BPS 311 – PROCUREMENT AND SUPPLY CHAIN NOTES

Introduction

Purchasing describes the process of buying: learning of need, locating and selecting
suppliers negotiating prices and other pertinent terms, and follow up to ensure delivery. It
entails the following activities:
i) Purchase needs identification through liaison with user departments.
ii) Identification of potential suppliers and negotiation.
iii) Selection of suppliers.
iv) Market research for important materials.
v) Analysis of proposals.
vi) Issuance of purchase orders.
vii) Maintenance of purchasing records.
Purchasing is a process of obtaining materials, works and services of the right quality, in
the right quantity, from the right source, delivered at the right time, to the right place and at
the right price (from objectives point of view)

Procurement is a broader term (wider) and includes purchasing stock, receiving incoming
goods, inspection and salvage. Procurements process or concept encompasses a wider range
of supply activities than those included in the purchasing functions. It includes the
traditional role, with more buyer participation in related material activities. These activities
include;
i) Description of requirements
ii) Materials research and value analysis activities.
iii) Extensive market research.
iv) Conduct of all purchasing functions.
v) Suppliers quality management
vi) Management of investments recovery activities (salvage of surplus and scrap)

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Essentially therefore procurement tends to be broader and more proactive, focusing on
strategic matters, rather than mere implementation of purchasing concept.

Supply management is a system management concept employed by some organizations

designed to optimize the factors of materials costs, quality and services. It is a process
responsible for the development and management of a firm’s material management of a
firm total supply system.
It is the physical handling of stock awaiting issue or transport to the end user. Managers
should ensure that costs such as holding costs and ordering cost are kept at minimum
It includes and expands the activities of the purchasing function and the procurement
process. The other activities in supply management are:
i) Early Purchasing Involvement (EPI) and Early Supplier Involvement (ESI) in
product design and subsequent specification development for crucial items.
ii) Heavy use of cross–functional teams in supplier qualification and selection.
iii) Purchasing partnering and strategic alliances with supplies.
vi) Continuous monitoring and improvement in the supply chain.
vii) Participation in strategic planning process.

Materials Management – It is the planning, organizing and control of all aspects of

inventory embracing procurement, warehousing, Work In Progress and distribution of
finished goods.
Materials management includes the following activities:
i) Purchasing and supply management activities.
ii) Inventory management
iii) Receiving activities
iv) Stores and warehousing
v) In-plant material movement
vi) Production planning, scheduling and control

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vii) Scrap and surplus disposal.

Supply chain

A supply chain is a network of retailers, distributors, transporters, storage facilities,

and suppliers that participate in the production, delivery, and sale of a product to the
consumer. The supply chain is typically made up of multiple companies who
coordinate activities to set themselves apart from the competition.

A supply chain has three key parts:

Supply focuses on the raw materials supplied to manufacturing, including how,

when, and from what location.

Manufacturing focuses on converting these raw materials into finished products.

Distribution focuses on ensuring these products reach the consumers through an

organized network of distributors, warehouses, and retailers. While often applied to
manufacturing and consumer products, a supply chain can also be used to show how
several processes supply to one another. The supply chain definition in this sense
can apply to Internet technology, finance, and many other industries.

Supply chain strategy

A supply chain strategy defines how the supply chain should operate in order to
compete in the market. The strategy evaluates the benefits and costs relating to the
operation. While a business strategy focuses on the overall direction a company
wishes to pursue, supply chain strategy focuses on the actual operations of the
organization and the supply chain that will be used to meet a specific goal.

Supply chain management It is a network of organisation that are involved through

upstream and downstream linkages in the different process and activities that produce value
in the form of products and service in the hands of ultimate customers.

