Creating the Purchase Order
Once final approval has been given, central purchasing collects the paperwork and the information is transferredby handto a purchase order form and then usually faxed to suppliers. This is generally accompanied by further phone calls to confirm receipt. Copies are sent to shipping and receiving and accounting and finance, and then filed with various department managers.
For most companies, this process remains much the same as it was before World War II (except for the fax, of course), with long and unpredictable cycle times. Although there is usually a strong relationship between purchasing officers and suppliers, particularly for indirect goods, there is little ongoing attempt at strategic sourcing. Often, policies vary or overlap between each office, division, and business unit, or between corporate and departmental levels. There is seldom any means for tracking the progress of the order, nor any formal or standardized system in place to measure relative costs, savings, or vendor performance. Long lead times, particularly with MRO items, cause individuals to stock excess materials, raising inventory levels and carrying costs, and increasing the risk of obsolete stock.
Although in most manufacturing and distribution companies procurement is often a core competency, the process of purchasing direct materials for many companies is frustratingly similar to that of indirect goods. But purchasing direct production materials or MRO is, first and foremost, time sensitive and focused on the hourly demands of the assembly line. Yet, because the process is still paper-based and therefore both sequential and prone to errors, even the most efficient purchasing employees tend to experience a lack of integration between departments, numerous misorders, and gaps in materials delivery. The fear of being caught short forces purchasing officers to carry excess inventory, thereby raising carrying costs. Attempts by the CFO to reduce inefficiency through cost-based accounting and departmental-based incentive programs often create conflicting, silo-based priorities, disrupting the horizontal supply chain process flow, forcing managers back into positions where their department budget becomes more important than overall efficiency or cost of production to the firm.
The same issues concerning strategic sourcing and volume discounts apply to the direct materials side, where purchasing staff often complain of a lack of accurate, up-to-date performance data on what can be hundreds and sometimes thousands of suppliers. All of these issues are simply compounded by the complexity and scale of the procurement process for manufacturing. And yet all excess costs stem, ultimately, from the fact that a paper-based, sequential process, no matter how well-devised and run, can simply not provide a company with a single, accurate forecast, a just-in-time (JIT) materials delivery process, rationalized and minimized safety-stock, and a reliable available-to-promise date. It is this unpredictabilitythat the wrong goods are being ordered, that the vendor will not deliver the right items, that the goods will not arrive on timethat is the basis for all excess costs.