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Discussion and Illustration

19 January, 2016 - 12:35

Figure 13.4 reflects the level 0 data flow diagram for a typical PtoP process. To focus our discussion, we have assumed that the PtoP process performs four major subprocesses, represented by the four bubbles in the DFD.

Note that purchase requisitions are initiated by entities outside the context of the PtoP process. The purchasing process begins with each department identifying its need for goods and services. These needs are depicted by one of two data flows entering bubble 1.0: inventory’s purchase requisition or purchase requisition—supplies andservices.

Figure 13.4 The PtoP Process—Level 0 Diagram 

Review Question

What major logical processes does the PtoP process perform?

Figure 13.5 is an example screen for an electronic purchase requisition, which is an internal request to acquire goods and services. Observe the various items included in the header and body of the requisition, including company data and items to be ordered. The requisitioning department supervisor usually approves the requisition.

At first glance, the processes involved in preparing a purchase requisition may appear to be quite simple and straightforward. However, a closer analysis reveals that the techniques and methods involved in determining what inventory to order, whento order it, and how much to order are considerably more intricate and complex than we might first imagine. The processes associated with reordering inventory involve several important concepts and techniques, such as cyclical reordering, reorder point analysis, economic order quantity (EOQ) analysis, and ABC analysis. We discuss each of these methods in Technology Insight 12.2.

Review Question

Why is the process of identifying the need for goods and services not technically considered part of the PtoP process?


Each of the four process bubbles shown in the level 0 diagram are exploded in Appendix 12A, along with a discussion of the handling of exception routines.

Figure 13.5 Sample Purchase Requistion Screen (JD Edwards) 


Inventory Reordering Processes

  • Cyclical reordering is a time-based approach to reordering inventory. In practical terms, cyclical reordering assesses an organization’s total inventory (on a periodic basis) to determine the status of individual inventory items. If the stock levels for a given inventory item appear to be insufficient to meet customer needs for the upcoming period, a purchase requisition is prepared.
  • Reorder point (ROP) analysis recognizes that each item of inventory is unique with respect to the rate at which it is sold. Based on each inventory item’s sales rate, a reorder point is determined. Thus, when the on-hand level for an item falls to its specified reorder point, the item is reordered.
  • Economic order quantity (EOQ) is a technique of analyzing all incremental costs associated with acquiring and carrying particular items of inventory. Inventory carrying costs are composed of five cost elements: (1) opportunity cost of investment funds, (2) insurance costs, (3) property taxes, (4) storage costs, and (5) cost of obsolescence and deterioration.
  • ABC analysis is a technique for ranking items in a group based on the output of the items. ABC analysis can be used to categorize inventory items according to their importance. A given organization, for example, may have a situation where 15% of its inventory items accounts for 70% of its total inventory investment. Let’s call this portion group A. Furthermore, an organization may find that an additional 10% of its inventory items account for an additional 20% of its total inventory investment. Let’s call this portion group B. From this assessment, we can now deduce that the remaining 75% of the organization’s inventory items constitute only 10% of its inventory investment. With this information in hand, the warehouse manager or the supervisor of inventory control can decide which items of inventory are relatively more important to an organization and, consequently, require more attention and control. For instance, category C items might be ordered on a cyclical basis, whereas categories A and B might be ordered using reorder point analysis.

Vendor selection can have a significant impact on the success of an organization’s inventory control and manufacturing functions. For example, goods must arrive from vendors when needed and must meet required specifications.


After selecting a vendor, the buyer prepares a purchase order, a request for the purchase of goods or services from a vendor. Typically, a purchase order contains data regarding the needed quantities, expected unit prices, required delivery date, terms, and other conditions. Figure 13.6 displays a requisition record with the necessary information to release the associated purchase order.

Figure 13.6 Sample Purchase Order Release Screen (JD Edwards) 

The purchase order notification could take a number of forms—including paper or electronic. It is not uncommon for the copy available for the receiving department to be a blind copy, meaning that certain data are blanked out (i.e., blinded) or simply not included in an electronic replica. For instance, the quantities ordered might be blanked out so that the receiving personnel will not be influenced by this information when counting goods. Price data may also be blinded because receiving personnel have no need to know that information.

At some point, the vendor uses a notification known as a vendor acknowledgmentto inform the purchaser that the purchase order has been received and is being processed. In the case of inventory, the vendor packing slip, which accompanies the purchased inventory from the vendor and identifies the shipment, triggers the receiving process. Once annotated with the quantity received, the PO receiving notification becomes a receiving report, which is the form used to document and record merchandise receipts.

As in the case of the receipt of goods, services received also should be documented properly. Some organizations use an acceptance report to acknowledge formally the satisfactory completion of a service contract. The acceptance report data supports the payment due to the vendor in the same way as the receiving report.1

The accounts payable process is triggered by receipt of the vendor invoice, a business document that notifies the purchaser of an obligation to pay the vendor for goods or services that were ordered by and shipped to the purchaser. (Figure 12.5, shows a typical invoice screen).

Review Question

In designing vendor records to be incorporated into the vendor master data, what specific data elements would you include to help you select the best vendor? Be specific as to the nature of the data stored and how it will be used in the selection process.