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6.1 Introduction
Ethics are moral principle and values which govern our beliefs, actions and decisions. They are the rule or guidance of conduct by which we aim to live. Every profession issues its ethical codes and the integrity of any profession is maintained by adherence to their code ethics.

6.2 Ethical principles
The Chartered Institute of Purchasing and the National Association of Purchasing

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5.1 Elements of a Physical Distribution
Physical distribution is the set of activities concerned with efficient movement of finished goods from the end of the production operation to the consumer. Physical distribution takes place within numerous wholesaling and retailing distribution channels, and includes such important decision areas as:

  1. Customer service,
  2. Inventory control,
  3. Materials handling,
  4. Protective packaging,
  5. Order procession,
  6. Transportation,
  7. Warehouse site selection, and warehousing.

Physical distribution is part of a larger process called “distribution,” which includes wholesale and retail marketing, as well the physical movement of products. By storing goods in convenient locations for shipment to wholesalers and retailers, and by
creating fast, reliable means of moving the goods, business owners can help assure continued success in a rapidly changing, competitive global market. The importance of physical distribution is also based on its relevance to customer satisfaction.

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4.1 Introduction
Materials held by the organization in its stores or otherwise constitute its stock. In the ideal would stockholding would not be necessary. Demand and supply would be synchronized and materials would flow o the point of use at a rate matching the speed of consumption. This is however not the case in the real world

4.2 Reasons for Holding Stock

  1. Delivery cannot be exactly matched with usage day by day
  2. Economies associates with buying or manufacturing in large quantities more than offset the cost of storage
  3. Operational risks require the holding of stock to guard against breakdown on programme changes
  4. For work in progress where a completely balanced production flow is impracticable
  5. For finished goods where the holding of a buffer stock between production and the customer is desirable
  6. Owing to fluctuations is the price of a commodity it is desirable to acquire stocks when prices are low.
  7. In order that materials may appreciate in value through storage e.g. wine, coffee etc.
  8. In order that customers may be attracted by a range of products from which to select.

The weight given to each of these factors depends upon the type of organization and the approach to stock control will naturally be influenced by the nature of the firm’s activity. In order to adequately maintain its stock a firm must maintain stock records.

Role played by Stock Records

  1. To indicate the amount of stock of any item at any time without it being necessary for the stock to be counted physically.
  2. To establish a link between the physical stock and the stores accounts. All receipts and issues of stock cause adjustments to the stores accounts
  3. To provide a means of provisioning i.e. determining how much should be ordered to maintain stock at the required level.
  4. To supply information for stock taking, i.e matching records with physical stocks for control.
  5. to provide a method of informing stores staff of the location of goods in the stores
  6. to serve the purpose of a price list where unit prices are recorded

Definition of Inventories/Stocks

  1. Production inventories- raw materials, parts and components which enter the firm’s product in the production process.
  2. MRO inventories- maintenance repair and operating supplies which are used in the production process but which do not become part of the product e.g. lubricants
  3. In-process inventories- semi finished products found at various stages of the production operation
  4.  Finished goods inventories- completed goods ready for shipment.

Stock/Inventory Analysis
This is the process of determination and classification of all that is held in stock by the firm. Sound inventory management requires the development of a complete inventory catalogue followed by a thorough ABC analysis

Inventory Catalog
An inventory catalog is some form of classification of inventory items in some type of categories the most common category is the function of the items. For an inventory catalog to be prepared all inventory items have to be completely described , identified by the manufacturers part number and cross- indexed by users identification number if necessary. Inventory catalogs are very useful in:

  • Serving a medium of communication by enabling staff to tell which items are carried in the inventory, whether interchangeable items are carried in the inventory for missing items. etc
  • Acting as an inventory control tool through reduction of duplicate records for identified parts.

4.3 ABC Analysis: The 80-20 Concept
ABC analysis is also called Pareto analysis after Vilfredo Pareto an Italian economist who developed the concept during the early 20th century. Several studies made of large corporations have shown that 80% of all items carried in the inventory constitute 20% of the total investment while 20%of inventory items constitute 80 of total investment. In practice an ABC analysis can be made on the basis of either the average inventory investment in each item or the arrival shilling usage of each item.
Each item value is expressed as a percentage of the total inventory investment. Each item can be the fitted on the three classifications A, B, and C depending on the items percentage investments over the total inventory investment. The value of such an analysis so to provide a sound basis on which allocate time and personnel with respect to procurement management and the refinement of control over the individual inventory items. Clearly no manager wants to spent 75% of his time on class C low-value items and spend 25% of his time on class A high-value items  An additional classification dependant on criticalness of each item can be added to the ABC system. This classification is on a three-point scale; 1- critical, 2 medium, 3 non critical. Thus an item can be A1, A2, or A3 etc

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3.1 Introduction
A source is a place from which something comes from or is obtained from. Sourcing is therefore a process of determination and selection of places/firms from with to acquire materials or services.

3. 2 Sourcing levels

  • Strategic sourcing
    This is the process of creating a vale adding (or optional) mix of supply relationships to provide a competitive advantage. It is concerned with to-level, long term decisions relating to high-profit, high-supply-risk strategic items and low-profit, highsupply-risk both neck items. It is concerned with promotion of long-term policies relating to core competences, strategic make or buy decisions, partnerships sourcing, purchase of capital equipments, ethical issues etc.
  • Tactical and operational sourcing
    It is concerned with lower level decisions to high-profit, low-risk non-critical items. It also involves short term adaptive decisions as to how and from where specific supplier requirements are to be met. As such suggestions may be made to top management regarding temporary tactical deviations from strategic decisions e.g. in light of supplier failure or reversed conditions of stock.

3.3 Sourcing Considerations
1. Sourcing information
2. Sourcing strategies, tactics and sourcing decisions

Sourcing Information
Sourcing information relates to:

  • Analysis of market conditions
  • Directives
  • Suppliers sources
  • Suppliers assessment
  • Supplier performance rating.

Analysis of Market Conditions

Why is this necessary?

  • Helps in forecasting the long term demand of products.
  • Assist in forecasting price trends of terms.
  • Indicates what alternative goods and supply sources are available.
  •  Provides guidance on security of supply sources.

