Purchasing refers to a business or organization attempting for
acquiring goods or services to accomplish the goals of the enterprise. Though
there are several organizations that attempt to set standards in the purchasing
process, processes can vary greatly between organizations. Typically the word
“purchasing” is not used interchangeably with the word “procurement”, since
procurement typically includes Expediting, Supplier
Quality, and Traffic and Logistics (T&L) in addition to Purchasing.
Details
Purchasing managers/directors, and procurement managers/directors
guide the organization’s acquisition procedures and standards. Most
organizations use a three-way check as the foundation of their purchasing
programs. This involves three departments in the organization completing
separate parts of the acquisition process. The three departments do not all
report to the same senior manager to prevent unethical practices and lend
credibility to the process. These departments can be purchasing, receiving; and
accounts payable or engineering, purchasing and accounts payable; or a plant
manager, purchasing and accounts payable. Combinations can vary significantly,
but a purchasing department and accounts payable are usually two of the three
departments involved.
When the receiving department is not involved, it's typically
called a two-way check or two-way purchase order. In this situation, the
purchasing department issues the purchase order receipt not required. When an
invoice arrives against the order, the accounts payable department will then go
directly to the requestor of the purchase order to verify that the goods or
services were received. This is typically what is done for goods and services
that will bypass the receiving department. A few examples are software
delivered electronically, NRE work (non reoccurring engineering services),
consulting hours, etc.
Historically, the purchasing department issued purchase orders for
supplies, services, equipment, and raw materials. Then, in an effort to
decrease the administrative costs associated with the repetitive ordering of
basic consumable items, "blanket" or "master" agreements
were put into place. These types of agreements typically have a longer duration
and increased scope to maximize the quantities of scale concept. When
additional supplies were required, a simple release would be issued to the
supplier to provide the goods or services.
Another method of decreasing administrative costs associated with
repetitive contracts for common material, is the use of company credit cards,
also known as "Purchasing Cards" or simply "P-Cards".
P-card programs vary, but all of them have internal checks and audits to ensure
appropriate use. Purchasing managers realized once contracts for the low dollar
value consumables are in place, procurement can take a smaller role in the
operation and use of the contracts. There is still oversight in the forms of
audits and monthly statement reviews, but most of their time is now available
to negotiate major purchases and setting up of other long term contracts. These
contracts are typically renewable annually.
This trend away from the daily procurement function (tactical
purchasing) resulted in several changes in the industry. The first was the
reduction of personnel. Purchasing departments were now smaller. There was no
need for the army of clerks processing orders for individual parts as in the
past. Another change was the focus on negotiating contracts and procurement of
large capital equipment. Both of these functions permitted purchasing
departments to make the biggest financial contribution
to the organization. A new terms and job title emerged – Strategic
sourcing and Sourcing Managers. These professionals not only
focused on the bidding process and negotiating with suppliers, but the entire
supply function. In these roles they were able to add value and maximize
savings for organizations. This value was manifested in lower inventories, less
personnel, and getting the end product to the organization’s consumer quicker.
Purchasing manager’s success in these roles resulted in new assignments outside
to the traditional purchasing function – logistics, materials management,
distribution, and warehousing. More and more purchasing managers were becoming
Supply Chain Managers handling additional functions of their organizations
operation. Purchasing managers were not the only ones to become Supply Chain
Managers. Logistic managers, material managers, distribution managers, etc. all
rose the broader function and some had responsibility for the purchasing
functions now.
In accounting,
purchases is the amount of goods a company bought throughout this year. it is
also refers to information as to the kind,quality,quantity and cost of goods
bought that should be maintained. They are added to inventory. Purchases
are offset byPurchase
Discounts and Purchase Returns and Allowances.
When it should be added depends on the Free On Board (FOB)
policy of the trade. For the purchaser, this new inventory is added on shipment
if the policy was FOB shipping point, and the seller remove this item from its
inventory. On the other hand, the purchaser added this inventory on receipt if
the policy was FOB destination, and the seller remove this item from its
inventory when it was delivered.
Goods bought for the purpose other than direct selling, such as
for Research and Development, are added to inventory and
allocated to Research and Development expense as they
are used. On a side note, equipments bought
for Research and Development are not added to inventory, but are capitalized as assets.
