PURCHASING PROCEDURES NOTES
Introduction
A typical purchasing cycle consists of the following steps:
- Recognition of the need
- Definition and description of the need
- Transmission of the need
- Receipt and inspection
- Invoice audit and completion of the order
2.1 Recognition of the Need
A purchase need may originate from the firm’s user departments or the
inventory control section. The notification of the need is usually in
two methods.
- Standard purchase requisitions.
- Materials requirement planning (MRP) schedule.
Standard Purchase Requisition
This is an internal document comparable to the purchase order which is
an external document. Most firms have standard purchase requisition
which is serially numbered and produced in duplicate. The user
department retains one copy while the other is sent to he
purchasing dept. A requisition has the following information;
Description of the materials, quantity, and date required, estimated
unit cost, operating account to be charged, date and authorized
signature. Most big firms have logged the necessary information on the
firm’s mainframe or it’s Local Area Network. Thus, requisitions can be
produced electronically by scanning for the necessary data. A computer
maintained inventory monitoring system automatically produces or
generates requisition when the inventory level has reached reorder point.
Materials Requirement Planning (MRP) Schedule.
When a design engineer completes the design part he/she produces an
engineering bill of materials (BOM)- a list of materials and quantity of
each required to manufacture the item. In firms using computerized
inventory planning systems, the engineering bills
of material is reconfigured into a structured multi level bill of
materials which is used to determine the specific material requirements
for the item at a specific time period. This schedule is then sent to
purchasing for direct use in obtaining the required materials. The
schedule eliminates the necessity of preparing numerous purchases
requisitions.
Definitions and Description of the Need
Purchase description serves a number of purposes among them to;
- Communicate to the buyer in the purchasing department what to buy.
- Communicate to the prospective supplier what is required.
- Serve as the heart of the resulting purchase order.
- Establish the standard against which inspections test and quantity
checks are made.
Purchase description fall into two broad categories
- Detailed specification
- Other purchase descriptions
1. Detailed Specification
This is description that tells the seller what the buyer needs to buy in
exact terms. Design and engineering desires features of design
excellence but which may contribute to less sales potential, operation
may on the other hand favor easy to work on design that
have low unit cost. It is estimated that 75-80% avoidable total cost may
be controlled at design stage by reconciling the need of engineering,
operations, marketing and purchasing in order to come up with balanced
or optimal specifications that solve the
interdepartmental conflict of interest. To develop specifications that
properly balance product quality characteristics, and product cost, four
approaches can be used:
- Early Purchasing Involvement (EPI) and Early Suppler Involvement (ESI)
- Formal committee approach, representatives come from all the
functional area. No design becomes final without the committee approval - The informal approach emphasizes the concept of buyer to challenge
requests. Management urges designers to seek continual advice from
buyers. Person to person communications and co-operation between
designers and individual buyers is encouraged. - The purchasing co-ordinate approach– one or more positions are
created in the purchasing department usually called materials
engineers to serve in a liaison capacity with the designers
department.. The approach is highly structured, expensive but effective.
Specification Requirements
To meet the need of all departments, specification must satisfy many
requirements;
- Design and marketing requirements for functional characteristics and
other properties e.g. appearance. - Manufacturing requirement for workability, and produceability with
the specifications. - Stores requirements to use, store and receive the materials
economically. - Inspections requirements to test materials with compliance with the
specifications - Purchasing and supply management requirement to procure materials
without difficulty and with adequate competition from reliable
sources of supply. - Productions control-purchasing requirements to substitute materials
when necessary. - The firm’s requirements for suitable quality at lowest overall cost.
- The firm’s requirements to use commercial and industrial standard
materials whenever possible and to establish company standard in all
other cases.
Note: precision and clarity is of most importance when writing
specifications
Types of Detailed Specifications
There are three types of detailed specifications.
Commercial standards– this is complete description of an item
standardized.
Advantages of Commercial standards
- Description can be set forth accurately and easily
- Highly competitive and readily available at reasonable prices.
- No need for specific sale commitments before productions.
- Contribute to simplification of design, purchasing procedure,
inventory management and cost reduction.
Design specifications– for materials that are not covered by standard
specification, firms prepare their own specifications. The cost of
inspection to assure compliance with the company-made specifications can
be high. To avoid ambiguity, such specifications are accompanied by
engineering drawings, which provides a more precise and accurate
description, permit wide range of competition (what is wanted can be
easily communicated to a wide range of suppliers) and clearly
establishes the standards of inspection.