Sources of information relating to market conditions

  • Primary data i.e. field research, company data e.g. on market shares etc.
  • Secondary data i.e. statistical data and report issued by external organization e.g. government sources such as census and gazette notices, non-government sources such as professional organizations e.g. KAM

A directive is a general instruction. Typical directives relating to sourcing are to be issued by central and local governments, the European Union and companies. Mainly such directives are issued with regard to;

  • Health and safety issues
  • Establishment of common procedures
  • Competition
  • Equal opportunities for all EU suppliers
  • Companies top management also issues directives regarding inter company relations, reciprocal trading, etc for strategic reasons or otherwise.

Supply sources
Sources of information relating to supply sources are: catalogues, trade directories, database, sales persons, exhibitions, trade journals, yellow pages, informal exchange of information between buyers, information provided by prospective suppliers
etc. Buyers may require prospective supplier’s fill questionnaires with the following subheadings to gain information from them:

  • General-firm names, address, turnover etc
  • Personnel-name of directors and responsibilities, no of workers and shop area covered
  • experience-products or services offered, previous orders placed, etc
  • facilities-major plants and equipments, communications facilities etc

Supplier assessment and appraisal
Supplier appraisal may arise when:

  • A prospective vendor applies to be placed on the buyers approved list
  • Buyers wishes to assure him/herself that a supplier can meet requirements reliably
  • Items to be purchased are of critical importance
  • It is intended to adopt a policy of single sourcing based on partnership purchasing

Supplier appraisal can be undertaken through:
Desk research- this uses published or unpublished data already existing e.g. company reports, balance sheet reports, strike records etc
Field research- this will help additional data on technical production, management capacities etc. Field research is undertaken during visits to suppliers in order to ensure that important questions are not overlooked. A check list is invaluable during supplier visits; the check list should include the following
Personal attitudes:- Atmosphere of harmony among good workers; Degree of interest to customer service; Degree of energy displayed in getting work done; Use of man power- economical or extravagant.
Adequacy and ease of production equipment:- Modern or antiquated; Well care for by operators or neglected; Sufficient capacity to produce desired quantities; Technology know how of supervisory personnel.
Means of controlling quality:- Frequency of inspection during the product cycle; Employment of such techniques as statistical quality control
House keeping:- Is the plant orderly and clean
Competence of technical staff:- Knowledge of latest materials, tools and processes related to products and anticipated developments in their industry Competence of management

Supplier Performance Rating
The purpose supplier performance rating is to:

  • Evaluate performance with respect to such factors as price, quality delivery service etc
  • Provide objective information on which judgment can be based relating to source selection.
  • Assist the buyer with information on areas where the supplier can improve.

Types of rating

1. Subjective rating
Subjective ratings have to do with the buyer’s personal impression of the supplier. Subjective ratings have a tendency to be biased since they may be based on irrelevant impression or estimate of the supplier.
2. Quantitative rating
These have to do with actual data analysis. It aims to remedy deficiencies of subjective rating.

Categories under which suppliers are assessed and ranked

  1. Quality- Declared/undeclared Non-conformance, Responsiveness, Administration
  2. Delivery- Areas, Promise credibility, Early delivery, Responsiveness.
  3. Commercial- Cost reduction, Competitiveness, Risks sharing Administration
  4. Technologies- Process control, Computing links, Capital investment, Production capacity
  5. Management-Task, People, Delegated authority.

A vendor-rating form is designed with the above categories. The categories may be ranked out of a possible maximum of 20 to then added up to 100 or any other means as the firm may choose.

3.4 Sourcing Strategies and Tactics and Sourcing Decisions
The Supplier Base
This relates to the range, location and characteristic of vendors from whom the external supply requirements of an undertaking are obtained. Factors influencing the supply base of an enterprise include

  • The core competences of an enterprise
  • Make, buy, outsourcing and subcontracting decisions
  • Single, multiple and partnership sourcing decision
  • Tiering
  • International and global sourcing
  • Counter trade inter-company trading and reciprocal trade
  • Miscellaneous factor, large, small and local supplies

1. Core competences
Core competences are concerned with identifying particular strengths that give a firm an advantage over competitors and areas of weakness that need to be avoided. Finding out what the firm does best and enterprising to others needed goods and services that they do best is the key to strategic make or buy decisions.

2. Make, buy, outsourcing and subcontracting decisions

Make or buy strategies and tactics
Make or buy decisions compare the best of producing a component or providing a service from an external supplier. There are three levels of make or buy decisions all of which are linked to the overall organizational strategy.

Strategic make or buy decisions
These decisions influence the firms manufacturing operation shape and capacity by determining;
• What product to make
• What investments to make in plant and equipment
• The framework for short term tactical and component decisions.
• Development of new products.

Tactical make or buy decisions
This deal with the issue of temporary imbalance in manufacturing capacity e.g. changes in demand may make it possible to make everything in house.

Components make or buy decisions
Made at the design stage this decisions have to do with whether a particular component should be made in-house on bought. Cost factor in make or buy decisions after require the application of marginal costing and break-even analysis
Marginal Costing- this is a principle whereby valuable costs are charged to cost units and the fixed costs attributable to the relevant period written off in full against the contributions for that period.
Contribution = Purchase Price minus Variable Cost per item

Other considerations in make or buy decisions

Considerations in favour of making

  • Cost considerations the major elements of the cost considerations are: Materials and labour costs; Follow on costs stemming from quality related problem; Incremental inventory carry on costs; Incremental factory overhead costs; Incremental management costs; Incremental purchase costs; Incremental costs of capital
  • Desire to integrate plant operations
  • Reproductive use of excess plant capacity to help absorb fixed costs
  • Need to exert direct control over production and or quality.
  • Design secrecy required
  • Unreliable suppliers
  • Desire to maintain a stable work force (in periods of low sales )
  • Potential lead time reduction
  • Exchange rate risk
  • Greater purchasing power with bulk purchase of materials.

Considerations in favour of buying

  • Cost considerations, (less to buy the part) major elements of the cost considerations are: Purchase price of the part; Transportation costs; Receiving and inspection costs; Incremental purchasing costs; Any follow-on costs stemming from quality or service.
  • Suppliers research and specialized know how
  • Small volume requirements
  • Limited protection facilities
  • Desire to maintain stable work force in periods of increasing sales.
  • Desire to maintain a multiple-source policy
  • Indirect managerial control considerations.
  • Spread of financial risk for purchaser and vendor.

