P. J. H. Baily B.sc. (Econ.), A.C.I.S., F. Inst. P.S. (Auth.) - Purchasing and Supply Management-Springer US (1978)

Purchasing
andSupply
Management
Purchasing
andSupply
Management
P.J.HBaily
B.Sc. (Econ.), A.C.l.S., F.Inst.P.S.
FOURTH EDITION
Springer-Science+Business Media, B.V.
First published 1963

Second edition 1969
Third edition 1973
Reprinted 1976
Fourth edition 1978
P.J.H. Baily 1963, 1969, 1973, 1978
Originally published by Chapman and Hall in 1978
Photoset by Red Lion Setters, Holborn, London
ISBN 978-0-412-15690-8
ISBN 978-1-4899-6900-2 (eBook)
DOI 10.1007/978-1-4899-6900-2
This limp bound edition is sold subject to the condition that it
shall not, by way of trade or otherwise, be lent, re-sold, hired
out, or otherwise circulated without the publisher's prior
consent in any form of binding or cover other than that in
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this condition being imposed on the subsequent purchaser.
All rights reserved. No part of this book may be reprinted, or
reproduced or utilized in any form or by any electronic,
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including photocopying and recording, or in any information
storage and retrieval system, without permission in writing
from the Publisher.
Distributed in the USA
by Halsted Press, a Division
of John Wiley & Sons, Inc.
NewYork
Contents
Preface
vii
Part one: Fundamentals of purchasing and supply

1
2
3
4
5
6
7
8
9
Scope and objectives

Make or buy?
Purchasing practice and procedure
Information technology
Planning physical storage
Storesoperation and procedure
Materials coding and classification
Principles of inventory management
Stock control practice and procedure
3
19
30
53
63
77
90
98
118
Part two: Practice and techniques

10
11
12
13
14
Purehase specifications and quality control

Market structure and behaviour
Selecting suppliers; problems and systems
Trading with suppliers
Purehase contracts and contract clauses
141
154
169
190
211
Part three: The management of purchasing and supply

15
16
17
18
Planning
Personnel
Organization
Control
Index
233
256
266
285
307
Preface
The adoption by the Institute of Purchasing and Supply of a considerably

revised education scheme made it necessary to revise this book if it was to
continue tobe useful to the Institute's students. PartOne now corresponds
to the Introduction to Purchasing and Supply subject, and Parts Two and
Three to subjects at Final Ievel - it is hoped that the book will also be
useful to those studying purchasing and related subjects for BEC and
CNAA awards.
The text has been extensively revised and brought up to date. A new
feature is the inclusion of a !arge number of questions for review. Some
new case-studies are also included.
Apart from the people and organizations to whom I owe thanks for
quotations acknowledged in the text, I would particularly like to thank Dr.
David Farmer for support, David Jessop who helped with the revision of
two chapters, and Jill Baily, as before, for organizing the manuscript and
my life while writing it.
P.J.H. Baily
Cardiff, February 1978.
PAR TONE:
Fundamentals of Purchasing
and supply
1
Organizational purchasing is the process by which organizations define

their needs for goods and services, identify and compare the suppliers and
supplies available to them, negotiate with sources of supply or in some
other way arrive at agreed terms of trading, make contracts and place
orders, and finally receive the goods and services and pay for them.
Typically this process is complex. It can involve a number of people at
various Ievels in the hierarchy andin several functional departments. It can
be a lengthy process: major 'one-off' decisions may take years to finalize.
Even routine repeat orders which are placed immediately may be placed in
accordance with policy decisions reached after much consultation and
experiment.
The purchase decision process is made more complex by its detailed
involvement with several other decision and control processes within the
organization. These may include, for instance:
(l) in manufacturing organizations, and in some retail chains, the
designing and specifying of products
(2) in distributive organizations, the merchandising decisions: what
goods will be carried and sold
(3) the physical supply cycle which the actual goods pass through as they
are despatched by the supplier, transported, received, stored, and issued or
sold
(4) the administrative cycle of requesting, ordering, progressing, receiving, paying for and accounting for goods
(5) the stock control policies and procedures which determine, control
and replenish the range of items stocked
(6) in manufacturing, the production planning and control function
Fundamentals ofpurchasing and supply
which determines and controls the quantities of parts and material required
to meet production commitments
(7) the quality control policies and procedures which set standards,
assess the capability of suppliers to meet standards, and control the quality
of goods and materials
(8) the finance function as regards terms of credit, capital expenditure,
budgets, stockholdings, and the payment of bills.
Occupational specialization in purchasing is sometimes described as a
recent development. It is true that the overwhelming domination of the
advanced economies by !arge organizations is a recent development. Large
organizations operate by dividing their work forces into small working
groups. These small working groups in turn are grouped into !arger departments, and very often the departmentalization is along functional lines.
Consequently, !arge organizations usually have one or more departments
specializing in purchasing and possibly other supply activities. So in a sense
the increase in the number of purchasing (and other supply) departments
results from the increasing part which !arge organizations play in advanced
economies.
A glance backwards
But long before the !arge organization appeared on the scene with its purchase department, people were buying- i.e. acquiring goods amd services
in return for a price - on behalf of organizations as weil as on their own
private account. Like selling - the disposal of goods in return for a
price - buying for organizations dates back beyond the invention of
written records. It is likely that human communities have always bought
and sold to some extent, and have been enriched both culturally and
materially by these transactions.
Did trade occur between primeval tribes in the long ages before history
began? Archaeological evidence shows that it did; for instance, the distinctive products of a flint axe factory in the English Lakes at Langdale
have been found hundreds of miles away in South Wales. The details
remain for ever obscure: did Langdale have travelling salesmen in those
distant days? Or did South Wales send out tribal buyers to search the land
for better buys in stone age weaponry? We do not know. But it is known
that among the earliest things to be written down were stock records and
accounts of commercial transactions. At a time when Iiterature and history
were still recited from memory, the pioneer developments in written
record, whether incised on baked clay in cuneiform or carved or painted in
pictographs, dealt with purchase, stocks and sales.
Books were invented, and at first they dealt with higher matters than
trade. Yet in the Bible itself, the oldest book in mass circulation, we read:
'lt is naught, it is naught, saith the buyer; but when he is gone his way then
he rejoiceth' (Proverbs 20.14). In Chaucer's Canterbury Tales, the oldest
work in the canon of English literature, several of the horseback pilgrims

are described as 'purchasours' or (French having been the language of the
ruling classes until recently) 'achatours'. No salesmen made the pilgrimage.
Many of Chaucer's pilgrims have occupational titles which with the
passage of time have come to sound more like surnames; there was a
'manciple', for instance, described as an expert catering buyer. There was a
'reeve' who could 'better than his Iord purchase', and no auditor could
catch .him out. The merchant was stately in his bargaining, and as for the
sergeant of law,
So great a purchasour was nowhere none ...
Nowhere so busy a man as he there was,
And yet he seemed busier than he was.
There are buyers today who have never made a pilgrimage and do not
know a reeve from a manciple of whom the same could be said.
Coming closer to our own time, during the nineteenth and early twentieth centuries many leading businessmen adopted an entrepreneurial
approach to purchasing which made a major contribution to the success of
their organizations, as has been discussed elsewhere[l].
Organizational buying today
The present-day organizations which are the subject of this book are
engaged in manufacturing goods, providing services or distributing goods
to consumers and users. Buying for such organizations has indeed something in common with the sort of buying which all of us do when we make
purchases for our personal needs or those of our families, but it is also in a
number of ways different, and it should not be assumed that experience in
the one provides expertise in the other.
The scope and objectives of the purchasing function and its importance
in the achievement of organizational objectives varies from one organization to another. In this chapter we consider next the differences and similarities between purchasing and supply in three major sectors of the
economy: the distributive trade, the public sector, and manufacturing
industry. Thesetermsare all used in a broad sense; manufacturing industry
for this purpose comprises all those organizations, public or private, large
or small, which make or process goods or materials for sale; the public
sector comprises central and local government and certain other public
services; and the distributive trade or industry comprises all those organizations which buy and stock goods for resale, whether wholesale or retail,
without alteration.
Fundamentals oj purchasing and supply
Distribution
The distinguishing characteristic of the distribution industry is that it

arranges for goods to be available where and when they are wanted.
The distribution industry is large and diverse. In the UK, described by a
weH-known Frenchman as a nation of shop keepers, it recruits a hundred
thousand schoolleavers a year. It did not regard itself as a single industry
until it was blessed with the Services of the Distributive Industries Training
Board (DITB).
It includes wholesalers and specialist agents seHing to farms and factories and to other distributors such as retailers. But by far the largest part of
the distribution industry is the retail trade, which handles the bulk of the
distribution of goods from farm or factory to eventual consumer.
The organization of the retail trade alters continuaHy as consumer needs
change and the constraints imposed by law, society and the economy alter.
Mail order, credit trade, co-ops, supermarkets and hypermarkets have
appeared and flourished as needs and opportunities were perceived. Three
typical forms of retailer are:
(1) independents: traditional owner-managed establishments, which
have existed since civilization began and can be found everywhere in the
free world: corner shops, husband-and-wife businesses, etc.
(2) department stores: merchandise is split into several groups each of
which is bought and sold by a separate department.
(3) chain stores: a nurober of stores seH the same lines of merchandise
which is bought centraHy. The goods can be aH in one product group such
as shoes or food; alternatively they can be a variety of descriptions as with
Woolworths.
Buying is a vital function in all distributive organizations, since the
whole business of the retailer is to buy goods, hold stock, and sei! goods.
'Whether the firm is large or small, wholesale or retail, if it doesn't buy
what it seHs, or doesn't seH what it buys, it is heading for trouble', points
out the DITB booklet Training to Buy. 'Two major ways of losing profit
are to have unsold goods gathering dust on the shelves and to have unsatisfied customer demand.'
Buying decisions are normally taken by the managing proprietors in the
smaH independent businesses which make up the great majority of
establishments. Most of the people who work in distribution, however, are
employed by the 1600 firms with over a hundred employees. Buying
decisions in these larger firms are usually taken by specialists.
In department stores, traditionaHy each department is managed by a
buyer whose responsibilities include sales and staff supervision as weH as
buying. This total departmental responsibility is said to motivate the buyer
to perform weH as making for high job satisfaction.
In chain stores, buying is usuaHy centralized. This central buying is the
principal economy of scale available to the distributor and has been one of
the main reasons for the growth of the great chains during the middle part
of the century. The physical supply arrangements may be either direct from
suppliers to branches, or from suppliers to one or more central warehouses
and from there to branches.
When amultiple operates retail outlets which differ in character, as weil
as in size or location, stores managers may be given some discretion in the
selection and pricing of merchandise even though central buying is the
normal policy. (This approach is adopted in the UK at present by John
Lewis and House of Fraser. lt is of interest also that Harrods and
Carrefour, the old and the new as it were, both give full purchasing
responsibility to the department head or buyer despite the trend towards
central buying.)
Inevitably this growth in central buying has led to a diminution in the
roJe of the wholesaler. Retailers obtained most of their merchandise from
wholesalers in the early part of the century. Wholesalers 'broke bulk', i.e.
bought !arge lots from manufacturers and supplied small lots to retailers,
often on credit. Although major retail chains now deal direct with manufacturers, some wholesalers still do weil as special middlemen for the
smaller retail outlet, with developments such as cash-and-carry warehouses and voluntary buying chains. Industrial distributors, who supply
goods and other services on a wholesale basis to manufacturers and public
sector organizations, have also played an increasing part in the UK and the
USA in recent years.
There are obvious differences between the work of the retail buyer and
that of the industrial or public sector buyer, but also (as considered later in
chapter 16) there is much common ground. Industry and the public sector
have taken a particular interest in the purchasing policies and procedures
of one very successful retail chain, Marks & Spencer Ltd, which pioneered
a new approach to supplier relationships.
The company's annual reports usually refer to supplier relationships in
glowing terms. In 1972 for instance the chairman said:
The unique relationship we enjoy with our manufacturers has been built
up over many years of joint effort to extend and improve the range of
St. Michael merchandise. Our partnership is based on commercial and
technical collaboration between independent companies with a common
interest and approach to production, management and human relations.
We are working together on a range of problems from technology,
engineering and administration to staff management and welfare. We
have noted with pleasure their parallel growth to ours and appreciate
that they have increased their productive capacity to be able to meet the
growing demands of our public.
Goods are made to detailed specifications by carefully selected suppliers.
Production and quality control advisory services are offered by Marks and
Spencer to guide and assist suppliers in complying with exacting standards.
In the words ofthe firm's official history[2], 'through its technical services
and its merchandising departments Marks & Spencer undertook to ensure
that at every stage of production back to the primary producer of the raw
fibre the needs of the consumer were represented, and at each stage of
production its specialists and technologists collaborated with the firm
responsible'.
These specialists and technologists were not 'backroom boys who
operated in mysterious isolation. They were fully integrated into the
commercial organization of the business, so that they were active and
indispensable members of its buying department'.
The public sector
The term 'public sector' denotes a collection of services which come more
or less directly under government control. It is generally considered to
include:
(1) central government itself, with its many departments and agencies
(2) certain other services provided nationally, such as in the UK, the
Health Service or in the USA, NASA
(3) for some purposes, the nationalized industries
(4) local authorities.
Centrat government
The increasing scale of government actlVltles and interventions place
government procurement agencies high among the big spenders of the
world. Probably the largest single purchaser of goods and services in
existence is the United States federal government, if indeed when so many
departments and individuals are involved it is meaningful to speak of a
single purchaser.
The United Kingdom government buys about lOOJo of the entire output
of UK manufacturing industry. The range of purchases is immense, from
such things as paint and cleaning materials which are in common supply, to
complex weapon systems, and is shown in Figure 1.1. Certain industries,
such as aerospace and computers, are heavily dependent on public sector
patronage, both in the UK and in the USA. Complex issues of power and
control and the relationship between the public and private sectors are
raised by some of these transactions.
The main aim in government buying has been defined as 'to obtain what
is needed at the right time and in such a way as to ensure the best value for
money spent' (White Paper on Public Purchasing, 1967, Cmnd 3291). This
is almost a textbook definition of the main declared aim of most organizational buying, yet between the normal practice in industry and the normal
practice in government buying, considerable procedural differences have
developed.
The basic reason for these procedural differences is the need for public
WHAT THE GOVERNMENT BUYS
-==:::J
Military defence
400
CJ
r
500
rni!lion
Other central government services
r~~;:::::::::::\:':-:1 National hea!th Service
300
ill:;l
iiill
--..,-===~-,--~~-,--~-,---,--~==-,--..-~--------,
I ' ?d
t II
200
Figure 1.1 What the UK government buys. Breakdown of British government expenditure in 1969:
from the Treasury 'Economic Progress Report' for November 1971.
~lncludes insurance, banking, finance, busincss services, profcssional und scientific services ,nJd miscel!aneous services
rates
Rent and expenditure
Overseas
Distribution services
Other services*
Transport and communication services
;q
lhi ;'' MI
Other products
Construction work
Gas, electricity and water
rrq
I[]
Other manufactured goods
erJ
---l
-
->II
100
I
''''"'':! I
.. ... ,.,. . ,.,., .. , ""., , , , , ,: ' ' '-' """"'' ; >><;><! I
I< I
Textiles
Paper products etc
Other vehicles
Other metal goods
Aaraspace equipment
Ships and marine engines
Electrical engineering products
Chemieals and allied products

