Monday, August 11, 2008

Procurement Management Process:

A company's use of best practice purchasing methods in order to optimize price savings, to insure quality products and to develop strong vendor relationships cannot be overstated. Unfortunately, many purchasing decisions in small businesses are not based on best practices. Wise purchasing decisions should not be made solely on volume discounts which generally produce lower unit prices. Under certain circumstances, this volume discount approach has its benefits. However, one should not be lured by the myth that this approach works optimally all of the time! In fact, this volume discount approach can be a major contributor to elevated inventory levels. A more pertinent approach to purchasing is the Economic Order Quantity (EOQ) method. The EOQ is an inventory model that indicates the quantity to be ordered which reflects customer demand and minimizes total ordering and holding costs. EOQ inventory model employs the use of sales forecasts, historical customer sales volume reports, and the ongoing monitoring of current customers' sales activity. The Procurement Management Process involves the following steps:
1) Review Open Sales Report and Inventory Min/Max Report: Periodic analysis of these reports is mandatory in order to determine the quantity that should be ordered to replenish standard in-stock product inventory levels or non-stock items.
2) Issue Purchase Orders: A formal purchase order (PO) must be issued to each supplier. The PO should include pertinent information: product description, quantity, quoted price, and time frame for delivery.
3) Purchase Order Procedures: Procedures that are recommended:
  • Receive/Review Items: Once the items have been received, inspect them to determine whether or not they meet the description and quantity as stated in the Purchase Order and to determine any existing damages.
  • Resolve Issues: Any discrepancies between "what was ordered" and "what was received" or any product damages must be noted on the shipping documents and the supplier must be immediately notified.
  • Accept Items: After resolving any delivery, damages, or discrepancy issues, the Shipping/Receiving Supervisor accepts the items on behalf of the company.
  • Approve Payment: After the supplier issues an invoice for payment, the invoice must be approved before scheduling and issuing payment.
Following above three steps ensures better supplier relationships which, in turn, create greater customer satisfaction.

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