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Scope/perspective of Purchasing
Purchasing may be viewed as;
1. Purchasing as a function – A function in management can be defined as a unit or
department in which people use specialized skills, knowledge and resources to
perform specified tasks. Production function is to produce products whereas
purchasing function is to procure supplies.
2. Purchasing as a Process – a process is a set of sub process or stages directed to
achieving an output. Purchasing can therefore be depicted as a sequential chain of
events leading to the acquisition of supplies. At every stage in the process the parties
involved have three major questions to answer i.e
a. a) What are we required to purchase? (Need identification)
b. b) Where are we purchasing (sources)
c. c) How are we purchasing them? (method of procurement)
3. Purchasing as a supply or value chain – purchasing acts as a link with other
functions/departments such as production, warehousing, transportation and design.
The link is performed by ensuring that there is value addition at every stage of the
product service movement until it is handed to the end user.
4. Purchasing as a discipline – a discipline is a department of knowledge. Purchasing is
associated with other fields such as economics and law and draws heavily on other
subjects to build its knowledge base. Such subjects include accounting, economics,
ethics, information technology, marketing and management.

Objectives of purchasing
Broad focus/objective is to purchase or obtain materials in the right quantity, in the
right quality, at the right price, at the right time, and from the right supplier and
delivering to the right place. Specifically, its objectives are:
1. To supply the organization with the flow of materials and service to meet its needs
2. To ensure continuity of supply by maintaining effective relationship with existing
sources and by developing other sources of supply
3. To buy efficiently and wisely obtaining by an ethical means the best value for every
shilling spent
4. To maintain cordial relationship with other departments for the overall benefit of the
organization
5. To develop staff, policies, procedures and organization to ensure the achievement of
the set objectives
6. To select the best supplier in the market

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 7. To help add value to the development of new products

The Evolution of Purchasing

Purchasing can be traced as far back as 2800 BC in cuneiform clay tablets purchasing
orders. During the past two centuries has purchasing been addressed in trade books and text
books. In 1832 Charles Babbage addressed purchasing in his book “On the Economy,
Machinery and Manufacturing” The first book devoted specifically to purchasing, “The
Handling of Railway Supplies: The Purchase and Disposition” published in 1887 was
authored by Marshall M. Kirkman. The first college textbook on purchasing was authorized
by Howard T. Lewis of Harvard University in 1933.

Although interest of purchasing and supply function has been a phenomenon in the 20th, it
was recognized as independent and important function well before 1900. Growth of interest
and attention to purchasing was rather uneven in the early 1900’s but by 1915, several books
on purchasing had appeared and several articles had been published in trade press primarily
in the engineering journals.
Yet prior to World War I (1914-1918) most firms regarded the purchase function primarily
as a clerical activity. However during the world war, the ability to obtain raw materials
supplies and services needed to keep the factories and mines operating were thedeterminates
of organizational success. Attention was given to the organization policies and procedures
for purchase functions, and so it emerged as a recognized management activity.
Historically since management interest has focused on research and development,
marketing, finance and operations, purchasing has frequently been subordinated to these
functions.
It is with such insights that purchasing has evolved and evolves through the following four
stages.
i) Passive stage- Purchasing function has no strategic direction and primarily reacts to the
requests of other functions,
This stage is characterized by:
a) High proportion and individual communications due to purchasing low visibility
b) Supplier selections based on price and availability.

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ii) Independent stage- Purchasing functions adopted the latest purchasing techniques and
processes, but its strategic direction is independent of the firms competitive strategies.
In this stage;
a) Performance is based primary on cost reduction and efficiency measures.
b) Coordination links are established between purchasing and technical discipline.
c) Top management recognizes the importance of professional development.
d) Top management recognizes the opportunities in purchasing for contribution to
profitability
iii) Supportive- Purchasing function support the firm’s competitive strategy by adoption
purchasing techniques and products which strengthens the firm’s competitive position
In this stage;
a) Purchase is included in sales proposal teams.
b) Suppliers are considered a resource with emphases on experience motivation and attitude.
c) Market product and suppliers are continuously monitored and analyzed.
iv) Integrative stage- Purchasing strategy is fully integrated into the firm’s competitive
strategy and constitutes part of an integrated effort among peers to formulate and implement
a strategic plan. In this stage;
a) Cross-functional training of purchasing professionals executive is made available
b) Permanent lines of communication are established among other functional areas.
c) Professional development focuses on strategic elements of the competitive strategy

The Relationship between Purchasing Department and other Departments

a) Purchasing and Design/Engineering
i) Preparation of specifications for purchased material and components.
ii) Quality assurance or defect prevention
iii) Value analysis and Value engineering
iv) Information to design departments regarding availability of materials, suppliers and