3.5 Decision Process for Make or Buy

3.6 Outsourcing
This is the strategic use of resources to perform activities traditionally handled by international staff and their resources. An alternative definition is the buying in of components, sub-assemblers finished products and service from outside suppliers rather
than supplying them internally. It is strategy by which an organization outsources noncore items to specialized efficient providers.

Central to outsourcing are;

  • Make or buy decisions
  • Partnerships between purchasers and suppliers

What should an organization outsource?
Other things being equal enterprises should outsource non-core activities and concentrate on its core activities. Examples of outsourced services include: Car park management; cleaning; building repair and maintenance; catering; security; waste
disposal; medical/welfare etc.

Examples of what not to outsource
Management strategic planning; management of finance; control of supplies; supervision of the conformation of regulatory requirements e.g. product liability, public safety

Types of outsourcing

  • Body shop outsourcing- management uses of outsourcing to meet short-term requirements e.g. temporary shortage of in-house skills to meet temporary.
  • Project management outsourcing- use of outsourcing for all or part of a particular project e.g. development of new IT project
  • Total outsourcing- Where the outsourcing suppliers is given full responsibility for a selected area e.g. catering; security etc.

Benefit of outsourcing

  1. Trees management time
  2. Reduced staff costs
  3. Increased flexibility
  4. Cost certainty
  5. Reduction in staff management problems
  6. Improved consistency of service
  7. Reduced capital requirements
  8. Reduced risk

Problems of outsourcing

  1. Redundancy costs
  2. Quality of service maintenance problems
  3. Long term commitment absent
  4. Over dependence on suppliers
  5. Lack of suppliers flexibility
  6. Lack of management skills to control suppliers
  7. Possible loss of competitive advantage particularly in the loss of skills and expertise of staff
  8. Insufficient internal investment and the passing of knowledge and expertise to the supplier who may sieve the initiative.

This is an aspect of lean supply which is defined as a state of business in which there is dynamic competition and collaboration of equals is the supply chain, aimed at adding value at minimum total cost, while maximizing end customer service and product
quality. Lean thinking aims at eliminating waste such as spoiled production, unnecessary processing steps, uneconomic inventors etc. Tiering will therefore involve collaboration of several levels of suppliers to as tiers.

The main feature of supply relationships between the car producers (called assemblers) and their suppliers are:

  • Purchase of whole components from sub-assemblers e.g. seats rather than constituent parts from first tier suppliers.
  • First tier suppliers have teams of second tier suppliers who may engage third or even fourth tier suppliers. Second and other tier companies make individual parts to drawings supplier by first-tier companies.

Reasons for tiering

  • Assemble may require first tier suppliers to integrate diverse technologies not possessed by one organization.
  • Some components required for systems are very specialized and this made by a small number of large firms e.g. electronic chips.
  • Third level of sub-contracted work is simple and low value added.

Consequences of tiering

  • High degree of shared design employing the skills and knowledge of both customers and suppliers.
  • High degree of supplier innovation in both products and process.
  • Close long term relationship btw network members involving a high level of level of trust, profit sharing and openness.
  •  Use of rigorous grading systems to give way to suppliers self certification.
  • High degree of supplier co – ordination by the customer company at each level of the tiered structure.

International Sourcing
International, multinational and foreign sourcing are defined as buying outside the firm’s country of manufacture in a way that does not co-ordinate requirements among world-wide business units of a single firm. Strategic global sourcing is defined as the integration and co-ordination of purchasing requirements among world-wide business units, looking at common items, process technologies and suppliers.

Why source internationally?

  • Intense international competition
  • Pressure to reduce costs
  • Need for manufacturing flexibility
  • Ever changing technology (reduction in cost and increase in quality)
  • Domestic non-availability (not found within the country.
  • Insufficient domestic capacity to meet demand (locally products goods are not enough)
  • Insurance- to ensure continuity of supply.
  • Competitiveness of oversees sources e.g. lower prices.
  • Reciprocal trading and counter trade due to policy reasons or government pressures ( so as to an export orders)
  • To obtain penetration of a growth market.

Problems in international sourcing

  • Contact with suppliers is more difficult.
  • Longer negotiation time
  • Currency difficulties
  • Legal difficulties (rules and regulations)
  • Redress of complaints (jurisdiction issues)
  • Delays in delivery due to weather, dock strikes etc
  • Appointment of agents

Supply partnerships
Many favour establishment of long term relationships between buying and supplying firms. A supply partnership is a collaborative relationship between buyer and seller which recognize some degree of interdependence circle co-operation on a specific project or for a specific purchase agreement. It calls for sharing of forecasted demand and cost data and must contain as element of trust and respect.

Areas that may require partnership sourcing

  • Technically complex components where costs of switching could be prohibitive.
  • Areas where knowing future technology or trend is critical
  • Restricted markets with few reliable or competent suppliers, closer links with suppliers may improve security

Forming successful partnerships requires the following

  • Determination common objectives
  • Consistency of procedures in the development of the supply chain.
  • Gradual integration of functions on the road forwards high level strategic intervention

Problem of partnership sourcing

  • Termination of relationships- aim should be amicably
  • Over-dependence on the supplier
  • Confidentiality- where the supplier is also a competitor’s supplier.
  • Complacency- To avoid this regular meetings of multi-functional buying team to review competitiveness
  • Attitudes- Require retraining of adversarial buyers and sales force to adjust to new philosophy.
  • Contractual- Agreements should be letters of interest which are updated depending on forecasts.

Reciprocal Trade
Reciprocity is defined as mutual concession of advantages or privileges as forming basis of commercial relations

Types of reciprocity

  • External- suppliers and buyers have no relation
  • Internal- suppliers and buys are members of the same group.

Types of external reciprocity

  • Two-way reciprocity e.g. firestone agrees to buy forklifts from caterpillar on condition that caterpillar buys types from firestone.
  • Multi-reciprocity – e.g. A- (a building contractor) agrees to buy from B- (a block maker) on condition that B buys from C- (a cement maker) who is a substantial customer to A.

