Chapter 12: The Purchasing Process Accounting Information Systems, 9e Gelinas ►Dull ► Wheeler © 2011 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.

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. © 2011 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 (cont’d)  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. © 2011 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

Supply Chain  Supply chain: the connections from the suppliers of merchandise and raw materials through to an organization’s customers. These connections include the flow of information, materials, and services.  Organizations manage links in their supply chains to get the right goods, in the right amount, at the right time, and at minimal cost (i.e., efficiency) to create maximum value for their customers (i.e., effectiveness). © 2011 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.

Supply Chain Management  Supply chain management (SCM): the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers.  SCM IS or SW helps an organization execute the steps in the supply chain. © 2011 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.

Categories of SCM Software  Supply chain planning IS or SW 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 IS or SW Automates the SCM steps. Includes ERP software that receives and routes orders, and executes invoices. Many connections in the supply chain are B2B automated interfaces. © 2011 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.

Benefits of SCM  Lower costs to the customer.  Higher availability of product.  Higher response to customer requests.  Reduced inventories along the supply chain.  Improved buyer-seller relationships.  Smooth shipping and receiving.  Reduced item cost.  Increased customer orders.  Reduced product defects. © 2011 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.

Potential Problems with SCM Initiatives  Data not collected or not shared across functional boundaries.  Information is not shared between supply chain partners.  Inaccurate data negatively affects the entire chain.  Over-reliance on demand forecasting that may be inaccurate.  Competing marketing and sales objectives can lead to unrealistic forecasts. © 2011 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.

 Definition: Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise  Role: Purchasing is responsible primarily for inbound, channel activities whereas logistics spans both inbound and outbound relationship and material flows Purchasing

10 The Logistics Model Manufacturing Firm Warehouse Distribution Centers SuppliersRetail Stores Inbound LogisticsOutbound Logistics

Purchasing through the years  Clerical Purchasing (early days  ) Arms length relationship with suppliers Price is the key factor Short term contracts; lots of supplier switching Emphasis is on competition

Purchasing through the years  Managerial Purchasing (1970s  ) Purchasing is viewed, not as a cost center, but as a value contributor Supplier partnerships Long-term contracts Quality, service, and price considerations Negotiation as well as competitive bidding

Purchasing through the years  Strategic Sourcing (Supply Management ) [2000  ] Rationalization of the supplier base Long-term strategic alliances with key suppliers Institutional trust Emphasis is not on a specific contract but on the relationship Senior Management involvement e-Technologies

Types of Supplier Relationships Transactional: emphasis is on price Partnership: supplier is viewed as a resource Strategic Alliance: supplier is critical to the success of the firm and is viewed as a part of the business enterprise

15 Why Purchasing is Important  Materials is a logical cost-reduction area  Purchasing as a profit producer  Value-added contributions  Profit-Leverage Effect  Return on Investment Effect

16 Why Purchasing is Important  Materials is a logical cost-reduction area Materials/Sales Revenue Manufacturing Industries55% Services Industries30% Purchased materials: the biggest element of cost in manufacturing industries

17 Why Purchasing is Important IndustryMaterials/Sales Revenue Petroleum76% Automobile70% Wood Products61% Textile Mills59% Food Manufacturing59% Machinery50% Electrical Equipment49% Computers and electronics44%

18 Why Purchasing is Important  Purchasing as a profit producer 1. Purchasing’s impact on revenues 2. Purchasing’s impact on costs Profit = Revenues - Cost

Process Definitions and Functions  The purchasing process is an interacting structure of people, equipment, activities, and controls that is designed to accomplish the following: 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. © 2011 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.

An Internal Perspective of the Purchasing Process © 2011 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.

Description of Information Flows © 2011 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.

Physical / Document Flow © 2011 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. Physical Document

Purchasing Process—Context Diagram © 2011 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.

Purchasing Process—Level 0 Diagram

Sample Purchase Requisition Screen © 2011 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.

Determining Requirements (1.0)  Need to determine what inventory to order, when to order it, and how much to order.  Push-based supply chain: goods and services are ordered in anticipation of demand based on sales and demand forecasts.  Pull-based supply chain: uses data from vendors and customers to make purchasing decisions on the basis of actual demand. © 2011 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.

Inventory Reorder Methods  Reorder point (ROP) analysis: 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. © 2011 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.

Purchasing Process—Diagram 1 © 2011 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.

Purchasing Process—Diagram 2 © 2011 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.

Sample Purchase Order Screen © 2011 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.

Purchasing Process—Diagram 3 © 2011 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.

