BHM 4201 HOSPITALITY OPERATIONS MANAGEMENT
OPERATIONAL PROCEDURES FOR PURCHASING
1.
Definition and objectives of purchasing
2.
Steps and documents used in purchasing
3.
Methods of purchasing
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1.
Definition and Objectives of Purchasing
Purchasing is the procurement of goods from outside the establishment
at a price.
Purchasing may also be defined as a function concerned with the search,
selection, purchase, receipt, storage, and final usage of a commodity in
accordance with the policy of the establishment. This implies that the
person responsible for purchasing will:
 Seek out the required items
 Select the most suitable item s for the business
 Enter into contract with suppliers
 Ensure that the quality, quantity and price of goods delivered are
correct
 Ensure that the goods are transferred correctly to the user
departments
 Make a follow-up with the user departments to check that the goods
were satisfactory.
The objectives of purchasing are to ensure that the establishment obtains
 The Right Goods;
 Of the Right Quality;
 In the Right Quantity;
 From the Right Supplier;
 At the Right Price; and
 At the Right Time.
Each of these objectives is discussed briefly in the next section.
1.1
The Right Goods
The right goods for any business organisation are determined by what
raw materials and other supplies the organisation requires to provide or
deliver the products and services it offers to its customers. Thus in food
and beverage operations, the right goods are the ingredients required to
produce the dishes offered in its menu for food and beverages.
1.2
The Right Quality
The quality of a product is determined by its intended use and the
appropriateness of the product for that particular use. For example, fillet
of beef is very high quality meat, but it would not be the right quality to
cut up for beef stew, stews are associated with lower quality meat cuts.
Operations normally express their product quality requirements through
a document called the Standard Purchase Specification. This is a
concise description of the quality, size, weight, count or other quality
factors desired of a particular product. Standard purchase specifications,
especially for non-processed products should be prepared on the basis of
the establishment’s menu requirements. A simple format of the standard
purchase specification is shown below.
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Standard Purchase Specification: Sample Format
STANDARD PURCHASE SPECIFICATION
Ref. No.
Name of Operation
Date
1.
Product Name: ________________
This must be the exact and specific name as used in the trade, e.g.
Green Lettuce
2.
Product Use(s)
Clearly indicate the product use, e.g. to be used for making mixed
vegetable salad
3.
Product General Description
Provide general quality information about the desired product. For
example, Iceberg lettuce: Heads to be green, firm and without spoilage,
excessive dirt or damage, and packed 24 heads per case.
4.
Detailed Description
State other quality factors that help to clearly identify the desired
product. Specific factors may include some or all the following:
 Geographical origin
 Variety or type
 Brand name
 Package size, etc
5.
Product Test Procedures
Indicate product test procedures to be used either at receiving or when
the product is being prepared or used. Thus green lettuce packed 24
heads per case can be counted, while products delivered under
refrigeration can have their temperature checked with a thermometer at
the time of receiving.
6.
Special Instructions and Requirements
Include any additional information to clearly communicate to the
supplier the quality expectations of the product, e.g. labelling,
packaging and delivery requirements.
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Advantages of Standard Purchase Specifications
Standard Purchase Specifications can benefit the operation in several
ways. They are used to:
 Establish a buying standard for a particular commodity in the
establishment
 Inform all eligible suppliers in writing, precise and uniform quality
requirements of the buyer
 Inform the receiving clerk the quality of goods to accept
 Obtain competitive price quotations from different suppliers
 Train new staff and facilitate smooth job hand-over
1.3
The Right Quantity
The right quantity means purchasing sufficient quantities of goods for the
establishment’s immediate needs with regard to factors that limit how
much of the goods can be held in stock at a time. Some of these factors
include the following:
 Storage space and facilities available
 The usage rate of each commodity
 The distance of the establishment from the market, and the frequency
of deliveries
 The safety or minimum stock level
 The budget available for purchases
 Standard package sizes for different products
 Minimum order quantity specified by suppliers
One method of controlling stock levels, especially for non-perishable
items, is the minimum/maximum order system. The system determines
the periodic usage rate for each product, the minimum or safety level,
maximum level, and re-order level, to avoid under or over-ordering. The
example below illustrates how the system works.
Assume the following for one non-perishable product.
Purchase unit:
Daily usage rate
Order period
Periodic usage rate
Lead time
Lead time usage
quantity
Safety (Minimum)
Level
Order Point
Maximum Level
Case
2 cases
30 days
60 cases (2 cases per day x 30 days). This is also the order
quantity for the period.
4 days (goods delivered 4 days after placing order)
8 cases (2 cases per day x 4 days of lead time). This quantity is
used up while waiting for delivery of the order
8 cases (2 cases per day x 4 days of lead time). This quantity is
held for use in case of delivery delays, or unusually high
consumption rates.