Materials and method of manufacture specifications– in this method the
supplier is instructed precisely as to the specific materials to be used
and low they are to be processed. The buyer assumes full responsibility
for the performance. It is common in the defense industry.
Advantages
- Widest competition possible thus good pricing assured.
- Since product is non-standard, anti-discriminatory barrier is removed.
Disadvantages
- Puts a lot of responsibility on buyer.
- Specifications of this type are expensive and difficult to prepare.
- Inspection is generally very expensive
Other Purchase Descriptions
Performance specifications- instead of describing an item by its design
performance specification, it describes in words and quantitatively what
the item is required to do. The primary advantage of the kind of
specification is that it assures obtaining the precise desired
performance and ease of preparing specifications. it also assures
inclusion of all applicable new development, competition also ensures
quality and fair prices.
Function and fit specification- with this approach the function and the
way the item is going to fit in the whole system is described. This is
common in the computer and automobile industry where ESI is essential.
Brand or trade names- branding a product is done to develop reputation
and thus gain repeat sales. Consumers develop preferences for brands.
The branded products may attract higher prices than unbranded products.
Branding ensures or pledges consistent
quality from one purchase to the next. Describing brand names is quite
simple, inspection cost are low. This however eliminates competition and
the prices are relatively high.
Samples- samples are neither the cheapest nor the most satisfactory
method of purchases. Money saved on description costs is usually
exceeded in inspection costs. Samples should be used if other methods
are not feasible
Markets grades- grading is a method of determining quality of
commodities. A grade is determined by comparing a commodity standards
previously agreed. Grading is restricted to natural commodities e.g.,
hides, cotton, tobacco etc. The grades are developed by commodity
exchanges, trade associations, government agencies etc. The inspection
of grades is expensive in terms of time, effort and money
Qualified products- where it’s necessary to determine in advance of
purchase whether a product can meet specification then it is crucial to
qualify products. This exists in cases where:
• it takes too long to conduct post purchase inspection
• testing equipment is not commonly or immediately available
• purchase concerns safety equipment, life support equip, research
equipment etc
After qualification products of approved suppliers can be put in a
qualified product list Combination of methods- many products can’t be
adequately described by a single method as such many or a combination of
methods may be used
Transmission of the Need
1) The Stock Check
Apart from the requisition originating from the stock/ inventory control
section, in all other requisitions are checked to see if the requested
items are carried in stock .if adequate stock is on hand, no purchase is
necessary. If not, the requisition is adjusted to
accommodate the inventory levels.
2) Suppliers Selection and Preparation of the Purchase Order
When the need has been adequately and precisely described the buyer
begins an investigation of the market to identify potential sources of
supply. For routine items for which supplier relationships have been
already developed, little additional investigation
may be required to select a good source. For high value items on the
other hand, a lengthy investigation of the potential suppliers is
mandatory The firm may use cross functional teams to qualify a
preliminary group of suppliers through supplier evaluation/appraisal
procedures. The firm may then use the techniques of competitive bidding
or negotiation or both to select the desired supplier
With the supplier selected the purchasing department proceeds to prepare
and issue a serially numbered purchase order. This order in most cases
becomes a legal contract document. For this reason, the quality and
quantity requirements, price, delivery and shipping requirements etc.
must be accurately and precisely specified. Conditions of acceptance
should also be stated or referenced on the order. Each firm should
develop its terms and conditions of purchase in accordance with it own
unique need. This condition is printed on the back of the purchase
order. Several copies of each order are prepared and distributed to the
relevant department e.g. accounts,
receiving department, user, suppliers and purchasing
3) Acknowledgement and Follow-up of the Order
Normally the purchase order sent to the seller constitutes a legal offer
to buy. A contract will only exist; when the seller accepts the buyer’s
offers. The seller acceptance can be in two forms
- Performance of the contract
- A formal notification that the contract is accepted
An acknowledgement form usually sent with the order indicates acceptance
of the offer and whether the supplier will be able to meet the specified
delivery dates. It is customary for the supplier to indicate its terms
and conditions of sale on the order acceptance. In the view of the
posture adopted by courts on this matter, it is crucial to review
suppliers order acceptances with great care to rule out conflicting
terms and conditions. The purchasing department bears full
responsibility for an order until the material is received and accepted,
for this reason, active follow-up and attention is necessary to the
orders meet their specific delivery dates. Expeditors may be used for
follow-up activities.
