Chapter 5:

PURCHASING MANAGEMENT

Definition:

Purchasing is a function of procuring goods & services from sources external to the organization.

According to Alford & Beaty:

“Purchasing is the procuring of materials, supplies, machine tools & services required for the equipment, maintenance & operation of a manufacturing plant”

RESPONSIBILITIES OF PURCHASE DEPT.

A] Exclusive Responsibilities: Selecting Right suppliers. Obtaining Materials at best prices. Placing PO with suppliers. Follow up with suppliers for prompt delivery. Developing & Maintaining good relations with

suppliers. Enquiring into complaints both from suppliers &

user department.

Cont…

Selecting the right managers & staff for the purchasing function.

Giving training to the personnel to improve their effectiveness & efficiency.

Market research for purchasing.

Cont…

B] Shared Responsibilities: Obtaining technical information & advice on

materials. Establishing & developing specifications for

materials. Scheduling orders for materials on suppliers &

fixing delivery dates for supplies. Specifying modes of delivery & transportation. Inspecting materials received.

Cont…

Accounting of materials purchased, including payment of bills.

Inventory Control. Receiving, store keeping & warehousing. Sale of scrap & surplus. Transportation of materials including clearing of

goods. Determining whether to Make or Buy (i.e. make

the component in one’s own factory or buy them form outside)

PURCHASE CYCLE

NEED RECOGNIZED

SPECFNS & REQUIREMENTS

SPELT OUT

REQUISITION

CHK SPECFNS/ PRICES/

SUPPLIERS

SPECFNS. FILE

PURCHASE RECORDS

PURCHASE PLAN

SELECT SUPPLIERSUPPLIERS RECORDS

PRICE & TERMS FINALIZED

PURCHASE ORDER

SUPPLIERS ACCEPTANCE

MATERIAL RECD & INSPECTED

INVOICE CHECKED WITH PO & MRN

DELIVERY

PAYMENT MADE

FOLLOW UP

INQUIRY

TENDER

IMPORT

The Purchase Cycle

Elements of Purchase Cycle

1. ESTABLISHING THE NEED FOR PROCUREMENT

1. Recognizing the need for procurement2. Determining the requirements3. Spelling out the specifications4. Communicating requirements to purchase

a. Purchase indent/Bill of material (production items)b. Purchase indent (other items)

2. SCRUTINY OF PURCHASE INDENT

1. Completeness of description2. Appropriateness of request3. Routing of indent through stores4. Logging of indents into indent register

Cont…

Cont…

3. MARKET RESEARCH

1. Telephonic quotations2. Written quotations3. Scheduled buying4. Source selection & Source development

Cont…

4. ORDER PREPARATION

1. Scrutiny of quotations2. Negotiations3. Placing orders on suppliers4. Obtaining supplier’s acceptance of purchase order

Cont…

5. FOLLOW UP

1. Pre-delivery follow up2. Shortage chasing

a. Remindersb. Personal visitsc. Telephones/Telegramsd. Faxese. posting of personnel at suppliers works

Cont…

6. RECEIVING & INSPECTION

1. Receiving despatch details & logging them into the consignment register2. Collection of material from transporter’s godown3. Inspection for physical damages to the packages & number of packages4. Entering consignment details into GRR register5. Uncrating of goods6. Quantity certification7. Raising of GRR8. Intimating receipt of materials to the indentor9. Inspection of goods

Cont…

7. STORAGE & RECORD KEEPING

1. Movement of materials to concerned store/rejection store2. Quantity certification3. Application of protective coating/marking4. Storage of materials into appropriate racks5. Posting of receipt into stock card

Cont…

8. INVOICING & PAYMENT

1. Receiving GRRs in Accounts department2. Receiving suppliers bills3. Linking of GRR and suppliers bills4. Posting of purchase register5. Passing of bills6. Effecting payments

Principles of Purchasing:

Right Quality•Quality specification•Source selection & development•Vendor quality rating•Vendor upgradation/self certification•Value analysis•Standardization

Right Qty•EOQ•Replenishment systemsBuying methods

Right Price•Basic elements of price•Competitive bidding•Negotiation•Right place of delivery•Right transportation•Legal aspects•Price renegotiation•Payment methods

Right Source•Source selection & development•Vendor rating•Purchase research

Right Time•Replenishment methods•Lead time analysis

5 R’sof

Buying

Negotiation can be defined as a

“ Mutual discussion and arrangement of the term of a transaction or agreement”

Negotiation is an Art & involves convincing the other party of your point of view and reaching an

agreement.

Negotiation & Bargaining

Professional negotiation is a means by which two parties reach an agreement by a specialized process of communication techniques and arrives at a mutually satisfactory settlement, resulting in a balancing of the interests of the parties.

The success of a negotiation is measured by determining how the differences on all issues are resolved & its effect on the long association between the two parties.

In Negotiations, there are three possible results:

WIN-WIN (Both win; conflict resolved) WIN-LOSE (One party wins; other loses) LOSE-LOSE (Both parties lose. There is

NO agreement)

Negotiating Strategy & Tactics

Strategy concerns the planning & directing of the negotiations to achieve one’s goals and objectives.

Tactics relates to the moves and manoeuvres employed to implement the strategy.

The basic strategy for negotiations could depend on the following three choices:

1. No position is to be revealed to the supplier.

2. The minimum position may be revealed.

3. The minimum position & the objectives of the negotiation may be revealed.

1. Reveal NO position:

Its used when buyer doesn’t have adequate data on the price or relevant information on which to negotiate.

By avoiding discussion on his own position, he keeps the supplier guessing.

The buyer develop his knowledge on the suppliers platform.

Such a strategy is usually effective when the sellers position is fairly weak.