Mechanical engineering products
Instrumentengineering products
Food, drink and tobacco products

Goal and petroleum products
Commodity analysis of central government'current expenditure on goods and services in 1969
10
Fundamentals of purchasing and supply
accountability in the expenditure of public money. Government buying, it

is thought, should be organized and executed in such a way that it not only
is, but can be seen and shown to be, honest, fair and impartial. This
laudable objective has led to procedures which provide enough recorded
data to construct and support an answer to any public criticism, including
questions in Parliament, and to satisfy the external auditor. (When
Chaucer praised the purchasing ability of his sergeant of law because 'there
was none auditor could on him win', he was no doubt drawing on his own
experience as a government employee.) Since job security isahigh priority
for the public sector employee, and since his normal payment system
provides little scope for rewarding unusual successes but plenty of scope
for penalizing failures, there has also been a tendency for all purchasing
decisions to be taken by committees so that no individual could be held
accountable for success or failure.
Attempts are being made to change this, and the organization and
methods used for government buying are under constant review. Most of
the many Civil Service buying units already have extensive buying responsibilities. The Procurement Executive, for instance, handles all the requirements of the armed forces. The Stationery Office buys paper and supplies
printed documents. The Property Services Agency provides accommodation and equipment for all government departments. There is much scope
for standardization in such items as office furniture, carpets and cleaning
materials which are in common use, and bulk purchasing of standardized
requirements can bring substantial savings; but there are Iimits to what can
be achieved. There is the need to stimulate innovation by suppliers and to
keep competition alive; the capacity of firms is also in some cases a Iimitation. Large-scale central contracting has been shown to be economical in
some cases, but in other cases local contracts with short local deliveries
have been equally economical and have generally provided a good service.
It is advisable to avoid doctrinaire positions in matters of this kind and to
Iook at the facts which apply in particular cases at particular times.
Other public services
The public sectoralso includes other public services provided nationally. In
the UK this includes the Health Service, comprising hospitals and other
health care institutions located all over the country, whose combined purchasing power would be equivalent to a major industry. It is a major, and
in some cases a monopoly customer for the pharmaceutical and related
manufacturing industries.
The nationa/ized industries
The nationalized industries are a diverse collection, constantly being added
to. Some are entire productive industries such as coal mining and steel
making, formerly comprising many private organizations which have been
taken over by Act of Parliament and converted into state monopolies.
11
Some are parastatal organizations which have never existed except as

public property, such as the British Broadcasting Corporation. Some are
major concerns which were taken over to avoid bankruptcy and maintain
employment. The Post Office was for 300 years a government department
or Crown Office until it was converted into a public corporation on the
nationalized industry model.
The nationalized industries are part of the public sector firstly because
they are public property; and secondly because, as a result of this, a high
standard of propriety is required in the allocation of contracts. Public
accountability is a proper accompaniment of the expenditur"e of public
funds, and although it is not interpreted in quite the same way for
nationalized industries as it is for government departments, nevertheless
the several investigations which have been made into, for instance, the
Purchasing and Stores operations of the National Coal Board, were
probably more severe and detailed and conducted more in the spotlight of
public scrutiny than would have been the case if the Board had not been
heavily subsidised by the taxpayer.
Thirdly, nationalized industries belong with the public sector because the
government, through the appropriate minister, retains powers of last
resort, such as to appoint and discharge the chief executive, and to approve
or reject major capital expenditure proposals. The minister may also have
or seek to exercise ill-defined powers to influence policies and decisions in
the industry in accordance with the wishes of the government of the day.
Purchasing policies at the highest Ievels have been affected, in the UK, by
government pressure to buy British computers or British aircraft; and in
the USA by similar pressures to buy American computers or American
aircraft. Many governments- Arab, American, British, African- also
try to use international trade as a Iever or instrument in furthering their
diplomatic policies. Firms are urged or compelled not to deal with
countries which areout of favour with the government, and ministers tend
to lean most heavily on the nationalized industries.
But at the operational Ievel there is often little difference between
industrial purchasing in a nationalized industry and industrial purchasing
in one which is not nationalized. There is free interchange of purchasing
staff. Policies, practices and career prospects in nationalized industries
such as the British Gas Corporation seem to resemble those in comparable
private sector organizations such as Unilever, Shell or ICI more than those
in government departments.
Local authorities
Until the mid-seventies the number of local authorities existing in the UK
was !arge- about 1800- and although their total expenditure was sizeable ({6827m, equivalent to about 1511Jo of the gross national product in
1970), many of them were small organizations and most had no arrangements for central purchasing.
12
Two significant changes then occurred, with far reaching effects on Iocal
authority supply. The first was brought about by the Local Authorities
(Goods and Services) Act, which became Jaw in 1970. This empowered
local authorities to engage in joint purchasing arrangements, and started a
movemenf towards consortia buying. The second was the restructuring in
1974 of the local authorities themselves into fewer (under 500) and consequently !arger organizations. This meant that more of them were of
sufficient size to justify the employment of specialist purchasing and
supply staff, either in a relatively small contracts section, or in a fully
fledged supplies department with central storage and transport fleet.
It might be thought surprising that the Local Authorities (Goods and
Services) Act needed tobe passed. Local authorities are not like businesses
competing for customers in the market. They each serve a defined area and
provide similar services to the people of those areas. Despite the possible
existence of parochial or rivalrous attitudes among elected members or
officials of the authorities, it seems obvious that the scope for collaboration is immense, and that joint purchasing arrangements are an obvious
and desirable form of collaboration. However the legality of such arrangements was considered dubious unless specifically authorized by a local Act
(as was the case with the Greater London Council); there was a possibility
that expenditure by one authority for the benefit of another might have
been regarded as ultra vires. The Act therefore specifically authorized
every public body within its scope to make arrangements with any other
for:
(1) the supply of goods and materials
(2) the provision of administrative, technical and professional services
(3) the use of any vehicle, plant or apparatus
(4) the maintenance of land or buildings.
Each Jocal authority needs to proeure goods and services for a heterogeneaus collection of departments, such as libraries, parks, highways,
schools and catering establishments. Collaboration between authorities
enables buyers to pool the requirements of similar departments in different
authorities, and two main purchasing advantages are claimed for this.
Firstly, lower prices can often be obtained when Iarger quantities are
purchased on a single contract; and operating costs can also be reduced if
storage and distribution facilities are shared by authorities. Joint purchasing by authorities can thus reduce both invoice cost and overheads; but it
does presuppose that the authorities have standardized their requirements.
Secondly, a larger scale of Operation can justify the employment of
specialist staff skilled in modern purchasing techniques and possibly with
expertise in special areas such as catering, office furniture or printing and
stationery.
Substantial savings have been reported; 2507o price reductions for items
in common use, net savings after allowing for overheads of 10-15%, for
instance. User departments often react initially to such claims with
13
distrust. Their understandable misgivings were challenged by the Joint

Advisory Committee on Local Purchasing (JACLAP) in a 1972 report as
follows:
Whether individually small or !arge, local authorities collectively are
big business and it is up to local authorities to see that either individually
or by acting together they purchase as supermarkets and not as cornershops ... Central purchasing is too often associated, in the minds of
elected members and officers, with the provision of unsuitable goods,
in inappropriate quantities and in unappealing plain packs, from the
quartermaster's stores; and reservations are rightly expressed about
imposing patterns of consumption on children's homes and other local
authority services having a high degree of involvement with individuals.
But the aim of central purchasing is not to impose a uniform pattern.
Variety reduction does not mean reduction to a single variety. The aim
of central purchasing is to allow local authorities to provide the best
possible services to ratepayers and inhabitants for their money, through
buying what in their own estimation is the most suitable product at the
best possible price.
A buying consortium which serves the needs of 4 million people and
spends f200m a year has opportunities to buy more effectively and
efficiently than the various buying activities of the associated authorities
acting independently. These purchasing groups include:
(1) The Yorkshire Purchasing Organization; based in West Yorkshire,
serving about 30 public bodies within a 90 mile radius, usually on a
catalogue basis, although it also makes contracts for direct supply.
(2) The Welsh Purchasing Consortium, comprising the Gwent, South,
Mid and West Glamorgan supply departments acting in consort, although
retaining their separate identities.
(3) The Consortium of Purchasing and Distribution- Avon, Cornwall,
Dyfed, Dorset, Gloucestershire, Somerset, Wiltshire, etc.
(4) The Greater London Council Supply Department, which has long
offered its services to London boroughs, education authorities and other
rate-supported organizations such as theatres and youth clubs, and has
more recently catered for Thames Water Authority, London Transport
and others. Clients can draw goods from the GLC warehouses against a
catalogue and price Iist, and can also use its facilities for the negotiation of
contracts for direct delivery at invoice price plus a small percentage.
Manujacturing industry
Manufacturing industry is still the largest sector of the economy, despite

the growth in service industry and government. The way the purchasing
function is implemented varies with size of firm, type of industry, and
system of production. Raw materials are a major purchase for the chemical
14
Fundamentals ofpurchasing and supp/y
industry, but in aircraft or motor car manufacture they are of less