This is the balance of stock at which the order for fresh
supplies is made. It is calculated by adding Lead time quantity
+ Safety Level
8 cases + 8 cases = 16 cases
This is the highest level of stock allowed in the storeroom for
that particular item, calculated by adding Periodic usage rate
to minimum level: 60 cases + 8 cases = 68 cases
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When ordering at the order point, the quantity to order is the periodic
usage quantity. The calculation below shows how the established
maximum level is maintained.
Order Point
Periodic Usage
Total Available
Lead time quantity
Maximum Level
1.4
+
=
=
16
60
76
8
68
Cases
Cases
Cases
Cases
Cases
The Right Supplier
When selecting suppliers, the manager will need to consider several
factors because not every supplier who carries the needed products is
appropriate for the operation. The following factors may be used to
determine eligible suppliers for the Food and Beverage operation’s
business.
 Location of the supplier – this can have a major impact on delivery
times and transport charges, depending on how far the supplier is
from the operation
 Quality of supplier’s operation – the supplier should have adequate
and hygienic facilities which ensure quality of products
 Supplier’s range of products – whether the supplier has a wide range
and variety of products which can ease administrative tasks in
purchasing
 Supplier’s reputation – Recommendation from other buyers/users of
the supplier’s products on the supplier’s reliability
 Provision of free samples – Whether the supplier provides free samples
of products for evaluation
 The supplier’s trading terms – whether the supplier offers any
discounts, credit period and billing procedures, and whether interest
is charged on outstanding balances.
1.5
The Right Price
The right price is determined by the lowest price charged in relation to
the quality of the product. Ideally, the operation should order goods from
the supplier who quotes the lowest price, so long as all suppliers have
quoted based on the same standard purchase specification. However,
sometimes establishments purchase from higher priced suppliers
because other considerations outweigh the benefit of the lowest price.
1.6
The Right Time
The right time means that goods are ordered form suppliers such that
they are available for the establishment’s operational needs when they
are needed. Therefore this objective is achieved by taking into account all
factors affecting the right quantity, and with reference to the established
order point for each product.
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2.
Steps and Documents Used in Purchasing
2.1
Steps in Purchasing
i)
ii)
iii)
iv)
v)
vi)
vii)
Purchasing in food and beverage operations follows seven steps as
outlined below.
A user department completes an issue requisition form for storeroom
items needed for its operation
The storeroom responds by issuing the required products to the user
department
When products in the storeroom reach re-order level, the storekeeper
raises a purchase requisition to the purchasing department.
The purchasing department orders the required products from the
selected supplier, using a purchase order, with a copy to the receiving
department.
The supplier delivers the ordered goods to the receiving department
together with a delivery invoice.
The receiving accepts and places goods in the storeroom. Then forwards
the invoice, together with the receiving record and the copy of purchase
order to the accounts department.
After further processing of the necessary documents, the accounts
department sends payment to the supplier, and flies copies of the
purchasing and receiving records for control and accounting purposes.
The above purchasing cycle is repeated every time products need to be
ordered, and shows that purchasing is more than “Just picking up the
phone and calling in an order from a supplier”.
It is a complex cycle of activities requiring special planning and control
procedures that create an audit trail – a series of records, documents
and reports that trace the flow of resources through an operation.
2.2
Documents Used in Purchasing
Some of the documents used in the purchasing procedure described
above include the following:
i)
Purchase Requisition
This document originates from either the storekeeper or other user
departments in the food and beverage operation. It is addressed to the
purchasing officer requesting him to order the listed products. It is
important as it is:
 The initial record of purchase
 An approval to commit funds, and therefore forms the basis for writing
a purchase order
 Written communication, therefore prevents any misunderstanding
between the purchasing office and the requesting departments
The purchase request may be categorised according to food, beverages, or
general purchases for ease of control.
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ii)
Standard Purchase Specification
Details of this document are discussed under purchasing the right
quality of goods in the preceding section. In the purchasing procedure,
the purchasing officer refers to it when soliciting bids form suppliers. It
is used as the basis for evaluating supplier price quotations.
iii)
Purchase Order
The purchase order is a document initiated by the purchasing officer,
addressed to a specific supplier to supply the specified products and their
quantities to the ordering establishment. It is written based on an
approved purchase requisition.
This is the initial document of control in the receipt of goods, and is
legally binding between the buyer and the seller – it shows the seller’s
agreement to supply the goods, and the buyer’s commitment to pay for
the goods after delivery.
After writing, the purchase order is distributed as follows:
 Original – to the supplier
 Duplicate – to the receiving department, then to accounts
 Triplicate – book copy for the purchasing department
The purchase order must be approved by a designated official of the
establishment such as the General Manager, Financial Controller, or
Chief Accountant to be valid.
