INSTITUTE OF SUPPLY AND MATERIALS

MANAGEMENT

MATERIALS MANAGEMENT AND THE

PURCHASING CYCLE
COURSE : GDPSCM- MODULE : 01

Tharanga Bandara
MBA in SCM(UOM), DPMM, MISMM(SL)
Mobile/WhatsApp: 0773654529/0774896570
INTRODUCTION

Materials Management Department should

ideally consist of the following three main
divisions.

a) Provisioning and Stock Control Department

b) Buying or Purchasing Department
c) Storehouse or Storage Depots.
THE PURCHASING CYCLE
The operations of a Purchasing Department involving a large number of suppliers and
varied range of items are both various and complex.
Basic procedures, which are more or less common purchasing operations called the
Purchasing Cycle. The cycle of operations are: -
a) Recognition of need.
b) Description of need.
c) Determination the quantity needed.
d) Raising requisition.
e) Selection of source.
f) Ascertaining price.
g) Placing Purchase order.
h) Ensuring that suppliers have received the order- receipt of “acknowledgement copy”
CONTINUING ……….

i) Follow up order
j) Receipt of advice of dispatch note
k) Checking goods on delivery against specification, quantity…etc
l) Certifying Invoice and Voucher
m) Payment
n) Maintenance of records and documents relating to each purchasing
transaction.
THE PURCHASING CYCLE
A) RECOGNITION OF NEED - BY A USER DEPARTMENT

This stage of the purchase cycle is dedicated to identifying the need to be met,
whether it’s a reorder, raw materials for a new product produced by the
company, or office supplies.

(a) Stock items - Obtain stock items from stores, which will eventually be
replenish through Purchasing Department.
(b) Non-Stock items - Send requisition to Purchasing Department for placement
of order.
(c) Fixed assets - Same as for. (b)
Estimation of Needs –
The Purchasing Officer in consultation with stores department
determines the needs and size of order to obtain better terms. It is also his
responsibility to develop alternative sources of supply and suitable
substitute.
 B) DESCRIPTION OF THE NEED - AND ESTABLISHMENT OF SPECIFICATION

▪For regular items of stock, standard specification would have been established.
▪Such items are classified, codified and shown in a printed catalogue or price list.
▪In the case of items not carried in stock, they should be accurately described, so
that the buyer and seller and all parties concerned know what is exactly required.
▪In order to prevent an item of wrong description being purchased, the purchaser
and user should consult each other and decide on the proper specification the
internal specification should be properly determined.
▪The external specification on which the order is placed can then be formulated so
that the supplier knows what the buyer requires.
▪The purchasing officer should posses sufficient knowledge of items required.
▪The characteristics properties and availability in the market and alternative
material which could be used as substitute must be identified.
▪Purchasing Officer acts as the buying agent for his organization. He should not at
any stage alter, unilaterally, the description furnished by the user.
C) DETERMINING THE QUANTITIES NEEDED

Consider the following:-

a. Past consumption.
b. Existing stock
c. Future needs - Forecast of requirements.
d. Likely lead period (the period that lapses between initiation of the demand
the time the item is received at the store)
e. Storage space available.
f. Shelf life items.
g. Earmark quantities for special projects. (Projects other than those for
regular needs)

A purchasing officer has the right to question the estimated or requisitioned

if in his opinion the consumption trends not appear to justify the quantities
demanded.
Where there are a large number of suppliers to select from the panel of
registered supplies.
On the case of the value of purchase being small and item is regularly
purchased, the Purchasing Officer choose one supplier from the list of
registered suppliers bearing in mind the price, ratability and the desire to
maintain good will amongst all suppliers.
In the case of Government Department purchases, competitive bids are
obtained from a panel of pre-selected suppliers or invite open tenders. After
evaluation of offers, an order is placed on the supplier who offers the most
advantageous terms to the Department.
D) PLACING OF REQUISITION

Methods of requisitioning supplies from the Purchase Department.