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 costs.
v) Agreement of alternatives when specified materials are not available.
vi) Issues arising from the increasing importance of buying rather that making, i.e.
reduction of vertical integration.
vii) Importance of buying completer systems rather than individual components.
viii) Evaluation of cheaper alternate materials;
b) Purchasing and Production or “User” Departments
i) Preparation of material schedules to meet Just–In-Time (JIT) requirements.
ii) Ensuring that delivery schedules are maintained.
iii) Control of inventory to meet production requirements.
iv) Disposal of scrap and obsolete items
v) Quality control or defect detection and correction
vi) Make or buy decisions
vii) Suppliers development
c) Purchasing and Marketing
i) Provision of sales forecasts on which purchasing can base its forwarded planning of
materials and components.
ii) Ensuring that, by efficient buying, purchasing contributes to the maintenance of
competitive prices.
iii) Obtaining materials on time to ensure that marketing and production meets the
promised delivery dates.
iv) Exchange of information regarding customers and suppliers.
d) Purchasing and Finance
i) Provision of accurate forecasts of purchase schedules since they have an impact on
working capital and cash flow positions of the firm.
ii) Evaluation of potential income from unexpected buying opportunities against the
potential income from other alternative uses of the firm’s capital.

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 iii) Co-ordination to arrive are at the right time to buy for the firm (purchasing
department’s right time may not be the finance department’s right time)
iv) Aco-operative relationship between purchasing and finance clearly impacts on the
development of good supplier relationship e.g. through prompt payments.
e) 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
i) There will be lower costs of shopping in links to suppliers
ii) IT equipment will make records and reports available from a single recording of
information.
iii) Peak loads and end of month overtime with the minimized or eliminated
iv) Items needed repeatedly and in large amounts will be purchased with greater efficiency.
v) Better management can be made because of the speed and accuracy with which
information is available.
vi) It will relieve buyers and purchasing personnel of detailed work, permitting them to
spend more time in activities requiring judgment.
vii) It will ensure prompt delivery of critical items on major capital projects.
viii) Exceptions requiring special handling will be handled well by the computer, reducing
errors and delays.
ix) 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.
x) It will reduce the cost o f accomplishing necessary manual clerical work in purchasing
and related activities.
Disadvantages of Information Technology
i) The procedure is inflexible and must be followed exactly while manual program permit
deviations.
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ii) Errors or omissions in putting information into the computer are more likely than when
the information is manually posted.
iii) 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.
iv) 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:
i) Will automation of purchasing and related activities lower the net cost of performing the
function.
ii) Will it process all or most purchasing clerical function?
iii) Can it handle orders for complex as well as simple parts and materials and multiple
items as well as single item orders?
iv) Will it handle rush orders as well as routine deliveries?
v) Will it be easy to install and operate, or will the conversion process and maintenance be
difficult.
vi) Will it be compatible with other IT operations of the company or division?
vii) Does the information provided by the system have value?
viii) Will the cost of obtaining information for management be commensurate with its
usefulness, or could it be obtained in a more economical way.
ix) Is the information to be provided by the system already available from some existing
secondary source?
x) What personnel problems and needs will be generated by the conversion?
xi) Are many clerks involved in processing data at the moment (present?)
xii) What areas of application should be most rewarding? (This information will help
establish a priority time –table or conversion schedule)

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xiii) What changes in organization, policies and practices must be made.
xiv) Will purchasing be able to use the computer on a regular schedule
xv) What is the volume (percentage) of repetitive work (items ordered) as compared to non-
repetitive work?
xvi) 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?
xvii) 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?
xviii) What equipment would provide the desired information at the lowest cost with proper
consideration given to future needs?
xix) 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:
i) Bar codes and light pens
ii) Concept Keyboards
iii) Digital cameras
iv) Electronic point of sale registers
v) Graphic pads
vi) Laser scanners
vii) Magnetic ink character recognition
viii) Magnetic stripe cards
ix) Mark sensing and optical character recognition