Control of Purchase Orders
i)
All purchase orders must be serially numbered and used
consecutively. Any cancelled or unused purchase orders should be
stamped “CANCELLED” and all copies left intact in the Order
Book.
ii)
No deliveries should be accepted without a copy of the purchase
order.
iii)
A list of approved suppliers should be established. Any other
suppliers should be use with written authority.
iv)
A record must be kept of all purchase orders issued by the hotel or
restaurant.
v)
The manager should have an up-to-date price list for all products
so that he can quickly check the validity of prices before approving
a purchase order
vi)
The receiving clerk should retain the duplicate copy of the
purchase order until delivery of the goods, so that it can be
forwarded to accounts department together with the delivery
invoice and the goods received note.
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3.
Methods of Purchasing
Methods of purchasing used by food and beverage establishments include
the following:
3.1
Purchasing by Contract
A contract is a legally binding agreement made between two or more
parties through which one party acquires rights over the other. The legal
binding implies that the agreement is enforceable in a court of law.
In a purchasing contract, the parties involved are the buyer and the seller
(supplier). Purchasing contracts may be of two types.
i)
Time Contract
This covers a specific period of time within which the seller agrees to
supply the buyer with a particular commodity or commodities at an
agreed price. Unless it is renewed, the contract lapses at the end of the
stated time period. The objective of the time contract is to determine the
source of supply of a item for a known period and price.
ii)
Quantity Contract
This covers a specific quantity of an item for a particular trading period,
and normally applies to seasonal products when in season. The buyer is
not required to take delivery of the total quantity contracted at once, but
may accept small quantities periodically as dictated by operational needs.
Advantages
 Ensures continuity of supply at fixed price
 Saves time and labour by eliminating future price negotiations and
related administrative tasks and expenses during the life of the
contract
 There is no need to stock pile commodities in order to benefit from
bulk quantity discounts
 Menus can be accurately priced, based on agreed, known and stable
cost prices
Disadvantages
 May result in no flexibility in choice of suppliers and commodities
available
 Eliminates advantages of special offers or price cuts
 Supplier may take customers for granted
 It may lead to high stock piling, especially in the case of quantity
contracts
 It can be difficult to change suppliers in case a supplier proves
inconsistent in delivery of goods and services
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3.2
Centralised Purchasing
This method is widely used by chain organisations with units scattered in
different geographical regions of the country. It may also be used by a group of
small independent operators with similar needs located within the same region.
Operation
i)
A central purchasing office is first established
ii)
Each individual unit relays its material requirements to the central office
iii)
The central office determines the total requirements and orders the same
from suppliers
iv)
The suppliers normally deliver the goods at the central office stores, or
directly to each unit if instructed to do so
v)
Where delivery of the purchase orders is centralised, the organisation
must arrange for distribution to the individual units
Advantages
 The organisation benefits from quantity discounts
 It provides a better opportunity to obtain the desired quality of goods – the
buyer has a wider market to choose from
 Goods can be purchased to the buyer’s exact specifications
 Large inventories at the central stores ensure constant supply to individual
units
 Greater control can be maintained over dishonest individual unit purchasing
officers
Disadvantages
 The individual unit must accept the standard product in stock – there is no
room for the unit’s special needs
 Individual units cannot take advantage of local offers at reduced prices
 Centralised delivery may present distribution problems, and increase
purchase costs
3.3
Cash and Carry (Warehouse) Purchasing
This is conducted in warehouses or large food supermarkets, mostly found in
major towns. It is ideal for catering establishments located in major towns
where these large supermarkets are found. The buyers are required to pay cash
for all their purchases and provide their own transport to their establishments.
Advantages
 Smaller operations can obtain goods at competitive prices, even though the
total value of purchases may not be high
 Buyers can se the wide range of goods available and alternatives to what
they may be using currently
 It allows the purchase of items in small quantities; therefore a new product
can be sampled at minimum cost
 Purchases can be made more frequently in small quantities, thus keeping
stock levels and expenditure down
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Disadvantages
 Customers cannot benefit from credit purchases
 There is no delivery service, so customers incur extra cost in
transportation
 It may risky for the buyer to carry large sums of cash
 Sometimes availability of products may be restricted
 Usually there are no sales assistants to help buyers
3.4
Purchasing by Daily Quotation Sheets
This method is used by large establishments on daily/weekly/monthly
basis. The purchasing officer telephones at least three suppliers to
request for price quotations for the goods required according to standard
purchase specifications already sent to the supplier. The supplier who
offers the most competitive price for the quantity required will be given
the order to supply the goods.
On periodic basis for non-perishable goods, suppliers may be asked to
submit written quotations (price lists), whereas some establishments
(buyers) send their own quotation sheets for suppliers to enter their
prices and return.
Advantages
 The buyer is able to select the most competitive prices from different
suppliers
 It assists the purchaser in selecting the most economic order
quantities
 Suppliers only quote against the buyer’s purchase specification
Disadvantages
 It is time consuming and expensive
 It is impractical for small establishments due to the volume of supplies
required, making it uneconomic for suppliers to quote or offer such a
service
 Suppliers who offer a better service may not be as competitive in price
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