CHAPTER 3

PURCHASING/PROCUREMENT MANAGEMENT

3.1. Meaning and Role of Purchasing

All organization, big or small, business or non business, depend to a varying degree on
materials and services acquired through a group of activities known as procurement.
Goods and services may be acquired through purchasing, that involves exchange
transaction, or other means of procurement, such as, gift, aid, etc. Procurement thus
includes purchasing and other means of acquiring that do not require exchange
transaction however, our detailed discussions are directed towards purchasing which
involve the acquisition of materials and services in exchange for money.
Purchasing is a management function that consists of all the decisions, policies, and
activities involved in the acquisition of goods and services in exchange for money. With
the growing complexity of modern industrial organization for mass-production, mass-
distribution and mass consumption the function of purchasing has also grown into
complexity with the recognition of the fact that industries depend to a great extension a
steady flow of materials supplied by others, and the cost of purchasing is a major
component of the cost of the final product.
Purchasing can be carried out for resale or for consumption or conversion. Buyers who
acquire materials for resale are known as merchants. Purchasing managers who buy
materials for internal operation or conversion are called industrial buyers. Industrial
buying is more complicated than buying for resale because industrial buying requires the
involvement of many People in the organization. Industrial buyers participate in
determining what products their organization should make, what manufacture, and what
components or parts should be purchased from outside suppliers. They correlate their
purchasing actions with sales forecasts and production schedules they select suppliers
from whom purchases can be made on continuing and mutually profitable basis and most
important, they integrate the efforts of their departments with those of other departments
of the firm including finance, production, marketing, engineering and so on.

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It should be noted that institutional buyers (College, School Hospital, etc.) and
government buyers (City, Country, states, Regional administration etc.) are included in
the definition of industrial buyers. It should also clearly understand that purchasing is a
supportive function to production and other user departments and is only a means to a
given end, and not an end in itself.
The Place of Purchasing in Business
Purchasing is one of the basic functions common to all business. All businesses
operate by coordinating and integrating these six main functions.
1. Creation The idea or design function
2. Finance The capital acquisition and financial record function.
3. Personnel The human resources and labor relations function
4. Purchasing Acquisition of required equipment, materials, and services.
5. Conversion The transformation of materials in economic goods.
6. Distribution The marketing and selling of goods produced.
Depending on company’s size these basic functions may be supervised by a single
manager or by individual managers for each function regardless of how they are put in
the organization structure and supervised, the purchasing function must be still
performed.
By its very nature, purchasing is a basic and integral part of business management. For
business to successful, all its individual parts must be successful. It is impossible for any
organization to achieve its full potential without a successful purchasing effort. However,
it should be clearly understood that not all purchasing departments are of equal
importance to their respective organizations. Their importance varies widely depending
on various factors such as the type of business, its goals its economic circumstances, and
how the enterprise operates to achieve these goals.
3.2. The Objectives of Purchasing
The objective of purchasing can be viewed from three perspectives: from very general
managerial level, from more specific functional/operational level and from a detailed
strategic buying level.

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1) From very general managerial level: when management expects to achieve the
general objectives by using six right of purchasing. Such as the right quality, the right
quantity, the right price, the right time, the right service, and the right supplier (place).
The standard statement of the overall objectives of the purchasing function is obtaining
the right materials (meeting quality requirements) in the right quantity, for delivery at the
right time and right place from the right source (a vendor who is reliable and will meet its
commitments in a timely fashion) with the right service (both before and after sale) and at
the right price.
It is not efficient to buy at lower price, if the goods delivered are unsatisfactory from the
viewpoint of quality/performance, or if they are too late behind the production schedule,
causing a shutdown of a production line on the other hand, the right price may be a much
higher than normal price if the item in question is an emergency requirement on which
the buyer can not afford the luxury of adhering to the normal lead time. The purchasing
decision-maker thus deals with these conflicting objectives and should attempt to obtain
the optimum mix of the seven rights.
2) From more specific functional/operational level:
More specifically the overall objectives of purchasing will be described as follows:
1.To support company operations by providing with an uninterrupted flow of materials
supply and services: Stock outs of raw materials and production parts would shut down
an 0peration and be extremely costly in terms of lost production and inability to satisfy
delivery promises to customers
2.To buy competitively and wisely: To buy competitively involves keeping abreast of the
forces of supply and demand that regulate prices and availability of materials, to buy
wisely involves a constant search for better values that yield the best combination of
price, quality and service. For example a buyer who pays more for a product than a
competitor is not buying competitively. A buyer who purchases silver when copper could
perform the function just as well is not buying wisely.
3. To keep inventory investment and losses (due to deterioration, obsolescence,
pilferage) at a practical minimum: keeping too much inventory may assure an
uninterrupted material flow. But inventory assets require use of capital, which cannot be
invested elsewhere resulting in capital tie up.

