PURCHASING AND SUPPLY ASSIGNMENT 2

QUESTION 1

Briefly describe four steps involved in purchasing cycle:

1. Recognition of Need The first step in the purchasing cycle is the identification and recognition that the company is in need of a product. The need can come from an internal or external customer. The product can be one that has reached its reorder point or a new item that is not normally kept in inventory. 2. Specify Need To do the proper job for a company there is a lot of detail required to ensure the customer gets the right product, at the right time, in the right quality, and in the right quantity. There are several ways to effectively specify the item required. When an Industry Standard is available: Referencing standard items or services is a common method of determining specifications. A half-ton truck is a standard industry specified item that is the same across all manufacturers. Doing an oil change is a standard or industry specified service. A part number or service number is also a way to describe an item or service. When items or services have references, there is no need to specify quality, size, color, etc. and these attributes are already know to both parties. When no Industry Standard is available: If the product or service has been previously purchased the original purchase order or service contract can be used as a reference. This way the buyer, the seller and the end user are clearly identifying the same item or service and have the same expectations. If the product or service has not been previously purchased, the item or service must be specified from the very basics. Many products have specifications that are measurable size, shape, color, weight, etc., and may also have performance based specifications.

3. Determine Sourcing Options

When the purchaser is presented with a need and a specification, he/she must determine the most qualified source (supplier or vendor) to provide the material or service. Approved Supplier List In most instances, the purchasing department maintains a list of approved suppliers which would be qualified to supply materials or services. The qualified source lists is a good place to start as both organizations know what to expect from each other. When an approved supplier list is not available the purchaser needs to begin a search to find a supplier and then qualify them. Search An organization cannot provide its ultimate customers with better quality goods and services than it receives from its suppliers. If a supplier is late with a delivery or has quality problems the quality and availability of the product or service to the customer will be Qualifying affected unless the firm carries higher inventory. Purchasers must Each supplier goes through a qualifying process to make sure that it can perform as required with the right understand the needs of the customer in order to make the product, at the right time, in the right quality, in the right decisions to meet the right quantity, for the right cost. Qualifying suppliers organization's needs. includes verifying financial stability, product performance, references and reputation, past delivery performance and many other criteria. The buyer will search past and present purchase orders and contracts. The buyer will conduct research using trade journals, industry magazines, sales representatives, other purchasing professionals and many other sources.

4. Establish Price and Terms Prior to talking to any supplier, a buyer should know the nature of the market and the market value of the material or service. This type of information can be found in past purchasing records, industry magazines and other sources. The final price and terms established depend on the nature of the material or service. Commodities Those products or services, such as fixing an air conditioning system or doing renovations, that are readily available from any number of services are referred to as commodities and are selected on price or service. In these circumstances a request for quotation (RFQ) is sent to three or more sources. Terms and conditions are standard so the evaluation is calculated on price and availability. Regardless of the type of material or service, the buyer must choose the best method based on knowledge and experience and keep the interest of the Special Materials or Services When a special material or service is required, such as a computer program or forklift maintenance, the purchaser will negotiate with the supplier. The focus of the negotiation will focus on continued availability, performance standards, labour qualifications and expected performance results.

Once the buyer has determined reliable sources and established terms and conditions he/she will obtain quotes (usually 3), evaluate the quotes and decide on a supplier.

company in mind.

QUESTION 2

Clearly outline the steps used in purchasing with examples in your explanations:
1. Recognition of Need The first step in the purchasing cycle is the identification and recognition that the company is in need of a product. The need can come from an internal or external customer. The product can be one that has reached its reorder point or a new item that is not normally kept in inventory. 2. Specify Need To do the proper job for a company there is a lot of detail required to ensure the customer gets the right product, at the right time, in the right quality, and in the right quantity. There are several ways to effectively specify the item required. When an Industry Standard is available: Referencing standard items or services is a common method of determining specifications. A half-ton truck is a standard industry specified item that is the same across all manufacturers. Doing an oil change is a standard or industry specified service. A part number or service number is also a way to describe an item or service. When items or services have references, there is no need to specify quality, size, colour, etc. and these attributes are already know to both parties. When no Industry Standard is available: If the product or service has been previously purchased the original purchase order or service contract can be used as a reference. This way the buyer, the seller and the end user are clearly identifying the same item or service and have the same expectations. If the product or service has not been previously purchased, the item or service must be specified from the very basics. Many products have specifications that are measurable size, shape, colour, weight, etc., and may also have performance based specifications.

