Purchasing Cycle and Buying Situations

Study Notes

Describes a typical purchasing process followed by a SME, startup, and corporation.

Straight Re-buy: Repeating purchases of similar items from the same supplier.
Modified Re-buy: Purchasing items that are modified in some way.
New Tasks: First-time purchases for which there is no prior experience.

Recognize, define, and describe the need: Originates from operating departments or inventory control.
Transmit the need: Usually through a standard purchase requisition or a material requirements planning (MRP) schedule.
Investigate, qualify, and select the supplier: After the purchase order is received, the buyer identifies potential suppliers.
Prepare and issue the purchase order: The order should include all data required to ensure a satisfactory contract and minimize misinterpretation.
Follow up the order (including expediting and de-expediting): Monitoring and ensuring timely delivery.
Receive and inspect the material (except in the case of some JIT systems and some partnering agreements): Checking the received materials against the specifications.
Audit the invoice: Verifying the invoice for accuracy.
Close the order: Final confirmation and documentation of the purchase.

Standard purchase requisition:
- Serially numbered request from operating departments.
- Includes:
  - Description of materials, quantity, date required.
  - Estimated unit cost.
  - Operating account to be charged.
  - Date accomplished.
  - Authorized signature.
MRP schedule:
- Contains specific material requirements for a given production schedule.
- Sent to purchasing for direct use in obtaining the required materials.
- Eliminates the need for numerous purchase requisitions.

Buyer's responsibility:
- Checks the document for accuracy and completeness.
- Determines that the need has been adequately defined.
- Ensures that the appropriate method of description has been used to guarantee a satisfactory purchase for the user and provide latitude in supplier selection.
Terms and conditions:
- Define contractual obligations of the supplier and the purchasing organization.
- Considered an integral part of the specifications.
- Include sections covering warranties, liability, payment terms, legal jurisdiction, intellectual property ownership, contingencies, cancellations, shipping requirements, and inspection.

Customization Assumptions: Mistaken belief that the product must be customized to meet user requirements.
Standardization: Methods used to reduce or eliminate custom components and processes that introduce variability, potentially creating added cost and quality problems.
Disregarding Performance Requirements: Specifications that are unnecessarily stricter than actual performance requirements can add cost without adding benefits.
- May also eliminate potential suppliers who are unable to perform to the higher requirements, reducing competition and potential cost savings.
- Loose or incomplete specifications invite unacceptable quality and can create costly mistakes.
Brand Name:
- Limits competition and increases the likelihood of higher prices.
- May or may not improve quality but typically costs more due to higher advertising costs.

Buyer identifies potential supply sources and qualifies them.
Techniques like competitive bidding or negotiation or both are used.
Once a supplier is selected, the purchasing department prepares and issues a serially numbered purchase order.
The purchase order specifies:
- Quality specifications.
- Quantity requirements.
- Price.
- Delivery and shipping requirements.
- Conditions of acceptance.
In summary: The purchase order should include all data required to ensure a satisfactory contract and be ordered in a way that leaves little room for misinterpretation.