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4.To find or develop reliable and competent alternative sources of supply: The success
of purchasing department greatly depends on its capacity to locate or develop vendors,
analyze vender capabilities and select the appropriate supplier who is responsible for the
uninterrupted provision of materials at a reasonably minimum cost.
5.To develop and foster good vendor relations: Good supplier relations are invaluable
because they are the chief sources of information for a firm and suppliers naturally direct
their research, give advance information on new products and prices, and give better
service to their permanent customers.
6. Maintain the organizations competitive position: An organization will be competitive
if only it can control costs in order to protect profit margins. Purchase costs are the
largest single element in the operation of a firm. The purchasing function is responsible
for assuring the smooth flow of materials necessary to enable the production of goods and
services and provision of services as required, meeting delivering commitments to the
suppliers on which the success of any organization depends.
7. To achieve maximum integration with the other departments of the firm: This
requires understanding the needs of the other departments so that these needs can be
translated into support actions. The purchasing departments is required to support the
other departments in one or more of its responsibilities it should be integrated and
coordinated with the previously mentioned six functions of business so that the firm will
successful in its operations.
8. To develop policies and procedures which permit accomplishment of the preceding
seven objectives at the lowest reasonable operating cost;
3) From a detailed strategic buying level. It is usually annual objectives plans and
focused on major categories of materials that the firms use in its operations. The
objectives are generated from functional/operational level objectives. It is precise set of
objectives for each material typically varies because of usage requirements, operating
conditions and marketing conditions.
3.3 Purchasing policy and procedure
Purchasing policies are general statement of undertakings which guide or channel
thinking and action in carrying out purchasing transactions and objectives in an optional
manner. Policies are developed to serve as general guidelines in making operating

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decision that channel action towards achievement of objectives. They are one of the
administrative tools of the executing unit and reflection of top management philosophy.
Auditors who check purchasing adherence to corporate policies can use them. The
following are major policy examples:
1. policy defining purchasing responsibility
 Centralization versus Decentralization
When a firm uses a decentralized purchasing policy, individual departments
production, engineering, marketing, finance, and personnel handle their own purchasing,
i.e. they decide on sources of supply, negotiate with vendors directly, or perform and
other major function of purchasing. The advantage of decentralization is that users know
their departmental needs better than anyone else. It may also be faster because
departments directly place orders.
Centralization of purchasing refers to the degree of delegation of purchasing authority
rather than to the location of buying personnel. The extent to which the efficiencies
functional specialization is realized when a firm creates a purchasing department depends
largely on the authority delegated to that department. Centralization exists when the
entire purchasing function is made the responsibility of a single department or person.
The advantages of centralized purchasing are so great in comparison with decentralized
purchasing that almost all large firms are centralized. When used properly, centralized
purchasing results in the following benefits:
1. Duplication of effort and haphazard purchasing practices are minimized by the central
coordination of firms' purchases.
2. Quantity discounts are made possible by combining the requirements of different
department for the same and similar materials. It also results in unified procurement
policy.
3. Transportation savings are realized by consolidation of orders and delivery schedules,
for shipments can be made in carload quantities.
4. Suppliers are able to offer better prices and better service because their expenses are
reduced. Duplication of selling effort is minimized.
5. Responsibility for the performance of purchasing function is fixed with a single
department head, thereby facilitating management control.

