Accounts Administration: Procuring Departmental Requirements

Right Quantity

The right quantity is the amount of an item that meets the organisation's needs without running out and without holding too much stock.

Buying too little stops work and loses sales, while buying too much ties up cash, takes up storage space and increases the risk of theft, damage and items going out of date.

Factors considered when deciding the right quantity

The buyer considers the rate of usage of the item, the lead time taken by suppliers to deliver, the storage space available, the cash available, discounts for buying in bulk, the shelf life of the item and any expected price changes. For example, a canteen buys bread daily because it goes stale, but buys sugar monthly because it keeps well and is cheaper in bulk.

Stock levels and purchasing

Stock levels such as the reorder level, minimum level and maximum level tell the buyer when to order and how much to order. When stock falls to the reorder level, a requisition is raised, and the order quantity is chosen so that stock never rises above the maximum level.

Stock control methods and purchasing

Under a periodic review system, stock is checked at fixed intervals and orders are placed to bring it back up to a set level. Under a reorder level system, an order is placed whenever stock falls to the reorder level. Under just in time buying, goods are delivered only when needed, so very little stock is held. The method chosen decides how often purchases are made and how large each order is.

Right Quality

Quality is the fitness of an item for the purpose it is bought for, measured against an agreed specification.

The right quality is not always the highest quality: it is the quality that does the job well at a reasonable cost, so a cheap pen is right for an office, but a cheap brake pad is wrong for a delivery truck.

Importance of obtaining the right quality

The right quality reduces waste and rework, protects the organisation's reputation, keeps customers satisfied, improves safety, and saves money in the long run, because poor-quality items break down and must be replaced sooner. It also avoids disputes with suppliers, because quality is checked against an agreed specification when goods arrive.

Requisition

A purchase requisition is a written or electronic request from a department to the purchasing section, asking it to buy goods or services that the department needs.

It is the starting point of the purchasing cycle and the evidence that the purchase was requested by someone with a real need.

Content of a requisition

A requisition shows the requisition number, the date, the department making the request, a description and specification of the items, the quantity required, the date needed, the estimated cost or budget line, and the signatures of the person requesting and the person authorising.

Address of requisitions

Requisitions are addressed to the purchasing or procurement section, or to the stores if the items are already held in stock. They are not sent directly to suppliers, because only the purchasing section may commit the organisation to buy.

Specifications

A specification is a precise description of what is required, such as size, model, grade, colour, standard or performance. A clear specification ensures that suppliers quote for the same thing and that the goods delivered can be checked against it. For example, 'A4 bond paper, 80 g/m², white, 500 sheets per ream' is a specification, while 'paper' is not.

The Typical Purchasing Cycle

The purchasing cycle is the sequence of steps from identifying a need to paying the supplier. The table below shows the main steps and the document used at each one.

The Three Phases of Purchasing Procedures

The steps of the cycle fall into three phases. The pre-order phase covers identifying the need, raising the requisition, getting quotations and choosing a supplier. The order phase covers preparing, authorising and sending the purchase order, and following it up until delivery. The post-order phase covers receiving and inspecting the goods, matching the invoice with the order and GRN, recording the purchase and paying the supplier. Dividing the work this way shows clearly who is responsible at each stage.

Purchasing Documents, Records and Manual

Purchasing documents are the forms that pass between the organisation and its suppliers, such as requisitions, requests for quotation, quotations, purchase orders, delivery notes, GRNs, invoices and credit notes. Purchasing records are the files and registers kept by the purchasing section, such as the supplier register, order register, price records and contract files, which show what was bought, from whom and at what price.

A purchasing manual is a written guide setting out the organisation's purchasing policies and procedures, such as who may authorise purchases of different values, how many quotations are needed, and how suppliers are chosen. It makes purchasing consistent and helps to prevent fraud.

Quotations, Comparative Schedules and Authorisation

A quotation is a supplier's written statement of the price, terms and delivery time at which it will supply the goods. Many organisations require at least three quotations for purchases above a set value, so that prices can be compared fairly.

A comparative schedule sets the quotations side by side, comparing price, quality, delivery time, payment terms and after-sales service, so that the best supplier is chosen and the reason is recorded. Authorisation means that a person with the proper authority approves the choice and signs the purchase order, so that no one can commit the organisation to spend money on their own.