2. Reveal minimum position:

This is a sound strategy used in most negotiations. Buyer reveals his minimum position as an initial

counter-proposal which has to be realistic. This establishes the range of the negotiations since

min & max points become clear. Now there is a tendency to move to some middle

position.

3. Revealing the minimum objective:

In this case, buyer reveals the minimum figure & tells the supplier what his objectives are.

This strategy should be employed only when buyer is confident about his ability to convince the supplier with the reasonableness of his approach.

This is usually a difficult strategy & only an experienced negotiator should attempt it.

PURCHASING METHODS

Purchasing Methods:

1. Hand to Mouth Buying2. Scheduled buying3. Market purchasing4. Speculative buying5. Contract buying6. Blanket orders7. Tender buying8. Seasonal buying9. Group Purchasing10. Subcontracting11. Central Purchase organization12. Directorate general of supplies & Disposals (DGS & D)

1. Hand to mouth buying:

Its also called “buying according to requirements” refers to frequent purchase of an item in small quantities.

Eg: Machine tools, building materials, perishable products, etc.

Advantages: Lower investment cost, low carrying charges, reduce deterioration & obsolescence, lesser losses from price decline.

Disadvantages: Comparatively higher price, loss of qty discounts, higher clerical cost due to frequent purchase, etc.

2. Scheduled Buying:

It’s the process of procuring an item in staggered deliveries acc. to the delivery schedule furnished to the supplier.

Advantages: both parties enjoys savings resulting from regularity of production & smaller inventories, both parties are assured of supply of goods and business respectively.

Its suitable for regular items such as cutting tools, lubricants, forgings, castings, etc.

3. Market Purchasing:

Also called “Forward buying” refers to procurement of sufficient qty of an item in advance of its need, and at time when prices are low (and/or expected to rise)

Advantages: lower purchase price, greater margin of profit on finished goods, security against shortages, etc

Disadvantages: Price expectations if not realized may result in major financial loss, high inventory holding charges, chances of obsolescence if design changes, etc

Eg: suitable for Non-perishable items, coal, steel, seasonal items, etc

4. Speculative buying:

Refer to buying large qty of an item when its price is low with the intention of sell bulk of it at a higher price for speculative profits.

Advantage: Earnings of speculative profits Disadvantages: large capital locked, storage

problems, risk of obsolescence & company being ruined if predictions go wrong.

5. Contract buying:

Refers to those special contracts which call for deferred delivery over the period

Types of contract: Rate Contract: where the rate is fixed &

not the qty. Running Contract: where the rate & qty

both are fixed for the contract period. When specified qty is supplied by vendor, automatically contract comes to an end.

Service Contract: when various services are obtained periodically.

6. Blanket orders:

Refers to the purchase of a variety of items from a single source, usually a middleman.

A blanket order specifies the categories of items covered by the order.

The supplier is given requirements on phone who supplies & bills at the “prevailing prices less agreed discount”

The middleman selected should be a large stockiest in the vicinity of the factory who are known for their honesty & reliability.

Best suited for general hardware, electrical supplies, stationery, etc

7. Tender buying:

Government depts. & PSUs in India follow it.

The buying department establishes a bidder’s list & invites them to submit bids (a tender or quotation is a written offer from a supplier to render a specified service or supply materials of the specified quality, at a specified price & within specified time)

Bids on receipt are evaluated & right supplier is selected usually on the basis of lowest price.

Types of Tenders:

Single tender: wherein the details of the requirements are communicated only to one firm

Limited or Closed tender: wherein the details of the requirements are sent to a limited number of suppliers & bids are received in response.

Open tender: wherein the inquiry is advertised in the newspapers or periodicals or trade journals of the home country & bids are received in response.

Global tender: wherein the inquiry is advertised in the newspapers or trade journals of not only of home country but also in foreign country & bids are received in response.

Cont….

Advantages: 1. Tender buying is the purchaser’s most important single tool to select qualified suppliers on the basis of competitive prices2. It eliminates possibility of favoritism, patronage & personal preferences.

Disadvantages: It is costly and time consuming

8. Seasonal buying:

Refers to buying of annual requirements of an item during its season.

The items involved are available in a particular season only & therefore need to be purchased & stocked in sufficient quantities till the next season.

Market price is lowest during the season & items can be purchased at cheapest rates.

Purchases are usually made directly from manufacturers/ producers of the goods.

9. Group Purchasing:

Refers to buying of items of trivial value in a single purchase order.

Items required in small quantities are classified into a few basic groups. Eg- drills & taps are placed in one group.

One PO, one for each group, covering a number of varied items within its group is placed with the supplier.

Group purchasing results in significant savings in clerical & delivery cost.

10. Subcontracting:

Its hiring of another firm to perform some of the manufacturing operations or to furnish certain parts and sub-assemblies to be incorporated into the buyers end product.

Types: The company makes some of the final products & buys

balance from outside. The company concentrates on certain items of the assembly

& buy others from outside. The company gets certain operations like electroplating,

heat treatment from outside since it doesn’t have necessary facility in-house.

11. Central purchase organization:

A large firm in the public or private sector may have section-wise stores at different places. The requirement can be satisfied by Each store to make its own purchase. A central stores to make purchases & supply material

to the stores section-wise.• Advantages: Huge quantity discounts, CPO can exercise strict control on consumption thereby minimizing risk of malpractices•Eg: State road transport corporation, nationalized banks, etc

12. Directorate general of supplies & disposals (DGS & D):

The DGS & D is the central purchasing organization for the various government departments.

It enters into contract with various firms for the supply of certain materials to the government departments during the year at the agreed rate.

A formal document is raised for the purpose is called ‘Rate Contract’.