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6. More effective inventory control is possible because of company wide knowledge of
stock levels material usage, lead times and prices
7. It reduces record keeping and at the sometime record keeping is made significantly
more effective.
8. It enables lines department managers to devote full time and effort to their basic
responsibilities.
9. Centralized purchasing enables the development of specialization and expertise in
purchasing decisions and operations. A full time buyer who can devote undivided
attention to purchasing will rapidly develop expert knowledge of purchasing
techniques, sources of supply, available and new materials and manufacturing
processes, markets and prices. This development of expertise is the primary reason
why almost all firms have gone to centralization of the purchasing function.
2. Policies affecting external relation ship and image
Good supplier relations contribute to the formation of good public image. The business
organization may need to establish policies that promote relation ship with suppliers to
receive good treatment and service.
3. Policies on pricing and supply source
Competitive biding( the lowest qualified bidder will get the contract) and the use of
negotiation, the size of sourcing firms, local firms, international firms, distributors and
manufacturers selection criteria etc
4. policies on purchase orders and contracts
Identifies person authorized to sign purchase order and contracts, specifying the
dollar amount that a person is authorized to sign.
5. policies on internal relationship
Policies should define the scope and responsibility of the purchasing function.
These are related to line of authorities, channel or procedure, and department’s
relation ship.
6. policies on rush order
Rush orders are made under emergency situation. These orders should be received
only when the user departments have justifiable reason to make the request because
the rush orders cost more than if they were handled through the normal purchasing

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 system. Higher price may be paid and thorough investigation may not be made on
purchases. Rush orders result from poor planning by user department so that it should
be discouraged.
7. Policies on small orders
Small orders are permanent problems in most organizations. They are costly to the buyer
and the seller alike. The following methods can minimize small order problems:
a. Centralized store system: when the same supplies are ordered in small quantity
repeatedly, the solution is to order these items in large quantity and place them in a
centralized inventory for with drawl as needed. How ever carrying cost and inventory
investment cost should be considered.
b. Blanket order system: a blanket order system helps solve the problem for the
thousands of items a firm can’t carry inventory or can carry it. Base on the analysis of the
past purchase a buyer determines which materials should be handled in a blanket order.
After bidding or negotiation, a buyer selects a supplier for each items or family of items
and issue a blanket order to each supplier the order include the description of each item, a
unit price for each item, when possible and other customary contract provision. The
blanket order indicates the specific order quantities or only an estimated usage during the
period of coverage. It also states that all requirements to be delivered upon receipt of a
release form of the buyer or other authorized person. At the end of the period, the order
may be renewed or placed with another firm depending on the suppliers’ performance
record.
8. Policy concerning to ethical practice: in business, ethics is concerned with a set
of moral principles, values and norms
9. Policy related to time ( buying policies)
The followings are purchasing policy areas related to timing policies. Such as: hand to
mouth buying( stockless buying), market buying, open end/blanket buying, long-term
contract buying, hedging and speculative buying.
In general, policies should establish clearly the centralized or decentralized purchasing
needs: specify the purchasing function, responsibilities with respect to the development
of material specification, supplier selection and price determination. Policies should also

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provide guidance for departmental personnel in conducting activities that influence the
company’s relation ship with external individuals and external organizations.
3.4 Purchasing procedures
The acquisition process is closely tied to almost all other functions included in an
organization and also to the external environment, creating a need for complete
information systems. A purchasing department buys many different types of materials
and services and the procedures used in completing a total transaction normally vary
among the different types of purchases.
However, the general procedures followed in sound purchasing systems are outlined
below:
1. Recognition of the need
2. Description of the need
3. Flow of purchase requisition
4. Determination and analysis of possible sources of supply.
5. Preparation and placement of purchase order
6. Acknowledgement and follow-up of the order
7. Receipt and inspection of materials
8. Auditing the invoice and payment of the supplier
9. Maintenance of records
1. Recognition of need: The need for a purchase typically originates in one of a firm's
operating departments or in its inventory control section. The people responsible for a
particular activity should know what the individual requirements of the unit are-what,
how much and when it is needed. This may result in a material requisition on the stores
department.
The purchasing department is responsible of helping to anticipate the needs of user
departments. In addition, the purchasing department should inform user departments
about price trends, general market conditions, and any other major changes for all
standard purchased items.
2. Description of the desired need: No purchaser can be expected to buy without
knowing exactly what the user departments want. For this reason, it is essential to have
an accurate description of the need, the article, the commodity, or the service, which is

