Module 1 : Purchasing Process.

Ch 2. Purchase Requisition.

Edited by Dr. Seung Hyun Lee (Ph.D., CPM)

IEMS Research Center, E-mail : lkangsan@iems.co.kr
■ The Needs for Purchasing.
[TASK 102]

Recognition, Definition, Description, and Transmission of the Need

․ The need for a purchase typically originates in one of a firm's operating
departments or in its inventory control section.

․ The purchasing department is usually notified of the need by one of two basic
methods :
(1) A standard purchase requisitions, or
(2) A material requirements planning (MRP) schedule.

․ If the need is a one-time purchase, then an engineering bill of materials is

sometimes used.

- 1 -
■ Purchase Requisitions
[TASK 102]

Types of Purchase Requisitions.

Standard Requisition.
․ Standard requisition is an organization's document (paper or electronic) that
internal customers use to communicate to purchasing what, when, and how
many products or services they need.
․ Typically, a copy of the requisition or the purchase order is sent back to the
original requester to show that the products or services have been ordered.

Electronic Requisition.
․ Electronic requisition eliminates the need for paper-based systems, and it often
enhances decision process and recordkeeping.
․ Intranets are often used as the mechanism to link the internal customer and
purchasing in today's information environment.

- 2 -
■ Purchase Requisitions
[TASK 102]

Types of Purchase Requisitions.

Bill of Materials.
․ The bill of materials is a listing of all the materials and components required to
produce a product or service. In some organizations, purchasers, acting as
buyer-planners, use the BOM to generate purchase orders or trigger a release
schedule against an existing order.

System Generated Requisitions.

․ Many computer systems used today are in the production planning,
consumption, supply management, and purchasing realm. Many of these will
automatically or semi-automatically generate requisitions

- 3 -
■ Purchase Requisitions
[TASK 102]

Types of Purchase Requisitions.

Traveling Requisitions.
․ A form consisting of a printed card or a bar code with information on who item
is purchased from. A traveling requisition can be helpful because it can
conserve time when recording routine materials and supplies.
․ Information on the card or database entry.
: Description of item.
: List of approved supplier and addresses.
: Last prices paid to suppliers.
: Reorder point and Record of usage.

- 4 -
■ Purchase Requisitions
[TASK 102]

The required information for a requisition.

․ The name of the internal customer.
․ The signature (or approval code)
of the person authorized to
sign/approve the requisition.
․ A description and use of the
desired products/services.
․ The quantity.
․ The date needed.
․ The date of the requisition.
․ The estimated cost/budget allocation.
․ Possible sources.
․ The account to be charged.
․ The ship to location

- 5 -
■ Some Considerations.
[TASK 102]

1. Authorized Buying or Ratification.

Problems that can arise from unauthorized buying.
․ Circumventing proper budgeting systems, thereby resulting in lack of expenditure
control.
․ Committing purchasing dollars to less-than-qualified suppliers.
․ Circumventing the approval procedures for purchases.
․ Resulting in a loss of volume from authorized contracts issued by purchasing.
․ Making commitments with "sham" or boiler-room suppliers, creating ․
unnecessary expenditures of funds.

- 6 -
■ Some Considerations.
[TASK 102]

1. Authorized Buying or Ratification (cont).

Procedure to ensure that necessary approvals have been obtained.
․ Usually the director of purchasing, delegated individuals, and organization teams
are responsible for the commitment of funds to acquire materials, equipment,
and service.
․ It is good practice for organizations to require the formal evaluation for suppliers
receiving above a certain monetary amount per year.
․ If there is an emergency or other situation where it may prove advantageous to
the organization to do so, competitive bidding may be waived through
management documentation of such actions.

- 7 -
■ Some Considerations.
[TASK 102]

1. Authorized Buying or Ratification (cont).

Signing Limits.
․ Requisitions and other requests from internal customers affect specific
purchasing personnel in terms of the "authority" to acquire the items.
․ When individual purchasers, purchasing agents, and managers are given specific
dollar limits, this is termed "limits of authority." An order over this amount
requires the signature of the purchasing manager, in certain cases, a
higher-level purchasing executive.
․ Contracts for continuing needs such as blanket orders where the dollar
expenditure level exceeds the individual's authority, should contain the
manager's signature. This is true even though individual order releases will be
less than the purchase's authority limit.