importance and it is components that call for the main purchasing effort.
The effect of production system on purchasing and supply management
may be seen if we consider the differing demands of
(i) process industry;
(ii) large batch and mass production;
(iii) small batch and jobhing production;
(iv) one-off production.
In a chemical factory engaged on continuous production, raw materials
may be purchased to arrive in more or less continuous flows at the input to
the process, while spares and maintenance requirements are held ready for
intermittent but urgent demands. The mass-production car manufacturer
purchases large batches of parts and materials for delivery to tight
schedules which must be kept to if costly hold-ups or vast stockpiles are to
be avoided. Although the largest mass-production factories are big enough
to have their own weather inside the walls, there are also small massproduction factories with under a thousand workers; not size but production system is the distinguishing characteristic. Small batch and jobhing
factories make products usually in smaller lots and greater variety, to
customers' orders and often to customers' specifications, although batches
of standard products may also be produced against expected demand.
Planning purchases for this type of production can be a lot more complicated than planning for mass production, depending on the range of
products and their complexity. Planning errors are however usually less
serious since production plans can be altered more easily to cope with
shortages, while surpluses are not so damaging as in mass production
because throughput is lower and purchases often account for a lower
proportion of total expenditure. This is fortunate, since job shops tend to
have smaller, less expert planning staff than mass production shops, and
indeed in small firms planning may have to be fitted in with many other
duties. One-off manufacture, an extreme case of jobhing manufacture, is
exemplified by a major ship, a new chemical factory, the Houses of
Parliament, Coventry Cathedral. Typically there is one main contractor
with his satellite subcontractors. Properly dovetailing the specialist contributions of all sub-contractors so that the whole job goes smoothly and gets
completed on time requires a major planning and progressing effort, for
which Network Analysis is now the preferred technique.
The way purchasing and other supply activities are organized into
departments, how tasks and activities are allocated to full-time supply
personnel, and how authority is delegated to the department head to decide
matters in the supply area, are all subject to considerable variation in
practice. As stated in the opening of this chapter, the buying decisionmaking process not only involves more than one department, but is
associated with several related operations such as stock control, quality
control and physical supply, as well as the production departments and
15
other users of purchased parts, materials and services, who are the internal
customers of purchasing and supply. Later chapters examine these topics
in greater detail.
Some organizations issue an internal Charter or Purchasing Manual
which incorporates a formal statement signed by management of what the
responsibilities of the department are and what services it is expected to
provide. Croell for instance suggests the following[3]:
(l) Provide all materials and services that the company elects not to
provide internally. In accomplishing this, purchasing must perform the
following basic tasks.
(a) Select and develop as required, vendors capable of meeting company
needs.
(b) Prepare and sign all purchase orders/contracts, so that the needs of the
company and all pertinent terms and conditions related to the purchase are
clearly understood by the supplier and documented accordingly.
(c) Monitor supplier performance and related company activities during
the course of the contract to assure that performance is accomplished by
both parties in accordance with that originally intended.
(d) Re-negotiate or terminate purchase orders/contracts as required when
changes occur, or as other conditionsdevelop that warrantsuch action.
(2) Provide information to and participate in management planning
sessions on subjects related to purchased materials services.
(3) Review purchase specifications and assist operating departments in
selection of required materials and services for standardization purposes,
and to assure their availability from competent suppliers at reasonable
prices.
(4) Protect the company from all unnecessary or unauthorized commitments which may result from inappropriate contacts or discussions with
suppliers.
(5) Dispose of all obsolete materials, equipment, or scrap that is no
Ionger required for company Operations.
Marketing and purchasing
The buying department and the selling department are the two departments
which are mainly concerned with external relations, with reaching out into
the supply markets and the sales markets outside the firm. To what extent
does it make sense to say that both are engaged in marketing? This
question is partly semantic (what words mean and how they are used) and
partly it is about what departments do and how their work is perceived.
Definitions and discussions of marketing have certainly been dominated
by selling considerations in recent years, although not in earlier periods.
Consumer product manufacturers in the West which were competing for
discretionary spending by consumers took to the marketing concept in a big
way. The marketing concept, so called, could be described as the realization that firms need to find out what their customers want and take steps
16
to provide it if they are to prosper; rather than producing the goods they
were interested in producing, they needed to provide the goods the
consumer was interested in purchasing. The marketing concept was less
prevalent in industrial marketing, where many firms remained firmly and
indeed proudly product-oriented rather than customer-oriented.
Industrial marketing differs from consumer markering in several ways.
Firstly, it usually sells different products. It deals in heavy equipment, such
as tractors and machine tools; light equipment, such as photocopiers and
handpower tools; construction, e.g. of factories, docks and housing estates.
It sells raw materials, such as iron ore and coal; processed materials, such as
steel bar, chemieals and plywood; components, such as ball bearings and
electric motors and semiconductors; consumable supplies, such as cleaning
materials and cutting oils; and a variety of services, such as those of the
forwarding agent, the contract painter, or machine maintenance.
Secondly, it usually sells to different customers. Consumer marketing
aims at households and individuals. Irrdustrial marketing aims at organizations, and these have different and often much more complex buying
processes. Consequently, when products such as motor cars or typewriters
are sold both to consumers and to organizations the markering approach
tends to be very different for the two.
As Webster and Windpoint out,
industrial and institutional marketers have often been urged to base
their strategies on careful appraisal of buying behaviour within key
accounts and in principal market segments. When they search the
available Iiterature on buyer behaviour, however, they find virtually
exclusive emphasis on consumers, not industrial buyers. Research findings and theoretical discussions about consumer behaviour often have
little relevance for the industrial marketer[4].
Yet the total value of inter-firm purchases of raw materials, components
and semi-finished parts, finished parts, tools and supplies, is considerably
greater than the total of sales to retail consumers. Rowe and Alexander
quote an estimate to the effect that interfirm sales are worth about 25
times as much as sales to individual consumers- 35 times as much if sales
to the government are included. They conclude that:
resource allocation, in effect the sorting or matehing of needs to supplying ability, is what marketing and selling is all about when looked at
from the economist's viewpoint, and nowhere is this function more in
need of being expertly carried out than in the area of interfirm transactions where industries are becoming interlocked in increasing interdependence[5].
This remains at least equally true if the words 'purchasing and supply'
are substituted for the words 'marketing and selling'. It could indeed be
said that the sorting or matehing of needs to supplying ability is what
17
purchasing is all about, and that in the area of inter-firm transactions this
often calls for marketing initiatives on the buying side.
This is sometimes described as 'marketing in reverse'. But one definition
of 'to market', in the most popular dictionary in the UK, is 'to buy or sell
in market', and the very word 'market' derives from a Latin word which
means 'to buy' (mercan). In earlier days the merchant venturers set forth
through unknown seas and distant countries in search, not so much of
customers although they had to have something to trade, but more of new
suppliers of new products- spices, furs, carpets, turkeys, tomatoes,
oranges - as well as of new sources of known materials such as gold,
diamonds and tin. Sourcing, and buying generally, was the venturesome
and creative part of their marketing effort.
In the distributive industries, the selection and pricing of merchandise to
sell is fundamental to marketing plans, and buying is therefore an
important part of marketing for the retailer. In the manufacturing industries on the other hand, it is the selection and pricing of products to make
which corresponds to this, and the procurement of parts and material to
make them tends to be seen as part of the production process rather than
part of the marketing process.
Even here, some buying activities call for creative and entrepreneurial
skills, for commercial innovation and persuasion. lt is widely feared that
shortages of materials and certain products will be increasingly common as
the twentieth century draws to a close. And Kotler for instance argues that
in times of shortage the marketing problern shifts its location from selling
to buying[6, 7]. The development of new suppliers isanother example of
purchasing firms marketing their buying requirements to the supply
markets. And in the negotiation of major contracts (for the design and
development of equipment at the frontier of the art) to meet customer
requirements, the term marketing may well be equally appropriate to the
proposals and arguments coming from each side (if indeed it is appropriate
at all in this situation).
The increasing concentration of markets has been a noticeable feature of
recent years and accounts for part of the difference between industrial
marketing and consumer marketing. lf three detergent manufacturers sell
to tens of millions of households, scientific studies can be made of the
market and how it can be segmented, of marketing methods and how best
to apply them. But if an industrial manufacturer sells to six major
industrial customers plus a number of minor customers, the scope for
science is less, and it is more a matter of art. The shotgun communications
of mass media advertising are used in the first case; the sharpshooter
methods of field salesmen and low budget advertising in specialist trade
journals are used in the second case.
In many industries a small number of manufacturers produce most of
the output; and in quite a high proportion of cases, a small number of
customers take most of the output. Buying and selling are both affected by
18
the situation; after all, every purchase is someone's sale, purchasing and
marketing are the two sides of one coin. Purehase cost analysis, negotiated
prices based on mutually agreed figures for cost, !arger and more expert
departments both for buying and for selling, are typical features.
When two or three !arge firms supply equiva!ent or interchangeable
products to the same market, at prices which each is reluctant to change
because of the risk of retaliation by the others, two obvious ways to
increase security as weH as profits are: firstly by product differentiation,
and secondly by cost reduction. Product differentiation makes the products seem less equivalent or interchangeable to the customer. Cost
reduction enables a manufacturer to increase profits without starting a
price war.
Cost reduction in the fifties concentrated on the reduction of manufacturing costs, with much success in many firms. But as one managing
director said:
we have over the years by dint of research, engineering development
and good management, reduced Operating costs to such an extent that
now nearly 800Jo of total cost consists of purchased materials. Obviously
it is important that buyers have an eye for more than the cheap price.
Purchasing and supply have a major part to play in reducing cost and
increasing profit.
References
1 Baily, P.J.H. and Farmer, D.H. (1977), Purchasing Principles &
Techniques, 3rd ed., Pitmans, London.
2 Rees, G. (1969), St Michael, A History of Marks & Spencer, Weidenfeld
and Nicholson, London.
3 Croell, R.C. (1977), Measuring purchasing effectiveness, Journal of
Purchasing and Materials Management, 13, No. 1, 3-4.
4 Webster, F.E. and Wind, Y. (1972), Organisational Buying Behaviour,
Prentice-Hall, Englewood Cliffs, N.J.
5 Rowe, D. and Alexander, I. (1968), Selling Industria/ Products,
Hutchinson, London.
6 Kotler, P. and Balachandrian, V. (1975), Strategie remarketing: the
preferred response to shortages and inflation, Sloan Management
Review, August.
7 Kotler, P. and Levy, S.J. (1973), Buying is marketing too, Journal of
Marketing, January.
2
Make or buy?
Before any purchase order, or production order, can be issued, somebody

in the organization must have decided that the item in question is to be
purchased, or is tobe manufactured internally, as the case may be. These
decisions as to which things to manufacture and which things to buy out
may in principle be top management decisions. But in practice they often
seem to be taken as required by design, production or purchasing people,
acting together or separately, with no written policy guide and with no
apparent provision for regular review.
Here we must distinguish between tactical decisions and strategic
decisions. Make-or-buy decisions taken at departmental Ievel are those
which simply apply the existing policy- they are tactical decisions. It is
only when a change in policy is considered that the decision needs to be
taken at higher Ievels where company strategy is decided.
The existing policy of a manufacturing organization is in a sense
crystallized into the manufacturing plant and facilities it has available.
Decisions to make internally parts which can be made economically, and to
buy parts which can't, are thus routine applications of the existing policy.
Routine does not necessarily mean simple. Comparing make costs with buy
costs to see which alternative to adopt involves some considerations which
are hard to evaluate. Most executives will admit that the custom of the
company, the costing conventions adopted, prejudice and other partly
arbitrary factors play their part.
This applies even more to those make-or-buy questions where existing
plant and facilities would have to be extended before manufacture could be
undertaken. These involve a change in policy. Nevertheless there are times
when a supply manager may wish to recommend such a change.
20
Routine make-or-buy decisions
Large organizations sometimes set up a make-or-buy committee, with

representatives from design, production, buying, and costing departments.
Deciding which parts can be made economically on available plant is of
course simpler than deciding whether or not to invest in new plant, and the
decisions have a shorter time-span - they can often be reversed the next
time the item is required. The economics of particular cases can be
complicated, especially when capacity is under-employed. Another difficult problern occurs when capacity is fully employed and the question is
which parts to sub-contract. As new suppliers appear or new processes are
introduced, the make-or-buy cost balance may alter.
There are two main reasons why a factory buys out parts which it is
equipped to make in: the first is that it can often buy eheaper than it can
make, and the second is that it may not be able to make all it needs of the
sort of part for which its plant is suitable because it hasn't got enough
plant. This capacity shortage may result from a rush of orders, or from an
expansion in sales which is outrunning the expansion in manufacturing
facilities; or it may result from a deliberate policy of gearing capacity to
average output and sub-contracting exceptionally high output in order to
run the factory at a stable base load.
How can a factory buy parts eheaper than it can make them, if it is
equipped with suitable plant, when the buy price must include the seller's
selling expenses, distribution expenses, and profit?
The short answer is through specialization. This enables the specialist
supplier to get long runs and use special tackle. Any machine shop can turn
black steel bar into bright bar, but it is less expensive to buy bright bar in
the first place if that is what is wanted. Any machine shop can make a
white meta! bearing, but costs will be reduced substantially if one of the
wide range of commercially available standard designs can be adopted.
Many parts can be made in any machine shop in short runs on general
purpose plant. But making them in long runs on special purpose equipment
enables the specialist supplier to take his profit and deliver the product to
the buyer's door, often through distributors who also have costs to cover
and profits to take, at a selling price which may actually be lower than the
buyer's bare direct cost for making in.
But specialization extends beyond tooling up for long runs. The motor
car industry buys in quantities which give long runs on a single order, and
has never been slow to equip itself with special plant; yet it supports a host
of specialist suppliers employing between them four times as many people
as the motor car firms themselves. Some of these suppliers are large firms,
but many are tiny concerns in the backstreets of Birmingham and the Black
Country. How can a gasket supplier employing a hundred or so people sell
successfully to a motor car firm with a totallabour forceweil up in the tens
of thousands and whose qualified design staff alone heavily outnumbers
Makeorbuy?
21
the whole payroll of the gasket manufacturer? Why doesn't the motor
manufacturer buy out the gasket firm?
The fact is that specialization does not stop at the plant, the process and
the product; it extends to research and management too. In buying out
components such as gaskets and lamps and brakes the motor car men are
buying research and development as weil as just components. Car manufacturers used at one time to make their own brakes, make the brake shoes
and rivet the linings on; but they found that by buying them out they also
bought specialist design talent and a trade knowledge based on experience
in the service of the whole industry.
In general therefore most factories concentrate their research facilities,
talents, and development on the main product, and buy from, rather than
compete with, suppliers who have specialized in the accessories and subsidiary parts they require. But there are plenty of exceptions to this rule.
Make-or-buy decisions are based on facts which may alter, when buyers
and others concerned should request a reappraisal in the light of changes
and developments both in their own plant and outside.
Make-or-buy questions involving capital investment

