Purchasing (BMK 3748) Diploma in Business Management

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Chapter 3: Developing Purchasing Systems

Purchasing System.
Definition: Purchasing systems are procedures, manual or computerized, followed by an organization
to achieve the following basic objectives:
a. to determine the quality and quantity needed and the time when an item is needed;
b. to obtain the best possible price; and
c. to maintain information on sources of supply

A purchasing system manages the entire acquisition process, from requisition, to purchase order, to
produce receipt, to payment.
Purchasing systems makes the purchasing process more efficient and helps companies reduce
supply costs.
Computerized purchasing systems can cut companies administrative costs, shorten the length of
the purchase cycle and reduce human error, thereby minimizing shortages.
They can also simplify order tracking and make it easier to manage purchasing budgets by quickly
creating expenditure reports.

Types of Purchasing System
There are two broad types of purchasing systems:
1. Traditional system; and
2. Electronic system

1. Traditional Purchasing System
In a tradition purchasing system, three phases of purchasing are done manually:

Phase 1: Requisition
Definition: a precise document generated by an
internal organization or external to notify the
purchasing department of items it needs to order,
their quantity, and the time frame that will be given
in the future.



Phase 2: Order/ Issue of an RFx
a. Request for Quotation (RFQ)
Definition: a standard business process whose purpose is to invite suppliers into a bidding
process to bid on specific products or services. RFQ, generally means the same thing as IFB
(Invitation For Bid).
An RFQ typically involves more than the price per item. Information like payment terms, quality
level per item or contract length are possible to be requested during the bidding process.
To receive correct quotes, RFQs often include the specifications of the items/services to make
sure all the suppliers are bidding on the same item/service. Logically, the more detailed the
specifications, the more accurate the quote will be and comparable to the other suppliers.

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b. Request for Proposal (RFP)
Used for more complex requirements in which price is only one of key decisison factors.
Typicall buyer plan to negotoate price and terms.
An RFP includes detail description of requirement and invites bidders to use their expertise to
develop and propose one or more solution.
c. Request for Information (RFI)
Issued to gather information about suppliers products and services.
for information-gathering process purposes only.

d. Quotation

e. Purchase Order
Definition:a commercial document issued by a buyer to a seller, indicating types, quantities, and
agreed prices for products or services the seller will provide to the buyer.
Sending a purchase order to a supplier constitutes a legal offer to buy products or services.
Acceptance of a purchase order by a seller usually forms a contract between the buyer and seller, so
no contract exists until the purchase order is accepted.

Companies use purchase orders for several reasons:
1. Purchase orders allow buyers to clearly and explicitly communicate their intentions to sellers
2. Sellers are protected in case of a buyer's refusal to pay for goods or services
3. Purchase orders help a purchasing agent to manage incoming orders and pending orders
4. Purchase orders provide economies in that they streamline the purchasing process to a standard
procedure
5. Commercial lenders or financial institutions may provide financial assistance on the basis of
purchase orders. There are various trade finance facilities that almost every financial institution
allows to business people against purchase orders such as:
Before Shipment credit facility
Post Shipment credit facility
Trade Finance facility
Foreign Bill Purchase credit facility
Bill retirement credit facility

f. Order Acknowledgement
Definition: An Order Acknowledgment is a confirmation from supplier that they have recieved
and processed customer order.









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Phase 3: Post-Order
Delivery: Types of transport the supplier used to post/deliver an ordered product.
Receipt: A receipt is a written acknowledgment that a specified article or sum of money has been
received. A receipt records the purchase of goods or service obtained in an exchange.
Invoice: An invoice or bill is a commercial document issued by a seller to the buyer, indicating the
products, quantities, and agreed prices for products or services the seller has provided the
buyer.


2. Electronic Purchasing System
In a electronic purchasing system, most all of the above steps of purchasing are carried out
electronically by using either electronic technology such as Internet or private network.

Information Systems:
1. It include interconnected components that collect, process and store raw data and distribute
information to support decision making, control & coordination within the organization.
2. It can be manual, however,mostly rely on IT infrastructure.
3. IS technolog allows organization to connect with an important partners in supply chain
networks.

Benefits of Information System Technology

There are seven (7) important benefits to the organization:-
1. Cost reduction and efficiency gains: streamline the supply processes & allow supply staff to do
value-adding tasks.
2. Data accessability: quick & easy access to critical data in short time leads to identify problems
earlier, provides useful information,etc.
3. Speedier communication: helps in effciency & effectiveness when dealing with suppliers
especially global suppliers.
4. Dedicate resources to strategic issues: more resources (e.g., staff and budgets) can be spent on
strategic supply initiaves because less time is spent on administrative & tactical supply activities.
5. Data accuracy: will decrease data entry errors which later leads to customer satisfaction and
lower inventory.
6. System integration: integration across departments, suppliers and customers can provide
accurate information to assist in production and material planning & decision making.
7. Monetary control: enterprise system can control on how and where money is spent.

Types of Information Systems

1. Operational Level Systems
These system process data for routine operations. Its include generate purchase order, change
orders, request for quotations, update supplier lists & maintain commodity prices and supplier
history files.
2. Management Level Systems
Consists of management information system (MIS) and decision support system (DSS).
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a. MIS: provide reports and information to management to support planning, controlling and
decision making; this includes departmental budget information, supplier spend analysis,
supplier performance reports & raw materials requirements forecasts.
b. DSS: process data to assist in decision making. For instance; quotation analysis, price
discount analysis, forecasting, etc.
3. Knowledge Level System: at the workstation, number of elements are integrate to increased the
effectiveness and productivity. The components of workstation are:-
automated transaction system, linked to company database
access to decision support software
an expert system element
personal productivity improvement software-word processing, spreadsheets, graphics,
database manager, etc.

Internet
Definition: is a worldwide system of computer networks - a network of networks in which users at any
one computer can, if they have permission, get information from any other computer (and sometimes
talk directly to users at other computers).
Internet is used by supply professionals to search, retrieve and read computer files world wide;
exchange e-mail; search databases and access government sources; and seaech and purchase items
from electronics catalogs, suppliers and distributors.

Intranet
Definition: a single and widely accessible (for authorized users only) network set up to share
information and communicate with company employees.
It is a private, secure internal web.
Intranets communicate information and facilitate collaboration among employees.
It can be used to dispaly supplier catalog, provide list of approved suppliers & post company supply
policies.
Supply process can be enhanced by allowing emloyees to place orders via Web browsers, approve
and confirm purchases electronically, & generate Pos electronically.
The mainadvantages of supply-based intranet are low transaction costs and reduced lead times.

Extranet
Definition: a private intranet that is extended to authorized usres outside the company such as
suppliers.
Through Web-based interface, suppliers can link into customers system and vice versa to
performany numbers of activities, such as check inventory levels, track the status of invoices, or
submit quotes.
Because of extranet advantages, it allows supply professionals to spend time on value-added
activities.