a. Purchase Requisition -
I. Accurate description of item required with part number catalogue number, etc.
II. Quantity required in appropriate
III. Date by which item is required
IV. Appropriate account to be changed
V. Signature of officer placing requisition, date and authorization where necessary
At least two copies of requisition are made. One copy for the purchasing department
and the other retained for follow up action.
b. Traveling Requisition –
A card for each stock item is filed in the stores Department. The description of the
item is entered only once in the heading of the card space is provided for several
subsequent requests to make purchases.
When stock has gone down to re-order level, the storekeeper enters the date and the
pre-determined quantity desired to replenish stock and sends card to purchasing
through Stock Control. When Purchase has been made, it is posted on the card,
which is returned to the stores Department.
c. Bill of Materials –
A list of materials or parts required to make the item concerned or to do the job is
made by production or engineering Department and the Purchasing Officer bases his
purchasing programme on list. Items available in stock are deleted by stock control
and action to purchase remainder on the basis of the production schedule is
submitted.
It is essential to submit all requisitions to be signed by an authorized officer to whom
authority is delegated to sign requisitions.
E) SELECTION OF SOURCE

After the need has been recognized, quantified and properly described by the user.
It is the function of the purchasing officer to select the source of supply by obtaining
a price quotation or pro-forma. When the requirement is for a branded or patented
product there may be only one supplier. Prior to purchase the requirement should be
screened and order placed only when the purchaser is satisfied after consulting the
requisitioner.
F) ASCERTAINING THE PRICE

For small value purchased and repetitive orders for standard stock items, price could
be obtained from catalogue or supplier's price list. Even in this case, check price
regularly to ensure prices are competitive.
The second method of obtaining the price is by negotiation with the supplier.
Negotiations for high value items requires the purchasing Officer to have a good
background knowledge of the item (price and cost analysis), supplier capabilities,
market conditions and price trends.
The third method of ascertaining the price is to obtain competitive bids or
competitive quotations either from pre-selected suppliers or by open invitation. /
tender process.
G) Placing Purchase order.
When the supplier has been selected and the price ascertained, a formal order is placed on the
supplier. This constitutes a legal contract. The order should contain the following
information:
• Correct name of supplier
• Correct description of item
• Quantity to be supplied
• Place at which delivery should be made
• Date of delivery
• Price
• Stipulate whether item should be ex- work site, F.O.B., C.E.R., C.I.F.
• Method of transport
• It is the policy of the Government to use Air Lanka and the Ceylon Shipping Corporation to
transport overseas freight, whenever possible.
Where tonnage is high, it may be cheaper to get it on a chartered vessel.
The Purchasing Officer must ensure that the supplier delivers at the right time and at the right
place.
FOLLOW-UP BY USER/STOREKEEPER

As soon as requisitioner user/ storekeeper receives his copy of the order from, he
should check it carefully to ensure that the following particulars are correct:-

a. Conformity to specification or requisition.

b. Conformity to quantity
c. Conformity to price.
d. Conformity to place of delivery.
e. Conformity to time of delivery.
If there are discrepancies, the Purchasing Officer should be informed immediately.
H) Ensuring that Supplier has received the order
Supplier should be asked to acknowledge receipt of the order. Such acceptance
should be duly noted on the office copy of order.
I) Follow -Up of order
The Purchasing Department should have a follow -up system with supplier .The
requisitioner too should keep in touch with the Purchasing Department.
J) Receipt of Advice of Dispatch Note
This is a note sent by the Supplier to the purchaser informing him that the goods
stated in the order have been dispatched to the destination stated in the purchase
order. Some times when goods are sent in supplier's transport, the note accompanies
the goods.
It is desirable that the purchaser receives the advice of Dispatch note at least 2
weeks before the goods are received.
The advice note when received should be sent ASAP to the stores/goods receiving
sector to ensure the following:
(a) To be informed of the date of receipt of goods (not necessary it is stipulated in the
purchase order)
(b) To be informed of quantities to be received.
(c) To arrange for space in the stores to accept.
(d) To prepare / arrange required mechanical handling equipment and / or manual labor
force to unload and store goods in the stores.

