Material Purchase Release

Buyers use material purchase releases to order items covered by blanket purchase orders. Purchasing specifies the required part number(s), quantity, unit price, required receipt date, using department, ship-to address, and method of shipment and forwards this to the supplier. Purchasing forwards copies of this form to the supplier, accounting, receiving, and traffic. Purchasing retains several copies for its records. The copy to the supplier serves as a notification of a required item or items. Accounting receives a copy so it can match the quantity received against the quantity ordered for payment purposes. Receiving must have visibility of incoming orders so it can compare ordered quantities with received quantities. As with other forms, this part of the process is increasingly becoming electronic.

Different types of material releases exist. Organizations often use the material release as a means to provide visibility to the supplier about forecasted material requirements as well as actual material requirements. One U.S. automobile producer provides suppliers with an 18-month forecast for replacement parts. The first three months of the release are actual orders. The remaining nine months represent forecasted requirements that help the supplier plan.

In other cases, a more detailed contract is required above and beyond a simple purchase order. A contract is typically required if the size of the purchase exceeds a predetermined monetary value (e.g., $1,000), or if there are risks associated with doing business with a supplier where the potential for conflict and problems is not negotiated prior to the purchase. Because purchasing professionals buy products and services as a career, it is not surprising that they deal regularly with contracts. It is therefore critical that purchasing managers understand the underlying legal aspects of business transactions and develop the skills to manage those contracts and agreements on a day-to-day basis. Once a contract has been negotiated and signed, the real work begins. From the moment of signing, it is the purchasing manager’s responsibility to ensure that all of the terms and conditions of the agreement are fulfilled. If the terms and conditions of a contract are breached, purchasing personnel are also responsible for resolving the conflict. In a perfect world, there would be no need for a contract, and all deals would be sealed with a handshake. However, contracts are an important part of managing buyersupplier relationships as they explicitly define the roles and responsibilities of both parties, as well as how conflicts will be resolved if they occur (which they almost always do).

Purchasing contracts can be classified into different categories based on their characteristics and purpose. Almost all purchasing contracts are based on some form of pricing mechanism and can be categorized as a variation on two basic types: fixed-price and cost-based contracts. In a fixed-price contract, the price stated in the agreement does not change, regardless of fluctuations in general overall economic conditions, industry competition, levels of supply, market prices, or other environmental changes. Costbased contracts are generally applicable when the goods or services procured are expensive, complex, and important to the purchasing party or when there is a high degree of uncertainty regarding labor and material costs. In this case, the supplier is reimbursed all of their actual costs plus some agreed on operational margin and overhead amount. The differences in contracts will be discussed later in Chapter 14.