Expenditure Cycle - Purchasing Process Notes
Expenditure Cycle
Introduction
Definition: recurring set of business activities & related info-processing operations, associated with procuring goods & services from suppliers (primary external info exchange) & cash disbursements
Objectives: minimise total cost of acquiring/maintaining inventory, supplies & services
Goals of Expenditure Cycle • Purchase from reliable vendors (service-focused) • Purchase high quality items (quality-focused) • Obtain best possible prices for items (price-focused) • Purchase only items that are properly authorised • Have resources available at hand when needed • Receive only items that are ordered • Pay for the items in a timely manner
Goal Conflicts & Ambiguities • Individual managers’ goals may not be in congruence with organisational objectives o Purchasing department may buy large quantities of inventory (bulk ordering) to take advantage of quantity discounts & reduce ordering costs/pay in cash to take advantage of cash discounts o But this drives up costs of receiving, inspecting & holding inventory costs (may not have enough storage space, may want to preserve cash to improve cash flows)
• Ambiguities in defining goals & success in meeting them o Purchasing goal = select vendor providing best quality at lowest price by promised delivery date o But realistically, 1 vendor will not be able to satisfy all 3 (timely, quality & price)
• Prioritisation of goals is necessary for choosing best solution given various constraints o Trade-offs while prioritising amongst conflicting goals o Depending on market characteristics as well (eg. if market sensitive to satisfying customer needs -> may pay higher price to ensure best quality & timely delivery)
Performance Reports • Supplier performance • Employee (those related to expenditure cycle process) performance • Quantity of POs processed by
Introduction
Definition: recurring set of business activities & related info-processing operations, associated with procuring goods & services from suppliers (primary external info exchange) & cash disbursements
Objectives: minimise total cost of acquiring/maintaining inventory, supplies & services
Goals of Expenditure Cycle • Purchase from reliable vendors (service-focused) • Purchase high quality items (quality-focused) • Obtain best possible prices for items (price-focused) • Purchase only items that are properly authorised • Have resources available at hand when needed • Receive only items that are ordered • Pay for the items in a timely manner
Goal Conflicts & Ambiguities • Individual managers’ goals may not be in congruence with organisational objectives o Purchasing department may buy large quantities of inventory (bulk ordering) to take advantage of quantity discounts & reduce ordering costs/pay in cash to take advantage of cash discounts o But this drives up costs of receiving, inspecting & holding inventory costs (may not have enough storage space, may want to preserve cash to improve cash flows)
• Ambiguities in defining goals & success in meeting them o Purchasing goal = select vendor providing best quality at lowest price by promised delivery date o But realistically, 1 vendor will not be able to satisfy all 3 (timely, quality & price)
• Prioritisation of goals is necessary for choosing best solution given various constraints o Trade-offs while prioritising amongst conflicting goals o Depending on market characteristics as well (eg. if market sensitive to satisfying customer needs -> may pay higher price to ensure best quality & timely delivery)
Performance Reports • Supplier performance • Employee (those related to expenditure cycle process) performance • Quantity of POs processed by