Advantages of reciprocity

  • Both buyer and supplier benefit from exchange of orders.
  • Greater understanding of mutual problems thereby increasing goodwill.
  • Elimination of intermediaries and marketing costs.

Disadvantages of reciprocity

  • Costs may rise due to reduced competitive position
  • Marketing efforts may become slack.
  • Disputes may once where volumes are unequal
  • Opportunity to buy cheaper , better quality alternatives may be derived
  • Difficulties may once in finding alternative suppliers during emergencies.
  • In practice it’s difficult to terminate reciprocity amicability.

This is a form of international reciprocity in which an order is placed by a purchaser with a supplier in another country on condition that goods to an equal or specified value are sold in the opposite direction

Forms of counter trade

  • Barter/swaps- Simultaneous exchange of goods or services (no cash)
  • Counter purchase- Y sells to country X with the understanding that a percentage of the sales proceeds are to be uses on importing goods from country X in cash
  • Buy-back/compensation- Exporter agrees to accept full or partial payment in products by the importer.
  • Switch trading- Country X sells goods to country Y, Y credits X with the value of goods that it can buy from Y, but X not willing to buy from Y sells the credit to a third party trading house at a discount . The trading house sells the credits at a profit to any country wishing to buy goods from Y. Switch trading is used to overcome an imbalance of money by a trading partner
  • Offset- similar to counter purchase only that a percentage of the exchange can be in barter.

Purchasing can play a major part in countertrade by;

  • Identifying low-cost sources of supply for counter trade exploitation.
  • Provision of negotiating expertise in counter trade arrangements
  • Ensuring quality of goods in counter trade.
  • Finding internal uses of counter trade partnerships

Advantages of countertrade

  • Avoid exchange controls
  • Promotes trade with countries with inconvertible currencies
  • Reduces exchange risks of unstable currencies
  • Enables entry to new or formerly closed markets.
  • Reduces foreign protectionism.
  • Finds valuable outlets for declining products.

Disadvantages of counter trade

  • Negotiations of counter trade takes long
  • Additional expenses erg brokerages fees.
  • There may be difficulties in quality
  • Pricing problems.

Intra-Company Trading
This applies to large enterprises and conglomerate where the possibility arises of buying certain materials from a member of the group e.g. U.D.V. a member of E.A.B. may source bottles from Central Glass Industries also a member of E.A.B. In intracompany trading the policy is to support internal suppliers to the fullest extent and to develop product and service quality to the same standards as those available in the external market.

Common in construction industry the client hands over performance of sections of the contract to other parties who will be responsible to the client while the overall contract performance remains with the client. Reasons fro subcontracting include:

  • Over-loading of machinery or labour
  • To ensure completion of work on time
  • Lack of specialist machinery or specialist know-how
  • To avoid acquiring long-term capacity when future demand is uncertain.
  • Subcontracting is cheaper.

3.7 Local Suppliers
What is local is determined bearing in mind the ease of transportation and communication. Advantages of using local suppliers

  • Closer co-operation based on personal relationships is facilitated
  • Social responsibility-“ Supporting local industries” is shown
  • Reduced transport costs
  • Improved availability is emergency situations
  • Development of subsidiary industries is encouraged
  • Deciding whether to use small or large suppliers

Advantages for small suppliers

  • Closer attention to buyers requirements
  • Relationships especially at executive level more personal
  • Special assistance requests from buyers is more rapid
    Note: Governments discourage anticompetitive practices that can force small enterprises out of business e.g. delayed payments.

Advantages of large suppliers

  • Reserve capacity to cope with extra work and cope with emergencies
  • Special facilities and knowledge can be made available to the buyers
  • There is less danger of supplier becoming too reliant on the buyers business

3.8 Factors in Deciding Where to Buy
General considerations

  • Current and projected level of business for the item
  • Have we sourced the item before?
  • Within what time scale is the item required? etc

Strategic considerations

  • What source will offer greatest competitive advantage in price, quality security if supply? etc
  • Does the source offer possibilities of joint product development reciprocal or counter trade? etc
  • What relationships does the supplier have with our competitors?
  • What risk factors are attached to the purchase?

Product factors

  • Is special tooling required?
  • Is the product special or standardized?
  • In what cost size is the product manufactured?

Supplier factors

  • Performance on delivery, quality etc
  • Size

Willingness to share risk etc

Personal factors
This relates to psychological and behavioral aspects of those involved in making buying decisions in the firm such as:

  • Background- education, job orientation
  • Satisfaction with past purchase, time pressure, risk etc
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2.0 Introduction
A typical purchasing cycle consists of the following steps:
1. Recognition of the need
2. Definition and description of the need
3. Transmission of the need
4. Receipt and inspection
5. Invoice audit and completion of the order

2.1 Recognition of the Need
A purchase need may originate from the firm’s user departments or the inventory control section. The notification of the need is usually in two methods.

  • Standard purchase requisitions.
  • Materials requirement planning (MRP) schedule.

Standard Purchase Requisition
This is an internal document comparable to the purchase order which is an external document. Most firms have standard purchase requisition which is serially numbered and produced in duplicate. The user department retains one copy while the other is sent to he
purchasing dept. A requisition has the following information; Description of the materials, quantity, and date required, estimated unit cost, operating account to be charged, date and authorized signature. Most big firms have logged the necessary information on the firm’s mainframe or it’s Local Area Network. Thus, requisitions can be produced electronically by scanning for the necessary data. A computer maintained inventory monitoring system automatically produces or generates requisition when the inventory level has reached reorder point.

Materials Requirement Planning (MRP) Schedule.
When a design engineer completes the design part he/she produces an engineering bill of materials (BOM)- a list of materials and quantity of each required to manufacture the item. In firms using computerized inventory planning systems, the engineering bills
of material is reconfigured into a structured multi level bill of materials which is used to determine the specific material requirements for the item at a specific time period. This schedule is then sent to purchasing for direct use in obtaining the required materials. The
schedule eliminates the necessity of preparing numerous purchases requisitions.

