Material inventory purchase procedure

Specific objectives; definition; purchase requisition; letter of inquiry; quotation; purchase order; actual receipt of goods; rejection/or return of goods; invoicing; making of payment; documentation of the purchase


Specific objectives

This article is guided by the following 8 specific objectives. The learner/user of this article will be able to;

  1. Define the term material inventory purchase procedure
  2. Purchase of reasonably cheap raw materials without compromising the quality thereof.
  3. Carry out investigative enquiry so as to compare various features of products from different suppliers
  4. Able to identify the most competitive supplier(s) in all aspects
  5. Effectively and efficiently place the correct orders with minimal over lapses
  6. Mitigating the scenarios of rejected or returned goods after purchase
  7. Ensure continuous production or operations
  8. Availability of future evidence on purchase of raw materials


Material inventory purchase procedure is a step-by-step guideline on how to manage raw materials for an organization especially of manufacturing or processing nature. It one of the key managerial activities an organization adheres to so as to avoid wastage of resources. The steps are characterized by nine key stages to be followed when dealing with purchase of material inventory. They are as detailed hereunder


Any management function on inventory for an organization starts with acquisition of material inventory (i.e., purchases of the raw materials) unless there was an opening inventory in the beginning of the financial period.  Purchase of inventory is basically the first step the firm undertakes through the purchase department for production/manufacturing to take place. The process entails availing the raw materials or any other acquisition to the premises of the organization to ensure continuous operations. The main aim being to ensure no wastage arising and optimization of the end goal. Since what is to be acquired or purchased cuts across the needs of the relevant departments, the respective departments undertake several official purchasing affiliated activities which are expressed in stages, form stage one to nine as indicated below;

Stage 1: Purchase Requisition

This is the activity of officially raising the purchases needs of the respective department to the purchases department which is done by writing using a requisition form by the concerned departmental head. At this stage/level, the respective department, branch or section plans ahead in a committee meeting and comes up with a budget of the raw materials or purchases needed so as to avoid under or over purchasing. The details of the department need are recorded in a purchases requisition form which entail details such as description of the goods, quantity required and the time span within which they are expected. Here planning and organizing skills are needed so as to avoid any kind of inconveniences. The head of department has to append signature and also the document has to be signed by another responsible and authorized official to ensure segregation of duties. For example, if the goods are still in the stores, then the store man is the one who countersigns the purchase requisition form. If the production department is in need of some raw materials, then the production manager is the one who signs this document.

Stage 2: Letter of Inquiry

This stage of purchasing process becomes relevant if the raw materials are to be acquired externally from a supplier. In this case, once the purchasing department gets all the purchasing requisitions from all the departments, the purchasing manager sends to the suppliers a letter of enquiry. The aim of this letter which can be sent to various suppliers is to find out the availability of the goods in demand and also the terms and conditions of sell. 

Stage 3: Quotation

Once the purchasing manager sends the letters of inquiry to different potential suppliers, the latter respond by sending quotations to the purchasing manager. The quotation represents an offer by the various suppliers where by each of those suppliers quote the price and terms and conditions of their goods or raw materials. The purchasing manager uses these documents from the various suppliers to compare the best offer. Once he/she identifies the best seller, the next stage is to contact the selected supplier to supply the goods. This is achievable by placing an order.

Stage 4: The Purchase Order

It is at this stage that the purchasing manager writes to the specific supplier of the goods or raw materials required by the respective departments. For this to take place, the details of what is required are recorded in a purchase order form. If the goods or raw materials are from local supplier(s) (i.e., within the country), a Local Purchase Order (LPO) is Used. If the goods or raw materials are to be ordered from a supplier from overseas, then an Overseas Purchase Order (OPO) is used. Incase supplier is providing services, then a Local Service Order (LSO) or Overseas Service Order (OSO) is utilized.


The purchase order entails; description and quantity of goods to be supplied. This document is a contract between the supplier and the firm in question which is represented by the purchases manager. Therefore, it is authenticated by being signed by the right personnel. This form is filled in either triplicate or four copies for future reference purposes and for distribution to the supplier, to the purchasing department, the receiving department such as the stores and to the accounts department.

Stage 5: Actual Receipt of Goods

This is the level at which the goods ordered by the purchasing manager are physically delivered at the organization’s premises. The supplier makes this possible by undertaking the following activities;

Package the right quantity and quality of the goods required.

Prepare a delivery note or an advice note (where by both play the same role).

Organize for the transportation of the goods.

NB: A delivery note is a document prepared by the supplier and who sends it together with the goods which have been ordered for confirmation purposes. If the goods supplied match the delivery note content and the purchase order details, then the purchasing manager signs the delivery note and sends it back to the supplier. A delivery note is used when the supplier uses his/her transport means. On the other hand, an advice note is also a document prepared by the supplier and sent to the buyer and it plays the same role as the delivery note. Only that it is used when public transport means are used.

Physical delivery of the goods. Once goods are received, physical inspection is done and the stores section or department records the details of the goods received in a Goods Received note if they are in good condition as expected.

Stage 6: Rejection/or Return of Goods

When goods have been accepted, it is assumed that they are in good condition. However, some times during inspection, some or all the goods may fail to meet the buyer’s expectations as per the purchase order. If this be the case, the goods with discrepancies are returned to the supplier and at this point, the buyer prepares a rejection/damaged goods note which explain the reason for the goods to be rejected. Further, if the goods are accepted first and later some discrepancies are identified, the goods are still returned to the supplier and a Goods Returned Note is attached to the goods giving an explanation why the goods are being returned to the supplier.

Stage 7: Invoicing

Once the buyer (i.e., purchasing manager) confirms fully that the goods supplied are okay, the supplier on the other side prepares an invoice. An invoice is a document used by the supplier to officially launch a demand for payment for the goods supplied. The invoice has details such as quantity, price per unit, total monetary value of goods supplied, transport charges and any other charge and discount allowed if any.

Stage 8: Making of Payment

Once the buyer receives the invoice, the next stage is payment of the goods. The payment may be made as per the guidelines of the supplier which can either be in cash form or direct bank transfer or otherwise.

Stage 9: Documentation of the Purchase

This is a very important stage in purchasing. You see, unless it is put in record, then there is not authenticity and hence no accountability. It does not matter how straight forward or transparent the processes of purchasing were, if no recording, then even if millions of dollars were paid in the name of purchases and no recording, then that is futile. It is a total loss and no business. So, recording of the purchases made is key for any further transactions to take place. Therefore, the goods purchased are recorded in the books of accounts. Refer to our notes on source documents and books of original entry available in our website under intermediate level course outline. So, the purchase transaction is recorded in the books of accounts from the goods received note.


This is the last stage under the activity of inventory purchase procedure.

NB: All the activities, from stage one to eight are activities which are external in nature for they take place between the organization in question and third parties (i.e., between the buyer and the supplier). It is only the 9th stage of recording which is internal.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.