procurement cycle in supply chain

Procurement Cycle in Supply Chain

Supply Chain Management

Procurement Cycle in Supply Chain


The structure of the Procurement Cycle in Supply Chain department depends upon various factors like nature of the items Procured, volume, frequency of Procurement, inspection procedure, to be adopted etc. The structures and procedures followed also vary from company to company. An authority of amount to be spent on Procurement also may vary in different company. There is no standard method for organization activities of Procurement department but every company organize its activities best suited to itself.

However, broadly the various steps involved in can be as follows.

  1. Identification of need of materials in terms of quantity and quality.
  2. Intimation to Procurement department about need.
  3. Preparation of Procurement plan.
  4. Selection of waste source after proper scrutiny.
  5. Negotiation and finalizing of terms of purchase contract.
  6. Send purchase order to supplier.
  7. Call of timely delivery after receiving suppliers’ acceptance.
  8. Inspection of material received.
  9. Verification of suppliers’ invoice against purchase order and documentation of goods received.
  10. Payment to supplier against material received.

This is called as the purchase cycle following figure shows a typical purchasing cycle

Goals of Procurement Cycle

Procuring is the important function of materials management. An objective of the Procuring is to issue or continuous supply of raw materials, subcontracted items and spare parts to the production department. It also aims to reduce the ultimate cost of the finished goods by purchasing materials at right price, right time on right quality in right quantity from right source at right place through right mode of transportation. Right price means purchasing at lowest price by proper planning and through proper negotiation. Right quality means desire quality specifications should be made after due measurement. The specifications are laid down by user department while preparing indents. Sometimes drawings are also attached to indents. Right time is decided on the basis of lead time for different items. Lead time is the total time gap between identification of need of an item and the time at which item is available for use after arrival. The lead time consists of four components such as,

  1. Pre-contractual administrative time.
  2. Manufacturing time.
  3. Transportation time.
  4. Inspection time.

Right source is the one which is dependable and can supply items of consistent quality over period of time. Selection of right transportation method is also important, as transportation method will decide the time for transportation and the ultimate cost of the product.

Right quantity is to be decided after considering factors like availability of item, price structure, discounts, relationship with supplier and should be based on knowledge and experience of buyer. Negotiations are an integral part of purchasing. Availability, number of sources, price, delivery, penalty, discounts, transportation method etc. Are some of the parameters affecting process of negotiation.

Procurement Cycle Budget

Procurement Cycle budget indicates the requirements of direct and indirect material and purchased services as set out in production cost and capital expenditure budget. These requirements should be expressed in physical and fiscal terms to the extent possible. Main purpose of purchase budget is to plan purchases and place long term contract after considering relevant aspects. Second purchase is to plan cash requirement

Purchase Method / Procedures

User department authorizes purchase department to make purchases by three method such as,

  1. Through purchase requisition or materials indent form.
  2. Through permanent order card or travelling requisition.
  3. Through various part list made in conjunction with production department.

The Purchase Requisitions

The department needs material prepares material requisition usually on the materials indent form.

This requisition is generally, made in duplicate, one copy each for the department raising requisition and for purchase department. Purchase requisitions are signed only by the person authorized by the management. The authority to sign is generally linked to the seniority and the value of purchase made. The value limits linked to the seniority designation of the person like general manager, manager, deputy manager, officer etc. May be prescribed by the management. The name of authorizing officers along with their sanctioning financial limits must be available in writing with the purchase department. Generally capital equipment purchases are handled by top management.

Permanent Order Card (TR) Traveling Requisition

This method is used for those items, which are required to be purchase repeatedly in bulk quantities. Generally, these are items regularly stopped in stores. The travelling requisition is permanent card, which records all detail of the material. As most of the detail required are already available on this card, it saves time and reduces paper work. It also avoids errors, which may occur while translating the information into usual purchase requisition. It also automatically creates a record of transaction for a particular item.

The stock control clerk sends TR to the purchase department when the stock level reaches the reorder level. To avoid mistakes a colored strip is attached to the stock cards. On receipt of TR, purchase department finalizes the source, quantity to be ordered and passes the card further for typing of the purchase order. The number of purchase order is then entered on TR and it is returned to the stock clerk.

Bill of Materials Of Parts List

Bill of materials is a list of various materials, which are required to make a particular product. This is also called as part list. Production schedule is converted into the bill of materials which indicates materials required and the timing when they are required. This helps purchase department to exactly understand the quantity and timing of various materials required. Purchase department consultants stock control department for items, which are already in stock and purchases balance items. It is expected that the department making requisition should give all details to purchase department like specification, account head, functional requirements, etc. For better choice and reduced price.