2.4 Receipt and Inspection
The receiving agent/clerk uses the packing slip from the supplier that
describes the contents of the shipment in conjunction with his/her
purchase order copy to verify that the correct material has been
received. After the inspection of the shipment for quantity and general
condition, the receiving clerk issues a receiving report. This report is
also copied to the relevant department i.e. purchasing, accounting and
inspection. The distribution of the inspection report is withheld until
a technical inspection is done and only then is the shipment accepted.
With the use of the certified suppliers for JI-T and some partnering
purchase arrangements the receiving and inspection function have been
eliminated.
Invoice Audit and Completion of the Order
A typical invoice audit procedure involves the simultaneous review of
the purchase order, receiving report and invoice. Comparing the
purchasing order and receiving report ensures the material ordered was
actually received. The invoice and purchasing order and receiving report
ensure that the supplier bill is priced correctly and it covers proper
quantity of material received. Invoice, verifying its arithmetic
accuracy ensures correctness of the total invoice figure. Invoice
auditing should be conducted soon after receipt of the invoice to ensure
prompt payment to obtain applicable cash discounts and maintain good
supplier relationships.
Invoice auditing is an accounting function but in some instances it is
performed by the purchasing department. Closing the ordered entails
consulting all documents in the closed order file will constitute;
purchase requisition open-order file copy of the purchase order,
acknowledgement and receiving report, inspection report and any
correspondence pertaining to the order.
2.6 Purchasing and Supply Department Records
The following records are essential for the effective operation of most
purchasing departments.
- Records of open orders- Although practice varies widely each open
order records contains; purchase requisitions working copy of
purchase order, acknowledgement information, follow up data, notes
and correspondence pertaining to the order. - A record of closed orders- Provides a historical record of all
completed orders, - Purchase log- Provides a record of all purchase order issued. It
constitutes or contains the purchase order number, status of the
order, supplier’s name, and brief description of the materials and
total value of the order. In the event that the working copy of the
purchase order is lost, basic draft concerning the purchase can be
found in the log. The log can be recoded in journal or in the
computer data base. - Commodity record- Typically it include a complete description of the
materials or service, with full reference to engineering drawings
and specifications, approved supplier list and their price
schedules, competitive quotations etc. This information is
invaluable in repetitive purchase investigations. - Supplier record- It includes the address, telephone, names of
contacts persons, selling terms and routing instructions for
shipping purchases etc. This provides a quick access to information
about suppliers. This record additionally summarizes the supplier’s
delivery and quality performance. - Contract record- In addiction to providing immediate access to all
contract documents this file apprises buying persons of the
materials purchased in this manner. - Special tool records- Most firms have no need for this record. It is
however necessary for firms that purchase items that requires
special tooling for their manufacture. The records will show at a
glance the special tools owned, age and location, and the essential
mounting and operation characteristics.
Rush Orders
Rush orders are those made in urgency. Even in cases of emergency it’s
unwise to accept oral requisitions, too much chance for erroneous
interpretation exist. A special procedure for handling rush requisitions
is needed. The buyer should process the written
rush requisitions immediately and phone emergency order to the supplier
then mail a confirming purchase order Only justifiable requests should
receive rush order service since rush purchases attract higher prices
and premium in transportation. As such efforts should be made to
discourage all rush order that arise due to poor planning. This can be
done by:
- Coordinating the activities of the user dept or production
scheduling and purchasing. - Seeking the approval of the general management executive for
requisition. - Levying the requisitioning department a predetermined service charge
for each emergency requisitions processed.
2.8 The Small-order Problem
An examination of the firms order file reveals that up to 80% of its
purchase involves low expenditure items. Clearly no manger wants to
devote more buying and clerical efforts to the expenditure of less than
20% of his/her buying funds than to the other 80%. The following are
methods that a purchasing manager can use to minimize the small order
problem.
- Centralized Stores System
Items are ordered in large quantities and placed in an inventory
system for withdrawal when needed. Economic order quantity may be
used where item usage is relatively stable. There is a limit to the
financial investment that a firm can place in inventory. - Blanket Order System
Include a description of the item, unit price and other contract
provisions. The quantity is however not noted. It notes the usage
period usually 1-3 yrs and states that all requirements are to be
delivered upon receipt of a release order from the buyer or other
authorized person. When a requisition is made the buyer sends a
brief release to the suppliers. Receiving reports are filled with
the original order and checked against the supplier invoice at the
end of the month.