Advice of Dispatch Note contains the following information:-

(a) Purchase Order No.
(b) Date of Dispatch and date of arrival at purchaser's stores
(c) Description of goods.
(d) Quantities involved.
(e) Number of packages and sizes of packages.
(f) Mode of transport.
This note also advises the storekeeper to prepare space for his goods. And also arrange for
mechanical handling devises and/ or manual workforce to unload and store receipts.
K) CHECKING AND RECEIPT OF MATERIALS

This is mainly a function of storekeeping.

In most departments the goods received are weighed opened and checked,
documents compared, inspection carried out to ensure goods delivered are as per
specifications and are not damaged.
A clean receipt is then given to the supplier on his delivery note. If goods are not as
per order and specification or are damaged, then a clean receipt cannot be given to
the supplier.
The Goods Received Note (GRN)
The storekeeper then prepares the GRN for each delivery giving the following information. The number of GRN copies
prepared depends on the receipt procedure adopted in the organization. In small stores organizations minimum of two
copies are made.
(a) Date of receipt.
(b) Consignor
(c) Advice Note number
(d) Purchase Order No
(e) Description
(f) Quantity received undamaged
(g) Number and type of packages
(h) Method of transport
(i) Damage /Shortage report (If applicable)
(j) Any delivery in excess of quantity ordered
(k) Storekeeper's signature.
(When prepared in duplicate the original goes to support the payment voucher, and duplicate copy for storekeeper's file)
It is most important that the original copy of GRN is sent to the finance department, to make payment. This is to prevent
multiple payments being made by fraudulently using copies of the GRN.
L) Checking of Invoices and Certification of Vouchers for Payment.
Is this a purchasing or accounting function ?
(a) Checking is part of the purchasing transaction because receipt of the invoice is
the usual notification that the goods have been shipped or dispatched.
(b) It is the purchasing Officer's duty to ensure that his orders are accurately filled
and billed. It is his duty to inform the supplier to rectify the errors. If the Accounting
Department is handling this task, there could be a delay in informing the Purchasing
Department which will have to connect the supplier.
(c) As the Purchasing Department is familiar with the order, they can easily detect
discrepancies and quickly take corrective action before the invoice is paid.
(d) For the Accounting perspective it may be said that invoice checking is basically
an Accounting function, which can be efficiently handled by this Department.
(e) Another argument is that if this task is given to the Accounts Division, the
certification will be done with sufficient promptness to ensure eligibility for cash
discounts.
(f) The normal practice today is for the Purchasing Division to check invoices, certify
vouchers recommending payment and send them to the finance Division for
payment.
The following four steps are involved in a purchase transaction:

(a) Authorization
(b) Approval
(c) Certification of Voucher
(d) Payment
Steps (a), (b) and (c) are carried out by the Purchasing department and passed to the
Finance Department for payment. In the Purchasing Department the authorization
of a purchase and the certification of payment should be by independent officers.
Auditors stress this procedure as vital for the proper control and accountability of
expended funds.
As supplier are entitled to payment with out delay, G. R. N's should be quickly
processed and passed for payment preferably within 48 hours of supply being made.
GRN' s and invoice registers should be maintained and regularly checked by the
purchasing officers for delays.
M) Payment

This is the penultimate step in the

Purchasing Cycle. Payment is a function
of the Finance Division. It is however
the duty of the Purchasing officer to
ensure certified invoices and Vouchers
are passed to the Accountant promptly.
Suppliers are reluctant to deal with
customers who are habitually late in
payment. In a sellers market where
bank interests are high and cash flow is
limited, the supplier may quote at a
considerably higher price to cover the
risk of delayed payment.
N) Maintenance of Records of Purchase

This is the final and vital step in the Purchase Cycle. Records relative to every
Purchase transactions are maintained to :-
(a) Serve as a historical record of expenses incurred by the organization in respect of
material/goods consumed during the budget period.

(b) Enable the Purchasing Department make a time series analysis to ascertain
prices that must be made for same or similar products in future Purchase
transaction.