2.2 Definitions and Description of the Need
Purchase description serves a number of purposes among them to;

  • Communicate to the buyer in the purchasing department what to buy.
  • Communicate to the prospective supplier what is required.
  • Serve as the heart of the resulting purchase order.
  • Establish the standard against which inspections test and quantity checks are made.

Purchase description fall into two broad categories

  • Detailed specification
  • Other purchase descriptions

1. Detailed Specification
This is description that tells the seller what the buyer needs to buy in exact terms. Design and engineering desires features of design excellence but which may contribute to less sales potential, operation may on the other hand favor easy to work on design that
have low unit cost. It is estimated that 75-80% avoidable total cost may be controlled at design stage by reconciling the need of engineering, operations, marketing and purchasing in order to come up with balanced or optimal specifications that solve the
interdepartmental conflict of interest. To develop specifications that properly balance product quality characteristics, and product cost, four approaches can be used:

  • Early Purchasing Involvement (EPI) and Early Suppler Involvement (ESI)
  • Formal committee approach, representatives come from all the functional area. No design becomes final without the committee approval
  • The informal approach emphasizes the concept of buyer to challenge requests. Management urges designers to seek continual advice from buyers. Person to person communications and co-operation between designers and individual buyers is encouraged.
  • The purchasing co-ordinate approach– one or more positions are created in the purchasing department usually called materials engineers to serve in a liaison capacity with the designers department.. The approach is highly structured, expensive but effective.

Specification Requirements
To meet the need of all departments, specification must satisfy many requirements;

  • Design and marketing requirements for functional characteristics and other properties e.g. appearance.
  • Manufacturing requirement for workability, and produceability with the specifications.
  • Stores requirements to use, store and receive the materials economically.
  • Inspections requirements to test materials with compliance with the specifications
  • Purchasing and supply management requirement to procure materials without difficulty and with adequate competition from reliable sources of supply.
  • Productions control-purchasing requirements to substitute materials when necessary.
  • The firm’s requirements for suitable quality at lowest overall cost.
  • The firm’s requirements to use commercial and industrial standard materials whenever possible and to establish company standard in all other cases.

Note: precision and clarity is of most importance when writing specifications
Types of Detailed Specifications
There are three types of detailed specifications.

Commercial standards– this is complete description of an item standardized.

Advantages of Commercial standards

  1. Description can be set forth accurately and easily
  2. Highly competitive and readily available at reasonable prices.
  3. No need for specific sale commitments before productions.
  4. Contribute to simplification of design, purchasing procedure, inventory management and cost reduction.

Design specifications– for materials that are not covered by standard specification, firms prepare their own specifications. The cost of inspection to assure compliance with the company-made specifications can be high. To avoid ambiguity, such specifications are accompanied by engineering drawings, which provides a more precise and accurate description, permit wide range of competition (what is wanted can be easily communicated to a wide range of suppliers) and clearly establishes the standards of inspection.

Materials and method of manufacture specifications– in this method the supplier is instructed precisely as to the specific materials to be used and low they are to be processed. The buyer assumes full responsibility for the performance. It is common in the defense industry.


  1. Widest competition possible thus good pricing assured.
  2. Since product is non-standard, anti-discriminatory barrier is removed.


  1. Puts a lot of responsibility on buyer.
  2. Specifications of this type are expensive and difficult to prepare.
  3. Inspection is generally very expensive

Other Purchase Descriptions
Performance specifications- instead of describing an item by its design performance specification, it describes in words and quantitatively what the item is required to do. The primary advantage of the kind of specification is that it assures obtaining the precise desired performance and ease of preparing specifications. it also assures inclusion of all applicable new development, competition also ensures quality and fair prices.

Function and fit specification- with this approach the function and the way the item is going to fit in the whole system is described. This is common in the computer and automobile industry where ESI is essential.

Brand or trade names- branding a product is done to develop reputation and thus gain repeat sales. Consumers develop preferences for brands. The branded products may attract higher prices than unbranded products. Branding ensures or pledges consistent
quality from one purchase to the next. Describing brand names is quite simple, inspection cost are low. This however eliminates competition and the prices are relatively high.

Samples- samples are neither the cheapest nor the most satisfactory method of purchases. Money saved on description costs is usually exceeded in inspection costs. Samples should be used if other methods are not feasible

Markets grades- grading is a method of determining quality of commodities. A grade is determined by comparing a commodity standards previously agreed. Grading is restricted to natural commodities e.g., hides, cotton, tobacco etc. The grades are developed by commodity exchanges, trade associations, government agencies etc. The inspection of grades is expensive in terms of time, effort and money

Qualified products- where it’s necessary to determine in advance of purchase whether a product can meet specification then it is crucial to qualify products. This exists in cases where:
• it takes too long to conduct post purchase inspection
• testing equipment is not commonly or immediately available
• purchase concerns safety equipment, life support equip, research equipment etc
After qualification products of approved suppliers can be put in a qualified product list Combination of methods- many products can’t be adequately described by a single method as such many or a combination of methods may be used

2.3 Transmission of the Need
1) The Stock Check
Apart from the requisition originating from the stock/ inventory control section, in all other requisitions are checked to see if the requested items are carried in stock .if adequate stock is on hand, no purchase is necessary. If not, the requisition is adjusted to
accommodate the inventory levels.

2) Suppliers Selection and Preparation of the Purchase Order
When the need has been adequately and precisely described the buyer begins an investigation of the market to identify potential sources of supply. For routine items for which supplier relationships have been already developed, little additional investigation
may be required to select a good source. For high value items on the other hand, a lengthy investigation of the potential suppliers is mandatory The firm may use cross functional teams to qualify a preliminary group of suppliers through supplier evaluation/appraisal procedures. The firm may then use the techniques of competitive bidding or negotiation or both to select the desired supplier
With the supplier selected the purchasing department proceeds to prepare and issue a serially numbered purchase order. This order in most cases becomes a legal contract document. For this reason, the quality and quantity requirements, price, delivery and shipping requirements etc. must be accurately and precisely specified. Conditions of acceptance should also be stated or referenced on the order. Each firm should develop its terms and conditions of purchase in accordance with it own unique need. This condition is printed on the back of the purchase order. Several copies of each order are prepared and distributed to the relevant department e.g. accounts,
receiving department, user, suppliers and purchasing

3) Acknowledgement and Follow-up of the Order
Normally the purchase order sent to the seller constitutes a legal offer to buy. A contract will only exist; when the seller accepts the buyer’s offers. The seller acceptance can be in two forms

  • Performance of the contract
  • A formal notification that the contract is accepted

An acknowledgement form usually sent with the order indicates acceptance of the offer and whether the supplier will be able to meet the specified delivery dates. It is customary for the supplier to indicate its terms and conditions of sale on the order acceptance. In the view of the posture adopted by courts on this matter, it is crucial to review suppliers order acceptances with great care to rule out conflicting terms and conditions. The purchasing department bears full responsibility for an order until the material is received and accepted, for this reason, active follow-up and attention is necessary to the orders meet their specific delivery dates. Expeditors may be used for follow-up activities.