This system;
- Reduces clerical work in purchasing, accounting and receiving by
reducing the purchasing orders - Releases buyers from routine work to concentrate on major issues.
- Permit volume pricing by consolidating and grouping requirements.
- Reduces buyers lead times and inventory levels.
- Develops long term buyer-supplier relationships.
The system is subject to petty fraud and this requires effective control.
- Numbered purchasing orders
- Authorized delivery releases
- Bona fide evidence of receipt of items
- System Contracting
This is a more sophisticated extension of the blanket order
purchasing concept. It’s sometimes called “stockless” purchasing. It
is often a 1-5 yr contract with a supplier to purchase a large group
of related materials which are described in detail in a catalog that
becomes part of the contract. Estimated sage and fixed price for
each item is included and as agreement by the supplier to a carry a
stock of each item adequate to meet buyer’s needs. Through
variations exists the users in the buying form will sally send
requisitions directly to the suppliers holding the contract item.
The supplier maintains a “tally sheet “identifying each by the
requisition number and periodically submits the tally sheet to the
buyer for payment with invoices attached. - Term Contracting Coupled with MRP
First the buyer establishes a long term contract with a supplier
then sends the supplier weekly or monthly MRP schedule. The MRP
schedule acts as a purchase requisition and a purchasing order,
suppliers simply devices to the schedule. - Telephone /Fax Order System
Under this system when the purchasing dept receives a requisitions,
it does not prepare a formal purchasing order instead the order is
placed by fax or phone and the requisitions is send in the receiving
procedure. The price is determined during in had
telephone conversation and is recorded in the requisitions. When the
item is received as ordered the A/C dept users payment on the basic
of purchase requisitions. This system goes a step further in
elimination of the paper work. - Electronic Ordering Systems
With this system the buyer places a purchase requisitions, in
magnetic card form in the reader and deals the suppliers phone
number then transmits the requisitions data over phone lines to the
supplier’s interpretation unit. Another approach is to have the
buyer se a computer as an impact device and transmit
data over phone lines to the supplier’s
computer which works as an output terminal. Clearly the use of
electronic ordering system requires a blanket order or similar
contractual arrangement with the supplier. - Petty Cash and Cash on Delivery
Most firms use a petty cash fund to make small one-time purchases,
some firms also find it economical to make small one-time purchase
on cash on delivery basis material may be order by phone and payment
made on arrival. - Purchase Credit Card
Use of corporate credit card by employees for Maintenance Repair and
Operations (MRO) purchases has become common over the recent years
e.g. fuel cards. It reduces purchasing cycle time, improves
purchasing relations with operating dept and makes the payment
faster. The credit cards are issued to operating dept personal
selected by their supervisor. Through beneficial the credit card
system offers exposure to risks for the firm;
- Loss of control over what is actually purchased.
- Possible disregard of departmental authorization and control.
- Opportunity for petty fraud.
Control can be affected in the following ways
- Select the suppliers where the cards can be used.
- With the help of supervisors determine who receives credit cards.
- Selecting purchases limits for such card.
- Supplier Stores/Consignment System
In this system if a buyer makes large volume purchases from the
supplier, the supplier may staff a small store in the buyers
premises and operate it an a consignment basis. Users can then go to
the store and sign for their purchases. At the end of the
month the firm is filled for its purchases. This is not a short term
arrangement. - Supplier Delivery System
This system is somehow similar to the supplier stores system but
it’s more feasible for firms with small volume purchases. The buyer
accumulates purchase requisitions and the supplier delivery person
picks them on a specified day while at the same time
delivery materials ordered in the proceeding requisitions. This
recharges buyers paper work and in voluntary problems.
Purchasing Fraud
Examples of purchasing supply related fraud
- Buyer/supplier collusion leading to approval for payment for
fictitious charges. - Presentation of false invoices.
- Re-presentation of genuine invoices that have not been cancelled at
the time the cheque was signed for second payments. - Arranging for lowest tender to come from a desired source.
- Premature scrapping of assets in return for a “kick back” from a
scrap dealer - Computer based fraud that takes advantage of inadequate contort or
limited understanding of computers on the part of fines management.
Prevention of purchasing fraud involves three methods:
Internal control
- Ensuring separation between recording and custodian duties
- Delegation of requisition power to specified employees with
authorized limits which increases with level of authority - The requisitioning department may act as a control to purchase
department since each order placed may be traced to a requisition.