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required. At best an inaccurate description may result in some loss of time; at worst it
may have serious financial consequences and cause disruption of supply, hard feelings
internally, and loss of supplier respect and trust. Any questions regarding the accuracy of
the description and specification of the materials should be referred back to the
requisitioned and should not be settled unilaterally in the purchasing department.
Purchase requisition formats vary widely because each company designs its own format
to simplify its own particular communication problems. The essential information, which
every requisition should contain, however, includes the following:
- Date
- Serial number (identification)
- Originating department
- Budget account to be charged
- Description and quantity of the material
- Date the material required
- Any special shipping instructions
- Signature of authorized requisitioner
3. Flow of the purchase requisition: The user department generally makes a minimum
of two copies. The original is forwarded to the purchasing department and the duplicate is
retained in the requistioner's file. It is important for the purchasing department to
establish definitely who has the power to requisition or authorize. Under no
circumstances should the purchasing department accept requisition form anyone other
than those specifically authorized.
All requisitions should be checked carefully before any action is taken. The requested
quantity should be based on anticipated needs and should be compared to economical
purchasing quantities. The delivery date requested should allow for sufficient time to
secure quotations and samples, if necessary and to execute the purchase order and obtain
delivery. If insufficient time is allowed, or the date would involve additional expense, this
should be brought to the attention of the requisitioner immediately.
4. Determination and analysis of possible sources of supply: As soon as a need has
been established, described, and transferred to the purchasing department a buyer begins
the investigation of vendors to select a source of supply. Supplier selection constitutes an

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important part of the purchasing function, and involves the location of qualified vendors
and assessing the probability that a purchase agreement would result in on time delivery
of satisfactory product and needed services before and after the sale.
The purchase of a new or a high-value item may require a lengthy investigation of
potential suppliers. After selecting a preliminary group of potential sources, the buyer
may employ the techniques of competitive bidding or negotiation or both.
Competitive bidding is a discussed form of purchasing. It is one of the basic methods by
which price can be determined. It is more often used by government organizations. When
competitive bidding is used by private industry, requests for bids are traditionally sent to
three to eight vendors, depending on the money value of the purchase. But government
buyers generally are not able to restrict the number of bidders to only eight. Requests for
bids ask vendors to quote the price at which they will perform in accordance with the
terms and conditions of the order or contract, should they be the successful bidder.
Under competitive bidding, industrial buyers generally, but not always, give the order to
the lowest bidder. By law, government buyers are routinely required to give the order to
the lowest bidder, provided the lowest bidder is deemed qualified to perform the contract.
The proper use of competitive bidding, as the best method, is subject to the following
criteria, which enable competitive bidding to assure the buyer of obtaining the lowest
possible price.
The money value of the specific purchase is large enough to justify the expense, to both
buyer and seller that accompanies this method of pricing. In the case of Ethiopian
government organizations, the minimum Birr value to use competitive bidding was birr
250.
The specifications of the material or service to be purchased are explicitly clear to both
buyer and seller so that the seller knows the cost of producing the item or rendering the
service.
The market consists of an adequate number of sellers.
The sellers comprising the market are technically qualified and actively want the contract
and, therefore, are willing to price competitively to get it.

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The time available is sufficient for using this method of pricing. The time required for
preparing, mailing, opening and evaluating bids, and obtaining the best price should be
considered.
As discussed earlier in detail, after the quotations of the prospective suppliers are
analyzed, evaluation of bidders follows to select the best supplier. Accordingly, the bids
are reviewed in terms of prices, discounts, shipping and delivery times. The reliability of
the supplier, reciprocity, quality of work and other relevant factors are also considered in
rating and determining the best source of supply.
5. Preparation and placement of purchase order: Once a supplier has been selected,
the purchasing department issues a serially numbered purchase order. It should be
emphasized that in most cases the purchase order becomes a binding contract if it is
accepted by the supplier. For this reason, the purchasing department should take great
care in preparing and wording the order. The order should include all data required to
ensure a satisfactory contract, and it should be worded in a manner which leaves little
room for misinterpretation by either party. Quantity requirements, price, delivery
requirements, and quality specifications must be described accurately. Engineering
drawings, if necessary, must be incorporated clearly by reference. In the event sampling
inspection is to be used, sampling plans and conditions of acceptance should be stated on
the order. Similarly, any other important factor affecting the acceptability of the product
should be precisely stated.
In addition to those provisions, which are unique to each contract, most firms also include
as part of every contract a series of terms and conditions that are designed to govern the
relations between the buyer and the seller. These conditions are extremely important and
the question of what should and what should not be included is the subject to a good deal
of discussion. These terms are legal protections to the buyer concerning:
- Contract acceptance
- Delivery performance and contract termination
- Shipment rejections
- Assignment and subcontracting of the order
- patent rights and infringements
- Warranties

