Case Study

On
Purchasing
(Functional Document)

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Scope

This case study is considered for purchasing of inventory items based on reorder levels.
Other types of purchasing are not included in this case study. Inventory will have so
many transactions but considered transactions like
 Receiving the material from supplier, issues against stock and updating of stock.
 The factors for computing Economic Order Quantity are FIXED at the ITEM
level.
 Min lead time and Max lead time are FIXED at ITEM level.
 Converting PR to PO is done manually by taking supplier as input.
 Sending PO document to supplier’s thru e-mail.
 Rejection process is confined to updating of GRN. (Goods Receipt Note).
 All items having single Unit of Measure.
 Currency details identified against supplier and get defaulted in supplier specific
transactions.
 Single inventory location.
 The items which go into the product are considered.

Out of Scope

 Receiving any acknowledge from supplier.

 Store to store transfers.
 Material request for issue.
 Material return/rejection note.
 Bill of Material.

Client Business Scenario

ABC Company manufactures XXX product. It must maintain the ready supply of
inventory to produce its products. To achieve this goal, ABC Stores department checks
inventory position each day by reviewing the inventory items stock list. When the
quantity-on-hand of a particular item reaches its economic reorder point, Stores raises the
purchasing requisition to place a purchase order with its approved supplier .Receiving
the goods delivered by supplier taken place in three step process.
• First, the Receiving stores verify the goods by accessing a copy of the purchase
order and comparing it to the invoice. If a received item appears on the purchase
order and the invoice, the invoice and received items are passed on to Inspection.
Otherwise, the receiving stores return goods to supplier in case of error.
• Next, the inspector inspects the received goods by accessing the quality criteria,
from the purchase order inspection criteria. If the item meets all the quality
criteria, the inspector adds it to an accepted items list, which is forwarded to the
holding stores.

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 • Finally, the holding stores update the inventory items with received quantity and
cost with moving weighted average method. Whenever request for issue comes,
holding stores issues the material.
Apart from these, client also performs inventory analysis like ABC to have better control
on inventory.
Diagram Representation

Issue
Check Reorder Level Ok
Qty<Reorder Level

Raise Requisition
PR Info Supplier Info

Convert to PO
PO Info Send to Supplier
Place Order
Supplier
PO Info &
Inspect details Receive Material

Inspect the Material

Accepted Material
Store Credit Material

Problem Definition & Requirements

ABC Company is having stiff competition from externals with respect to delivery,
Cost of the Product. It is not able to cop up in market due to their high inventory carrying
cost, Shortage of materials due to more purchase lead times and lack of proper planning.

Company understood the criticality and to stand up in competitive market, it

constituted a committee to reengineer the entire business processes involved by
considering major elements Cost, Purchase Lead times.

Committee reviewed the existing business process and identified the following
requirements which need to be addressed.

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 • Perform the ABC Analysis to identify the items to have a better control on the
inventory items.
• Identify the Maximum Stock Level, Minimum Stock Level,Reorder level and
Reorder Quantity to all identified materials based on
o Purchase lead times
o Cost of the product
o Availability of the product.
• Identify the suppliers for items
• Raising the purchase requisitions based on Reorder levels
• Reducing the purchase lead time involved
o Automatically generating Purchase requisitions.
o Converting Purchase requisitions to Purchase Orders
o Implementing Electronic media in passing documents to suppliers.

Company reviewed the Suggested changes in business process and apart from
bringing these changes, it identified a requirement of software solution which take care
all criticality requirements in producing competitive product.

Company identified the following requirements with respect to software solution

• Support to perform ABC analysis to identify critical items
o Organization divides the material into three categories for the purpose of
selective control on them and to reduce inventory carrying cost. An
analysis on material cost shows that a small percentage of items in stores
may contribute to a large percentage of cost while in another case a large
percentage of material contributes to small percentage of cost. Generally
small percentage of items with large percentage of cost called “A” Class
items
o ABC analysis based on Item consumption. It can be calculated based on
total item consumed cost to Total consumption cost in that period
o Procedure to perform ABC analysis provided design document
• Enable to capture Reorder levels, Maximum Stock Level and Minimum Stock
Level for critical items
o Minimum Stock Level
 The Lowest level to which stocks should normally be allowed to
fall, and is held as buffer stock to be made available in situations of
urgency
o Maximum Stock Level
 The highest level to which stock should normally be allowed to
rise.
o Reorder Level
 This is the level at which material requisition can be raised
o Economic Order Quantity
 It is the quantity which is most economic to order as it minimize
the cost of ordering and inventory carrying cost
o Procedure to calculate these provided in design document

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• Purchase Requisitions should be raised automatically based on reorder levels
• Capturing Supplier Information to extent of doing internet enabled document
Transactions
• Converting Purchase requisitions manually or through system to Purchase Orders
• Capture Receiving goods Information
• Provision to Enter Inspection Details and accepting Details for Received Goods
• Support to store credit the accepted Items and Updating Stock Balances, cost
based on weighted average cost
• Providing on-line Binbalance Inquiry information and provision to know cost,qty
on hand on any given date