Goods inwards should be received at designated area preferably the
gate or entrance and receipt of all good recorded. The record should
be then distributed to the accounting and purchasing departments. - Random invoice check
- Institute system development control, organizational control and
procedural controls with respect to computers
External auditing
Contrary to popular belief it’s not an auditor’s primary function to
prevent fraud but to make an independent examination of the books,
accounts, and vouchers of a business for purpose of reporting whether
the balance sheet and profit and loss account
reflects a true and fair view of the firm affairs. But in doing so
external auditing serves as deterrents for fraud. External auditing is
necessary under the companies Act.
Give away signs
- Unfold invoices that have not come through post.
- Too many orders to one supplier other than those with single
sourcing arrangements. - Loss of supporting documentations
- Sudden unexplained affluence.
- Unwillingness of employees to take holiday or accept transfers or
promotion to other work.
2.10 Purchasing and Information Technology (IT)
Information Technology is the acquisition, processing, storage and
dissemination of vocal, pictorial, textual and numeric information a
microelectronics-based combination of computing and telecommunications.
The major components of I.T. are therefore
computers and telecommunications.
Information technology and its impact on daily operations
- There will be lower costs of shopping in links to suppliers
- IT equipment will make records and reports available from a single
recording of information. - Peak loads and end of month overtime with the minimized or eliminated
- Items needed repeatedly and in large amounts will be purchased with
greater efficiency. - Better management can be made because of the speed and accuracy with
which information is available. - It will relieve buyers and purchasing personnel of detailed work,
permitting them to spend more time in activities requiring judgment. - It will ensure prompt delivery of critical items on major capital
projects. - Exceptions requiring special handling will be handled well by the
computer, reducing errors and delays. - The computer will eliminate defensive records keeping on purchased
items from which government contracts require proof that the buyer
obtained adequate price quotations and paid prices consistent with
the market. - It will reduce the cost o f accomplishing necessary manual clerical
work in purchasing and related activities.
Disadvantages of IT
- The procedure is inflexible and must be followed exactly while
manual program permit deviations. - Errors or omissions in putting information into the computer are
more likely than when the information is manually posted. - Since IT involves special equipment a company cannot use
conventional equipment when the computer breaks down. Some major
companies have contract with data processing centers or other
companies for emergency processing of data, but the arrangements are
not ideal. - A good IT programmer or department head must be well informed about
company procedure and problems. It is difficult to hire or replace
such employees.
Decision process on whether to computerize
When carrying out investigation to find out whether to computerize the
system, the following questions should be addressed:
- Will automation of purchasing and related activities lower the net
cost of performing the function. - Will it process all or most purchasing clerical function?
- Can it handle orders for complex as well as simple parts and
materials and multiple items as well as single item orders? - Will it handle rush orders as well as routine deliveries?
- Will it be easy to install and operate, or will the conversion
process and maintenance be difficult. - Will it be compatible with other IT operations of the company or
division? - Does the information provided by the system have value?
- Will the cost of obtaining information for management be
commensurate with its usefulness, or could it be obtained in a more
economical way. - Is the information to be provided by the system already available
from some existing secondary source? - What personnel problems and needs will be generated by the conversion?
- Are many clerks involved in processing data at the moment (present?)
- What areas of application should be most rewarding? (This
information will help establish a priority time –table or conversion
schedule) - What changes in organization, policies and practices must be made.
- Will purchasing be able to use the computer on a regular schedule
- What is the volume (percentage) of repetitive work (items ordered)
as compared to non-repetitive work? - Will the program provide management by exception, freeing executives
from the need to work through voluminous reports and allowing them
instead to attend to matters requiring immediate action? - What are the intangible values that should result from timely
information and reports to management goodwill from on-time
deliveries or reports of order status, reduction in emergency orders
as a result of grouping needs by product, family and improved trade
relations by virtue of regularly monthly reports of specific
commodity purchases by vendor? - What equipment would provide the desired information at the lowest
cost with proper consideration given to future needs? - What cost and savings will result from the automation of purchasing
and related activities?
What Is Data Capture ?
Data capture refers to the collection of data for input into a computer.
A wide variety of methods are available, including the following:
- Bar codes and light pens
- Concept Keyboards
- Digital cameras
- Electronic point of sale registers
- Graphic pads
- Laser scanners
- Magnetic ink character recognition
- Magnetic stripe cards
- Mark sensing and optical character recognition
- Questionnaires
- Scanners
- Sensors
- Voice recognition.
