Purchasing is gaining increasing attention from top management as it holds significant sway over profitability and supply chain performance compared to other departments. The purchasing process comprises six steps: specification, supplier selection, contracting, ordering, expediting, and follow-up. In this article, I delve deeper into the fourth step: ordering.
Once a contract is in place, it is executed through the ordering of products, services, or works from the supplier in line with the agreed conditions outlined in the contract. In the case of a one-off purchase, the contract itself serves as the actual purchase order. How can you ensure you receive the correct items, in the right condition, at the appropriate time, and in the correct location?
A purchase order is typically initiated through a purchase order requisition or materials requisition. In production environments, this requisition is generated by the materials requirements planning system, determining the required volumes for production over a specific period, taking into account existing inventory levels.
There are various ordering methods: stock-sourcing, demand-tailored sourcing, and Just-In-Time (JIT) sourcing. Stock-sourcing involves the buyer maintaining stock, sometimes alongside the supplier. This method is typically used for repetitive needs and/or low-value products. Demand-tailored sourcing, on the other hand, is employed for occasional high-value items. Here, the buyer seeks to avoid holding stock, with the supplier potentially maintaining central stock. JIT sourcing is utilised for high-value and predictable demand. In this method, neither the buyer nor the supplier holds stock in theory. However, due to long production lead times for certain items, the supplier or their supplier may hold stock.
When placing an order with a supplier, precision in conveying information and instructions is crucial. Generally, a purchase order will include the following details: order number, product description, unit price, quantity required, expected delivery time or date, delivery and invoicing address, and handling instructions (such as halal logistics or temperature requirements).
Lessons Learned
Ordering administration can incur significant costs due to the expense per invoice and the high volume of invoices. Cost reductions per invoice can be achieved by eliminating redundant activities, processes, and paperwork. E-ordering via online catalogues and purchase cards (P-cards) further streamlines the order administration process. P-cards are employed for high-frequency purchases of low-value items, such as stationery. Payments are handled by credit card companies, resulting in monthly billing. While organisations incur a small fee per card, they reap substantial administrative cost savings.
A high volume of invoices may stem from numerous one-time invoices, multiple invoices from a single supplier, and separate invoices per department. The number of invoices can be reduced through three main avenues. Firstly, reducing the number of suppliers results in fewer invoices. It is advisable to start by reducing suppliers for product categories that can be easily sourced locally. Secondly, contract terms should specify invoicing methods, frequency, and consolidation across departments. Sending a single monthly invoice is more cost-effective than receiving multiple invoices from the same supplier each month. Lastly, educating users across the organisation on ordering procedures is crucial to limit the number of invoices generated. In essence, achieving efficiencies is paramount in the ordering process.
