Aim for efficiency in the ordering administration
PURCHASING is receiving an increasing amount of attention from the top management as it has more impact on profitability and supply chain performance than other departments. The process consists of six steps: specification, supplier selection, contracting, ordering, expediting and follow-up. Today, we focus on the fourth step: ordering.
After a contract is in place, it is executed through ordering the product, service or work from the supplier in accordance with the conditions agreed upon in the contract. In the case of a one-off purchase, the contract is the actual purchase order.
How do you make sure you get the right things, in the right condition, at the right time and in the right place?
A purchase order is usually initiated through a purchase order requisition or materials requisition. In a production environment, this is generated through the materials requirements planning system, which asks what volumes are needed for production over a specific period given existing inventory levels.
There are different ordering methods: stock sourcing, demand tailored sourcing and justin-time (JIT) sourcing. In stocksourcing, the buyer maintains stock and the supplier may maintain stock as well. This ordering system is normally used for repetitive needs and/or products of low value.
Demand tailored sourcing is used for incidental high value items. In this ordering system, the buyer tries to avoid holding stock, while the supplier holds central stock.
JIT sourcing is used for highvalue and predictable demand. In this ordering system, both buyer and supplier have no stock, in theory. However, as production lead-times of certain items are long, the supplier or the supplier of the supplier may be the one holding stock.
When ordering from a supplier, it is very important to be precise about instructions to them. Generally, a purchase order will include the following information: order number, product description, unit price, number of units required, expected delivery time or date, delivery and invoicing address and handling instructions (such as halal logistics, temperature range, etc).
The ordering administration might be quite costly, due to the cost per invoice and high number of invoices. Cutting the cost per invoice can be achieved by eliminating redundant activities, processes, and paperwork. E-ordering via online catalogue and purchase cards (P-cards) further simplify administration of an order.
P-cards are used for frequent purchases of low-value items, like stationaries. Payment is taken over by credit card companies, resulting in monthly billing. The organisation pays a small amount per card, but harvests major administrative cost savings.
A lot of invoices can be the result of a lot of one-time invoices; a lot of invoices per supplier and separate invoices per department. The number of invoices can be reduced. If you have fewer suppliers, you have fewer invoices. Cut the number of suppliers for product categories that can be easily sourced locally.
Second, the contract terms should specify the method of invoicing, frequency of invoicing, and consolidation among departments. Sending one invoice per month is cheaper to administer compared with 20 invoices per month from that same supplier.
As various users in the organisation have the authority to order from contracted suppliers, educating these users is important in order to limit the number of invoices sent. In short, obtaining efficiency is of key importance in ordering.
email@example.com The writer is founder and CEO of LBB International, the logistics consulting and research firm that specialises in agri-food supply chains, industrial logistics and third-party logistics. LBB provides logistics diagnostics, supply chain design and solutions and market research in Asia, Europe and the Middle East.
Cutting the cost per invoice can be achieved by eliminating redundant activities, processes, and paperwork. Eordering via online catalogue and purchase cards (P-cards) further simplify administration of an order.