It is important to ensure that the data capture is accurate.
Bar codes
Invented in the 1950s, bar codes accelerate the flow of product and
information throughout the business community. The bar code is read by a
laser scanner and sent to the computer. The description of the item is
stored in the computer and in the case of supermarkets, the information
is instantly sent back to the checkout where it is printed on the receipt.
Bar code applications
Some production applications of bar coding are:
- Counting raw materials and finished goods inventories.
- Automatic sorting of cartons and bins and on conveyor belts.
- Lot tracking.
- Production reporting
- Automatic warehouse applications including receiving, put away,
picking and shipping - Identification of production bottlenecks
- Package tracking
- Access control
- Tool cribs and spare parts issues
Benefits of Bar Coding
- Faster data entry- bar code scanners can record data 5- 7 times as
fast as skilled typists - Greater accuracy- keyboard data entry creates an average of one
error in 300 keystrokes. Bar code entry has an error rate of about 1
in 3 million. - Reduces labour costs- through time saving and the increased
productivity. - Elimination of costly over-or-under stocking- and the increased
efficiency of just-in-time inventory systems. - Better decision making- Bar code systems can easily capture
information that would be difficult to collect in other ways. This
helps managers to make fully informed decisions. - Faster access to information
- The ability to automate warehousing
- Greater responsiveness to customers and suppliers
Electronic Point of Sale (EPOs)
The most important purpose of using an EPOs system is to scan and
capture information relating to goods sold. An EPOs system verifies,
checks an d changes transactions, provides instant sales reports,
monitors and changes prices, send intra and inter stores messages and
stores data. The most familiar example of EPOs is the recording of
retail stores sales by scanning product bar codes at the check out
tills. In the context of retailing, the benefits of EPOs to customers
and sellers include:
- Reduced checkout times
- Provision of information to customers relating to products and prices
- Facilitation of payments by credit cards
- Reduction in labour costs by eliminating the need to mark products
individually - Electronic article surveillance (EAS) can assist in the detection
and prevention of shoplifting. - Smart shelves which read and transmit data through the internet to
store manages and manufactures notifying them when stocks are low,
managers are thereby relieved of checking inventory or placing
orders since automatically generated purchase orders enable
suppliers to produce and replenish goods sold. - EPOS also has applications in production supply chain management
including vendor managed inventory (VMI) and collaborating planning,
forecasting and replenishment (CPFR).
Captured data is fed into the computer using such devices as a keyboard,
mouse, voice or scanner. Care must be taken to avoid mistakes when
inputting data.
Electronic Data Interchange (EDI)
It is the technique based on agreed standards, which facilitates
business transactions in standardized electronic form in an automated
manner directly from computer application in one organization to an
application in another. Data elements and codes are described in a
directory relating to the message standard used. By the use of EDI,
national and international organizations can trade electronically.
The Advantages of EDI
- The replacement of the paper documents e.g. purchase orders,
acknowledgment, invoices etc used by buyers and sellers in
commercial transactions, by standard electronic message conveyed
between computers often without the need for human intervention. - Reduction in lead times through buyers and suppliers working
together in a realtime environment. - Reduction in costs of inventory and release of working capital.
- Promotion of such strategies as Just-In-Time approach of purchasing
- Better customer service
- Facilitation of global purchasing through international standards
- Facilitation of invoice payments by the computer-to-computer
transfer of money (EFT) which eliminates the need for the
preparation and posting of cheques. - The integration of functions, particularly marketing, purchasing
product and finance. - EDI tends to promote long-term buyer-supplier relationships and
increase mutual trust.
Factors to consider before adopting EDI
- Ensure that exchanging information electronically supports the
overall organizational strategy. - Consider the cost and ramifications of EDI standard tools and
techniques including implementation, software maintenance manpower and participant training and how to promote systems and applications integration. - Consider the organizational and process changes involved.
An organization can comfortably use EDI in a purchasing environment
where the following factors exist:
- There is a high volume of paperwork transaction documents
- There are numerous suppliers
- There is a long internal administration lead time associated with
the purchasing cycle - There is a desire for personnel reductions, new hire avoidance or both.
- There is a need to increase the professionalism of purchasing personnel.
Limitations of EDI
- It is an expensive system to install
- It is a cumbersome, static and inflexible method of transmitting
data most suited to straightforward business transactions such as
the placement of purchase orders for known requirements.