Purchasing: Topics
Acquisition Process
The revised acquisition process for major systems in industry
and defence is shown in the next figure. Then the purchase has to clear all the
materials. The process is defined by a series of phases during which technology
is defined and matured into viable concepts, which are subsequently developed
and readied for production, after which the systems produced are supported in
the field.[1]
Model of the Acquisition
Process.[1]
The process allows for a given system to enter the process at any
of the development phases. For example, a system using unproven technology
would enter at the beginning stages of the process and would proceed through a
lengthy period of technology maturation, while a system based on mature and
proven technologies might enter directly into engineering development or,
conceivably, even production. The process itself includes four phases of
development:[1]
§ Concept and Technology Development: is intended
to explore alternative concepts based on assessments of operational needs,
technology readiness, risk, and affordability.
§ Concept and Technology Development phase begins
with concept exploration. During this stage, concept studies are undertaken to
define alternative concepts and to provide information about capability and
risk that would permit an objective comparison of competing concepts.
§ System Development and Demonstration phase. This
phase could be entered directly as a result of a technological opportunity and
urgent user need, as well as having come through concept and technology
development.
§ The last, and longest, phase is the Sustainment
and Disposal phase of the program. During this phase all necessary activities
are accomplished to maintain and sustain the system in the field in the most
cost-effective manner possible.
Selection of Bidders
This is the process where the organization identifies potential
suppliers for specified supplies, services or equipment. These suppliers'
credentials and history are analyzed, together with the products or services
they offer. The bidder selection process varies from organization to
organization, but can include running credit reports, interviewing management,
testing products, and touring facilities. This process is not always done in
order of importance, but rather in order of expense. Often purchasing managers
research potential bidders obtaining information on the organizations and
products from media sources and their own industry contacts. Additionally,
purchasing might send Request for Information (RFI) to potential suppliers to
help gather information. Engineering would also inspect sample products to
determine if the company or organisation can produce products they need. If the
bidder passes both of these stages engineering may decide to do some testing on
the materials to further verify quality standards. These tests can be expensive
and involve significant time of multiple technicians and engineers. Engineering
management must make this decision based on the cost of the products they are
likely to procure, the importance of the bidders’ product to production, and
other factors. Credit checks, interviewing management, touring plants as well
as other steps could all be utilized if engineering, manufacturing, and supply
chain managers decide they could help their decision and the cost is
justifiable.
Other organizations might have minority procurement goals to
consider in selection of bidders. Organizations identify goals in the use of
companies owned and operated by certain ethnicities or women owned business
enterprises. Significant utilizing of minority suppliers may qualify the firm
as a potential bidder for a contract with a company or governmental entity
looking to increase their minority supplier programs.
This selection process can include or exclude international
suppliers depending on organizational goals and criteria. Companies looking to
increase their pacific rim supplier base may exclude suppliers from the
Americas, Europe, and Australia. Other organizations may be looking to purchase
domestically to ensure a quicker response to orders as well as easier
collaboration on design and production.
Organizational goals will dictate the criteria for the selection
process of bidders. It is also possible that the product or service being
procured is so specialized that the number of bidders are limited and the
criteria must be very wide to permit competition. If only one firm can meet the
specifications for the product then the purchasing managers must consider
utilizing a “Sole Source” option or work with engineering to broaden the
specifications if the project will permit alteration in the specifications. The
sole source option is the part of the selection of bidders that acknowledges
there is sometimes only one reasonable supplier for some services or products.
This can be because of the limited applications for the product cannot support
more than one manufacturer, proximity of the service provided, or the products
are newly designed or invented and competition is not yet available.
Bidding Process
This is the process an organization utilizes to procure goods,
services or equipment. Processes vary significantly from the stringent to the
very informal. Large corporations and governmental entities are most likely to
have stringent and formal processes. These processes can utilize specialized
bid forms that require specific procedures and detail. The very stringent
procedures require bids to be open by several staff from various departments to
ensure fairness and impartiality. Responses are usually very detailed. Bidders
not responding exactly as specified and following the published procedures can
be disqualified. Smaller private businesses are more likely to have less formal
procedures. Bids can be in the form of an email to all of the bidders
specifying products or services. Responses by bidders can be detailed or just
the proposed dollar amount.
