Main Evaluation Aspects of Purchase Management

This article throws light upon the three main evaluation aspects of purchase management. The evaluation aspects are: 1. Authorization for Purchase and Procurement 2. Internal Operations 3. Special Test.

Purchase Management: Evaluation Aspect # 1.

Authorization for Purchase and Procurement:

i. Review the procedures, such as adequacy of approvals necessary for particular types of items and amounts in terms of either quantities or value, appropriateness of forms used, and the manner in which the supplementary approvals are handled when actual purchase cost exceeds original estimates and the provision made for changes in specifications or quantities.

ii. On the basis of actual tests, verification and appraisal of:

(a) The extent to which the procedures are complied with. (Where they were not complied with to any significant degree, determining the causes).

(b) Unusual authorizations in terms of types of products, quantities, source restrictions, and the like.

Purchase Management: Evaluation Aspect # 2.

Internal Operations:

i. General:

(a) Adequacy of facilities for

(i) Reception and interviews with vendor representatives and

(ii) Internal operations.

(b) Whether the internal operations are being carried out in a manner consistent with established organisational responsibilities, policies and procedures:

In case of deviations, reviewing such questions as:

(i) Should the organisational responsibilities be modified?

(ii) Should operational policies be reappraised?

(iii) Should operational procedures be revised?

(c) Adequacy and appropriateness of internal records and files of various types in terms of special purpose and relation to other records and procedures.

(d) Adequacy of control over the total purchase cycle as to receipt of authorisation, assignment to buyer, making of purchase, follow-up, and completion so that the status of individual procurements can be easily determined.

(e) Whether the purchasing forms are properly safeguarded and controlled.

(f) Whether the purchasing actions are processed on a timely basis.

ii. Relating to Vendors:

(a) Adequacy of the vendor records maintained showing supply capabilities and continuing purchasing relationships.

(b) Adequacy of the effort to develop new vendor sources and of the field contacts with vendors to keep abreast of these vendor situations and to maintain cordial, high-level relationships.

(c) Reviewing the company’s investigation procedures through the banks and credit agencies about vendor financial solvency.

(d) Adequacy and appropriateness of the departmental efforts to evaluate vendor performance for price, delivery and quality.

(e) With respect to competitive bidding, whether the procedures include:

(i) Solicitation of tenders in all cases.

(ii) Invitation of quotations from at least three qualified vendors.

(iii) In the case of recurring purchases, solicitation of tenders with needed frequency.

(f) With respect to negotiated purchase prices, whether:

(i) The need to purchase on this basis has been adequately justified.

(ii) Adequate cost breakdowns were made available as a basis for negotiation.

(iii) All the possible cross checks were made in the way of comparison with products involving similar materials and processing, or via ‘make or buy’ decisions.

(g) With respect to cost-type procurement, whether:

(i) The need to purchase on this basis has been adequately justified.

(ii) Clearly defined and reasonable agreements have been reached as to recover­able costs prior the issue of the purchase order.

(iii) Profit was reasonable and established in such a manner as to best motivate the lowest possible level of cost.

(iv) Cost computations were adequately examined for compliance with established agreements.

(h) Adequacy of provisions regarding approval of the vendor and the proposed procurement by a higher-ranking member of the purchasing group.

Purchase Management: Evaluation Aspect # 3.

Special Test:

In addition to the above observations, studies, and queries relative to specific aspects, the management auditor should test a representative number of purchase transactions by following them through all steps in the procurement cycle. The sample should be picked at random from the original input of authorizations to procure.

Points of special interest at all stages should include:

1. Compliance with all policies and procedures.

2. Reasonableness of timing at the various stages.

3. Evidence of care and maximum protection of company interest.

4. Evidence of good collaborative effort of the total purchasing group.

5. All possible evidence of good value received.

6. Excessive emergency orders or petty procurement activities.

7. Possibilities for combining separate purchases in one order.

8. Orders for unauthorized items—such as capital equipment.

9. Necessity of commitments in advance of price agreements.

10. Effectiveness of internal records and related procedures.

11. Any evidence of favouritism to vendors.