3. Determine Sourcing Options When the purchaser is presented with a need and a specification, he/she must determine the most qualified source (supplier or vendor) to provide the material or service.

Approved Supplier List In most instances, the purchasing department maintains a list of approved suppliers which would be qualified to supply materials or services. The qualified source lists is a good place to start as both organizations know what to expect from each other. When an approved supplier list is not available the purchaser needs to begin a search to find a supplier and then qualify them. Search An organization cannot provide its ultimate customers with better quality goods and services than it receives from its suppliers. If a supplier is late with a delivery or has quality problems the quality and availability of the product or service to the customer will be Qualifying affected unless the firm carries higher inventory. Purchasers must Each supplier goes through a qualifying process to make sure that it can perform as required with the right understand the needs of the customer in order to make the product, at the right time, in the right quality, in the right decisions to meet the right quantity, for the right cost. Qualifying suppliers organization's needs. includes verifying financial stability, product performance, references and reputation, past delivery performance and many other criteria. 4. Establish Price and Terms Prior to talking to any supplier, a buyer should know the nature of the market and the market value of the material or service. This type of information can be found in past purchasing records, industry magazines and other sources. The final price and terms established depend on the nature of the material or service. Commodities Those products or services, such as fixing an air conditioning system or doing renovations, that are readily available from any number of services are referred to as commodities and are selected on price or service. In these circumstances a request for quotation (RFQ) is sent to three or more sources. Terms and conditions are standard so the evaluation is calculated on price and availability. Regardless of the type of material or service, the buyer must choose the best method based on knowledge and experience and keep the interest of the company in mind. Special Materials or Services When a special material or service is required, such as a computer program or forklift maintenance, the purchaser will negotiate with the supplier. The focus of the negotiation will focus on continued availability, performance standards, labour qualifications and expected performance results. The buyer will search past and present purchase orders and contracts. The buyer will conduct research using trade journals, industry magazines, sales representatives, other purchasing professionals and many other sources.

Once the buyer has determined reliable sources and established terms and conditions he/she will obtain quotes (usually 3), evaluate the quotes and decide on a supplier.

5. Prepare Purchase Order or Contract A purchase order (PO) or contract is a legal instrument that documents the entire agreement between the buyer and the seller. If any dispute takes place, the PO or contract will be used to solve the dispute. A purchase order is used to purchase materials whereas a contract is typically used to purchase services. The purchase order or contract has to specifically define the agreed price, terms and conditions, and specification of the material or service and must be written to avoid any misunderstanding of expectations or obligations to perform by either party. 6. Delivery of Purchase Order or Contract The usual methods of delivery are by hand, mail, courier, electronically or by fax. If the delivery method is agreed to in the purchasing documents then they must be delivered accordingly, provided it is legal. Failure to do can result in the agreement being null and void. Purchasing documents usually specify a method of acknowledgment and acceptances. Contracts often require both parties to sign the original and each party retains a copy. A purchase order typically requires a written document stating receipt and acceptance of the terms and conditions. 7. Expediting Expediting is an activity to ensure that materials or services are being delivered or performed in the manner and timing agreed to. It also serves as a follow up on over-due deliveries or performance. Delivery, performance completion and payment dates are the most common items identified in the purchase order or contract, that require expediting. 8. Receive and Inspect Purchases In receiving, items are accepted or rejected based on the documentation. Once acceptance is made, the company is obligated to pay for what was received. When the purchase order or contract is specific, with a measurable means of inspecting the material or service, the receiver's work is more effective, efficient, and productive.

9. Invoice Approval and Payment Invoices (asking for payment) are approved based on a "three-way match" of the purchase order/contract, the receiving document and the invoice. The purchase document and the receiving document confirm that the company got what was ordered and confirm the quantity accepted. The invoice indicates what the supplier expects to receive in compensation. Before payment is issued any discrepancies must be identified and resolved. The form of payment is agreed upon during source determination and the preparation of the purchase

order or contract. Usual forms of payment are cash, cheque, bank transfer, electronic transfer or letter of credit (LOC).

10. Maintain records Detailed records must be maintained to satisfy government auditors and as a reference for the company. Government Auditors Purchasing records must be available to government auditors to review to ensure that the right amount of tax or levies have been paid. Company Reference The purchase order or contract describes warranties and the method the purchaser needs to follow to resolve any problems - i.e. something breaking down while under warranty. The purchasing records also provide references to making new purchases, especially when searching for reliable suppliers.