Serious problems in quality, delivery or price, or in guaranteeing continuity of supplies, sometimes justify the purchasing manager in making a
recommendation that consideration should be given to investing in new
manufacturing facilities in order to switch items from purchase to production. Such a recommendation will usually be made with reluctance,
because it could be construed as an easy way out of a purchasing problem,
because it does involve some loss of flexibility, and because of course it
builds up someone else's empire, at the expense of one's own.
Ensuring that very tight quality specifications are met by making the
parts within the organization is a traditional approach to quality problems.
For instance spool Axminster carpets with floral patterns may use sixty or
seventy different hues. Getting these colours right requires great and
repeatable accuracy in the dyeing of the yarn. lt is quite easy for two
shades of green to diverge slightly from the standards and become indistinguishable. Consequently many firms which weave spool Axminster
operate their own dyehouses despite the facts that dyeing is a specialist
trade and a very different one from weaving, and that there are many
textile dyeing and finishing firms producing high quality work. Carpet
manufacture is an old industry, and supplier education and development to
meet difficult quality Standards is the more usual approach in the newer
industries.
Delivery problems have prompted firms to take over their suppliers in
seller's market conditions. In the post-war period when machine tool
manufacturers enjoyed fantastic boom conditions by the Standards of
more recent times, supply shortages often set Iimits on their output.
22
Several machine tool firms bought iron foundries as captive suppliers in

this period. Such decisions are board Ievel, requiring substantial capital
investment and some diversification of the business in order to ensure
supplies of sufficient quantities at the time required.
Price problems can sometimes be solved by threatening to make the part
internally instead of purchasing it. The threat is often implied. The buyer
does not use crude statementssuch as 'if you don't get this ridiculous price
down to a sensible Ievel we'll just have to make it ourselves'. Instead he
insists on cost breakdowns from the supplier. He then compares these with
internally prepared cost estimates. His cost estimator, who usually sits in
on the negotiation, adopts the position that these are the costs which apply
inyour (the supplier's) industry. Nobody has tospell out that these are the
costs which we (the purchaser) estimate we should incur if we decide to
make it ourselves. There has to be a serious possibility that the purchaser
will embark on manufacture if he thinks it necessary, for this tactic to be
effective.
Continuity of supplies can be a problern in bilateral oligopoly markets.
The motor car industry is rich in examples of situations where two or three
firms supply some specialist item to the whole trade. If one or other of the
vehicle manufacturers decides to increase its security by taking over one of
the supplier firms, the result is a sharp decrease in the security of the other
vehicle manufacturers. There used tobe two or three specialist suppliers of
steel pressings who made car bopies for the whole British motor car
industry. A long strike at the firm which supplied car bodies to Jowett Cars
forced this estimable little manufacturer to close down. Ford Motor
pondered this situation, and decided to take over their main body
supplier - not, as the chairman explicitly stated in his annual report,
because of any dissatisfaction with their quality, delivery or price.
For many years Briggs supplied us with almost all our body requirements. A car body today costs about 40<t?o of the total cost of a car ... We
are greatly indebted to Briggs Motor Bodies Ltd for their unfailing cooperation in meeting so successfully all demands we have made on them,
sometimes under conditions of considerable difficulty. Nevertheless our
great dependence on their supplies has been of increasing concern to
us[l].
To gain control over this vital and costly elemenr in the product seems to
have been the intention- although taking over a strike-prone supplier
does not necessarily make it any less strike-prone. British Motor
Corporation, the other !arge car maker, replied by taking over Fisher and
Ludlow, another body presser. And now there are none.
Before making a recommendation to solve problems in quality, delivery,
price or continuity by embarking on substantial capital expenditure so that
the items can be manufactured, it would be prudent to ask oneself some
searching questions, for instance: what have we done already to solve the
Makeorbuy?
23
problem? What eise could we try apart from making in? Is it really a
permanent difficulty or might it clear itself up in, say, a year? What would
it cost to give effect to the proposal? What sort of problems might it
involve? Could we absorb all the output ourselves? If we could make it pay
only by selling part of the output, is this the sort of business we want to go
into? Should we aim at making the whole of our requirements, or at
making part and buying part? Would this harm or help our relations with
suppliers?
Suppliers within the group
Topmanagement must decide what plant will be provided and hence what
things can be made, and what plant will not be provided and hence what
things must be bought out. This is because there is no general rule; policy
depends largely on what skills and talents the management has and where
its interests lie, as weil as on what funds are available and on the strict
economics of the situation.
lt is true that there is a difference between industries here. In old and
declining industries there may sometimes be a tendency for successful firms
to acquire their suppliers in order to eke out a slim pro fit margin by vertical
integration. In expanding industries horizontal integration, broadening the
end-product, may provide a better return on investment. But the difference
between firms in a single industry is far greater than the difference between
industries. In every industry there are firms which have succeeded by
specializing- and others, equally successful, which have diversified.
There are also firms which have not been saved from failure by specialization, and firms which have diversified and still failed. There is one firm
which makes nothing but aperients for parrots, a specialization so extreme
as to strike awe in the beholder; at the other extreme great combines like
Imperial Chemical Industries produce paint, plastics, wallpaper, dyestuffs,
metals: a score or more of specialist product groups.
Diversification on this scale brings purchasing problems of its own.
When one division buys the product of another division in the group, the
operation is intermediate between making in and buying out. In the short
term the price paid may not matter much, since it is like transferring money
from one of your suits to another; the money stays in the group. But in the
long term inter-divisional pricing does matter and does affect group profitability; because of its effect on relative profitability of divisions it affects
the allocation of resources between divisions. Price bargaining between the
divisions of a great corporation is consequently often as keen as price
bargaining between the company and its outside suppliers. And in theory
at least the buying division is often free to place its orders with an outside
source if the supplier within the group cannot match the outside price. But
in practice this freedom is far from absolute.
Research into the policies of 193 companies in the UK revealed that !arge
24
firms, and firms with a decentralized management style, gave considerably

more freedom to buyers in this respect than others did[2].
Transfer prices
Large concerns have to find some way to set transfer prices - the prices at
which goods manufactured by one division are transferred as supplies to
another division. In highly centralized firms these prices are set centrally in
three-quarters of cases[2]. This is said tobe because only centrat staff have
enough information to set prices properly. In multi-national companies,
transfer prices between divisions in different countries involve highly
complicated considerations of exchange rates and different tax laws, and
may be set with the main object of reducing the total tax liability of the
company.
Prices negotiated between selling division and buying division are not
always a happy solution. If the seller is compelled to sell internally his
negotiating position is poor. If the buyer is not allowed to buy externally, his
position is poor. Personalities and positions in corporate hierarchies complicate matters. A great deal of time can be taken up by these internal
negotiations. Yet some negotiation is necessary, and purchasing managers
for instance try to negotiate a discount off market price where this is the
basis chosen for transfer pricing on the grounds that market price includes
selling overheads such as advertising and salesmen which an internal
supplier does not need to incur.
Market price, and full cost of production, emerge as the two most widely
used methods of setting transfer prices. Market price is preferred when firms
are interested in divisional profitability, and production cost when they are
more interested in the profitability of the product[2]. Setting up product
divisions as pro fit centres is the standard method of running !arge manufacturing businesses. The authority and the accountability of the division chief
cannot be quite as untrammelled as that of the managing director of an
independent business. If it were, the whole firm would degenerate into a
collection of separate units gaining nothing by association. But within
defined Iimits, and subject to centrat or corporate management's reservation of certain matters such as sources of finance and major capital
expenditure, division chiefs have a good deal of autonomy so long as they
earn acceptable returns on the assets they employ.
This is why it matters to them how prices are fixed for goods or services
supplied by one division of the company to another division. If Division A
supplies goods to Division B at an excessively high price, then Division A is
profitable and its return on assets is high. It gets all the finance it wants.
Corporate headquarters backs the winner. Meanwhile Division B cannot get
approval for sorely needed development. Butthefigures are misleading; A's
good results, and B's poor results, are due to an unfair transfer price.
In principle the fairest approach is to charge opportunity costs: that is,
Makeorbuy?
25
what the seller division could charge an outside customer, or what the buyer
division would have to pay an outside supplier. Market price, in fact: but
this is not easy to establish unless the item is a standard price-list part. With
made-to-order castings, forgings, fabrications, the price may be set by
selling some of the output, and buying some of the input, externally.
The stated policy may then be to buy from the best source, inside or
outside the company. Buying departments get dispirited when they find
what seems a better source outside the company only to see their decision to
switch to an outside supplier overruled. But the real policy may in fact be to
sell the output of the supplier division at opportunity cost. This is equal to
outside supplier price when the internal supplier division is fully employed,
but it would change downwards if the division had unused capacity.
Market price can hardly be used as the basis for transfer pricing when
there is no real opportunity to buy outside. Production cost (fuil cost or
standard cost rather than marginal cost) is then the usual basis for transfer
prices.
Psychological complications make thoroughly rational policies on transfer pricing difficult to implement. As Edwards and Townsend point out:
the material suppliers within a group may be supported even beyond the
point that a cool appreciation of the economics of the situation would
justify. Pride is at stake; the investment has been made and its results must
be bolstered. Loyalty is also at stake; once an undertaking has been
acquired, those who run it are in the family and therefore to be supported
in bad times as weil as good'[3].
Cyert and March describe the real-world firm as a 'coalition of participants in which conflict is only partly resolved'[4]. When divisional results
depend partly on how weil a division has coped with external circumstances and partly on the transfer payments they have managed to arrange
with other divisions, prices result in practice from a permanent bargaining process, rather than from the solution of a theoretical problern in
'resource allocation, performance disaggregation, or cost distribution',
and divisions whose results are poor will bargain hard for better results.
'In general we should find that transfer payments are made on the basis
of a few simple rules that (1) have some crude face validity and (2) have
shown some historical viability. We should find that they are the focus of
conflict between sub-units in the same way as other allocative devices.'
Organizing sub-contracting
Purchases of components which can be bought more economicaily than
they could be made in are regarded as normal purchases. But purchases of
components which could weil be made in but for a capacity shortage are
often regarded as a special type of purchase. Since what is being bought is
not so much components as capacity, the choice between different
26
Fundamentals ojpurchasing and supply
components for sub-contracting involves consideration of relative machining times as weil as price.
Sub-contracting is nearly always a combined operation of more than one
department. The purchasing department is involved because this is a
commercial operation in which company money is being spent with an outside supplier; and the production control department is involved because
what is being bought is not so much particular things as a short-term
extension of the productive machinery; and inspection is involved since the
sub-contracted parts will usually be inspected by the buyer company's
internal inspection department just as if the parts had been made in. Much
of the detailed planning and progressing may be undertaken by the production control department as an extension of their normal work. Controlling
sub-contracting usually involves less desk work and more chasing about
than most purchasing jobs. One buyer who was put in charge of subcontracting for a !arge Yorkshire engineering factory found that he had to
spend about half his time visiting sub-contractors, which is very much
more than most buyers spend visiting most suppliers, and about a quarter
of histime in discussions with colleagues in his company's drawing office
and production planning department.
When there isn't enough sub-contract work to assign a man to it
full-time close and thorough co-operation between departments is
especially important. To stake out one area of work for purchasing and
another part of the job as a production control preserve is difficult and
unlikely to be rewarding; both departments should work so closely
together that such questions are academic.
Case study 2.1: Midland Motors (1920) Ltd *
Midlands Motors (1920) Ltd is a manufacturer of heavy commercial
vehicles, many of which are specially adapted to meet customer needs. The
company, successful, but relatively small, is a public limited company,
though over 5007o of the shares are held by the White family. Sir Harold
White, the son of the founder, is the present managing director.
The company competes with the big guns of the industry by identifying
and filling small sectors of the market. Labour relations have always been
very good at Midlands Motors. Sir Harold has often in the past been heard
to say: 'We've got a good bunch of lads here, and we know how to Iook
after them.' Indeed welfare services and recreational facilities are second to
none. Midlands has always, as at present, paid wages in excess of general
rates.
In recent months a great deal of unrest had spread through the workforce (about 800 shop floor employees) of the company; production was
falling and absenteeism rising. Sir Harold was completely at a loss as to the
*Reprinted by permission of Purchasing Development Services, consultants in
purchasing and supply.
Makeorbuy?
27
reason for this situation. He had remarked to many people in the firm that
he was absolutely aghast at the attitude of his workers. The personnel
manager had conducted some research in an effort to identify the causes of
the unrest, and had come up with the following points:
(I) The 'social contract' had meant that the rates of pay of shop floor
workers had remained at around the same Ievel, yet it was common
knowledge that management jobs had been 'shuffled' and renamed as a
device to circumnavigate the social contract.
(2) There had been re-organization of work on the factory floor. The
foremen in the machine shop had been asked to take on additional
inspection duties, so that the inspection department staff could be
redeployed in the finished vehicle area. This had affected: the machinists,
as the rate of rejection of finished pieces had risen, thereby reducing their
bonus; the foremen, who had more work to do; the inspectors who had
been moved; and the final assembly workers.
(3) It was discovered that the attitude of top management, who saw
themselves as benevolent, was reckoned by some of the newer workers to
be patronizing and anachronistic and that Sir Harold was regarded as a
'supercilious' type.
Recently things had come to a head with the walk-out of the machine
shop foremen. Agreed procedures had been followed since the first request
for a meeting three weeks ago when the foremen had asked for an upgrading in view of their increased responsibilities, but management was
adamant that this was not possible. It was generally known that other
departments would not be disrupted immediately, as there was a reasonable stock of most manufactured parts.
Mike Mullins, the buyer, was sitting in his office privately reflecting that
the attitude of Sir Harold was probably a result of his hurt pride employees had never had the temerity to ask him for anything in the past,
he had always anticipated well and increased wage rates in advance of
need, but that he seemed to be getting rather cantankerous. Just then the
door opened and Sir Harold walked in. 'Look Mike', he said, 'you must
buy from overseas if possible, for delivery as soon as can be arranged,
some of the parts which we would normally machine 'in-house' for the five
trucks on the Middle East contract. We can't afford to let this customer
down because of those silly beggars in the machine shop, and there should
be enough time to get what we need. I've had my assistant do some
checking, and the parts that are not yet manufactured are on this list.' He
handed Mike a sheet of paper and said, 'Let me know how you get on by
9.30 tomorrow.'
Mike spent most of the rest of the day working on the problern which
was not a particularly difficult one, there being only seven items on the list,
all of them fairly simple ones and to be made in batches of five. It was
simply a case of finding a general machine shop on the continent or elsewhere which was willing to supply at short notice (a 'premium' price would
28
be charged of course). By five o'clock he had got the answer, a firm in

