There are various ways of communicating material needs, namely
Travelling purchase Requisitions/Bar Code
Materials needs are also communicated through a travelling purchase requisition – a form consisting of a printed card or a bar code with information about whom the item is purchased from.
This method is used primarily for very small companies that have not automated their purchasing or inventory management process. Information on the card or the database entry associated with the bar code can include the following;
- Description of item
- List of approved suppliers
- Prices paid to suppliers
- Reorder points
- Record of usage
A travelling requisition can be helpful because it can conserve time when reordering routine materials and supplies. When stock levels reach a specific reorder point an employee notifies purchasing by forwarding the traveling requisition maintained with the inventory or by electronically scanning the bar code into the ordering system. The employee notes the current stock level and desired delivery date. To eliminate the need to research information, the travelling requisition includes information required for the item on the card (or in the data base) that otherwise would require research by a buyer. For example the travelling requisition can include a
list of approved suppliers, prices, a history of usage and ordering and lead time information. Historical ordering information is noted directly on the record over a period of time. As inventory systems are used less frequently. With an automated system, clerks simply enter the order requirement and the system generates a purchase requisition or automatically places an order.
Forecast and Customer Order
Customer orders can trigger a need for material requirements, particularly when changes to existing products require new components. Customer order can also signal the need to obtain existing materials. As companies increasingly customize products to meet the needs of individual customers, purchasing must be ready to support new material requirements. Market forecast can also signal the need for material. An increasing product forecast, for example, may signal the need for additional or new material. If a supplier is already selected to provide that material, then an automated ordering system such as material requirements planning (MRP) systems may forward the material request to suppliers automatically.
Reorder Point System
A reorder point system is a widely used way to identify purchase needs. Such a system uses information regarded order quantity and demand forecast unique to each item or part number maintained in inventory. Each item in a reorder point system, which is usually computerized, has a predetermined order point and order quantity. When inventory is depleted to a given level the system notifies the materials control department (or the buyer, in some organizations) to issue a request to a supplier for inventory replenishment. This signal might be a blinking light on a screen, a message sent to the materials control departments e-mail address, or a computer report. Most recorder point systems are automated using predetermined ordering parameters (such as an economic order quantity, which considers inventory holding and order.
Most reorder point systems are automated using predetermined ordering parameters (such as an economic order quantity, which consider inventory holding and ordering costs). Electronic systems (such as material requirements planning systems) can instantly calculate reorder point parameters. Most systems can also calculate the cost tradeoffs between inventory holding costs, ordering cost and forecast demand requirements. Reorder point systems are used for production and nonproduction items. An automated reorder point system efficiently identifies purchase requirements. This type of system can routinely provide visibility to current inventory levels and requirement of thousands of parts number. The reorder point system is the most common method for transmitting routine
material order requests today, particularly for companies that maintain spare part distribution centers.
Stock checks (or cycle counts) involve the physical checking of inventory to verify that system records (also called the record on hand, or ROH) match actual on hand inventory levels also called the physical on-hand (POH) levels. If the physical inventory for an item is below the system amount, an adjustment to that part record can trigger a reorder request for additional inventory. Why might physical inventory be less than what the computerized system indicates should be on hand? Placing material in an incorrect location, damage that is not properly recorded, theft and short shipments from the supplier that receiving did not notice all can contribute to the POH being less than the ROH for example, at one major hardware retailer, missing inventory on the shelf may be located in another area of the store, or may simply be missing because f a problem with the incorrect item being entered into the system.
Smaller firms that rely on standard, easy-to-obtain items often use stock checks to determine material ordering requirements. In this environment, the stock check consists of physically visiting a part location to determine if there is enough inventories to satisfy user requirements. No purchase reorder is necessary if there is enough inventories to satisfy user requirements. No purchase reorder is necessary if there are enough inventories to cover expected requirements.
Cross-functional New-Product Development Teams
When users contact purchasing with a specific need, we say that purchasing is operating in a reactive manner. When purchasing works directly with internal customers to anticipate future requirements, such as during new product development purchasing is being proactive. What does it mean to anticipate a requirement? If purchasing is part of new product development teams, then the opportunity exists to see product designs at early stages of the process. Purchasing can begin to identify potential suppliers for expected requirements rather than reacting to an engineering requirements at a later date anticipating requirements can contribute to faster products development cycle times and better supplier evaluation and selection. As firms continue to be forced to reduce the time required to develop new products cross-functional interactions will increasingly be the means through which organizations identify, and hopefully anticipate, materials requirements in the purchasing process cycle.
However the need is clarified, the point here is that a requisition document is completed by requisitioner. A requisitioner is someone who is authorized by purchasing to complete the needs clarification process. In some cases, the person who expresses the need can also be the requisitioner. This occurs in case where the supplier has already been qualified, and the individual who has the need can go to a supplier’s online catalogue, order the product or service directly and pay for the item using a company purchasing credit card. In such cases, the item is typically low cost, and it is not worth the expense and trouble completing an entire requisition.