2.4 Receipt and Inspection
The receiving agent/clerk uses the packing slip from the supplier that describes the contents of the shipment in conjunction with his/her purchase order copy to verify that the correct material has been received. After the inspection of the shipment for quantity and general condition, the receiving clerk issues a receiving report. This report is also copied to the relevant department i.e. purchasing, accounting and inspection. The distribution of the inspection report is withheld until a technical inspection is done and only then is the shipment accepted. With the use of the certified suppliers for JI-T and some partnering purchase arrangements the receiving and inspection function have been eliminated.

2.5 Invoice Audit and Completion of the Order
A typical invoice audit procedure involves the simultaneous review of the purchase order, receiving report and invoice. Comparing the purchasing order and receiving report ensures the material ordered was actually received. The invoice and purchasing order and receiving report ensure that the supplier bill is priced correctly and it covers proper quantity of material received. Invoice, verifying its arithmetic accuracy ensures correctness of the total invoice figure. Invoice auditing should be conducted soon after receipt of the invoice to ensure prompt payment to obtain applicable cash discounts and maintain good supplier relationships.

Invoice auditing is an accounting function but in some instances it is performed by the purchasing department. Closing the ordered entails consulting all documents in the closed order file will constitute; purchase requisition open-order file copy of the purchase order, acknowledgement and receiving report, inspection report and any correspondence pertaining to the order.

2.6 Purchasing and Supply Department Records
The following records are essential for the effective operation of most purchasing departments.

  • Records of open orders- Although practice varies widely each open order records contains; purchase requisitions working copy of purchase order, acknowledgement information, follow up data, notes and correspondence pertaining to the order.
  • A record of closed orders- Provides a historical record of all completed orders,
  • Purchase log- Provides a record of all purchase order issued. It constitutes or contains the purchase order number, status of the order, supplier’s name, and brief description of the materials and total value of the order. In the event that the working copy of the purchase order is lost, basic draft concerning the purchase can be found in the log. The log can be recoded in journal or in the
    computer data base.
  • Commodity record- Typically it include a complete description of the materials or service, with full reference to engineering drawings and specifications, approved supplier list and their price schedules, competitive quotations etc. This information is invaluable in repetitive purchase investigations.
  • Supplier record- It includes the address, telephone, names of contacts persons, selling terms and routing instructions for shipping purchases etc. This provides a quick access to information about suppliers. This record additionally summarizes the supplier’s delivery and quality performance.
  • Contract record- In addiction to providing immediate access to all contract documents this file apprises buying persons of the materials purchased in this manner.
  • Special tool records- Most firms have no need for this record. It is however necessary for firms that purchase items that requires special tooling for their manufacture. The records will show at a glance the special tools owned, age and location, and the essential mounting and operation characteristics.

2.7 Rush Orders
Rush orders are those made in urgency. Even in cases of emergency it’s unwise to accept oral requisitions, too much chance for erroneous interpretation exist. A special procedure for handling rush requisitions is needed. The buyer should process the written
rush requisitions immediately and phone emergency order to the supplier then mail a confirming purchase order Only justifiable requests should receive rush order service since rush purchases attract higher prices and premium in transportation. As such efforts should be made to discourage all rush order that arise due to poor planning. This can be done by:

  • Coordinating the activities of the user dept or production scheduling and purchasing.
  • Seeking the approval of the general management executive for requisition.
  • Levying the requisitioning department a predetermined service charge for each emergency requisitions processed.

2.8 The Small-order Problem
An examination of the firms order file reveals that up to 80% of its purchase involves low expenditure items. Clearly no manger wants to devote more buying and clerical efforts to the expenditure of less than 20% of his/her buying funds than to the other 80%. The following are methods that a purchasing manager can use to minimize the small order problem.

  • Centralized Stores System
    Items are ordered in large quantities and placed in an inventory system for withdrawal when needed. Economic order quantity may be used where item usage is relatively stable. There is a limit to the financial investment that a firm can place in inventory.
  • Blanket Order System
    Include a description of the item, unit price and other contract provisions. The quantity is however not noted. It notes the usage period usually 1-3 yrs and states that all requirements are to be delivered upon receipt of a release order from the buyer or other authorized person. When a requisition is made the buyer sends a brief release to the suppliers. Receiving reports are filled with the original order and checked against the supplier invoice at the end of the month.

This system;

  1. Reduces clerical work in purchasing, accounting and receiving by reducing the purchasing orders
  2. Releases buyers from routine work to concentrate on major issues.
  3. Permit volume pricing by consolidating and grouping requirements.
  4. Reduces buyers lead times and inventory levels.
  5. Develops long term buyer-supplier relationships.

The system is subject to petty fraud and this requires effective control.