Contents of Purchase Order

Procurement department may send inquiries to probable suppliers to quote rates for supply of materials. Once the supplier is selected and rates are finalizing the purchaser gives purchase order to the supplier, which is a contract expressing terms and conditions of supply.

Generally purchase order contains details such as,

  1. P.O. Reference number.
  2. Description and specification of materials to be supplied.
  3. Quantity and delivery schedule, if any.
  4. Price discounts payment terms.
  5. Shipping transport instructions.
  6. Location where materials are to be delivered.
  7. Signature of materials manager.
  8. Other standard terms and condition usually printed on reverse sideThe P.O. Is in multiple copies. Original and one additional copy being sent to supplier for giving acceptance, and the balance copies one each to department raising acquisition accounts department and the receiving department or stores.

Follow Up

Items are classified into fast moving and slow-moving items depending upon their movement. Depending on the items, time and frequency of follow-up can be decided. In order to ensure selective follow-up p.o. Status reports are prepared. These are printed parts number wise or supplier wise to make necessary follow up.

Receiving Inspection

Receiving is an important control point in the purchase system. The materials received are checked for quantity and quality against the purchase order. A systematic record of consignment received, carrier details and description would enable quick identification of materials. Secondly, it can reflect the suppliers, which supply materials late or provide split deliveries.

Inspection of received materials should be done by the qualified and experienced staff in receiving department. After inspection goods received note GRN is prepared by the receiving clerk. If goods are rejected, rejection report is prepared. Similarly, a separate report is prepared for short received on excess supply.

Checking And Payment Of Suppliers Bill

The supplier sends the invoice for the material supplied for payment. This invoice / bill is checked by purchase department of accounts department against purchase order and GRN. Once the bill is checked the payment to the supplier is made by cheque.

It is expected that each organization should define its purchase policy giving broad statement of procedure on principles laid down to guide executive action. Policy gives direction and overall boundaries within which activities related to purchase function must occur.

It is obvious that once policy is finalized, operating procedures to implement policy must be develop. Operating procedures are expected to define a series of steps to be taken to accomplish a task. Hence, this should be a simple and result oriented. It is also necessary that these procedures should enable from communications between different departments and avoid burden of paperwork.

Special Procurement Cycle System

Forward Buying

Forward buying depends upon availability of item, the economic order quantity, discounts available, delivery schedule and funds available with organization. In manufacturing organization, speculative buying is not this sorted to, which generally aims at making capital out of price fluctuations. In commodities market “hedging” is common where contracts are sold on brought.

Tender Buying

Tender buying is generally undertaken by state, central, government departments and public-sector undertakings. Initially bids are sought from registered bidder, suppliers. These bids are evaluated by comparing quotations. Generally, order is given to the lowest bidder, however other aspects like quality, reliability of supplier are also considered.

Market Order

This is used for ‘c’ class items required frequently. This is a contract for supplying required quantity of items, say for one year, at fixed price. This system avoids paper work and enable to purchase material at lower prices due to quantity discounts. The delivery schedule should be incorporated in contract as per buyers needs

Zero Stock

Buyers firm does not stock any item but sailor holds inventory, due to which he charges higher price per unit for the item supplied. For buyer, this system avoids Procurement Cycle procedure, and fears of obsolescence of inventory. This also frees him to concentrate on other activities of organization.

Rate Contract

This system is mainly used in government departments and public-sector undertakings. Buyer and seller agree to the rates of items after negotiations. Rate contracts generally, indicate rates and not delivery period. Hence, suppliers demand higher rates for urgent deliveries. To avoid this problem, delivery of minimum quantity at the agreed rate is made. This is called as running contract. Railways dgs&d etc. Follow running contract system. The main advantage of this method is reduced reduction in internal administrative lead time.


When purchases are made from one customer in reference to other, it is called as reciprocal buying. Reciprocity encourages less efficient manufacturers and suppliers by assuring them gains, which would not have been possible by price and quality. Reciprocity should not be used in all purchases as it discourages competition and may lead to selective supplier and higher price.

Systems Contract

This is useful for items with low unit price and high quantitative demand. It primary aim to reduce administrative expenses coupled with necessary control. Original intent approved by appropriate authority is shipped back with the items, which avoids usual documentation like material requisition, purchase orders, follow up letter, etc. The contract mentions delivery period, price and invoicing procedures.

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