Purchase Orders

A purchase order is a written, authorised instruction to a supplier to supply stated goods at stated prices and terms. It shows the order number, date, supplier's name, description, quantity, price, delivery address and date, and the authorising signature. Once the supplier accepts it, the order forms a contract, so copies go to the supplier, the stores (to check deliveries), the accounts section (to check the invoice) and the purchasing file. In the comparative schedule above, Supplier C would usually be chosen: it costs $20 more than Supplier B but delivers faster, gives a longer warranty and allows 30 days to pay.

Meaning of Electronic Purchasing

Electronic purchasing, or e-procurement, is the use of computer systems and the internet to carry out the purchasing process, from requisition and approval to ordering, receiving and payment.

It can be done through an accounting or ERP system, a supplier's online catalogue, or a government e-procurement platform, so the paperwork is replaced by electronic records that can be tracked at every step.

Criteria for Electronic Purchasing

Before buying electronically, the organisation needs reliable computers and internet access, suitable purchasing software, trained staff, suppliers who can trade electronically, secure log-ins and approval levels for each user, secure payment methods, and backup of the electronic records. Without these, electronic purchasing can create more problems than it solves.

Benefits of Electronic Purchasing

Electronic purchasing is faster, because requisitions and approvals move instantly; cheaper, because less paper and handling are needed; more accurate, because data is typed once and reused; more transparent, because every action is recorded with the user's name and time; and easier to control, because the system can block purchases over budget. It also gives better information, such as reports of spending by supplier or department.

The Electronic Purchasing Cycle

In the electronic cycle, the user raises an e-requisition in the system, which routes it automatically to the approver. Once approved, the buyer requests quotations or selects from an online catalogue, and the system generates an electronic purchase order sent by email or through a supplier portal. When the goods arrive, the stores record the GRN in the system, the supplier's e-invoice is matched with the order and GRN, and payment is made by electronic transfer. Each step is time-stamped, so the whole purchase can be traced.

Economic Order Quantity

The economic order quantity (EOQ) is the order size that keeps the total of ordering costs and holding costs as low as possible. Ordering often in small amounts raises ordering costs, while ordering rarely in large amounts raises holding costs, and the EOQ balances the two.

It is calculated as EOQ = √(2 × C × D ÷ H), where C is the cost of placing one order, D is the annual demand in units, and H is the cost of holding one unit for a year.

Here you are working out how many units to order each time, so that the cost of placing orders and the cost of keeping stock add up to the smallest total. First write down the cost of one order (C), the demand for the whole year (D) and the cost of holding one unit for a whole year (H), changing monthly figures into yearly ones. Then put them into EOQ = √(2 × C × D ÷ H), work out the part under the square root first, and take the square root last. Below, we show you how it is done, step by step.

Reorder, Minimum, Maximum and Average Stock Levels

The reorder level is the stock level at which a new order must be placed, so that the goods arrive before stock runs out. The minimum stock level is the lowest level stock should normally fall to; if it goes below, urgent action is needed. The maximum stock level is the highest level stock should reach, to avoid overstocking. The average stock level is the typical amount held over time. The formulas are shown in the worked example below.

Here you are setting the stock levels that tell the storekeeper when to order and how much stock is too little or too much. Start with the reorder level, because the minimum and maximum levels are both worked out from it. Always take the right usage and lead time for each formula: maximum figures for the reorder level, normal figures for the minimum level, and minimum figures for the maximum level. Below, we show you how it is done, step by step.

Buffer Stock and Safety Stock

Buffer stock and safety stock both mean extra stock held to protect against running out when usage is higher than expected or deliveries are late. In many organisations the two terms are used in the same way; where a difference is made, safety stock covers uncertainty in demand and lead time, while buffer stock covers wider supply problems, such as a supplier strike. For example, a hospital keeps a safety stock of essential medicines because running out could cost lives. The minimum stock level in the example above acts as this safety cushion.

Security Items

Security items are items that could be used to commit fraud, steal assets or harm the organisation if they fell into the wrong hands. The table below shows the main security items and why each must be controlled.

Maintaining the Register

A security items register records each item's description and serial number, location, the person responsible for it, and every issue and return, with dates and signatures. Receipt books are recorded by their number range, so a missing book is noticed at once. The register is checked regularly against the actual items, any loss is reported immediately, and the register itself is kept in a locked place. This creates clear responsibility, so that every security item can be accounted for at any time.