Amsterdam that had supplied goods before. He left the office, and was
just getting into his car in the staff car park when he heard a voice from
behind- 'Hello Mike'; It was John McKenzie, one of the foremen, who
went on to say 'I daresay old Harry will be along to see you soon about
sourcing machined parts outside; take my advice, don't.' McKenzie went
on to say that it would be unfair to do so, in view of the just claims of the
foremen, and anyway Mike was an employee too, so there should be some
solidarity. He also made one or two oblique comments about inspectors
and fitters not looking too kindly at 'inferior' parts from outside.
Mike drove home, and spent a long evening and a !arge part of a sleepless night worrying about the problem. The more he thought about it the
more complex it became, and he found hirnself considering the implications for a surprisingly !arge number of individuals or groups, most of
them with interests which conflicted in some way. These were as follows:
(a) Sir Harold, who wanted the work to be done at all costs.
(b) The rest of the board, who generally supported Sir Harold but would
probably be ready to recognise the wider implications of resourcing the
work.
(c) The foremen, who would clearly be against the purchase of work
normally within their province.
(d) The other employees at Midlands, who would be in a way forced to
'take sides' in the dispute by handling (or not) the bought-in components.
(e) The Middle Bastern company, which was very anxious to have the
trucks delivered on time so that it could meet its own contractual obligations with a third party.
(f) The Dutch sub-contractor, who would possibly be reluctant to supply if
he was fully aware of other circumstances.
There was also the question of ethics. Mullins regarded hirnself as a man
of integrity, and an upholder of professional standards.
In the early hours of the morning, Mullins made his decision. He would
tell Sir Harold that he feit unable to do this particular job and would take
the consequences. With that he slept fitfully for a couple of hours. It is
now 9.00 a.m. andin half an hour Sir Harold will expect to hear that the
problern has been solved.
Questions
(l) How should Mullins put the situation to Sir Harold?
(2) Do you think Mullins' decision was the right one? What would you
have done?
(3) Devise a clause tobe included in a 'code of conduct' for buyers designed
to cover such contingencies as this one.
Makeorbuy?
29
References
1 Ford Motor Co., annual report to shareholders for 1952.
2 Rook, A. (1972), Transfer Pricing, British Institute of Management
survey report No. 8.
3 Edwards, R.S. and Townsend, H. (1958), Business Enterprise, Its
Growth and Organization, Macmillans, London.
4 Cyert, R.M. and March, J.G. (1963), A Behavioral Theory ofthe Firm,
Prentice-Hall, Englewood Cliff, N.J.
3
In formal organizations making large numbers of purchases it is necessary

to adopt standard forms and to prescribe routine procedures for the purchasing process. The process itself can be thought of as comprising the
following stages:
(l) Initiating the purchase
(2) Selecting the supplier
(3) Placing the order
(4) Progressing the order
(5) Receiving the goods and paying for them.
When purchasing is departmentalized, most purchases will be initiated
outside the department, and payment of bills will also be carried out by a
different department. The intervening stages are mainly the responsibility
of the purchasing department, although other departments and functions
take part to a varying extent in them.
Jnitiating the purchase

Various types of documentation are used to initiate purchases.
For specific individual needs, the person requiring the item writes out a
purchase requisition for it. A typical requisition form is shown in Figure
3.1. This form serves to notify purchasing of the requirement, to authorize
the expenditure and to provide a filed record. Requisitions can be madeout
by anyone in the organization, but a limited number of senior people can
authorize the expenditure by countersigning the form. Purchasing officers
have a duty when spending the organization's money to ensure that the
expenditure is proper. A Iist of authorized signatories should be available
31

PURCHASE
REQUISITION
Drt.ptr.,.tmcnt- .... __________ -----
l>tttc------ ___________ ----
NumM"------ -------------Quantty anti Pucriptiofl
Figure 3.1 Typical purchase requisition. Handwritten, one copy to

Purchasing and second copy retained by originator.
in the purchasing office. It should mention any limitations on their
authority: for instance the toolroom foreman may be authorized to
countersign requisitions for tool-room requirements up to :200 in value,
and above that value the works manager may have to countersign.
Capital expenditure has to be treated as a special case. In one firm, the
requisition has to be signed by a director, and directors are responsible for
obtaining the approval of the capital expenditure sub-committee of the
board. In another firm, purchases of a capital nature have to be approved
in advance of ordering by the board of directors, the requisitions must
quote the Board Approval nurober, and an extra copy of the order goes to
the company secretary (for budgetary, analysis and post mortem purposes). Capital expenditure is treated differently in the accounts, and for
taxation purposes. It often involves extensions to assets and consequently
changes in, rather than maintenance of, the basis of operations, and it
usually involves a long-term investment such as a new machine tool rather
than a short-term investment such as a pile of materials for processing.
Although the distinction between capital expenditure and revenue expenditure seems clear in principle, there is in practice a rather vague borderline,
which different firms treat in somewhat different ways, and it is for the
accountants to define where the border runs in any particular firm.
Material requirements p/anning
Requirements programmes may be thought of as groups of specific needs

related in some way which are treated as groups for convenience. The
32
commonest type is lists of parts and material required for a production

programme. The bill of materials or parts Iist gives the detailed requirement for each product. The authorized production programme states how
many products aretobe made in each time period. For commercial reasons
it may be necessary to make purchase commitments further ahead than
manufacturing programmes are firm. Motor vehicles and tractor manufacturers have a standard procedure to cope with this.
The Board of Directors issues to the Supplies Division a document called
a Sanction, which authorizes parts and material to be bought either for a
stated quantity of products (e.g. when an initial batch of a new product is
to be made) or for a stated period of time at the programmed output rate.
Thus there are three types of production forecast: the firm manufacturing
programme, which covers a short period ahead only, to give flexibility; the
long-term programme, which forms a basis for forward planning, but
cannot be used to enter into commitments without confirmation; and the
sanctions, which represent the maximum quantity of products or the
Iongest period of time to which the directors are prepared to commit the
company in advance.
The sanction quantity may not always be the same as the order quantity;
adjustments for scrap allowance, spares, stock on hand and balances outstanding may require to be made, anti it is possible that more than one
supplier may share the business. Nor is the order quantity necessarily the
same as the delivery quantity; the order may cover a six-month period,
with weekly or monthly deliveries, for instance.
The sanction authorizes purchase commitments for a stated quantity (or
period and frequency) of products; the next stage is to calculate the
requirement quantities of components and materials to implement the programme. This is done by using schedules of parts and materials to make up
each product. The 'explosion' of manufacturing programmes or sanctions,
and parts lists, into purchase schedules requires a great deal of detailed
clerical work which must be done quickly, if programmes are not to be
inflexible, and accurately. Computersare often used for this work. Plenty
of ready-made programme suites are available from computer manufacturers and elsewhere. For each item the quantity reguired for each endproduct must be shown; and one size of steel bar could be used on several
sub-assernblies and indeed on several products. Each item quantity must be
multiplied by the planned production rate per product and the results
summed to get a total requirement per item per period. Finally adjustments
may need to be made for stock on hand and/or for outstanding order
quantities.
Normal procedure in engineering manufacturing, both in batch production and in mass production, is to buy low value sundries and common use
items for stock, and to buy costly or special items against production
requirements programmes. In batch production the order quantity is
usually the same as the batch size. If batches of standard products are in
33
regular production, schedule orders with releases can be used, and this is
the preferred method for line production.
Stock rep/enishment
Stock orders can be originated, either from the physical stocks, or from
manual stock records, or from computer stock records. With computer
records, the usual procedure is that as records are up-dated, each stock
balance is compared with an order Ievel quantity for the item in question.
If the balance has fallen below order Ievel, a note is made. At the end of the
up-dating run, a Iist is printed out of items which need to be ordered,
together with whatever other information has been specified in programming, such as quantity on band, actual usage during the last three periods,
statistical forecast of usage for the next three periods, Iead time as
recorded, etc. In some sophisticated computer programmes, the order Ievel
is recalculated on the latest usage figures before deciding whether the item
needs reordering. The order quantity may also be recalculated and printed
out.
With manual stock records the procedure is in essence the same. As
records are being posted, each stock balance after posting is compared with
the appropriate order Ievel, and if an item has fallen below order Ievel, a
note is made. This may be done by sticking a coloured flag into the visible
edge of the stock record card, or by pencilling the stock number onto a
sheet. At the end of the up-dating run, or day's postings, a block
requisition, or schedule requisition, may be prepared: this is a Iist of items
to order with relevant data. Alternatively travelling requisitions may be
extracted from the stock record files. These are also used with some
systems for ordering against production programmes, and they are
commonly used when stock orders are originated in the stores from
physical stocks.
Travelling requisitions
The term travelling requisition denotes a document which travels from the
originating department to start a purchase order, and then returns for
filing and re-use the next time the item is required. Permanent order cards,
and perpetual requisitions, are alternative terms. An example is shown in
Figure 3.2. These forms are printed on heavy-weight card. Purehase
specifications and other permanent data such as supplier names and
addresses are written in. Spaces are provided to enter date, quantity on
band, quantity required, initials of originator and of authorizer. The same
card can be used for years without rewriting.
Some firms prepare a travelling requisition whenever anything is ordered
for the firsttime- unless it's obviously a unique purchase. (If the managing director requests the purchase of a Rolls-Royce coupe with wickerwork
cladding and built-in cocktail bar, there is really no need to prepare a
34
tOll
LOCATION
DEStRIPTJON
~OUUTIA-l-1_0_.--!--'---J'-'-'-+_1_0_.--!--19_"+_1_9_.-JI_u_s_o_o"-'-~~~~~~~---j
- ~:__::_-J~~~~-+~---+-~-+~----+~-JI-~~~~~~~~~---l
_3~~
,... .. ~~~-~-~~~~~~~+---~-+-~~--------------~------1
T
DATE_
f-------
STO'K
UISITIOH
UAHTITY.
.NNTIDt'l'
APP':l
DATIE
f--NO. _
QUANTIT'tf--St.U. _
PRiel
f.!9.!1l!ll
AHEIYED
ZIAH. _
QUA.N.
-~---I------+-----+---Jt-----+----+------1-------+-----+~--+-----+-~--i
--------+-----+----+---J~--+----+-~--+------+---~f-~+------1------i
---1--~-+~--
Figure 3.2 Typical travelling requisition. Used for repeat ordering.

travelling requisition for repeat orders.) Travelling requisitions are very
suitable for releases against bulk orders and period contracts. Normally
they go straight to the order typist as received from departments, since
where to order and at what price will already have been noted on them by
the buyer in the aourse of his periodical reviews; if he wishes to reconsider
at the time of ordering, he simply arranges for the card to be marked 'refer
to Buyer'.
Specific authorization of each purchase to replenish stock is not usually
required, since if the department has f>een authorized to stock an item it
has been granted implied authority to replenish that item as needed.
Routine requisitioning procedures as described above do not exhaust the
purchasing officer's responsibility to ascertain the type and quality of
things required, the quantity, cost bracket, and requirement dates. Sound
clerical routines should be established to cover the great bulk of the work.
Executive personnel can then concentrate on matters which clerical
routines do not cover.
Selecting the supplier
Once the purchasing department has been notified that a requirement

