries. Purchase management is regarded as a significant activity in
many organizations because of the high cost involved in carrying out purchasing activities,
increasing quality benchmarks, and increasing global competition. Purchase departments buy raw
materials, parts, machinery, and services used by production systems. The objective of purchase
management is to procure the right equipment, materials, supplies and services in the right
quantity, of the right quality, from the right suppliers, at the right time, at the lowest price.

OBJECTIVES OR GOALS OF PURCHASING

Primary objective or goal of purchasing function is making inputs available to the conversion
process at minimum cost to the final output of the company. Thus focus is on system output
rather than on micro level objectives.

The inputs to be made available are raw materials, semi finished items, bought out items etc.
There are certain parameters to be monitored for fulfilling the system objectives. We can call
them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right
price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs are

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achieved primary objective is fulfilled:-

• Right Price: Right price is determined by costing the production process of the supplier.
Right price is determined by allowing reasonable profit for the supplier and insisting and
helping to reduce cost. Tender system should be used to identify lowest responsible bidder
rather than lowest bidder. Principles normally used to ensure right price are cost structure
and learning curve.

• Right Quantity: Right quantity of purchase is the one that ensures no excess and no
shortage. High priority items are subjected to determine the right quantity for purchase. This
ensures overall minimum cost for inventory.

• Right Quality: In an item purchased should ensure adhering to mutually accepted

standard by supplier and customer at the time of finalizing the purchase order. The accepted
standard may be a drawing, a sample, a grade or a universal standard like DIN, IS, BS,
ASTM etc.

• Right Place: is the one where the item is going to enter the value stream. If the item is not
available here, when needed, it is in short supply for the process.

• Right Time: is as decided by production schedule for meeting customer’s requirements.

THE PROCESS OF PURCHASING

The purchasing process mainly carried out in three segments.

• Pre purchasing

• Purchase order

• Post purchasing

Steps involved in Purchasing

A. Pre-Purchase activities:

1. Recognizing need

2. Purchase requisition(PR)

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3. Make copies of PR as per department requirement

4. Identifying a supplier.

5. Send copies of PR to supplier

6. Getting the quotations from supplier

7. Analyzing the quotations

8. Finalize the quotations

B. Purchase Order

9. Qualifying and placing an Purchase Order(PO)

10. Getting Order Acceptance(OA).

C. Post Purchase Activities

11. Follow up procedures

12. Receipt

13. Invoice checking

14. Monitoring and managing delivery process.

Detailed Analysis of Purchasing activity

Recognizing the need:

All departments need to buy something or the other. So first need can be recognized for placing
the order. Whenever a department needs an item (material), it informs the purchasing
department.

Purchase requisition:

1. A form called as “purchase requisition” is filled by the production/planning

department and forward to the purchasing department.

2. The purchasing requisition contains the following:

- Name of requestor
- The planned use of the item.
- The specification of the item.

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- Number of units.
- Tentative price per unit.
- Expected of purchase.
Requisition No………………….
Date……………………
Shop: ………………………………
Required for
1. (a)Work order no: ………………………..
(b) Department use: ……………………
(c)To stock: ……………………………………
Sr.no Description Specific Quantity Approx Remarks if any
Of material ation cost

Delivery Required by ………………….. (Date), at ……………………. (place)

Address of probable supplier …………………………………………………………

Signature

Production/Planning
Manager
…………………………………………………………………………………………………………
…………………………………………………

2. Report Of store Keeper

Signature

StoreManager
…………………………………………………………………………………………………………
…………………………………………………
3. For the use of Purchase/Inspection section

Same copy is also Sent to the supplier. Hence 3-6 copies are made as per department requirement.

Part I is filled by the production or planning department. For quick purchasing and monitoring the work of
purchase section should maintain the addresses of probable suppliers who can supply these materials.

Part II is for storekeeper for onward transmission, it is filled by storekeeper in remaining 2 copies and he
reports on it whether the required material is available in the store or not. If the storekeeper also wants this

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material for stocking in store he adds demand also.

Part III is for purchase section, they’ll make the necessary arrangement for purchases.

Identifying a supplier and Send copies of PR to supplier:

As per requirement prepare the list of suppliers who deal with the business of the articles to be
purchased and are reliable. If the material to be purchased is of small amount and required
urgently it may be purchased locally.

If necessary prepare and issue N.I.T (Notice inviting tenders) to the concerning suppliers,
mentioning different terms, conditions, date and time of the opening and closing of tenders.

There are two types of tenders: 1. Open Tenders 2. Closed Tenders

Getting the quotations from supplier, Analyzing and Finalize the quotations

Open the tender/Offer/Quotation on the prescribed time on the prescribed date.

Prepare a comparative statement of the rates, terms and conditions mentioned in the tender and study
them. Finalize the quotation in terms of quality, cost and other parameters.

COMPARATIVE STATEMENT

Date of issue of N.I.T. ………………….. Date of receipt of Tenders

………………….

Sr. no. Name of Quantity Firm/Vendor Firm/Vendor 2

article with Reqd 1
Specification

Quoted value Quoted value

Terms and conditions

comparison

1.

2.

Qualifying and placing an Purchase Order(PO)

1. 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.

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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:-
It includes terms and conditions regarding payment, Transportation, warranties,
limitations and liabilities, Scope of work, replies of Technical questionnaires.

Several numbers of copies made to be forwarded to various recipients. Many companies color
code the copies making the color destination specific.
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.
One copy is sent to the receiving department for making necessary receiving arrangement
One copy is sent to the indenting department for information.
One copy is sent to finance department for organizing payment to the supplier.

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Post Purchase Activities

1. Follow up procedures

2. Receipt

3. Invoice checking

4. Monitoring and managing delivery process.

• 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. 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.

Delivery of Material receipt and material examination

Material supplied by the vendor is received by the receiving department which unpacks the
materials received and checks the quantities and conditions of the materials. A copy of purchase
order is present with the receiving department to check the materials received. A material receipt
is material received report. It is prepared and is sent to purchase department to inform that these
are goods received and also for them to check and compare it with the purchase order.

A material receipt form is as under

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Material examination

All items, after they have been received, are inspected and sample tested to ensure that the
purchase order specifications have been met or not. Results of the inspections & tests are
indicated in the testing report, upon the basis of which a clearance report or rejection note is
prepared and sent by the inspection department to purchase department In case of rejection, a part
or whole of the consignment may be returned to the vendor with a request either for complete
cancellation of the order or for replacement. A clearance report or rejection note is as under

Entire work flow from initial stage to final stage will consist of Five Toll Gates

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1st Toll Gate - Work Assessment / Understanding
2nd Toll Gate - Vendor Selection / Evaluation
3rd Toll Gate- Release of Order (Clarity on Technical and Commercial conditions /requirements)
4th Toll Gate - Certificate of Conformance (CoC) form QA
5th Toll Gate - Delivery, Completion of Project and Feedback from Customer
Flowcharts will graphically represent the steps making up the entire process.

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