  1. Numbered purchasing orders
  2. Authorized delivery releases
  3. Bona fide evidence of receipt of items
  • System Contracting
    This is a more sophisticated extension of the blanket order purchasing concept. It’s sometimes called “stockless” purchasing. It is often a 1-5 yr contract with a supplier to purchase a large group of related materials which are described in detail in a catalog that becomes part of the contract. Estimated sage and fixed price for each item is included and as agreement by the supplier to a carry a stock of each item adequate to meet buyer’s needs. Through variations exists the users in the buying form will sally send requisitions directly to the suppliers holding the contract item. The supplier maintains a “tally sheet “identifying each by the requisition number and periodically submits the tally sheet to the buyer for payment with invoices attached.
  • Term Contracting Coupled with MRP
    First the buyer establishes a long term contract with a supplier then sends the supplier weekly or monthly MRP schedule. The MRP schedule acts as a purchase requisition and a purchasing order, suppliers simply devices to the schedule.
  • Telephone /Fax Order System
    Under this system when the purchasing dept receives a requisitions, it does not prepare a formal purchasing order instead the order is placed by fax or phone and the requisitions is send in the receiving procedure. The price is determined during in had
    telephone conversation and is recorded in the requisitions. When the item is received as ordered the A/C dept users payment on the basic of purchase requisitions. This system goes a step further in elimination of the paper work.
  • Electronic Ordering Systems
    With this system the buyer places a purchase requisitions, in magnetic card form in the reader and deals the suppliers phone number then transmits the requisitions data over phone lines to the supplier’s interpretation unit. Another approach is to have the buyer se a computer as an impact device and transmit data over phone lines to the supplier’s computer which works as an output terminal. Clearly the use of electronic ordering system requires a blanket order or similar contractual arrangement with the supplier.
  • Petty Cash and Cash on Delivery
    Most firms use a petty cash fund to make small one-time purchases, some firms also find it economical to make small one-time purchase on cash on delivery basis material may be order by phone and payment made on arrival.
  • Purchase Credit Card
    Use of corporate credit card by employees for Maintenance Repair and Operations (MRO) purchases has become common over the recent years e.g. fuel cards. It reduces purchasing cycle time, improves purchasing relations with operating dept and makes the payment faster. The credit cards are issued to operating dept personal selected by their supervisor. Through beneficial the credit card system offers exposure to risks for the firm;
  1. Loss of control over what is actually purchased.
  2. Possible disregard of departmental authorization and control.
  3. Opportunity for petty fraud.

Control can be affected in the following ways

  1. Select the suppliers where the cards can be used.
  2. With the help of supervisors determine who receives credit cards.
  3. Selecting purchases limits for such card.
  • Supplier Stores/Consignment System
    In this system if a buyer makes large volume purchases from the supplier, the supplier may staff a small store in the buyers premises and operate it an a consignment basis. Users can then go to the store and sign for their purchases. At the end of the
    month the firm is filled for its purchases. This is not a short term arrangement.
  • Supplier Delivery System
    This system is somehow similar to the supplier stores system but it’s more feasible for firms with small volume purchases. The buyer accumulates purchase requisitions and the supplier delivery person picks them on a specified day while at the same time
    delivery materials ordered in the proceeding requisitions. This recharges buyers paper work and in voluntary problems.

2.9 Purchasing Fraud
Examples of purchasing supply related fraud

  • Buyer/supplier collusion leading to approval for payment for fictitious charges.
  • Presentation of false invoices.
  • Re-presentation of genuine invoices that have not been cancelled at the time the cheque was signed for second payments.
  • Arranging for lowest tender to come from a desired source.
  • Premature scrapping of assets in return for a “kick back” from a scrap dealer
  • Computer based fraud that takes advantage of inadequate contort or limited understanding of computers on the part of fines management.

Prevention of purchasing fraud involves three methods:
Internal control

  • Ensuring separation between recording and custodian duties
  • Delegation of requisition power to specified employees with authorized limits which increases with level of authority
  • The requisitioning department may act as a control to purchase department since each order placed may be traced to a requisition. Goods inwards should be received at designated area preferably the gate or entrance and receipt of all good recorded. The record should be then distributed to the accounting and purchasing departments.
  • Random invoice check
  • Institute system development control, organizational control and procedural controls with respect to computers

External auditing
Contrary to popular belief it’s not an auditor’s primary function to prevent fraud but to make an independent examination of the books, accounts, and vouchers of a business for purpose of reporting whether the balance sheet and profit and loss account
reflects a true and fair view of the firm affairs. But in doing so external auditing serves as deterrents for fraud. External auditing is necessary under the companies Act.

Give away signs

  1. Unfold invoices that have not come through post.
  2. Too many orders to one supplier other than those with single sourcing arrangements.
  3. Loss of supporting documentations
  4. Sudden unexplained affluence.
  5. Unwillingness of employees to take holiday or accept transfers or promotion to other work.

2.10 Purchasing and Information Technology (IT)

Information Technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numeric information a microelectronics-based combination of computing and telecommunications. The major components of I.T. are therefore
computers and telecommunications.

Information technology and its impact on daily operations

  1. There will be lower costs of shopping in links to suppliers
  2. IT equipment will make records and reports available from a single recording of information.
  3. Peak loads and end of month overtime with the minimized or eliminated
  4. Items needed repeatedly and in large amounts will be purchased with greater efficiency.
  5. Better management can be made because of the speed and accuracy with which information is available.
  6. It will relieve buyers and purchasing personnel of detailed work, permitting them to spend more time in activities requiring judgment.
  7. It will ensure prompt delivery of critical items on major capital projects.
  8. Exceptions requiring special handling will be handled well by the computer, reducing errors and delays.
  9. The computer will eliminate defensive records keeping on purchased items from which government contracts require proof that the buyer obtained adequate price quotations and paid prices consistent with the market.
  10. It will reduce the cost o f accomplishing necessary manual clerical work in purchasing and related activities.

Disadvantages of IT

  1. The procedure is inflexible and must be followed exactly while manual program permit deviations.
  2. Errors or omissions in putting information into the computer are more likely than when the information is manually posted.
  3. Since IT involves special equipment a company cannot use conventional equipment when the computer breaks down. Some major companies have contract with data processing centers or other companies for emergency processing of data, but the arrangements are not ideal.
  4. A good IT programmer or department head must be well informed about company procedure and problems. It is difficult to hire or replace such employees.

