Types of purchasing system
- 1. TYPES OF PURCHASING SYSTEM Avish Shah (87) Karen Rodricks (82) Subramanian (102) Niket Shah (89) Pranali Nawale (63) Varsha Parmar (67) Viddhi Parekh (66)
- 2. WHAT IS A PURCHASING SYSYTEM? A method used by businesses to buy products and/or services. A purchasing system manages the entire acquisition process, from requisition, to purchase order, to product receipt, to payment. Purchasing systems are a key component of effective inventory management in that they monitor existing stock and help companies determine what to buy, how much to buy and when to buy it.
- 3. FUNCTIONS OF PURCHASE DEPARTMENT Purchase materials at lowest possible cost while maintaining quality. Maintain good relationship with the suppliers. Take advantage of economies of scale. Maintain records efficiently. Develop highly competent personnel. Co-ordinate with all the departments of the organization.
- 4. TYPES OF PURCHASING SYSTEM Tender System Stockless Purchase System Blanket Order E-Purchasing / E-Procurement Subcontracting Rate Contract Method Petty Cash System Capital Equipment Purchase
- 5. SUBCONTRACTING What is Subcontracting? Examples
- 6. WHAT IS SUBCONTRACTING? Subcontracting refers to the process of entering a contractual agreement with an outside person or company to perform a certain amount of work. The outside person or company in this arrangement is known as a subcontractor. Many small businesses hire subcontractors to assist with a wide variety of functions. Example: A small business may use an outside firm to prepare its payroll.
- 7. SUBCONTRACTING IS ALSO KNOWN AS OUTSOURCING Outsource means to send part of a company’s work to outside providers to simplify or reduce cost.
- 8. ADVANTAGES & DISADVANTAGES Advantages: Cost Saving Increased Efficiency Continuity & Risk Management Disadvantages: Loss of Managerial Control Quality Problems Hidden Costs
- 10. EXAMPLES Subcontracting is probably most prevalent in the construction industry, where builders often subcontract plumbing, electrical work, drywall, painting, and other tasks. In some cases, a general contractor may only be used as the construction manager or supervisor. In that case, subcontracting accounts for all of the physical work done on the premises. The general contractor's only responsibility is to approve the contracts, keep the project within budget, and inspect the work.
- 11. TENDER SYSTEM What is Tender? Types of Tender Advantages Disadvantages
- 12. WHAT IS TENDER? In this system the entity invites suppliers to give their quotations. The supplier with the lowest quotation wins the contract. It is a kind of contract mostly followed by large organisations and governments when purchases are of large value.
- 13. TYPES OF TENDER Open Tender This is where an opportunity (including all tender documents) is advertised inviting providers to bid directly for a contract. All interest parties then submit a tender. Scoring takes place and the successful organisation is awarded the contract. Sometimes there is a selection stage first, which is then followed by the award stage.
- 14. NOTICE Advertised in a leading daily
- 15. TYPES OF TENDER Restricted Tender This involves the opportunity being advertised in the relevant places and media. Organisations will then submit an expression of interest and fill in a pre qualification questionnaire. Successful organisations will go onto select list and be given an invitation to tender with the tender documents. Tender documents are completed and submitted. From the submitted tender documents scoring takes place and the successful organisation is awarded the contract.
- 16. TYPES OF TENDER Negotiated Tender It can only be used in a limited number of carefully defined cases (e.g. large capital projects where a range of solutions to deliver are possible). An opportunity is advertised (the specification is not established at the start of the process) and organisations can submit an expression of interest and fill in a pre qualification questionnaire. Successful bidders are invited to negotiate with the procuring body, which is called the dialogue phase. Once dialogue has generated solutions to the agreed requirements, final tenders are submitted based on each bidders individual solution. Scoring then takes place and the successful organisation is awarded the contract.
- 17. PROCESS Invitation Pre/Post Qualification Questionnaire Bid Bond Site Visit Tender Box Receipt of Tenders Withdrawal of Offer Tender Offerings Evaluation Recommendations Letter of Award Conditions of Award
- 18. ADVANTAGES & DISADVANTAGES Advantages: Competitive Lower Cost Transparent Process Disadvantages: Low Price usually Detriment of Quality Time consuming
- 19. BLANKET ORDER What is Blanket Order? Advantages & Disadvantages
- 20. WHAT IS BLANKET ORDER? Company purchase many small items on day to day basis. It becomes difficult to have inventory for all. It is most popular method for purchasing items which are used regularly. There are two methods: Agreement is made to supply a Fixed Quantity of the product at a Fixed Price for a Specific Period. Agreement is made to supply for a Specific Period but the Quantity is unknown.
- 21. BLANKET PURCHASE ORDER Proforma of a Blanket Purchase Order
- 22. ADVANTAGES Flexible Avoid negotiation Avoid placement of new order again and again Advantage to supplier to plan the work at his place Reduces clerical activities Protections against higher pricing in future
- 23. DISADVANTAGES Petty frauds It requires flexible internal control Poor vendor performances Difficult to determine and forecast the quantity
- 24. CAPITAL EQUIPMENT PURCHASE What is Capital Equipment Purchase? Advantages Disadvantages
- 25. WHAT IS CAPITAL PURCAHSE EQUIPMENT? It is a purchasing system which requires high capital. It is used to purchase large value assets such as Machinery and Equipment's.