exists, the next stage is to decide how to fill the requirement. For repeat
orders, reference should be made to buying records to see where previous
orders were placed and whether supplier performancewas satisfactory. A
typical record card is shown in Figure 3. 3.
Existing purchase contracts may cover the requirement. In this case only
a call-off or release against the contract is needed. Or there may be no
35
Figure 3.3 Purehase record card. Shows purchase history of items bought
regularly.
contract, but there may be an existing supplier. Competent purchasing
staff do not change from established suppliers without good reason. This
was brought out very clearly by Hugh Buckner in his research into 'How
British Industry Buys':
Approximately half the persons involved in purchasing would not
change from their best supplier to buy an identical product from a new
supplier for a price reduction of less than 5%, i.e. on average 27o/o
increase in profitability. Approximately one fifth would not change for
less than 10% reduction in price[l].
If there is no existing supplier, or if the previous supplier did not prove
satisfactory, then a new source must be sought. The standard procedure is:
(2) select a short Iist of potential sources
(2) send them details of the need and ask for quotations of price,
delivery, and terms
(3) compare the quotations, obtain additional information as required,
and decide.
The procedure is shown in Figure 3.4.
How do buyers find sources of supply for things which haven't been
bought before? In a !arge department there may be thousands of catalogues cross-indexed by commodity and supplier; anything likely to be
useful out of the mass of trade Iiterature delivered by post or visiting
salesmen is kept, and every purchase department must have some
directories.
These include general directories such as Seils' and Kelly's, the
Manufacturers' Manual, the FBI Register. The Stock Exchange Register
gives data about financial structure and history which can be useful, and
the Kompass Register Iists sources for 30 000 products and services, with a
wealth of company data. For particular areas, classified telephone directories and the local guides issued by many chambers of commerce are most
useful. For particular Irades, excellent guides are issued by trade associations or independent publishers, e.g. TheIndustrial Safety Equipment and
36
NO...,....-----.
YES
I
I
I
I
I
I
L.
Figure 3.4 Outfine of procedure for selecting supplier. The broken line
indicates steps Iaken after the order has been placed. (Reproduced from
Bai/y, P.J.H. and Tavernier, G. (1970), Design of Purchasing Systems
and Records, Go wer Press, London.)
clothing Cata/ogue, and especially by trade magazines, e.g. Machinery's
annual Buyer's Guide for the machine tool world, the Business Guide to
Office Equipment, the Furnishing Trades Directory. The Buck and
Hickman small tool catalogue and the Matthews' office furniture catalogue are notable among dealers' literature. There's even a Directory of
Directories, as weil as a Directory of Directors.
Buyers of components and special order goods generally keep their own
supplier lists on small cards or in loose-leaf pocket books. These record
37
name and address of the firms, types of work, personnel and other useful
data. In selecting a supplier for an important purchase it isn't enough to
know that the supplier does in fact supply items of the type required. He
may not be able to supply the volume wanted or meet quality Standards, so
that data on facilities available, performance standards, and perhaps
financial stability may be required. The buyer should always arrange to see
the supplier's establishment if it is nearby; for important purchases it may
be advisable to travel a considerable distance to investigate facilities, and
to be accompanied by technical staff from the buyer's organization. A
record should always be kept of such visits, as weil as of any troubles in
dealing with firms, so that the buyer company's knowledge of suppliers is
not confined to the heads of individual purchasing personnel but is available for the use of others.
Buyers also learn of possible suppliers from trade magazines, trade
shows and exhibitions, and calls by salesmen; and membership of professional associations puts them in touch with buyers in other companies
who are usually glad to help.
Enquiries and quotations
When asking firms to quote prices and terms, it is usual to employ a form
called an Enquiry, or aRequest for Quotation. This form should be on the
same lines as the organization's letterhead rather than its order form, to
avoid confusion in the supplier's office. It is essentially a Ietter in which
such words as 'Your quotation is invited not later than ... for the supply
and delivery of the goods specified below' are preprinted to save typing. A
copy of the enquiry is kept in a pending file until all replies are received, or
until a closing date, and the quotations are then compared and analysed.
It is convenient both for comparison and for subsequent reference to
transfer key data from the quotations to a quotation summary sheet, which
may be the carbon copy of the enquiry form, or may be a special form.
When set-up costs, or tooling charges, or different transport costs, or a
different basis for charging for the goods are involved this is particularly
useful. The order number and the selected supplier are entered on the form
before filing it away. The reason for selecting that supplier may also be
shown.
A complication with parts produced on special tooling is that a high tool
cost often makes possible a low price for the part, and vice versa. One
method of tackling these two-element quotations is to decide on a write-off
quantity for the tooling, divide the tool cost by this write-off quantity, and
add the resulting figure to price quoted for the part. Unless the write-off
quantity is correct this procedure will not necessarily give correct solutions,
and it is not easy to choose write-off quantities correctly because of variations in tool life and uncertainty about future volumes of requirement.
A better method is to apply break-even analysis. Suppose for instance
that the following quotations are received:
38
Supplier A: flOOO for tooling, parts at BO per 1000

Supplier B: f2000 for tooling, parts at f20 per 1000
Supplier C: f4000 for tooling, parts at flO per 1000
The cost position can be shownon a breakeven chart, as in Figure 3.5.
6000
Break-even point
B&C
5000
4000
....
...
"'0
-c:
Break-even point
3000
A B
::r~---+---~--+---------'
0
50 000
100 000
150 000
200 000
QUANTITY
Figure 3.5 Break-even analyses of two-element quotations.

From this it can be seen that total invoice cost is lowest for Supplier A until
total off-take exceeds 100000 parts, when B becomes the low-cost source,
while for total off-takes greater than 200000 parts C becomes eheaper still.
The break-even points can also be derived by calculation, without
drawing the graph. The difference between A's piece price per thousand
and B's piece price per thousand is flO. The difference between A's tooling
price and B's tooling price is flOOO. Dividing one difference cost into the
other gives the break-even point between A and B as 100000. In the same
way the break-even point between Band C can be calculated:
(tool cost C minus tool cost B)
200000
(part price B minus part price C)
Sometimes suppliers quote a figure for part tool cost. This enables them
to use the same tool on work for other customers - which may or may not
be desirable. It prevents the customer taking the work to another source
unless he pays for a new tool, which is desirable from the seller's viewpoint
but not from the buyer's viewpoint.
39
The /ow bid and the best buy

When everything except price is equal, the order will go to the firm which
submits the lowest price. Since it is never the case that everything except
price is equal (if everything eise is equal price becomes equal too in the
absence of error), technical and commercial evaluation is often called for.
Sometimes the Jow bidder turns out on investigation to be unsuitable
because he is unable to meet volume requirements, or unlikely to meet
quality standards, or isabad risk in some other way. For major purchases
buyers do not ask unsuitable suppliers to quote a price. For less important
purchases it would often not be worth making a proper investigation of an
untried supplier until he has submitted an attractive quotation. Sometimes
the Jow bidder cannot deliver when required, and an assessment has to be
made as to whether it is worth the extra price to obtain the quicker
delivery.
It is a courtesy to notify unsuccessful bidders by post. Sometimes apreprinted postcard is used, with a word of thanks and a Iist of reasons such
as: lower quotation accepted, better delivery elsewhere, alternative
material or equipment selected, order not placed this time - which can be
ticked.
Ordering systems
When the purchasing department has been notified of a requirement and

has settled the supplier and the price and other contract terms, the next step
is to place an order. Even if emergency requirements have been ordered by
telephone, a standard form is used to confirm requirements.
A typical purchase orderform is shown in Figure 3.6. Four copies are
prepared: one for the supplier, one for the requisitioner, one for goods
receiving, and the fourth is the purchase department file copy, used for
progressing and for invoice approval. Outstaoding orders are filed alphabetically by supplier name on Iever arch files. Completed orders are filed
numerically.
If a high proportion of outstanding orders have to be progressed, it is
convenient to have a fifth copy, a follow-up copy of the order which can be
filed in due date order. An alternative to the lever-arch files for outstanding orders, where the number outstanding at any time is more than a
thousand perhaps, is a vertical pocket file Jike a filing cabinet drawer on a
trolley, which can be wheeled from desk to desk as needed.
Many firms send an extra acknowledgement copy to the supplier with a
request that he signs and returns it. The arguments for this are, firstly, that
it makes sure that the supplier receives the order; and secondly, that it
makes sure that he accepts the buyer's conditions of contract.
However one survey disclosed that half the purchase departments contacted did not use acknowledgement copies, and of those who did a third
failed to follow up their suppliers and insist on getting the signed
Fundamentals of purchasing and supp/y
40
PURCHAH ORDER
JOHN CROSSLEY AND SONS LTD. HALlFAX YORKSHIRE

Telephone: Holi(u 1111 .Ext. 67 Telernuns: Cronlys, Ho/lfox
To:
;:L=-------~-------_j-.,.--------1
ORDER No.
~h_"'_'_~______LI_"_NN_m___P_c_~---4-D____ro_r_d__~------",_,. supply ;..
Pr/ce
IIII'OiCli'J,odl'!CeJ flfHi corra,....

m111t QUOTE ABOVE
OftDER NUMBEA.
.,..,"
Goods tobt ltllt corriott pold.

!n~olctl
1/lould llol posted 10
UJ
IIOl/Oiff tllctndaypodiG""
delf>cltd!Cd.
Cousondslmi/Grpockofnw/11
1'1111 be 11<Jod
(or;
~llf 11Yt'7
rffort
w11/ b.: mGU ID "'turn 114mt

carriCif<t (orword i( duiml.
PCI)'mentl
/JC r1(
IIUC
bul C1M
monthfol/-lntdotefl(de/1...-y
/IIIUIUti//I'IOti!/)'d/I((HIIII.
Mokrt offlne corpt>tJ for more thon 150
for Jolln Crouley & Sons Ltd.

y.or'!
Figure 3.6 Typical purchase order form. Typed in quadruplicate, with

copies for supplier, requisitioner, goods receiving, and purchase departmentfiles.
acknowledgement back. The remote chance of orders being lost in the post
can indeed be insured against, at the cost of more work and expense to
both parties, by posting, collecting and checking acknowledgement copies;
but the expense is out of proportion to the result for most concerns. There
are Special cases of COUrse in which acknowledgement copies are justifiable
on other grounds.
Most acknowledgement copies make specific reference to conditions of
contract, with some phrasesuch as 'We acknowledge receipt of your order
of which this is a copy and accept the conditions printed on the back
thereof.' Many suppliers return this unsigned, or signed but with the bit
about accepting conditions crossed out, or perhaps with their own
Acceptance of Order form pinned to it, which details their own conditions
of contract. If you want to make sure that whenever possible your purchases are made under your own conditions of purchase, it isn 't enough
just to use an acknowledgement copy.
41
Shou/d a/1 orders be priced?

Some firms insist that every purchase order must show the price at which
the goods are ordered. Other firms show the price when it is specially
quoted, or when a major occasional purchase is made, but omit the price
for regular purchases, purchases against period contracts, or goods sold
off the shelf on price lists.
The arguments for pricing all orders are:
(1) It proves that the buyer knows the price at which he is buying; it
encourages price-consciousness and checks that the buying job is being
done.
(2) It reduces invoice checking to a clerical routine; the invoice clerk
passes bills on which prices agree with those shownon the order, refers the
rest to the buyer.
(3) It facilitates routine preparation of commitments reports.
On the other hand purchase departments which do not price all orders
argue that:
(1) Delays in placing orders delay delivery of goods; delays in passing
invoices often do not matter to a day or two. It is therefore efficient to
check a known price at the invoice stage rather than at the pre-order stage.
(2) When many purchases are against standing orders or price lists, price
checks at the invoice stage can be selective (every item above :50 and every
tenth item below, perhaps) but price checks at the pre-order stage must be
exhaustive if the price is to be shown on every order; they must therefore
take Ionger without necessarily performing better.
(3) Insistence on pricing every order can mean a costly waste of time if
buyers are obliged tophone suppliers and notedown prices before they can
write small value non-repeating orders.
Many purchasing men Iike to see most orders, if not all, priced, as
evidence of a properly done job. But departments mainly concerned with
routine maintenance orders, or detail orders against period contracts and
standing orders, often favour the unpriced order subject to proper safeguards.
Discounts
Discounts are percentage variations to the normal price. The three main
kinds are: cash discounts, trade discounts and quantity discounts, but
some others are encountered.
Cash discounts are reductions in the face value of a bill offered in return
for paying the bill promptly. They were formerly very common typical
terms being 3U OJo for payment within a week and 2 Yz O!o for payment
within a month. This is substantial; the equivalent of losing 2 Yz OJo for
taking an extra month's credit is paying loan interest at 3007o per annum.
Rather than forfeit the discount, every solvent business would pay on time.
There did not seem to be much point in giving discounts for what was
standard practice, so suppliers saw an easy way to smuggle in a 2 Yz OJo price
42
increase. The discount was withdrawn- 'a change in our terms of

payment' - on the assumption that customers would continue to pay in
the normal time .
This ceased to happen in the tight-money periods of the late sixties and
early seventies. Trade credit is a perfectly Iegitimale source of finance provided that it is taken with the agreement of the supplier. Large purchasers
abused their position in some cases by taking up to twelve months credit
and t.erms of payment with any associated discounts became a negotiable
matter, even in some cases a major issue. This was to some extent a consequence of the high rates of inflation Britain was suffering from at the time;
in other countries with even higher inflation rates cash on delivery or cash
with order terms became common.
It can be said that the traditional accounting attitude to terms of
payment developed intimes of stable prices. Cashdiscounts were treated as
inducements to pay bills either promptly or earlier than usual. Any cost
saving resulting from cash discounts was not offset against the cost of
purchases but was credited to a different account to which corresponding
discounts to customers were debited; the cost of extending credit to
customers was as it were offset against the benefit of receiving credit from
suppliers. Terms of payment both to suppliers and from customers were
decided at policy Ievel and adhered to without change for long periods of
time, and for the purchasing officer they constituted constraints within
which he operated, rather than issues he was free to negotiate. This attitude
is perfectly valid so long as tilt purchasing officer can take it for granted
that payment will be made in accordance with the terms laid down. But if a
hard-pressed finance function succumbs to the temptation to treat the time
of payment as a variable rather than a constant, and to regard suppliers as
sources of free credit !in es, then it will be found that the purchasing officer
also has to treat the time of payment as a variable to be negotiated while
agreeing the contract details, and to regard the provision of credit as one of
the factors to receive priority in the choice of suppliers, along with price,
delivery, quality, and so forth.
Once suppliers have realized that a purchaser, however !arge or wellknown, does not honour the terms of payment printed on its order forms,
they will start to demand such terms as 40Jo surcharge on bills not paid
within 30 days of date, payment in full for all previous deliveries before
starting manufacture of any further goods, or cash with order. It follows
that purchasing officers employed by organiiations which tend to take a
long time to pay what they owe need to be authorized to negotiate and
decide the terms and time of payment, along with other aspects of the
contract, and to commit their organization to payment terms which will be
honoured. It should be borne in mind that the better suppliers are also
assessing their customers, and they are unlikely to Iook with favour on a
customer organization which negotiates terms of payment with them and
then proceeds to ignore them.
43
Terms of payment are significant issues in contract negotiations, not

