Presentation for Purchase Management Presented By : group 8, PGPRM(PRIL)/07-09
Purchasing is a service function . Like all other service function , the fundamental objective of purchase department is to provide the efficient services with minimum costs.
Moreover, it should also endeavor to improve and maintain high employee morale resulting into initiative and extra efforts.
Types of Evaluation:
Purchasing Evaluation in General
Creation of any organizational set-up basically consider the benefit analysis. To justify, the existence of any department or section, the benefit must outweigh the costs. Over and establishment costs of the purchase department , the following costs should also be considered –
Over expenditure on items purchased or services obtained.
Costs of stock- outs
Cost of failure of efficient negotiations and obtaining favorable terms and conditions.
Additional cost of expediting the procurements.
Cost of not providing satisfaction to outside customers.
Cost of failure in excessive stock pilling.
Cost of failure to dispose of surplus or obsolete plant, equipments, materials or scrape at maximum price.
Cost of measuring efficiency of the purchasing department.
Need for the evaluation
Evaluation is a control function, which tends to be continuous one. However, the specific need of the evaluation arises due to following reasons:
Management fails to identify any problem, but is dissatisfied with the current affairs.
Numerous complaints are received from various departments.
Numerous complaints are received from the vendors and outsiders.
4. The cost of purchasing operations seems high.
5. It seems that the purchasing department is overstaffed.
6. The integrity of the purchasing staff has become questionable.
7. Failure to achieve planned progress.
8. The need of the management to have performance records for subsequent reviews.
EVALUATON THROUGH MANAGEMENT AUDIT
A recently developed concept controlled by value of M.B.O (Management by objective) is tested.
Examines the functions to see whether they contribute to objective.
Ensures optimum utilization of human resources and physical facilities
Anticipates problems and helps them solve in time. Statutory audit is basically concerned with the truth and fairness of the balance sheet and P/L account.
Characteristic of Management Audit
Management audit is the audit of the whole process of management. Management standards are used to evaluate the performance.
It is essentially an integrated approach. It is concerned with the effectiveness of management as whole.
It is a continuous process.
It emphasizes opportunity cost, rather than historical cost.
It is constructive
It is essentially a management service and it concerns itself with the intensive analysis of information needs any availability of relevant information to management, for decision making purposes.
It is a tool to check efficiency and effectiveness of purchase department.
Audit is mainly carried out by a ‘detached’ auditor to ensure objectivity.
It focuses attention not only on the strength but also on the weakness in the operation.
To determine the adequacy of internal controls over purchases, both in terms of existence and use.
To verify whether all purchases have been updated in inventory records, all payments on account of purchases represent values of items purchased and taken into inventory.
To verify whether the items, and quantities of the items, purchased are reasonable and within the justifiable requirements of the Auditee.
To ascertain whether descriptions, classifications, and, related disclosures are adequate and not misleading.
To determine whether the purchase management function is directed towards the accomplishment of organizational objectives, targets and goals.
To establish the adequacy of MIS relating to purchases, to facilitate analysis of information, management control and decision support.
Examine the time lag between date of Purchase Requisition and date of issue of Purchase Orders
Review Purchase Requisitions for proper documentation and authorization.
Review adequacy of Purchase Orders in terms of lowest quotation, approvals etc.,.
Review instances of cancellation and amendments of Purchase Orders.
Are the Purchase Orders complete in all respects- specifications, terms of delivery, unit price, quantity, insurance, terms of payment etc.?
Does the Purchase Order refer to vendor’s quotation?
Cont… (Detailed Test)
Review vendor identification and selection criteria. Ensure fairness in selection. Also ensure that if there is only one vendor, the internal control is working and adequate.
Review import purchase orders for completeness and adequate authorization.
Are instances of urgent buying justified?
Are petty cash purchases in accordance with the laid down policy?
Are purchases handled by departments directly, when they are to be handled by the Purchase Department?. Are decentralized purchases handled strictly in accordance with laid down procedures?.
Test check purchase vouchers with vendor invoices, purchase orders, purchase requisitions, and goods received note to ensure that all purchases are properly authorized properly documented. Review accounts payables for old unpaid items. Relate the listing to unpaid Goods Received Notes.
Where goods received note are not supported by vendor invoices, prepare a listing of missing invoices and ensure follow-up.
Review instances of fresh purchase orders being raised when existing purchase orders are not fully executed. Confirm justification for the same.