Developing the Right Purchase Description
Within the requisitioning, it is important to include a description of what is to be sourced. Why? If the time is not spent to describe the product or service purchasing will have no idea of what to go out and purchase! How purchasing accomplishes this will defer dramatically from one situation to the next.
There are two main problems common in the area of purchase descriptions:
- Requiring activities frequently fail to consider the cost implications of alternative proaches to describing their requirements.
- Purchasing departments often fail to conduct systematic procurement research and analysis on alternate materials when appropriate.
The word requirement means “need,” not product or service type, which is a solution to a need. All purchasing starts with need determination, and this process eventually is translated into products or services, which then direct us to potential suppliers and the cost of the solution. Under appropriate circumstances, need determination may include carefully screened suppliers. Jumping to a product skips the essential first step of identifying alternatives and can result in automatic supplier selection, locked-in high costs, mistakes causing very expensive change orders, and users doing the buying-all potentially uneconomical actions. For example, if the need is to join two pieces of material together, we can weld, bolt, glue, screw, or use other methods to fasten, that is, the need is
to “fasten together” and the requirement determination process is which method, then which product, then which supplier. This kind of thinking also forces the investigation of new methods and helps prevent the continued use of obsolete products/procedures.
Classifying an Inventory Catalog
An inventory catalog should be coded according to several classifications, easily done today with computer data systems. A few classic classifications are:
1. Buying-Using Experience. Is the product/service a new buy, modified rebuy (same product type, slightly different need), or straight rebuy? This will determine the amount of effort needed to determine the requirement. Most of the straight rebuys are via systems contracts, electronic data interchange (EDI), and such; they should be “automated” with requirements changed as the need dictates.
2. Value-Volume Relationships. This is the familiar ABC inventory analysis, which usually starts with a finding that A items account for 80% of the dollars spent but represent just 20% of the physical volume, B items represent 15% of the dollars spent for 30% of the physical volume, and C items represent 5% of the dollars for 50% of the physical volume. This traditional analysis targets candidates for special study. Critical items that can shut the operation down also qualify as A items. Requirements for A items are obviously the top priority, for they are the real cost drivers.
3. Type of Product or Service. Capital goods, especially production machine tools, call for a vastly different requirement determination than most raw materials or maintenance, repair, and operating (MRO) supplies.
Coding your inventory catalog according to the above classifications have the following advantages:
- facilitate rapid computer
- printouts to give direction to purchasing research assignments.
- It helps the purchasing department focus activities to achieve the highest payoff.
- It also helps to explore the questions of simplification and standardization to avoid too many unnecessary requirements and/or slight variations adding little or nothing to value.
- Serving a medium of communication by enabling staff to tell which items are carried in the inventory, whether interchangeable items are carried in the inventory for missing items . etc
- Acting as an inventory control tool through reduction of duplicate records for identified parts.
The Importance of the Purchase Description
Once the buyer has known the need, he or she can now write the purchase description that forms the heart of any procurement.the process of describing purchase is known as specification. specification can be defined as a statement of needs. It defines what the purchaser wants to buy and, consequently, what the supplier is required to provide. Specifications can be simple or complex depending on the need.
The success of the purchasing activity relies on the specification being a true and accurate statement of the buyer’s requirements.
Apart from being a means of identifying the goods or services required, a specification will form part of any future contract that might result from offers received. The specification forms part of an “Invitation to Offer” document. Other elements in the invitation document include the “Conditions of Offer”, the “Conditions of Arrangement/Supply/Contract” and “Form of Offer” and response schedules.
Good specifications should:
• state the requirement clearly, concisely and logically in functional and performance terms unless specific technical requirements are needed;
• for goods, state what the item will be used for;
• contain enough information for offerors to decide and cost the goods or services they will offer and at what level of quality;
• permit offered goods or services to be evaluated against defined criteria by examination, trial, test or documentation;
• state the criteria for acceptance of goods or services by examination, trial, test or documentation;
• provide equal opportunity for all potential suppliers to offer goods or services which satisfies the needs of the user, including goods or services incorporating alternative solutions;
• form the fundamental basis of the contract between buyer and seller;
• not over-specify requirements; and
• not contain features that directly or indirectly discriminate against any suppliers
Whether a purchase order or contract will be performed to the satisfaction of the buyer frequently is determined at the time the purchase description is selected or written. In no other form of communication is there a greater need for clarity and precision of expression. The extent of this precision has a major bearing on the successful completion of the procurement. Purchase descriptions serve a number of purposes. Some of these are used to do the following:
- Communicate to the buyer in the purchasing department what to buy
- Communicate to prospective suppliers what is required.
- Serve as the heart of the resulting purchase order.
- Establish the standard against which inspections, tests, and quality checks are made.
The purchase description can greatly influence the amount of competition. The amount of competition has a major impact on the purchase price. The type of purchase description also may affect the “depth” of competition: This depth of competition may have an even more pronounced effect on the purchase price.