Purchasing systems different types simplified

1. TYPES OF
PURCHASING
SYSTEM
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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
Subcontracting
Tender System
Blanket Order
E-Purchasing / E-Procurement
Rate Contract Method
Petty Cash System
Capital Equipment Purchase
Imports
Stockless Purchase System

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

9. HIDDEN COSTS OF
SUBCONTRACTING

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 initial RFP (Reqt. For proposal) can be limited
to only technical bids.
Evaluation on technical grounds and elimination can
result in narrowing the number of bidders.
Suppliers are now asked to quote their financial
bids. As per RFQ (Request for Quotation)
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 interested 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.

31. IMPORTS
What are Imports?
Advantages
Disadvantages
Process

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
D ispatching
letter of
credit
Receipt of
D
uocuments
B
i
l
l
l
li
i
l
l l o
f 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

35. E-PURCHASING
What is E-Purchasing?
Advantages
Disadvantages

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. RATE CONTRACT
METHOD
What is Rate Contract
Method?
Process

42. 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.
A Rate Contract can be awarded after bidding and negotiating
for certain services or the Rate Contract can be awarded post
E-bidding which can be based on Forward Auction or it can be
on Reverse Auction after which there are no negotiations.
Rate Contracts are Time bound and generally valid for 1 year.

43. PROCESS
Spend
Analysis
Market
Analysis
Supplier
Interactions
Receipt of
Quotes
Selection of
Suppliers
Finalization
of Rate
Contract

44. STOCKLESS
PURCHASING
What is Stockless
Purchasing?
Examples
Advantages &
Disadvantages

45. 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 or VMI.
In this system the vendor has a clear idea of the requirements
of the buyer and holds the stock in convenient location.
The Vendors are Self-Certified by the parent organization
after which supply can be continuous and without any
Inspection.
Suppliers are integrated with the ERP and daily reqts or shift
wise reqts are visible on the system and fulfilled accordingly.
The seller has the financial responsibility of holding the stock.

46. EXAMPLES
Tyre warehouse near automobile manufacturing units.
Petrol pumps in transport undertaking.
Aviation fuel pumps at airport.

47. ADVANTAGES &
DISADVANTAGES
Advantages:
Reduced warehouse space
Eliminate the cost of storing, maintaining and distributing
supplies
Reduced ICC
Increased inventory turnover
Less manpower
Disadvantages:
High cost
Need of complex technology

48. Assignment
Group wise PPT- Group-1 Rate Contract
Group-2 Subcontracting
Group-3 Capital Purchase
Not more then 5-8 Slides
Define the process
No. of variables
Implementation methods
Monitoring and Controls
To be submitted to Shiva by 12th EOD and Fwd. Presentation on 13th.