Procurement: Supplier Selection and Purchasing Process

Evaluate and Select Suppliers

The most important duty of purchasing is the right to evaluate and select suppliers. This is what purchasing personnel are trained to do.

The selection decision in sourcing teams requires that members reach a consensus in selecting suppliers.

Review Specifications

The authority to review material specifications is also within purchasing’s span of control.

Purchasing should also lead or coordinate negotiations with suppliers. This means that purchasing retains the right to control the overall process, act as an agent to commit an organization to a legal agreement, and negotiate a purchase price.

E-Procurement and the Procure-to-Pay Process

We examine in detail the purchasing process, which includes all the steps that must be completed when someone within the organization requires some product, material, or service.

The purchasing process is a cycle consisting of six major stages:

• Forecast and plan requirements
• Need clarification (requisition)
• Supplier identification/selection
• Contract/purchase order generation
• Receipt of material or service and documents
• Settlement, payment, and measurement of performance

Forecast and Plan Requirement

The purchasing cycle begins with the identification of a need (a requirement). Today, purchasing is the primary vehicle for obtaining external inputs (products or services) from suppliers.

Purchasing is responsible for acquiring products and services for the entire organization. The information flows between the purchasing function and other areas of the organization can be extensive.

Users may transmit their needs by phone, by word of mouth, or through a computer-generated method.

This form of communication for a specific need is called a requisition.

Methods for Identifying Purchase Needs

B. Traveling Purchase Requisitions/Bar Codes

This method is used primarily for very small companies that have not automated their purchasing or inventory management processes.

C. Forecasts and Customer Orders

Customer orders 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.

D. Reorder Point System

A reorder point system is a widely used way to identify purchase needs. Such a system uses information regarding order quantity and demand forecasts unique to each item or part number maintained in inventory.

Reorder point systems are used for both production and nonproduction items.

E. Stock Checks

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.

The stock check consists of physically visiting a part location to determine if there is enough inventory to satisfy user requirements.