Most bid processes are multi-tiered. Acquisitions under a
specified dollar amount can be “user discretion” permitting the request or to
choose who ever they want. This level can be as low as $100 or as high as
$10,000 depending on the organization. The rationale is the savings realized by
processing these request the same as expensive items is minimal and does not
justify the time and expense. Purchasing departments watch for abuses of the
user discretion privilege. Acquisitions in a mid range can be processed with a
slightly more formal process. This process may involve the user providing
quotes from three separate suppliers. Purchasing may be asked or required to
obtain the quotes. The formal bid process starts as low as $10,000 or as high
as $100,000 depending on the organization. The bid usually involves a specific
form the bidder fills out and must be returned by a specified deadline.
Depending of the commodity being purchased and the organization the bid may
specify a weighted evaluation criterion. Other bids would be evaluated at the
discretion of purchasing or the end users. Some bids could be evaluated by a
cross-functional committee. Other bids may be evaluated by the end user or the
buyer in Purchasing. Especially in small, private firms the bidders could be
evaluated on criteria or factors that have little if anything to do with the
actual bid. Examples of these factors are history of the bidder with the
company, history of the bidder with the company’s senior management at other
firms, and bidder’s breadth of products.
Technical evaluation
Technical evaluations, evaluations of the technical suitability of
the quoted goods or services, if required, are normally performed prior to the
commercial evaluation. During this phase of the procurement process, a
technical representative of the company (usually an engineer) will review the
proposal and designate each bidder as either technically acceptable or
technically unacceptable.
Commercial evaluation
Payment Terms
Cost of Money is calculated by multiplying the applicable currency
interest rate multiplied by the amount of money paid prior to the receipt of
the Goods. If the money was to have remained in the buyer's account, interest
would be drawn. That interest is essentially an additional cost associated with
such Progress or Milestone payments.
The manufacturing location is taken into consideration during the
evaluation stage primarily to calculate freight costs and regional issues which
may be considered. For instance, in Europe it is common for factories to close
during the month of August for Summer holiday. Labor agreements may also be
taken into consideration and may be drawn into the evaluation if the particular
region is known to frequent labor unions.
The manufacturing lead-time is the time from the placement of the
order (or time final drawings are submitted by the Buyer to the Seller) until
the goods are manufactured and prepared for delivery. Lead-times vary by
commodity and can range from several days to years.
Transportation time is evaluated while comparing the delivery of
goods to the Buyer's required use-date. If Goods are shipped from a remote
port, with infrequent vessel transportation, the transportation time could
exceed the schedule and adjustments would need to be made.
Delivery Charges - the charge for the Goods to be delivered to a
stated point. Bid Validity Packing Bid Adjustments Terms and Conditions
Seller's Services Standards Organizations Financial Review Payment Currency
Risk Analysis - market volatility, financial stress within the bidders Testing
Negotiating
Negotiating is a key skillset in the Purchasing field. One of the
goals of Purchasing Agents is to acquire goods per the most advantageous terms
of the buying entity (or simply, the "Buyer"). Purchasing Agents
typically attempt to decrease costs while meeting the Buyer's other
requirements such as an on-time delivery, compliance to the commercial terms
and conditions (including the warranty, the transfer of risk, assignment,
auditing rights, confidentiality, remedies, etc.).
Good negotiators, those with high levels of documented "cost
savings", receive a premium within the industry relative to their
compensation. Depending on the employment agreement between the Purchasing
Agent (Buyer) and the employer, Buyer's cost savings can result in the creation
of value to the business, and may result in a flat-rate bonus, or a percentage
payout to the Purchasing Agent of the documented cost savings.
Purchasing Departments, while they can be considered as a support
function of the key business, are actually revenue generating departments. For
example, if the company needs to buy $30 million USD of widgets and the
Purchasing Department secures the widgets for $25M USD, the Purchasing
Department would have saved the company $5M USD. That savings could exceed the
annual budget of the department, which in effect would pay the department's
overhead - the employee's salaries, computers, office space, etc.
Post-Award Administration
Post-award administration typically consists of making minor
changes, additions or subtractions, that in some way change the terms of the
agreement or the Seller's Scope of Supply. Such changes are often minor, but
for auditing purposes must be documented into the existing agreement. Examples
include increasing the quantity of a Line Item or changing the metallurgy of a
particular compon
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