- 26. ADVANTAGES & DISADVANTAGES Advantages: Flexible One Time Investment Increased Co-ordination & Communication Disadvantages: Requires lots of capital Decision making is difficult
- 27. PETTY CASH SYSTEM What is Petty Cash System? Advantages Disadvantages
- 28. WHAT IS PETTY CASH SYSTEM? A small fund of cash is kept in hand for purchases or reimbursements which are too small to be worth submitting to the more rigorous purchase and reimbursement procedures of a company or institution. Petty cash funds must be safeguarded and documented to ensure that thefts do not occur. The most common way of accounting for petty cash expenditures is to use the imprest system.
- 29. ADVANTAGES & DISADVANTAGES Advantages: Easy Time saving Disadvantages: Embezzlement of Funds Cuts down on accountability Accounting Errors Lot of Paper Work
- 30. EXAMPLES Purchase of Stationery like pen, pencil, paper, book, etc. Purchase of Postal Stamps.
- 32. WHAT ARE IMPORTS? It is a method to purchase the goods from the area or the country outside the India Territory. Imports are not easy and are governed by the Central Government.
- 33. PROCEDURE Obtaining Import License Obtaining Foreign Exchange Placing an order Receipt of Shipment Advice Appointing C & F Agents Dispatching letter of credit Receipt of Documents Bill of Entry Delivery of Goods
- 34. ADVANTAGES & DISADVANTAGES Advantages: Stabilize seasonal market fluctuations Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Higher quality More variety Cheaper goods Disadvantages: High Tax Increased Transportation Cost Foreign exchange risk
- 36. E-PURCHASING / E- PROCUREMENT E-procurement is the business-to-business or business-to- consumer or business-to-government purchase and sale of supplies, work, and services through the Internet. E-procurement helps to achieve benefits such as increased efficiency and cost reduction.
- 37. ADVANTAGES Reducing Cost Visibility of spend Productivity Control Quicker processing times Better communication
- 38. DISADVANTAGES High Learning curve Human or system errors in orders No hardcopies Training costs System failure
- 39. ORDER ON TELEPHONE What is Order on Telephone? Advantages Disadvantages
- 40. WHAT IS ORDER ON TELEPHONE? It is a method used to place orders of small value. In this method the purchase department does not prepare a formal purchase order. The order is placed by telephone. The price is discussed an finalized on the telephone. This works well with the captive type of vendors
- 41. ORDER ON TELEPHONE A purchase manager in a restaurant placing the orders for the grocery over the telephone
- 42. RATE CONTRACT METHOD What is Rate Contract Method? Process
- 43. WHAT IS RATE CONTRACT METHOD? A Rate Contract or a Rate Agreement (RC in short) is a procurement cost reduction strategy aimed at standardizing procurement prices for commonly procured, homogenous and price varying inputs. The basic idea behind a rate contract is to aid a company in establishing parameters for the purchase of goods and services necessary for the continued operation of the business.
- 44. PROCESS Spend Analysis Market Analysis Supplier Interactions Receipt of Quotes Selection of Suppliers Finalization of Rate Contract
- 45. STOCKLESS PURCHASING What is Stockless Purchasing? Examples Advantages & Disadvantages
- 46. WHAT IS STOCKLESS PURCHASING? Stockless purchase system can be defined as Arrangement in which a supplier holds the items ordered by the customer in its own warehouse, and releases them as and when required by the customer. It is also known as just-in-time purchasing. In this system the vendor has a clear idea of the requirements of the buyer and holds the stock in convenient location. The seller has the financial responsibility of holding the stock.
- 47. EXAMPLES Tyre warehouse near automobile manufacturing units. Petrol pumps in transport undertaking. Aviation fuel pumps at airport.
- 48. ADVANTAGES & DISADVANTAGES Advantages: Reduced warehouse space Eliminate the cost of storing, maintaining and distributing supplies Increased inventory turnover Less manpower Disadvantages: High cost Need of complex technology
- 50. INDIAN RAILYWAY CATERING AND TOURISIM CORPRATION Indian Railway Catering and Tourism Corporation uses Open Tender and Selective Tender for purchase of Capital Equipment. It uses subcontracting for maintenance, catering and cleaning. It uses blanket order to purchase day to day items like stationery, etc.
Editor's Notes
- #18: A bid bond is issued as part of a bidding process by the surety to the project owner, to in hopes guarantee that the winning bidder will undertake the contract under the terms at which they bid.Performance bond: A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract.
- #48: Volkswagen India have a factory in Pune, Chakan. Goodyear tires have a warehouse in the same area. They tires are supplied when they are needed. Volkswagen don’t hold the stock for the same.
- #49: Inventory Turnover is a measure of the number of times inventory is sold or used