Purchasing Process Data Stores  Inventory master data: record of each item stocked or regularly ordered.  Vendor master data: record of each vendor approved for use by the organization.  Purchase requisition data: data on all purchase requisitions.  Purchase order master data: open POs including status of items on order.  Purchase receipts data: record of each receipt of goods and services. © 2011 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.

ER Diagram (Partial) for the Purchasing Process © 2011 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.

Selected Relational Tables (Partial) for the Purchasing Process © 2011 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.

Selected Relational Tables (Partial) for the Purchasing Process (cont’d) © 2011 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.

Purchasing Inputs and Outputs  Purchase order (PO): request for the purchase of goods or services from a vendor.  Blind copy: certain data on a document (or computer screen) is blanked out (i.e., blinded), such as quantities ordered on the PO available to receiving personnel.  Vendor packing slip: accompanies the purchased inventory from the vendor and identifies the shipment. © 2011 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.

Purchasing Inputs and Outputs (cont’d)  Receiving report: a document, such as a PO, annotated with the quantity received that is used to record merchandise receipts.  Acceptance report: documents services received to formally acknowledge the satisfactory completion of a service contract. © 2011 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.

Triggering the Purchasing Process  Purchase requisition: internal request to acquire goods and services.  Requisitions are received from authorized personnel within an organization are : For inventory replenishment. Received from automated inventory replenishment systems, such as SCM processes. Routed by workflow for approval by the requisitioning department supervisor. © 2011 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.

Technology and the Purchasing Process  E-procurement: use of information technology to automate significant portions of the procurement process to reduce the number of people and amount of time required for the procurement process. For example, a purchasing organization can use intelligent agents, Web Services, and B2B exchanges.  Paperless systems: eliminate documents and forms as the medium for conducting business. © 2011 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.

Technology and the Purchasing Process (cont’d)  B2B marketplaces: which are particular Web sites or portals that may be used as sources of supply in the procurement process.  Radio-frequency identification (RFID): a system for sending and receiving data, using wireless technology, between an RFID tag and an RFID transceiver. RFID tags are computer chips containing information about the object to which the tag is attached and an antenna that sends and receives data. © 2011 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.

Validity of PO Inputs  Valid PO inputs (i.e., purchase requisitions): start with a requisition that is approved by the appropriate cost center authorities and results in POs that are themselves approved and issued to an authorized vendor. To be added to the vendor master data, a vendor should be investigated for the quality of its processes and products. By adding a vendor to the vendor master data, management has provided authorization to do business with that vendor. © 2011 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.

Validity of Vendor Packing Slip Inputs  Valid vendor packing slip inputs are supported by an approved PO and an actual receipt of goods. Vendor packing slips not supported by an approved PO may result in overstocking inventory and, if the inventory cannot be used, an overstatement of the inventory asset. Vendor packing slips that do not correspond to an actual receipt of goods will cause inaccurate inventory records and an overstatement of inventory and liabilities. © 2011 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.

Key Controls for the Purchasing Process  Approve purchase requisition: An authorized individual, or several individuals, such as cost center or department management, should approve purchase requisitions.  Use authorized vendor data: Vendors should be vetted to determine their suitability to provide the organization with goods and services. The screening process might include vendor financial viability and performance record. © 2011 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.

Key Controls for the Purchasing Process (cont’d)  Independent vendor master data maintenance: should be a separation of duties between the personnel who create vendor records (to authorize purchases and payments) and those that create and approve POs, record accounts payable, and approve payments. Without this separation: There could be kickbacks or conflict of interest. Accounts payable personnel could create a vendor account to create an invalid/fraudulent invoice. © 2011 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.

Key Controls for the Purchasing Process (cont’d)  Compare vendors for favorable prices, terms, quality, and product availability: Before executing a purchase, prospective vendors should be compared to determine that they are the optimal choice for the purchase.  Approve purchase order: appropriate personnel should approve POs to ensure that an appropriate supplier has been selected and that the correct goods and services, for the correct amounts, are being purchased. © 2011 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.

Key Controls for the Purchasing Process (cont’d)  Confirm purchase order to requesting: department: The requesting department should be informed when a PO has been issued in response to a purchase requisition.  Independent authorization to record receipt: Before a receipt can be accepted and recorded, the receipt data should be compared with the PO master data to determine that an approved PO, prepared by someone other than receiving personnel, is on file. © 2011 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.

Key Controls for the Purchasing Process (cont’d)  Compare input receipt data to PO data: Before a receipt can be accepted and recorded, the receipt data should be compared with the PO master data to determine that the correct goods have been received.  Inspect goods: To ensure that the correct goods are received in acceptable condition. © 2011 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.