- 8 -
■ Some Considerations.
[TASK 102]

2. Leadtimes.
Two Components of Purchasing Leadtime.
․ The first time is the time it takes purchasing to process the request from the
customer, and is measured as the time between when the internal customer
submits the request and when purchasing issues the purchasing order.
․ The second component is the time from when the purchasing orders is placed
until the goods or services are received.

- 9 -
■ Some Considerations.
[TASK 102]

3. Availability of Funds.
Materials Budget. This type of budget covers an organization's need for production
materials and components.

Capital Budget. This type of budget covers the acquisition of equipment and
construction that is capitalized as a depreciable asset on an organization's balance
sheet.

Maintenance, repair, and operating supplies (MRO) Budget. This type of budget
covers items needed for the operation of a facility, but are not part of the finished
product.

Administrative Budget. This type of budget generally includes items for internal
use such as office equipment and computers.

- 10 -
■ Some Considerations.
[TASK 102]

3. Availability of Funds (cont).

Funding for the Requisition.
․ Some contracts allow the supplier to be reimbursed for its costs. These
contracts would specially identify which costs are allowable and the
requirements for documentation.
․ Most public sector entities require that funding for the requisition be
pre-encumbered or set aside at the time of requesting. This pre-encumbered
dollar amount is adjusted, if necessary, by the "encumbrance" at the time the
purchase order or contract is issued.
․ In government contracting, unallowable costs are identified in the Federal
Acquisition Regulation (FAR).

- 11 -
■ Some Considerations.
[TASK 102]

4. Priority Sequence for Handling Purchase Requests.

First-come, first-service. This approach ignores how important or critical a request
is in favor of the concept of fairness to all requisitioners.

Arrangement by need date. Processing by need date improves the delivery

performance as measured against the requestor's need data but ignores the issue
of supplier leadtime.

Rush orders/emergencies. Rush or emergency requisitions are the top priority of

any purchasing organization. This urgency requires purchasers to put aside other
tasks, address the rush requirements, and return to the previous activity. In
addition, suppliers are often selected for proximity rather than the least total cost.

- 12 -
■ Some Considerations.
[TASK 102]

4. Priority Sequence for Handling Purchase Requests (cont).

Order of importance or impact. With this approach, requests are prioritized using
a variety of criteria. Relevant measures could include
․ The difference between the need date and estimated leadtime.
․ Magnitude of dollar expenditure, criticality of product or service.
․ The complexity of the purchase.

Seasonal. This approach prioritizes purchase requests based upon purchasing

seasonal items first since they may not be available at a later point in time.

Longest leadtime. Another important determination of requisition priority is the

leadtime required for delivery.

- 13 -
■ Some Considerations.
[TASK 102]

Material Requirements Planning Schedule.

․ In firm using an MRP system, the structured bill of materials for each item
being manufactured can be used in determining specific material requirements
for a given production and purchasing schedule during a specific time period.
Table
100

Base Top
200 023

Legs(4) Bolts(4) Frame(1) Boards(3) Glue

203 220 300 030 066

Sides(2) Ends(2) Support(4) Glue

622 411 533 066

- 14 -
■ Some Considerations.
[TASK 102]

Statement Of Work (SOW).

․ A project such as new product design/development starts out as a statement of
work (SOW)
․ The SOW may be a written description of the objectives to be achieved, with a
brief statement of the work to be done and a proposed schedule specifying the
start and completion dates.
․ It could also contain performance measures in terms of budget and completion
steps(milestone) and the written reports to be supplied.
․ Typical milestone might be the completion of the design, the production of a
prototype, the completed testing of the prototype, and the approval of a pilot
run.

- 15 -
■ Statement of Work (SOW)
[TASK 102]

Roles of SOW.
․ SOW is the major means internal customers have of communication
requirements to both purchasing and the potential supplier.
․ Specifications can take the form of description by brand, specification of
physical or chemical characteristics, specification of materials, specification of
performance, specification of method of manufacture, engineering drawings, or
market grade.
․ When purchasing services, specifications are usually stated in the form of
SOW.
․ The SOW provides potential suppliers with a clear description of the work to
be performed, including inspection, testing and acceptance, quality, support
services, documentation, maintenance, results to be achieved, and so on.

- 16 -
Performance Check.
1. Purchasing in the ___________sector is usually tightly limited by the annual budget.
A. Private. B. Public. C. Non-profit. D. Institutional.

