UNIVERSAL CABLE (Acct 5133)

Universal Cable Network, located in a mid-size Canadian city, provides Pay TV rental
units, cable hookup and video production consulting for residents in its operating areas.
Business has generally been good, but recently other cable organizations have
announced their intention to move into the region. Management is concerned that,
because Universal Cable traditionally has had little in the way of competition, it may
have embraced a number of poor managerial practices resulting in unnecessary cost,
delays and overlaps. For this reason, it has decided to ask the Purchasing Department
to participate in an activity-based management project.
Because of a centralization policy, Universal Cable does not process customer
payments for regular cable services. These are sent to head office (in a large
metropolitan city) for processing. However, the specialized video services are billed
separately and the payments are processed locally.
These services create the need for the purchase of such routine items as connectors,
cables and office supplies, and non-routine items such as television sets, taping
cameras and recording equipment.

Stage 1 Identify and measure work

Activities and tasks
The activities in purchasing begin with a copy of a requisition for parts from the Stores
Department. Stores tend to make frequent orders because of its rather limited storage
facilities. Poor forecasting also results in numerous requisitions being sent to Purchasing
for rush orders.
For routine items, a purchasing clerk scans various vendor catalogues or calls various
vendors to get the best price. The purchase order (PO) is completed and mailed to the
vendor. A copy of the PO is sent to both the Receiving and the Accounts Payable
departments. When a non-routine item is needed, purchasing contacts the technical
director of research and development, who searches for sources himself. He gets all the
data necessary to make an informed decision and then orders a sample that is
subsequently passed on to the Purchasing Department for testing. See Table 1.
A purchasing clerk tests all the samples of the non-routine products. This is part of a
long-standing policy, begun by the founder of the company, that all incoming parts
should meet high quality standards. The product testing for one of these items can range
from a quick check to see that it can perform the basic function for which it is acquired to
very elaborate and lengthy test procedures. Each case, however, involves setting up test
equipment, performing the required test and writing up a report on the capabilities of the
product. The report is then forwarded to the technical director of research and
development.
If a go-ahead is warranted, the technical director sends an authorization slip to
Purchasing, which allows one of the clerks to complete a PO for the product in question.
The PO is mailed to the vendor and a copy of the PO is sent to both receiving and
accounts payable departments.

The purchasing clerks spend a considerable amount of time on follow-up calls to and
from vendors. Problems arise as a result of purchasing clerk errors on the initial PO
Sometimes the information requested on the purchase requisition sent to Purchasing is
not specific enough; sometimes, in their haste, the clerks omit recording necessary
information such as coatings, colour, length, etc. on the PO, and sometimes the wrong
part number or quantity is recorded. These routine errors are troublesome. Most times,
the vendor catches them and calls purchasing prior to shipping the part(s), at which point
purchasing makes adjustments to the PO and resubmits it. However, sometimes the
order is delivered, resulting in more severe problems for the organization and frustration
directed at the purchasing clerks.
Problems also occur because of the slow payment process. Because of Universal
Cables chronically late payments, a vendor may call back after an order is placed and
refuse to ship it until payment is made. These are really not problems purchasing can
handle, so purchasing clerks are forced to make a number of calls to accounts payable
and head office to see if they can resolve the issue.
Table 1
Resource category
Payroll
Purchasing clerks ($25,000 x 3)
Accounts payable clerks ($25,000 x 2)
Supplies
Purchasing
Accounts payable
Equipment
Purchasing (long-term rental)
Accounts payable (depreciation)
Total

Amount (per year)

$ 75,000
50,000
10,000
2,000
12,000
10,000
$159,000

Performance measures
Placing orders takes a lot of the purchasing clerks time. Making calls, to determine
availability of stock and prices, and placing orders are estimated to consume 45% of the
time available in purchasing. Supplies used are 20% of the department total. Each order
placed takes about one hour to complete, but because the purchasing clerks are so
busy, they may not actually start the order process until four or five days after the
requisition has been received.
This preoccupation with other matters also means that the accuracy of the order process
suffers. Due to inaccurate part numbers on the POs, or missing information, vendors
often have to call back for additional details. This happens about 20% of the time and
can add another five days to the process since a revised PO must be sent to the vendor.
Because of the time pressures and because the clerks often feel that they are not given
enough time to learn about the technical aspects of their jobs, turnover has been high.
Testing non-routine parts is a time-consuming activity and can range from 30 minutes to
one week depending on the nature of the item. About 30% of purchasing time and 75%
of the supplies budget are consumed here. The testing procedures are accurate and

give good results at 98% accuracy. Equipment is required in the test area to complete
the tests. The annual cost to lease this equipment is $12,000.
Follow-up activities occur daily and account for 25% of the purchasing clerks time and
5% of the departments supplies. Telephone calls result from late payments or verifying
part numbers and specifications when the written orders are incorrect. Some problems,
such as late payments, take up to two hours to solve, while other problems relating to
incorrect part numbers or quantities take about an hour. At the end of this
correspondence, approximately 5% of vendors are still not satisfied with the companys
response. Eventually, all calls regarding delayed payments are transferred to the
Accounts Payable Department or to head office.
Universal Cable Network has assembled some operating statistics for the period.
Table 2
Operating statistics (per year)
No. of purchase orders worked on (includes reworks)
No. of invoices paid
No. of hours of set-up time for testing equipment
No. of telephone calls from vendors received in purchasing
relating to late payments
No. of non-routine parts tested

2,400
2,000
300
400
1,600

Stage 2 Develop useful information about the work

The work team now must identify its suppliers, inputs, customers and outputs in the
Purchasing Department.
Operating departments, such as the cable hook-up, place requisitions through stores
with purchasing. This triggers the ordering procedure, which differs depending on
whether the order is routine or non-routine. For routine parts, purchasing clerks look up
part numbers in catalogues and place POs with vendors. For non-routine parts,
purchasing contacts the technical director of Research and Development.
The technical director obtains samples of the non-routine parts from vendors and gives
them to Purchasing to test with the equipment that is available. Purchasing clerks do the
required tests and prepare a report about the products capabilities for the technical
director. If the technical director is convinced that the product is acceptable, he
authorizes purchasing to proceed with the order. Copies of POs are sent to the
Receiving and Accounts Payable departments.
The problems associated with erroneous orders and late payments lead to a number of
vendor calls that are received by the Purchasing Department. This in turn requires
purchasing to retrieve its original documents and to make calls to other departments,
such as accounts payable, receiving or head office to determine the source of the
vendor problem. If the problem can be resolved by purchasing, a clerk will call the
vendor back with the necessary information. Sometimes, however, as in late payments,
purchasing must pass the problem off to accounts payable or head office.