only for organizations with liquidity problems, but also in international
trade between countries with mutual currency problems. They are also
important in major contracts likely to take several years to complete,
where initial payment of part cost to finance development work, and
progress payments to cover work packages as they are completed, may be
arranged; along with contract price adjustments if labour and material
costs increase during the contract period, and a retention amount if a trial
period is required before the purchaser is able to tel! if the equipment
performs in accordance with specification. Purchasing officers often get
expert advice from other departments, such as finance and accounting, in
such negotiations.
Trade discounts differ from cash discounts in that they do reduce the
cost of goods purchased and they are not connected with terms of
payment. Originally, no doubt, the term trade discount referred to discounts given to 'the trade', that is the distribution channels used by a
manufacturer. These might include franchised representatives, wholesalers
or agents, and local dealers, and a graduated scale of discounts might be
established to enable each of these intermediafies to fulfil his roJe and
make a profit while still enabling the final user to acquire the goods at the
intended final price. However a major retail chain in a position to place as
!arge an order as any wholesaler might insist on a trade discount at least as
!arge as a wholesaler's. A !arge manufacturer might buy direct instead of
through intermediades in order to get a trade price. At present the term
trade discount seems to mean simply a discount (that is, a price reduction
usually expressed as a percentage off Iist price) offered for any particular
dass of trade. The Original Equipment Manufacturer (OEM) is often given
an OEM discount so that goods cost him less than they cost the user.
Buyers should make sure that they get any trade discounts to which they
are entitled under normal terms of trade tagether with any special
discounts they can negotiate.
Special discounts are sometimes offered to induce buyers to take
seasonal goods out of season: road salt, antifreeze or coal in the summer
for instance. The advantage to the seller is a smoother pattern of production and distribution and lower Stockholding costs. The buyer's advantage
of lower price needs to be weighed against the disadvantage of higher
stockholding costs. Some buyers claim appreciable savings from an extension.of this idea: counter-cyclic ordering, or buying when suppliers are in
the trough of their annual cycle, in a slack period for orders.
Quantity discounts are often given for !arge orders or to !arge customers.
Most firms are willing to reduce prices for !arge orders, which often enable
them to reduce direct costs and nearly always reduce their indirect
costs. Sometimes a price-quantity table is published such as the following:
44
Price per kilo
For quantities of:
42p
40p
38p
36p
35p
Below 1 000 kilos

1 000 to 2 249 kilos
2 250 to 4 999 kilos
5 000 to 9 999 kilos
10 000 kilos upwards
Alternatively, the price could be quotedas 40p a kilo, subject to a 50Jo surcharge for orders below 1000 kilos, and to quantity discounts on the
following scale: less 5% for orders of 2250 to 4999 kilos, less 10% for
orders of 5000 to 9999 kilos, and less l2Vz% for orders of 10000 kilos or
more. These two ways of expressing the price-quantity relationship are
arithmetically equivalent. It is a matter of preference which one the seller
adopts.
Small quantity extras, small order premiums, and minimum order
charges are imposed by some firms; in a sense they are the reverse of
quantity discounts, but they have the same effect of charging higher prices
for smaller quantities.
When offered a lower price (whether in the form of a discount or not)
for ordering a !arger quantity for delivery at one time, the buyer needs to
weigh the advantage of a lower purchase cost against the disadvantage of
carrying !arger stocks than would otherwise be needed. This can sometimes
be quantified, as discussed in a later chapter (on stock control). Other
possible disadvantages include: having to place all the business with a
single source instead of dividing it between two suppliers; and undertaking
to deal with a particular supplier for a Ionger period.
Buyers also take the initiative in Jooking for quantity discounts. Group
contracts are an example of this: a group of establishments can often get a
Iower price if they all agree to deal with a single source for a particular
item. Imaginative approaches can pay off: order quantities can be adjusted
to make the most of price breaks, rebates can be requested on total annual
volume of business, if it exceeds a certain figure.
Special types of order
Most purchase departments have to place a high proportion of smaJI

orders, and it is often more efficient to adopt special ordering systems for
these which save time and expense and enable the department to concentrate its efforts on the !arger orders. These systems include blanket orders,
standing orders, cash pick up arrangements, and others. Special ordering
systems may also be used, at the other end of the cost scale, for !arge
capital contracts, and for the supply of major raw materials. Regular
supplies of production materials and components are also often bought by
means of a special ordering system.
Furtherdetails of these special systems may be found in Chapter 15. In
45
this chapter we continue with an account of the standard purchasing cycle

and ordering procedure. The first three stages - initiating the purchase,
selecting the supplier, and placing the order - have already been reviewed.
The next stages are to progress the order if required, and to receive and pay
for the goods.
Progressing orders
The supply task is to deliver parts and material where and when they are
wanted. Simply placing orders and leaving the rest to suppliers may not
suffice to achieve this. Some administrative effort is usually required to get
orders delivered at the desired time.
Purehase progressing systems now in use range all the way from the
exhaustive, with teams of expediters on the road, to the vestigial- a desk
diary, perhaps. This reflects a real difference in the importance of prompt
delivery to different businesses. Half-day timing matters vitally to the mass
production factory which has elected to work off one day's stock of major
raw materials and parts. Suppliers in general should do their own progressing, but this sort of demand is exceptional. Full-time inside and outside expediters, chart-rooms and progress boards are part of the price of
stockless Operation.
At the other extreme, orders to replenish stocks of sweeping brooms,
cleaning rags and small tools are not critically timed. And a spinning mill
which orders ten thousand tubes to replace loss and darnage in its normal
float of several hundred thousand spinning tubes doesn't usually mind if
the order arrives a few weeks late or early. Purehase departments handling
mostly maintenance and operating supplies therefore worry less about
progressing than departments whose main concern is direct production
requirements, who know that the factory could be brought to a standstill
by late delivery of key components and materials.
But even then at least 751Jfo, and often well over 95%, of orders require
little or no progressing. Time and money are wasted if al/ orders are
followed up before they are due; by far the largest group need no urging
until they are late and safety stock has been broken into. But the second
group, thcr small fraction of orders which do need chasing some of them
almost from the day they are placed, takes up a good deal of time and
effort in many purchase departments.
The simplest follow-up system for orders comprises a desk diary and a
black Iist (for suppliers who have Iet the buyer down once too often). Every
day the buyer Iooks through the day's orders and notes in the diary under
due dates details of the few orders (if there are more than a few the system
is too simple) which he intends to follow up- perhaps because the
supplier is erratic, perhaps because earlier than usual delivery has been
requested, perhaps because prompt delivery is important for that order.
The follow-up date depends on circumstances; it may be the date the order
46
is due, it may be a week earlier, and for a complicated order with several
stages the buyer may want to check progress at each stage - completion of
tooling, trial runs and so on - before production actually starts.
More elaborate and capable of handling higher volumes than the desk
diary, but similar in principle, is the tick! er file. This may comprise a file of
6in x 4in cards similar to Figure 3. 7. The cards are ruled with columns for
ORDU ftO.
DATE UF ORDER
SUPPLIUI.
MATERIAL
PlOMIS(D BY
A(.TION TAKEN
SUPPL.IER CONTACTEO
P.C.
LfTTER
PHONl
DATE
lros
PROMISE
1: c
LETTE!\
PHONE
DATE
I~""'" 1:'
PROMISE
DATE
~~EVHo
PROMI!i:
LETTER
PHONE
Figure 3. 7 Progress card.

order number, supplier name, how urged, when urged, and answer
received, and one is assigned to each working day this month and next
month. One will be kept for each week in the following few months, and
one for each month further on still in the future where due dates are spaced
out. Each day any of the day's orders which are to be progressed is entered
on the card corresponding to the first date of follow-up. Entries are
adjusted whenever requirements or delivery information alters.
Both these reminder systems are selective not exhaustive. They need to
be supplemented by a periodic scan right through the outstanding order file
to clear dead orders which have been overlooked and to chase orders
which, though not urgent enough to appear in the tickJer file or urge diary,
have been outstanding Ionger than is reasonable.
lt is usual to make an extra copy of the purchase order when more than a
quarter of the orders need to be progressed. Often all orders are urged
when they become overdue, even though very few need progressing before.
The follow-up copy has pre-printed spaces at the foot to enter details of
date urged, how urged, and reply. Vertical or lateral filing pockets indexed
by date provide a suitable method of filing these; the front set of pockets
are numbered from I to 31 for days of the current month, the back set
Iabelied from Janu<.ry to December for the other eleven months. Each
day's orders are sorted by follow-up date and filed in the appropriate
pocket.
47
Wall-charts and visible indexes are used as well to indicate progress of

parts for particular jobs- a new factory, shop, or marine engine. Colour
codes-red for behind schedule, yellow for expect on time, green for
received- show at a glance the state of orders.
These are ways of singling out for action orders which may need chasing.
What then? Routine urging may start with a postcard or duplicated Ietter
asking for confirmation that delivery is on the way or will be made as
agreed. No reply or unsatisfactory reply tothiswill Iead to personalletters,
phone calls or visits by the buyer or his expediter. In critical cases buyers
comb the continent for alternatives to fill the gap and may consult top
management to see what extra pressure can be applied.
Purchasing planning
Planning purchases is difficult when Iead times are long, especially when
suppliers quote Ionger deliveries for components than the buyer firm
quotes for the end product.
The buyer must then make a positive effort to find out and keep in touch
with developments; getting matcrials is his job, and his colleagues can
hardly be expected to know his difficulties if he does not tel! them. The
purchase department must make quite sure that requisitioners, planners
and designers understand what Iead times to allow, and give early warning
of needs which may be difficult to fill as soon as such needs take shape,
even before specifications are finally settled. Often this enables the
purchase groundwork tobe done so that the order can be placed as soon as
the go-ahead is given, or so that the buyer can book a place in the queue by
Ietter of intent or provisional order.
Few suppliers can keep a long delivery promise to the dot, and some get
quite confused when they have more than nine months' work on their
books. M. Simpson has suggested the following translations for quoted
deliveries:
Ex-stock
Three to four weeks
Three to four weeks
Three to four months
Three to four months
This year
This year
Next year
Sometime
Never.
Most purchasing officers feel quite strongly that suppliers should treat
their estimated delivery times as firm undertakings rather than pious hopes
or devices to get the business. If the delivery position changes between submitting the quotation and receiving the order, the supplier should tel! them
at once, they feel, and of course many suppliers do this. Promises, they
feel, arenot madetobe broken, unlike pie crusts or Iovers' vows. Suppliers
should also warn their customers if they find that once the work is in hand
deliveries are slipping.
From a marketing point of view, the ability to recognize delays and warn
48
customers before they have to contact the seller is a definite competitive

advantage, so that industrial marketing people have an interest in getting
their firms to install a proper production planning and control system to
enable them to do this.
The buyer has to adapt his tactics to the market situation. One supply
manager put it this way in conversation with the author: 'Just as both the
soft sell and the hard sell have their uses, so as buyers we need in progressing orders a whole range of approaches, from pained aggressiveness to soft
soap.'
It is of course essential that delivery schedules should be realistic for
parts and materials which are supplied continually to the main manufacturer by sub-contractors. They must be based on Iead times, arrived at by
objective calculation and acceptable to both parties. Unfortunately, the
best laid plansgang aft agley, as a Scottish poet teils us, and the supplier
can suffer as much disruption from changes in the customer's plans due to
changes in his sales pattern, or Stockholding policy, or interruption to his
production, or simple ineptitude, as the customer can suffer from similar
causes in the supply organization. Time is often very short and quick
change round very urgent in the mass production situation, calling for
excellent communication and a high degree of co-operation. A breakdown
in the flow of supplies, whatever the cause and whether or not the
component in question is cheap or costly, can have serious effects on
output, plant utilization and profitability.
Receiving goods and approving payment
The final stages of the transaction are to receive the goods and, after
making various checks, to arrange for payment.
For the reception of goods many organizations set aside a special goods
receiving area. This is usually located in the main stores building if there is
one. Alternatively, goods are received by the department which ordered
them. Whatever the physical arrangements, it is important that the
administrative procedure for receiving and checking goods is clearly laid
down, so that goods are promptly made available to those requiring them,
and payment is not made for goods which have not been received, or have
been delivered without proper authorization.
After checking that goods delivered appear to conform to description
and that quantity is correct and that darnage has not occurred in transit, a
common procedure is to record the delivery on a Goods Received Note,
with copies to interested departments, or in small organizations in a Goods
Received Book.
Some of the material received may be subject to technical inspection.
Such inspection is of course expensive, and the less of it that can be done
without allowing the quality of material to fall below an acceptable Ievel,
the better. The concept of acceptable quality is discussed in a later chapter;
49
suffice it to say here that the design of inspection systems to maintain

quality of delivered goods without excessive cost is a problern of some
complexity.
The normal terms on which firms do business are that the supplier
submits an invoice for the goods, dated the same day they are despatched,
and allows the customer a month to pay. (There are also plenty of special
terms, providing advance payment, stage payments, and extended credit.)
Consequently, organizations operating on a scale sufficient to justify the
operation of a purchase department receive !arge quantities of invoices
daily which must all be checked, sorted and approved for payment quickly
so that payment can be made within the time allowed. This clerical work is
normally carried out in the accounts department, although it is sometimes
found convenient to have a section in the purchase department to do it,
since records are available there, and since it is the purchase department
which will take up any queries with suppliers. Invoices are usually rubberstamped with a block such as the one shown in Figure 3.8 so that the
persons who make the various checks can certify that they have done their
part.
FOR
TERMS
POSTED TO ORDER
PRICE CORRECT
CALCULATIONS CORRECT
GOODS RECEIVED
PASSED FOR PAYMENT
Figure 3.8 Invoice stamp.