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x) Questionnaires
xi) Scanners
xii) Sensors
xiii) 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:
i) Counting raw materials and finished goods inventories.
ii) Automatic sorting of cartons and bins and on conveyor belts.
iii) Lot tracking.
iv) Production reporting
v) Automatic warehouse applications including receiving, put away, picking and shipping
vi) Identification of production bottlenecks
vii) Package tracking
viii) Access control
ix) Tool cribs and spare parts issues

Benefits of bar coding

i) Faster data entry- bar code scanners can record data 5- 7 times as fast as skilled typists
ii) 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.
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iii) Reduces labour costs- through time saving and the increased productivity.
iv) Elimination of costly over-or-under stocking- and the increased efficiency of just-in-
time inventory systems.
v) 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.
vi) Faster access to information
vii) The ability to automate warehousing
viii) 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 and 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:
i) Reduced checkout times
ii) Provision of information to customers relating to products and prices
iii) Facilitation of payments by credit cards
iv) Reduction in labour costs by eliminating the need to mark products individually
v) Electronic article surveillance (EAS) can assist in the detection and prevention of
shoplifting.
vi) 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.
vii) 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
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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
i) 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.
ii) Reduction in lead times through buyers and suppliers working together in a real-time
environment.
iii) Reduction in costs of inventory and release of working capital.
iv) Promotion of such strategies as Just-In-Time approach of purchasing
v) Better customer service
vi) Facilitation of global purchasing through international standards
vii) Facilitation of invoice payments by the computer-to-computer transfer of money (EFT)
which eliminates the need for the preparation and posting of cheques.
viii) The integration of functions, particularly marketing, purchasing product and finance.
ix) EDI tends to promote long-term buyer-supplier relationships and increase mutual trust.

Factors to consider before adopting EDI

i) Ensure that exchanging information electronically supports the overall organizational
strategy.
ii) 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.
iii) Consider the organizational and process changes involved.

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An organization can comfortably use EDI in a purchasing environment where the following
factors exist:
i) There is a high volume of paperwork transaction documents
ii) There are numerous suppliers
iii) There is a long internal administration lead time associated with the purchasing cycle
iv) There is a desire for personnel reductions, new hire avoidance or both.
v) There is a need to increase the professionalism of purchasing personnel.
Limitations of EDI
i) It is an expensive system to install
ii) 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.

Documentation in Purchasing
Purchasing records are concerned with the storage of information with manual
system. This information will be entered on card indexes or filed on appropriate
system. Computerization using master files or databases ensures the efficient
retrieval of data.
Purchasing records include:
 Supplier index giving details of addresses, telephone, staff and items supplied
 Supplies rating giving details of supplier performance relating to price quality,
delivery, etc
 Supplier visits giving details of visits paid to the supplier to inspect their
facilities
 Records of items purchased giving details of standard description of bought
out items and particulars of suppliers and order placed
 Price trends of sensitive commodities i.e graph of the trend of the prices
 Records of materials issued to sub-contactor
 Contract records
 Order register providing a record of all orders placed each day

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Advantages of purchasing records
 It facilitates reference to orders placed and filed
 It provides information regarding the number of orders placed during a given
period
 It facilitates checking actual against budgeted purchasing expenditure
 It indicates the amount of any item at any time without it being necessary for
the stock to be counted physically
 It supplies information for stock taking
 It serves the purpose of a price list
Records need to be kept for no longer than the expiry period of the contact. For
substantial contract it is prudent to retain evidence for a minimum of six years
A purchasing document is an instrument used by the purchasing department to
procure materials and service. It includes the following:
1. Purchase order
It is a document sent to the supplier by the buyer ordering for the goods. One copy
is retained by the purchasing department, another copy is sent to the accounts for
verification and payment, the last copy is send to the receiving department (stores)
to await delivery of goods
2. Quotation Enquiry
It is a document used by the purchasing department to communicate with external
potential vendors or suppliers prices and condition and can be used for vendor
selection
3. Consignment Note
This is a document sent by the supplier (consignor) when goods are delivered by an
independent transporter. It contains the following information:
 Carrier name and address
 Description of goods
 Quantity of goods
 Weight of goods/cargo
 Transporter information i.e vehicle registration number
4. Goods received note
This document is prepared by the receiving officer after receiving goods for quality
and quantity satisfaction. The purpose of goods received note is to:

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  Confirm the arrival of goods
 Identify any loss or damages
 Update the records
5. Advice note
This is sent by the supplier to advice the buyer that the goods or materials are on the
way. The purpose is to enable the buyer to pay for them on arrival. It also gives
instructions on what to do if goods get lost on transit. It contains the following:
 Quantity sent
 Mode of transport
 Invoice
 Local purchase order numbers
Advice note is usually signed after the goods are received and one copy is sent back
to the supplier.
6. Standard purchase requisition
It is an internal document comparable to the purchase order which is an external
document. It is serially numbered and produced in duplicate. The user department
retains one copy while the other is sent to the purchasing department. It contains the
following information:
 Description of the materials
 Quantity and date required
 Estimated unit cost
 Operating account to be charged
 Date and authorized signature
7. Damage/ Shortage report note
The store keeper raises a serially numbered damage/shortage report form;
 If goods delivered are damaged
 If goods received show a shortage in comparison with the suppliers advice
note or the package note
 If goods have not arrived within the allowed time
8. Supplier packaging note
This is a list of contents of the package and it is attached to the package of the
consignment
9. Letter of Enquiry

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It is a letter from purchase department to various suppliers after receiving the
purchase requisition to find out the prices and quality of goods which can be supplied
by different suppliers.
10. Contract
A contact is a type of outline purchase agreement or long term buying arrangement
against which a number of orders can be issued for agreed materials and service as
when it is required during a certain overall time frame. It is a binding commitment
between purchasing and vendor or external supplier to procure a certain materials or
services over a certain period of time
11. Delivery note
It is prepared by the receiving officer after receiving goods. It is used to:
 Confirm arrival of goods
 Identify any damages
 Update the record

Purchasing Liaison
Factors Considered When Establishing Purchasing Liaison
A liaison is a communication or co-operation between people or organisation
i) Expert knowledge required by the department concerned.
ii) Departmental objectives of all the departments
iii) Responsibility held to every department and how they contribute to the effectiveness
within the purchasing function.
iv) Material requirements of various departments.
v) The channel of communication –free flow of information

Limitations to development of purchasing liaison

i) Department conflict due to differences in objects.
ii) Time is wasted due to slow decision making.
iii) Any failure in one department could lead to failure in other department.

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Focuses in Purchasing and Supply
Historically purchasing focused on internal processes and tactics. In recent years however
there has been progression from these focuses to;
a) Value Adding Benefits
Today many world–class organizations expect their purchasing and supply management
function to focus on the following value-adding outputs of proactive purchasing.
i) Quality- purchased materials and services should be virtually defect-free.
ii) Cost- strategic cost management through reduction total cost of acquiring, moving,
holding, converting and supporting products containing purchased materials and services
through out the supply chain.
iii) Time- the time required to bring a new product to the market can be reduced by 20-40%
through the establishment of a world-class strategic supply management system.
iv) Technology- ensuring the supply base of the firm provides appropriate technology in a
timely manner and ensuring that the technology which affects the firm’s core competences
is carefully controlled when dealing with outside supplier.
v) Continuity of supply- monitoring supply trends, developing appropriate supplier
alliances and taking such other actions as required in reducing the risk of supply disruptions.
b) Strategic focus
i) Integration- the firm’s strategy must be integrated with the firms marketing, conversion
and finance strategies and that of the corporation.
ii) Business environment- purchasing must address the identifications of threat and
opportunities in the supply environment.
iii) Technology- technology is often used as a strategic tool. Its control is therefore critical
in order to insulate it from access from competitors.
iv) Component and commodity strategies- development of formalized market driven supply
plans for critical purchased materials and services.
v) Management Information System- ensuring a cost effective, timely and comprehensive
information system to provide data necessary to make optimal supply decisions
vi) Supply base strategy- the supply base that the firm belongs to must be carefully
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developed and managed to ensure that the firm belongs to a successful value chain in an
increasingly competitive market place.
vii) Centralization of development and management- while low-value adding activities are
decentralized the development and management of the firms supply strategy is centralized.
viii) Use of senior procurement professional- the key supply relationships or alliance is
assigned to senior procurement professional.

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