2. Order preparation time would fall into which category of lead-time ?

A. Transportation. B. Purchase order. C. Manufacturing. D. Supplier.

3. Areas subject to budgetary control in purchasing are:

Ⅰ. MRO supplies.
Ⅱ. Capital.
Ⅲ. Operating expenses.
Ⅳ. Materials.

A. I, II and III B. II, III and IV C. I, III and IV D. I, II, III and IV

- 17 -
Performance Check.
4. Materials consumed in the operations process, but which are not part of the final
product are known as
A. Capital expenditures. B. Operating expenses.
C. MRO supplies. D. Components.

5. Requirements for purchasing components for stock come from all of the following,
EXCEPT
A. Production plans. B. Specific orders from an internal customer.
C. Bill of material. D. Administrative staff

6. Who is MOST likely to be responsible for maintaining signature dollar limit lists ?
A. Purchasing. B. Quality Assurance.
C. Finance. D. Marketing.

- 18 -
Performance Check.
7. Essential information on standard purchase requisitions includes all of the following
EXCEPT.
A. A price quote from a supplier. B. A description to be charged.
C. The account to be charged. D. The quantity and date required.

8. The PRIMARY reason that different signature approval levels are required for a
purchase requisition is to
A. Comply with accounting/audit procedures. B. Authorize the expenditure of funds.
C. Authorize the purchase of goods. D. Establish accounting codes.

9. Which of the following is LEAST likely to be found on an organization's purchasing

requisition ?
A. The estimated cost. B. The account to be charged.
C. Possible sources. D. Current inventory levels.

- 19 -
Performance Check.
10. All of the following are needed in order for a Kanban system to work EXCEPT
A. The resolution of all quality problem. B. An approved purchase agreement.
C. A dependable supply source. D. A stable leadtime.

11. Which of the following is LEAST likely to be of benefit to a large organization using
credit cards to purchase travel and living services ?
A. A reduction in the number of purchase orders.
B. Improved cash flow.
C. An elimination of cash advances for travel.
D. Purchase leverage based on travel statistics.

- 20 -
Performance Check.
12. The success of credit card purchasing depends on the assumption that all of the
following are true EXCEPT
A. Both parties are trustworthy and reliable.
B. The buying organization will realize considerable saving.
C. Most of the items purchased are from local sources.
D. The paper trail is reduced.

13. The use of competitive bidding is LEAST appropriate when

A. Material is proprietary. B. The dollar value is large.
C. Tooling is required. D. There is an adequate number of sellers.

- 21 -
Performance Check.
14. Which of the following are commonly used to purchase indefinite quantities of an
item or items over a stated period of time at established unit prices ?
A. Purchase order drafts. B. Blanket orders.
C. Purchase orders. D. Delivery orders.

15. Which of the following describes a preliminary contract outlining an agreement in

connection with a specific procurement action, written prior to the issuance of a
complete purchase order or contract ?
A. Letter of intent. B. Statement of work.
C. Purchase order draft. D. Standing order.

16. Which BEST describes a BOM (Bill of Material) ?

A. A recipe. B. A store receipt.
C. A shopping list. D. A work of art.

- 22 -
Performance Check.
17. What type of problems arise from unauthorized buying (non-agents making direct
commitment with a supplier) ?
Ⅰ. Dollars committed to non-qualified suppliers.
Ⅱ. By-passes the budgeting systems.
Ⅲ. Approval levels are skipped
Ⅳ. Loss of volume with approved suppliers.

A. I and II B. I, II and III C. II, III and IV D. I, II, III and IV

18. In a typical organization, which of the following budgets does not make funds
available for purchases ?
A. MRO. B. Salary. C. Materials. D. Capital.

- 23 -
Performance Check.
19. Using a priority sequence based on need date to place purchase orders, results in
A. Ignoring supplier's lead time. B. An element of fairness to all.
C. Allowance for seasonal variations. D. Orders with large value placed first.

20. Which of the following systems generated statements is LEAST accurate ?

A. A card with standard part information is used.
B. Automatically generated reports are valid.
C. Systems generated requirements can be sent directly to suppliers.
D. The computer system data must be accurate.

- 24 -
Performance Check.

Solutions.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
B B D C D C A B D B A C A B A A D B A A

- 25 -