Chapter 12 The Purchasing Process

1. Accounting Information Systems 8e Ulric J.Gelinas and Richard Dull Chapter 12 The Purchasing Process © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

2. Learning Objectives • Describe the relationship between the purchasing process and its business environment, including the organization’s supply chain. • Summarize how enterprise systems, e-business and other technologies can improve the effectiveness of the purchasing process. • Assess the implications of implementing a supply chain management (SCM) system in a global business environment. • Depict the logical and physical characteristics of a typical purchasing process. • Prepare a control matrix for a typical purchasing process including an explanation of how business process control plans can accomplish operations and information process control goals. 2

3. Process Definitions and Functions The purchasing process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions: • Handle the repetitive work routines of the purchasing department and the receiving department. • Support the decision needs of those who manage the purchasing and receiving departments. • Assist in the preparation of internal and external reports.

4. Internal Perspective of Purchasing Process 1. Purchase requisition sent from inventory control (or various department) to purchasing department.

5. Internal Perspective of Purchasing Process 2. Purchase order sent to vendor (2a), inventory control (or various departments), (2b), receiving (2c), and accounts payable (2d).

6. Internal Perspective of Purchasing Process 3.Packing slip (with goods) received from vendor .

7. Internal Perspective of Purchasing Process 4. Stock notice (with goods) sent to ware-house.

8. Internal Perspective of Purchasing Process 5. Notice of receipt sent to accounts payable (5a), general ledger (5b), and purchasing (5c).

9. Goal Conflicts and Ambiguities in the Organization • Individual managers’ goals may not be in congruence with organizational objectives. • Purchasing may buy large quantities to reduce ordering costs and increase discounts. This increases costs of receiving, inspecting, and carrying inventory. • Ambiguity often exists in defining goals and success in meeting goals. • A purchasing goals might be to select a vendor who will provide the best quality at the lowest price by the promised delivery date. Realistically, one vendor may not satisfy all three conditions. • Prioritization of goals is necessary in choosing the best solution given the various conflicts and constraints placed on the process. • Trade-offs are made in prioritizing among the goals that conflict. • If the market is sensitive to satisfying customer needs, the company may pay higher prices to ensure that it can obtain the highest quality goods on a timely basis.

10. Organization’s Supply Chain

11. Purchasing and the Supply Chain • The supply chain is the system of adding value beginning with acquiring raw materials and ending with product field support. • Organizations attempt to achieve maximum value added in all the supply chain activities. • Internet purchases are driving down purchasing costs. • Supply chain management (SCM) software assists with demand planning, one of the most important areas of supply chain management.

12. Categories of SCM Software • Supply chain planning software • Accumulates data about orders from retail customers, sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps. • Supply chain execution software • Automates the SCMsteps. • Includes ERP software as it receives and routes orders, and executes invoices. • Many connections in the supply chain are B2B automated interfaces. For example, the sourcing step may be implemented through an automatic order sent via the Internet.

13. Benefits of SCM • Lower costs to the customer. • Higher availability of product. • Higher response to customer requests. • Reduced inventories along the supply chain. • Improved relationships between buyers and sellers. • Smooth workloads due to planned goods arrivals and departures, leading to reduced overtime costs. • Reduced item costs as a result of planned purchases through contracts and other arrangements. • Increased customer orders due to improved customer responsiveness. • Reduced product defects through specifying quality during planning and sharing defect information with suppliers during execution.

14. Potential Problems with SCM Initiatives • Data not collected or not shared across functional boundaries. • Lack of information sharing between supply chain partners. • Inaccurate data in the supply chain negatively affects the entire chain. • Over-reliance on demand forecasting that may be inaccurate. • Good demand forecasting requires an intelligent combination of software tools and human experience. • Competing objectives can lead to unrealistic forecasts. • Marketing may want an unrealistically high demand forecast to ensure a successful product, leading to inaccurate promotion and production budgets. • Sales wants a lower demand forecast as it will be evaluated on its ability to meet sales quotas.

15. Mitigating Problems with SCM Initiatives Types of Collaboration in the Supply Chain • CRP: Continuous Replenishment also called: • VMI Vendor Managed Inventory • SMI Supplier Managed Inventory • Co-managed Inventory (a form of CRP) • CFAR: Collaborative Forecasting and Replenishment (precursor to CPFR) • CPFR: Collaborative Planning Forecasting and Replenishment Technology Summary 12.2 discusses these methods

16. Mitigating Problems with SCM Initiatives Technology Summary 12.3: CPFR Process

17. Purchasing Process— Context Diagram

18. Inventory Reorder Methods • Reorder point analysis (ROP) • each item is assigned a reorder point based on its sales rate • Economic order quantity (EOQ) • order quantity based on costs of ordering and carrying inventory • ABC analysis • technique for ranking items in a group based on the output of the items • can be used to categorize inventory items according to their importance

19. Purchasing Process—Level 0 Diagram

20. Sample Purchase Requisition

21. Purchasing Process— Diagram 1

22. Purchasing Process—Diagram 2

23. Sample Purchase Order Screen

24. Purchasing Process—Diagram 3

25. Data Stores Used in the Purchasing Process • Inventory master data • Record of each item stocked or regularly ordered • Vendor master data • Stores information about approved vendors including vendor performance • Purchase requisition data • Data on all purchase requisitions • Purchase order master data • Open PO information including status of items on order • Purchase receipts data • Lists items received

26. ER Diagram- Purchasing

27. Purchasing Process Relational Tables

28. Purchasing Process Flowchart

29. Purchasing Process Flowchart (cont’d.)

30. Fraud and the Purchasing Function • Because it involves the payment of cash, manipulation of purchasing is involved in many frauds. • Typical cases include: • An employee (e.g., a buyer or purchasing manager) places purchase orders with a particular vendor in exchange for a kickback, secret commission, or other form of inducement from the vendor. • An employee has a conflict of interest between his responsibilities to his employer and his financial interest—direct or indirect—in a company with whom the employer does business.

31. Purchasing Control Matrix

32. Control Matrix, Cont’d.