Purchasing Process
The process involved in acquiring materials, machinery and equipment is similar in organizations. In this process, the purchase department interacts with organizational units like the production and finance departments, and sellers. The general procedure that is involved in the process of purchasing is illustrated in Figure 11.1.
Figure : The Purchasing Function Brings Together the
Operation and its Suppliers
The purchase department generally deals with elements like purchase indents (referred to as requisitions), requests for quotations and purchase orders. These three elements are also called purchasing instruments and are fundamental to the purchase process.
Purchase requisitions come from departmental representatives who make use of the materials in their processes. These requisitions include a clear specification of required materials, quantity required, probable date of requirement, name of the department to which the costs are to be accounted, and in some cases, the list of vendors capable of supplying them effectively. This indent is acceptable only when it is approved by the signatory authorized to undertake the purchase.
After receiving a purchase requisition from an indenting department with the approval of the authorized signatory, the purchase department prepares requests for quotations. These requests are sent to prospective suppliers, who are considered efficient enough to supply the materials by meeting the cost, quality and time requirements prescribed by the organization. In these requests, all the information about the material requirements that have been furnished by the indenting department is communicated to the suppliers. These requests will generate possible responses (also called Quotations) from the suppliers, in which they quote the price per unit of material, the delivery schedule, the mode of transportation and special conditions of the supplier, if any. The purchase department selects the supplier who offers the best quotation and negotiates the terms in order to enter into a meaningful and mutually agreeable deal. The department then prepares a purchase order for the materials in adherence to the negotiated terms and conditions, and sends the order to the vendor. A copy of the order is also sent to the head of the indenting department to inform him about the release of the order.
Purchase Order is the legal document that authorizes the supplier to supply the goods. It represents the buyer's obligation to buy the materials against the specified terms. Purchase order confirms the approval of the supplier's quotation by the ordering organization. If an order is issued in the absence of a quotation, the commitment exists only after the supplier accepts the order and acknowledges the same.
In addition, the purchase department is also responsible for the proper delivery of materials on time. The finance department pays the vendors only when the purchase department and the corresponding indenting department notify it about the quantity of materials received with an acceptable quality level. Though there may be some variations in purchasing procedures, depending on the material required, the procedure described above is the general procedure that many organizations follow to procure their materials.
Other than the procedures discussed above, many organizations now use the Internet to facilitate purchasing. Exhibit 11.1 describes how web-based tools and solutions are changing the facet of purchasing.
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