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 - Compliance with legal regulations
- invoicing and payment procedure
Most firms prepare their purchase orders on multipart snap-out forms. These multipart
forms provide enough copies of the order to satisfy both internal and external
communication needs.
The minimum number of copies most commonly used is five:
- Original copy is sent to the supplier
- Second copy informs the accounting department for use in checking
and issuing payment for the seller's invoice.
- Copy 3 advises the receiving department that can expect receipt of
shipment at a particular date. Receiving uses its copy to identify and
check the incoming shipment.
- Copy 4 informs the user department of the details of the order so it can
plan its work and budget accordingly.
- Copy 5 remains in the purchasing department open order file and is
often used for purposes of order follow-up and expediting.
6. Follow-up and expediting the order: When an order is a vendor, it can take one of
two forms: (1) Performance of the contract or (2) formal notification that he accepts the
offer. Sometimes firms may prepare one additional copy of the purchase order that is to
be sent to the supplier. The purpose of sending the supplier an acknowledgement copy is
two fold. First it is a form he can conveniently complete and return to the buyer,
acknowledging acceptance of the order. At the same time, he can indicate whether or not
he is able to meet the desired delivery date. If a supplier ships the ordered item
immediately from stock, he frequently disregards the acknowledgement form.
After a purchase order has been issued to a vendor, the responsibility of purchasing does
not terminate with making a satisfactory contract. Purchasing bears full responsibility of
order until the material is received, inspected and accepted. At the time the order is
placed, an appropriate follow-up date is often specified simultaneously. With the help of
the follow-up copy of the purchase order, the buyer tracks an order to assure that the
vendor will be able to meet delivery promises and other requirements of the purchase
order.

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In the systems, follow-up communication with the supplier usually takes two forms. A
letter, a telephone call, or a visit to the supplier plant is typically used for most critical
orders. Routine follow-up for the less critical orders is usually accomplished by mailing
an inquiry or postal card to the supplier.
7. Receipt and Inspection
The proper arrival, receipt, and inspection of materials are of vital importance. When a
supplier ships the materials as per order, he includes in the shipping container a pacing
list that itemizes and describes the contents of the shipment. The receiving clerk uses this
packing slip in conjunction with his copy of the purchase order to verify that the correct
material has been received.
After a shipment has been inspected for quantity and for other general conditions of the
contract, the receiving clerk prepares a receiving report using the purchase order along
with the packing list. Receiving report is usually accompanied by technical inspection.
Copies of the receiving are often prepared in four copies and their distribution is as
follows.
- Original copy used by accounting department in reviewing the order
for payment and settling the account
- Second copy is used by the purchasing department in closing out its
working file of the order
- Third copy is sent to inventory control section for stock control
purposes
- Fourth copy is retained in the receiving department's operating record
file.
8. Clearing the Invoices and Payment
Since the invoice constitutes a definite claim against the buyer, it needs to be handled
with great care. Procedures related to invoice clearance however, are not uniform. In
some firms checking and approval of the invoice is the function of purchasing. In others
it is the responsibility of accounting department. Whichever procedure is followed, the
invoice must be checked and audited.
A typical procedure involves a simultaneous review of the purchase order, the receiving
report, and the invoice. By checking the receiving report against the purchase order, the

