Appendix: An Overview of the Mechanics of Supply Management

Appendix:  An Overview of the Mechanics of Supply Management

 

The Typical Purchasing Cycle: Materials – While it may differ in organizations, the following are the steps in a typical procurement cycle:

 

  • Recognize, define and describe the need
  • Transmit the needs
  • Investigate and select the supplier
  • Prepare and issue the purchase order, contract, or agreement
  • Follow up on the order (including expediting and de-expediting)
  • Receive and inspect the material
  • Audit the invoice
  • Close the order

 

All of the tasks do not just simply happen.  Properly controlled procurement requires extensive communication with numerous work groups, good procurement procedures and excellent leadership.

 

Recognition, Definition, Description and Transmission of the Need – The need for a purchase typically originates in one of a firm’s operating departments or its inventory control section.  The supply management department is notified of the requirement by one of two methods: a purchase requisition or a materials requirement planning (MRP) schedule.

 

  • Standard Purchase Requisition – The purchase requisition is an internal document, in contrast to the purchase order, which is basically an external document.  The requisition communicates the user’s needs by giving the description of the product or service, material, quantity, and date required.
  • Material Requirements Planning Schedule – The bill of materials is used in determining specific material requirements for a given production schedule during a specific time period.  The production department sends the bill of materials and the production schedule to procurement for direct use in obtaining the required materials.

 

Supplier Selection and the Preparation of the Purchase Order – A firm qualifies and develops a potential group of suppliers, then a procurement professional may employ competitive bidding and/or negotiation to select a supplier to obtain materials, products, or services.  Once a firm selects a supplier, the procurement department uses a sequentially numbered purchase order (PO) to procure the item.  In most cases, the PO becomes a legal contract.  Great care must be done in preparing the order which may contain quality specifications, statements of work and other documents.  Firms will also have boilerplate (standardized terms set for by attorneys) language that set for the terms and conditions of the PO.

 

Acknowledgement and Follow-up of the Order – In most cases, the original PO sent to the supplier constitutes a legal “offer” to buy.  No purchase contract exists, however, until the seller “accepts” the buyer’s offer.  The seller’s acceptance can take one of two forms:

 

  • Performance of the contract (PO)
  • Formal notification that the offer has been accepted

 

The purpose of sending the supplier an acknowledgement form along with the PO is twofold:

 

  • The form can be conveniently completed and returned to the purchasing firm to acknowledge acceptance of the order
  • The supplier can indicate whether it is able to meet the desired delivery date

 

Receipt and Inspection – The seller receives and inspects the order.  This is important because payment of the PO can’t happen until this is done.

 

Services – Procurement of services differs from the procurement of products.  A firm uses a statement of work (SOW) to specify technical specs and inspections for compliance purposes.

 

The Invoice Audit and Completion of the Order – A typical procedure involves a simultaneous review of the purchase order, the receiving report, and the invoice. Checks are made between the receiving report against the PO to determine if the quantity and type of material or product were actually received.  One then compares the invoice with the PO and the receiving report to verify correct pricing for the quantity of material or product received.

 

The Small-Order Problem – Small orders drive up ordering costs by requiring lots of invoices and servicing of the invoices.  The goal is to reduce the number small orders, which will then drive down ordering costs.  Ways to reduce invoices are as follows:

 

  • Centralized Stores System – Store inventory in one centralized location.  Establish an optimum order quantity which is larger than the original small order, which will reduce invoices and ordering cost
  • Blanket Order System – When a firm can’t carry small inventory items in stores, a firm issues a blanket PO to a supplier to ship a family of items that are needed.  This order indicates no specific quantities, but only the estimated usage during the period of coverage (usually from one to three years).
  • Systems Contracting – involves the development of a corporate wide agreement with a supplier to purchase a large group or family of related materials.  Items purchased usually are in catalogs with a fixed price for each item and an agreement by the supplier to carry a stock of each item that is adequate to meet the buyer’s needs.  This is very similar to blanket order purchasing.
  • Electronic Ordering Systems – E-commerce platforms where computer replenish inventories of repetitively used items, expedite the purchase process, reduce paperwork, and simplify internal accounting and control.
  • Purchase Debit and Credit Cards – The use of corporate debit and credit cards by employees for MRO purchases and small-order buys has become commonplace.  In addition to eliminating the need for most purchase orders, using debit and credit cards reduces purchasing cycle time, improves purchasing relations with operating departments, provides faster payment to suppliers, and significantly reduces the workload in the accounts payable department. 
  • Supplier Stores/Consignment System – If a purchaser buys a large enough volume of certain materials from a single supplier, the supplier sometimes can afford to staff a small “store” at the purchaser’s plant and operate it on a consignment basis.
  • Supplier Delivery System – Purchase requisitions are accumulated, then the supplier’s delivery person then pick them up on the specified day and at the same time delivers the material ordered in the proceeding batch of requisitions