Cont… (Detailed Test)
Process of Evaluation in General
Qualitative and Quantitative Evaluation.
Agency of Evaluation.
Methods of Evaluation.
How are Quantitative and Qualitative Data Different?
Data are considered quantitative if they are numbers and qualitative if they are words.
Quantitative data are hard, rigorous, credible and scientific.
Quantitative data best explain the why and how of your program, while qualitative data best explain the what , who and when .
Important Quantitative aspects to be considered while evaluating the purchasing performance
Reduced inventory holding
Better classification of scrap & salvage, higher price and faster disposal
Advantage from shortest routing and economical packaging.
Qualitative aspects of purchasing
Development of purchase policies and procedures.
Centralization of purchasing function.
Selection of better staff and provision of training.
Development of good condition of functions and their optimum distribution within the department.
Good working relations with other departments.
Good relations with the suppliers.
Active participation in company, professional and community affairs.
Purchasing of better quality products
Awareness of make-or–buy possibilities.
Agencies for Evaluation
The performance of the purchase department is evaluated by the following agencies:
Evaluation by Internal Agencies can be done in tow ways-
Internal check system- wherein the work of one person or one section is checked by the other person or section of the purchase department.
The other method is the use of internal auditor for measuring the performance of the purchase department.
The external agencies refer to the use of the professional agencies or consultants for the evaluation work. These are experts in those areas . Though, it is a bit costlier as compared to the internal agencies, it proves more valuable and unbiased evaluation .
Generally the following aspects are studied by the external agents:
Does the purchasing department have responsibility of making all purchase for the company?
Does it have the adequate authority to go with this responsibility?
Is the company using manual of purchasing policies and procedures?
Is the purchasing department buying at right quantity, price and obtaining good service?
Does the purchasing department co-operate with other departments of the company and vice versa?
Are the relations with the vendors and outsiders good?
Are operating cost of the purchasing department in line with the comparable companies in the industry?
What is the calibre of the purchasing executive?
Does the purchasing department contribute substantially to the company profits?
In purchasing contributing its share of new ideas to the company?
Does purchasing have a planned programme of operations and saving such as value analysis, training, cost reduction, inventory control etc.
Methods of Evaluation
Forms and reports : Standard formats are designed to evaluate the performance on regular basis. The actuals are compared with the budgeted figures. The variances and discrepancies are ascertained and analyzed
Flow diagram : The flow diagram is an ideal method of depicting the normal procedure for performing the specific function. The flow diagram indicates purchase process, e.g., the initiation of purchase function, order-placing, follow-up, expediting, order progress, order closing etc.
Graphs and Charts : Graphs and charts are generally used to represent trends and relationships among various variables. In the evaluation of the purchasing function, graphs and charts are prepared to represent total orders placed versus price-adjustments, change in orders, goods rejected etc.
Check-list: The check list method is an effective method of evaluating the overall performance of the purchasing department. An exhaustive check list items pertaining to organization of the department, mode of paper processing, policies, procedures, reporting etc. are prepared for the purpose of evaluation. The evaluators are required to put ‘yes’ or ‘no’ tick against each item
The department is quite productive?
Close relationship with engineering, material control and manufacturing?
Purchasing manager spends reasonable time in directing/supervising the purchase process and department?
Purchase order numbers are controlled?
Acknowledgement of PO is returned by the vendor?
Records and Files
Price history records of repetitive parts are available?
Follow –up file is maintained on delivery promises?
Commodity wise lead time reports are published on regular basis?
Periodic reports about savings are prepared?
Policies and Procedures:
Statements of policies are available for vendor?
Few PO are given without requisition?
Example of a vendor evaluation check-list form:
Ratio and terms used in the evaluation of the purchasing function:-
Number of orders placed
Total rupee value of the orders placed
Ordering cost per order
Total rupee value of invoice processed
The percentage of cash discounted obtained
Numbers of changes in the purchase time
Purchases to sale ratio
Ratio of purchasing to total employees
Cost of purchasing as a percentage of the total sales
Purchased materials price index
Storing or inventory carrying cost as a percentage of value of materials stored
Loss due to stock-outs
Raw materials turnover
Finished goods turnover
Inventory to current assets
Inventory to total asset
Areas included in Purchase Audit
Purchase evaluation and reporting.
A good organization presents a well- defined authority-responsibility relationships.