Decision process on whether to computerize
When carrying out investigation to find out whether to computerize the system, the following questions should be addressed:

  1. Will automation of purchasing and related activities lower the net cost of performing the function.
  2. Will it process all or most purchasing clerical function?
  3. Can it handle orders for complex as well as simple parts and materials and multiple items as well as single item orders?
  4. Will it handle rush orders as well as routine deliveries?
  5. Will it be easy to install and operate, or will the conversion process and maintenance be difficult.
  6. Will it be compatible with other IT operations of the company or division?
  7. Does the information provided by the system have value?
  8. Will the cost of obtaining information for management be commensurate with its usefulness, or could it be obtained in a more economical way.
  9. Is the information to be provided by the system already available from some existing secondary source?
  10. What personnel problems and needs will be generated by the conversion?
  11. Are many clerks involved in processing data at the moment (present?)
  12. What areas of application should be most rewarding? (This information will help establish a priority time –table or conversion schedule)
  13. What changes in organization, policies and practices must be made.
  14. Will purchasing be able to use the computer on a regular schedule
  15. What is the volume (percentage) of repetitive work (items ordered) as compared to non-repetitive work?
  16. Will the program provide management by exception, freeing executives from the need to work through voluminous reports and allowing them instead to attend to matters requiring immediate action?
  17. What are the intangible values that should result from timely information and reports to management goodwill from on-time deliveries or reports of order status, reduction in emergency orders as a result of grouping needs by product, family and improved trade relations by virtue of regularly monthly reports of specific commodity purchases by vendor?
  18. What equipment would provide the desired information at the lowest cost with proper consideration given to future needs?
  19. What cost and savings will result from the automation of purchasing and related activities?

Data Capture
Data capture refers to the collection of data for input into a computer. A wide variety of methods are available, including the following:

  1. Bar codes and light pens
  2. Concept Keyboards
  3. Digital cameras
  4. Electronic point of sale registers
  5. Graphic pads
  6. Laser scanners
  7. Magnetic ink character recognition
  8. Magnetic stripe cards
  9. Mark sensing and optical character recognition
  10. Questionnaires
  11. Scanners
  12.  Sensors
  13. Voice recognition.
    It is important to ensure that the data capture is accurate.

Bar codes
Invented in the 1950s, bar codes accelerate the flow of product and information throughout the business community. The bar code is read by a laser scanner and sent to the computer. The description of the item is stored in the computer and in the case of supermarkets, the information is instantly sent back to the checkout where it is printed on the receipt.

Bar code applications
Some production applications of bar coding are:

  1. Counting raw materials and finished goods inventories.
  2. Automatic sorting of cartons and bins and on conveyor belts.
  3. Lot tracking.
  4. Production reporting
  5. Automatic warehouse applications including receiving, put away, picking and shipping
  6. Identification of production bottlenecks
  7. Package tracking
  8.  Access control
  9. Tool cribs and spare parts issues

Benefits of bar coding

  1.  Faster data entry- bar code scanners can record data 5- 7 times as fast as skilled typists
  2. Greater accuracy- keyboard data entry creates an average of one error in 300 keystrokes. Bar code entry has an error rate of about 1 in 3 million.
  3. Reduces labour costs- through time saving and the increased productivity.
  4. Elimination of costly over-or-under stocking- and the increased efficiency of just-in-time inventory systems.
  5. Better decision making- Bar code systems can easily capture information that would be difficult to collect in other ways. This helps managers to make fully informed decisions.
  6. Faster access to information
  7.  The ability to automate warehousing
  8. Greater responsiveness to customers and suppliers

Electronic Point of Sale (EPOs)
The most important purpose of using an EPOs system is to scan and capture information relating to goods sold. An EPOs system verifies, checks an d changes transactions, provides instant sales reports, monitors and changes prices, send intra and inter stores messages and stores data. The most familiar example of EPOs is the recording of retail stores sales by scanning product bar codes at the check out tills. In the context of retailing, the benefits of EPOs to customers and sellers include:

  1. Reduced checkout times
  2. Provision of information to customers relating to products and prices
  3. Facilitation of payments by credit cards
  4. Reduction in labour costs by eliminating the need to mark products individually
  5. Electronic article surveillance (EAS) can assist in the detection and prevention of shoplifting.
  6. Smart shelves which read and transmit data through the internet to store manages and manufactures notifying them when stocks are low, managers are thereby relieved of checking inventory or placing orders since automatically generated purchase orders enable suppliers to produce and replenish goods sold.
  7. EPOS also has applications in production supply chain management including vendor managed inventory (VMI) and collaborating planning, forecasting and replenishment (CPFR).

Captured data is fed into the computer using such devices as a keyboard, mouse, voice or scanner. Care must be taken to avoid mistakes when inputting data.

Electronic Data Interchange (EDI)
It is the technique based on agreed standards, which facilitates business transactions in standardized electronic form in an automated manner directly from computer application in one organization to an application in another. Data elements and codes are described in a directory relating to the message standard used. By the use of EDI, national and international organizations can trade electronically.

The advantages of EDI

  1. The replacement of the paper documents e.g. purchase orders, acknowledgment, invoices etc used by buyers and sellers in commercial transactions, by standard electronic message conveyed between computers often without the need for human intervention.
  2.  Reduction in lead times through buyers and suppliers working together in a realtime environment.
  3. Reduction in costs of inventory and release of working capital.
  4. Promotion of such strategies as Just-In-Time approach of purchasing
  5. Better customer service
  6. Facilitation of global purchasing through international standards
  7. Facilitation of invoice payments by the computer-to-computer transfer of money (EFT) which eliminates the need for the preparation and posting of cheques.
  8. The integration of functions, particularly marketing, purchasing product and finance.
  9. EDI tends to promote long-term buyer-supplier relationships and increase mutual trust.

Factors to consider before adopting EDI

  1. Ensure that exchanging information electronically supports the overall organizational strategy.
  2. Consider the cost and ramifications of EDI standard tools and techniques including implementation, software maintenance, manpower and participant training and how to promote systems and applications integration.
  3. Consider the organizational and process changes involved.

An organization can comfortably use EDI in a purchasing environment where the following factors exist:

  1. There is a high volume of paperwork transaction documents
  2. There are numerous suppliers
  3. There is a long internal administration lead time associated with the purchasing cycle
  4. There is a desire for personnel reductions, new hire avoidance or both.
  5. There is a need to increase the professionalism of purchasing personnel.

Limitations of EDI

  1. It is an expensive system to install
  2. It is a cumbersome, static and inflexible method of transmitting data most suited to straightforward business transactions such as the placement of purchase orders for known requirements.