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purchaser determines whether the quantity and type of material ordered was infact
received. Then by comparing the invoice with the purchase order and receiving report he
verifies that the supplier's bill is priced correctly and that it covers the proper quantity of
acceptable material.
The prime reason for having invoices checked in the purchasing department is that this is
where the original agreement was made. If discrepancies exist, immediate action can be
taken by purchasing. In cases where purchasing does the invoice checking the following
procedure applies: after being checked and adjusted for any necessary corrections, the
invoice is retained in the purchasing department until it receives notification form the
receiving department in the form of receiving report. Then it checks the report against the
invoice, and if the receiving report and invoice agree, the purchasing department keeps
both documents until it receives assurance form inspection that the goods are acceptable.
Finally, the purchasing department forwards the original receiving report from the
receiving department and the invoice to the accounting department to effect payment.
9. Maintenance of records
The next step is to close the order by completing the records of the purchasing
department. This operation involves little more than assembling and filing the purchasing
department's copies of the documents relating to the order and transferring to appropriate
records of the information the department may wish to keep. Most companies
differentiate between the various forms and records as to their importance. For example a
purchase order constitutes evidence of a contract with an outside party and as such may
well be retained much longer than the requisition, which is an internal memorandum.
3.5 Supplier Selection:
Sourcing: One of the responsibilities of purchasing is to establish and maintain a
satisfactory group of suppliers because it is impossible to run a high quality business
operation without satisfactory suppliers. Every industrial organization has two primary
sources of supply. It has either to invest capital to manufacture the materials required by
the firm or use the external supply source. This topic concerns itself with the second
alternative-external source.
Selecting capable suppliers is one of a purchasing manager’s most important
responsibilities. If the right supplier is selected, then competitive pricing, reliable quality,

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on time delivery, good technical service and other goals of purchasing are more likely to
be achieved. However, the buyer has worked to do that a good supplier must be assisted,
rewarded, and motivated. In addition, by making periodical evaluations, inefficient
suppliers should be eliminated and new efficient supplier should be developed.
Supplier Relations: A good or preferred supplier reacts to unforeseen needs’ such as
accelerated or decelerated volumes of business, changes in specifications, service
problems and any other legitimate requests the good suppliers takes the initiative in
suggesting better ways of developing products and services which will allow customers
to perform their operations more economically. The good supplier warns ahead of time at
material shortages, strikes and anything else that may affect the buyer’s operations. It will
remain competitive on a continuing basis. The art to a good purchasing department is,
therefore, to find and keep top suppliers over time.
Good sources of supply are one assurance of good quality production today and
progressive thinking and planning is a further assurance of improved quality tomorrow.
Good sources of supply, therefore, important company asset-like customer goodwill. A
company develops customer goodwill by selling acceptable products at a fair price
supported by good service with the customer’s interest in mind. It develops supplier
goodwill by being open, important and scrupulously fair in all of its dealings with its
suppliers. Sources of Information about suppliers: Knowledge of sources is a primary
qualification for any effective buyer. Although some buyers rely on memory and
experience for knowledge of sources of supply, competent buyers more correctly rely on
their records, published material and personal contacts. Source of information concerning
suppliers is plentiful. A relevant Source of supplier information a list of past and present
suppliers, which include:
 Name and address each supplier.
 List of materials (including specifications) he can supply.
 His/her delivery service.
 General information concerning his plant and management.
The following information sources should prove helpful to a buyer in establishing a
list of potential suppliers.
1. Supplier’s information purchasing file.

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 2. Supplier catalogs.
3. Trade registers and directors.
4. Trade journals.
5. Telephone directories (The yellow pages).
6. Filing of mailing pieces.
7. Sales personnel.
8. Trade from suppliers.
9. Visits from suppliers
10. Visits to suppliers
11. Advertisements.
3.6. Make or Buy decisions: it is not always correct to assume that making items in
house is more profitable than buying; even the organization has capacity to make. Due to
different reason buying from outside could be attractive than house production
The following considerations are which favor making materials:
1. cost considerations(less expensive to make the part)
2. desire top integrate plant operations
3. productive use of excess capacity to help absorb fixed overhead
4. need to exert direct control over production
5. design secrecy required
6. unreliable suppliers
7. desire to maintain a stable work force
The following considerations are which favor buying materials:
1. limited production facilities
2. cost of considerations( less expensive to buy the part)
3. small volume requirements
4. suppliers research and specialized know- how
5. desire to maintain a stable work force
6. indirect managerial control considerations
7. desire to maintain multiple policy
8. procurement and inventory consecrations

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3.7. Procurement and its procedures in Ethiopia
Methods of public procurement: there are seven Methods of public procurement that are
much related with each other. Such as: open tender, limited tender, two-stage bidding,
request for quotations, request for proposal, procure from one suppliers(single source
procurement) and direct procurement from the market.
NB: Assignment
Be in your respective group and take any government organization in your surrounding or
the university itself; identify the procurement methods and procedures used and make any
comment if you come up with by comparing against the standard purchasing procedures.

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