If deliveries of goods are incorrect in some way or if there is an error on
the invoice, the purchasing function must take this up with the supplier and
sort things out. Some of these discrepancies are trivial; no one is going to
lose any sleep over an invoice which charges for 50 twist drills when the
goods received note shows that only 48 were received, it is a simple matter
of adjusting the paperwork and advising the supplier so that he can do the
same. Other discrepancies or defects are quite important, and as exceptions
to the planned activity of the department, occupy a substantial part of
purchasing time and provide such interest and challenge. It is not the nine
out of ten transactions which go to plan that call for the exercise of skill
and creative thinking.
50
For instance, a manufacturer may receive a special casting just in time

for it to be machined and fitted in a job due out. But technical inspection
reports that the casting is porous, advising on request that it is probably
repairable. A whole host of problems which can be settled only by high
speed negotiation confront the buyer: where the repair should be done,
who should pay for it, how acceptable a repaired casting is to the purchaser's customer, time problems, indirect costs of reorganizing work, and
so on, involving the buyer in urgent communications with many individuals both in his own organization and outside it. Many buyers report
considerable job satisfaction from the satisfactory resolution of such
problems.
Normal procedure when goods are defective or fail to comply with
specification is to advise the supplier at once how much of the consignment
is being rejected and why, and to offer him an opportunity to inspect the
goods on site. Legally, rejected goods can be held on site for the supplier to
collect, or with his agreement can be returned to him at his expense. They
can also be accepted at a reduced price (to compensate for extra processing cost, for instance), or corrected by the purchaser at the supplier's
expense, or sold for scrap on the supplier's account.
One firm finds that three preprinted form letters suffice for most Situations. The first Ietter (known internally as 'Naughty Boy') teils the supplier
that materials were marginally outside specification but will be accepted on
this occasion, although it is sincerely hoped that future deliveries will
comply fully with the specification. The second letter states that materials
were defective, explains the nature of the defect, and adds that matters
have been put right and the supplier is requested to pay for this. A
rectification charges invoice is enclosed. The third letter is an outright
rejection, notifying the supplier that the goods are not acceptable and
requesting that replacements be delivered urgently.
Goods which have been rejected remain the property of the supplier.
They should not be disposed of or worked on without the express permission of the supplier, otherwise the purchaser may be deemed to have
accepted them by construction from his behaviour irrespective of what the
correspondence says.
Cancelling orders
It is not always appreciated that buyers have no right to cancel orders. A
legal contract is binding on both parties. The buyer is bound to receive and
pay for goods, just as the seller is bound to provide and deliver goods, and
neither party has any right to revoke the deal unilaterally without
compensation.
That is the legal position; but in commercial practice, every buyer
occasionally has to approach his suppliers with a request for cancellation,
or substantial modification, of orders he has placed with them. The
51
supplier is usually entitled in law to refuse; a deal is a deal. He will

normally be willing to make a new deal on the lines requested, but it should
be remernbered that it is a new deal and there is no legal or moral reason
why the old terms and prices should be necessarily a part of it. In the case
of cancellation, the supplier is normally entitled to compensation for the
full cost of work done up to the date of cancellation.
Common reasons for cancellation are design changes or unforeseen
alterations in sales or production plans. But late delivery by the supplier, or
the delivery of unsatisfactory prototypes, may also prompt the decision to
cancel the original order and Iook elsewhere. The supplier would not be
entitled to refuse cancellation or seek cancellation charges if the reason for
cancellation is his own failure to comply with the contract.
Disposa/ oj scrap and surplus
Finally in this chapter, mention must be made of a selling activity which is

normally assigned to the buying department. Every manufacturer,
unwillingly but unavoidably, manufactures scrap. Getting this off the
premises for what it will fetch is a chore usually undertaken by the
purchase department. Scrap and by-product can even in certain cases
generate sufficient income to rank as an appreciable secondary source of
revenue.
Apart from the scrap and by-product which is inevitably produced by
manufacturing processes, any buying operation which caters for changing
requirements will gradually, through failure to foresee changes, or simply
through buyers' blunders, accumulate a stock of goods which are surplus
to requirements. Often the buyers are the best people to dispose of this
stock.
Reasons are as follows:
(1) Buyers know the sources from which the goods were acquired.
Suppliers might be interested in buying back the goods, perhaps for recycling.
(2) Buyers know the prices they paid for goods and consequently have
some notion of the resale value of what is being disposed of. For instance
the sales department of a diesei engine manufacturer would not be likely to
know the market value of a Iot of scrap bronze bushes, while the buyer
who bought the bar stock they were made from should have a very good
idea of what the bushes were worth.
(3) Potential customers for scrap and redundant items are not the same
as potential customers for the end-product; rather, they are like other raw
material customers. They are members of the markets the buyers operate
in, rather than the markets the sales department operates in.
Regular bulk scrap, such as steel and iron turnings and borings in a
metalworking plant, is usually sold on period contracts awarded quarterly
or annually and providing for frequent collection. Non-recurring or
52
unusually valuable scrap is sold to the highest bidder after asking a few
dealers and merchants to inspect and quote. There are also specialist firms
who are in business to buy and sell surplus industrial equipment such as
bearings, fastenings, machinery and office equipment.
The realization that the earth's resources are finite and that raw
materials are likely to continue to rise in price has led to an increased
interest in recycling and reclamation; scrap is the one raw material which is
increasing in supply.
References
1 Buckner, H. (1967), How British lndustry Buys, Hutchinson, London.
4
Information techno/ogy
Recent developments in information technology have sometimes been described as a second industrial revolution. For countless centuries human
muscle was the main power; source, supplemented to some extent by windmills, waterwheels and animals. Man's ability to process materials was
immensely augmented when the machines of the first industrial revolution
unlocked the latent power of fossil fuels. In the same way, it is argued,
man's ability to process information is being greatly augmented by the
information technology developed in the last quarter of the twentieth
century. Purchasing and supply departments handle !arge quantities of
data and such developments have important implications for them.
The earlier applications of computers in this area were often disappointing. Stock control was generally considered to !end itself particularly to
computer processing; !arge quantities of numerical data were involved, and
the transformations required to keep them up to date were also largely
numerical. Yet even here any experienced consultant could tell of many a
stock control application which simply did not work. Surreptitious manual
systems would be operated for actual control of stock, while the voluminous weekly print-out from the computer served partly as a current pricelist and partly for scrap paper. Poor systems design was often part of the
reason for this, but the hardware also had severe limitations: data input
was laborious, data processing was on an intermittent batch basis, and
data output usually took the form of ream upon ream of print-out, posing
a genuine threat to the forests of the earth in the sheer quantity of paper
consumed. All three features - input, processing, and output - were
greatly improved in the later seventies.
A most significant change was from batch processing to on-line
54
operation. Batch processing continues to have applications in bulk data

processing but for most purchasing and supply applications on-line
systems are much more convenient. Instead of buying still bigger mainframes which would process the stock control subsystem once every
fourteen days, firms started to buy minicomputers which could be
dedicated to stock control and do nothing eise. Mainframes with random
access memories were fitted with numerous terminals and with operating
systems which gave the casual enquirer the illusion that the computer was
attending to him alone when in fact it was busy with many other activities.
The computer industry itself was losing definition. It had made big
costly machines which inhabited air-conditioned rooms where smoking
was not allowed, surrounded by !arge clattering input and output devices
such as card punches and readers and printers. Some computer manufacturers also manufactured oth.::r products, such as typewriters, but the
distinction between manufacturing divisions which were part of the
computer industry and those which were not was clear enough. But
electronic technology was producing smaller and more versatile products.
Microprocessors appeared, with their countless applications; and as the
equivalent of more and more components and circuits were packed onto
tiny fragments of crystal, the single chip microprocessor made its entry.
Meanwhile better production methods and the !arger scale of production
brought drastic reductions in cost, especially notable in mass market
electronics such as wristwatches and pocket calculators whose prices
tumbled while most other prices rose steadily. With the intelligent terminal
(or slightly less than moronic terminal), distributed processing, computer
output in microform, t~letext, internationally accessible databases and
word processing, what had been the computer industry became a part of a
!arger industry concerned with information technology. It had become
both technically possible and economically feasible for information technology to develop devices corresponding, in terms of the first industrial
revolution, to the hand power tool.
By the end of the 1970's the fastest growing input/ output device was the
visual display unit (VDU). This comprises a video screen as used in
television sets attached to a keyboard as used in typewriters or teleprinters.
The keyboard is used to input data, instructions or programmes to the
computer, or to interrogate a database. The screen displays the input or
output. In the decade starting in 1976 the number of VDU's used in
European retail and wholesale distribution was expected to increase from
40000 to 350000. Manufacturing industry was expected to increase its
usage from 90000 to 250000 in the same period, according to a Eurodata
estimate.
One VDU application in retailing is at the point of sale, where the basic
VDU is supplemented by internal computing facilities and possibly a
scanner which identifies articles by means of preprinted bar codes on the
packages. The point-of-sale terminal calculates the amount due from a
55
customer, displaying it on the screen; gives change for cash transactions or

checks credit rating for charge accounts; and immediately adjusts stock
records and accounts through its link with the main computer in the stores
or at headquarters.
In manufacturing, minicomputers and microprocessors are used on an
increasing scale, whether operating independently or linked to each other
or to a head office mainframe central processor. A typicallocal data centre
is shown in Figure 4.1. The central processing unit is connected by means
of a telephone line and a Modem (modulator/demodulator) with a local
processor, accepting cassette inputs, feeding outputs to printers, and
linked to a nurober of VDU's for both input and output.
G.PO telephone line
Up to 8 v.o.u's per
processor
I
Dual cassette
U[J___
-I.PROCESSOR
mini-computer) _ _ _ __
Visual display unit

(data entry and enquiry)
Figure 4.1 Typical data centre.

Computer output in microform is used for documents which need to be
filed. (A microphotograph is a much reduced photograph of a document,
etc. Pieces of film bearing microphotographs are known as microfiche;
rolls of film bearing microphotographs are known as microfilms; there are
other ways in which the film can be presented, and the term microform has
been put forward as a generic term for all of them.)
Microfilming requisitions, orders, goods received notes, invoices,
catalogues, correspondence and engineering drawings enables them to be
stored in very much less space than would otherwise be required. Access to
a particular document can be much faster than location of a filed original;
some microform systems automatically locate the copy required by means
of an encoded blip on the transparency. Microform readers project the
small photograph on a !arge screen so that it can be read, and some of them
56
incorporate printers which can produce a full-size or reduced size copy of

the original if required.
Computer input used to be confined to punched card, punched paper
tape, or magnetic tape, but a variety of other input media have increased
the versatility of computer systems. These include Optical Character
Reading (OCR) equipment, which can read ordinary alphanumeric characters provided that they are written fairly carefully (so that a 2 does not Iook
like a 7) in boxes on the form. For instance, goods are issued from stores
against a requisition. After issue the requisition is scanned by the OCR
equipment which updates the computer records immediately; the requisition does not need to go through the extra stage which used to be required
of transferring it to some machine-readable form such as punched cards.
Broader applications of information technology in the purchasing and
supply area include teletext, and what is at present unfortunately known as
word processing, although it is to be hoped that someone thinks of a better
term for it soon.
Teletext is a system for presenting text, i.e. printed material and
diagrams rather than television pictures, on a television screen. In the UK
current systems are Ceefax and Oracle, transmitted by the television broadcasting stations on a previously unused part of the broadcast signal which
carries their television programmes. A related system is Prestel, transmitted by the Post Office over telephone lines. Ceefax and Oracle provide
a constantly updated news magazine, which can provide the buyer in the
afternoon with the same morning's commodity prices, or current rates of
exchange. Prestel is not restricted to the amount of data which can be
crammed into a previously unused part of the television signal, and many
commercial applications are possible (such as on-line access to current
catalogues and price lists and various applications in sourcing). Prestel is
not the only system of this kind, nor was it the first. Various systems
involving a database (indexed files of information) to which users can have
immediate access via a VDU and a telephone line were already in existence
when it started.
Word processing is basically the application of microprocessors and
visual displays to upgrade dictating machines and typewriters. An early
example of an automatic typewriter used for repeat typing, e.g. of letters
of enquiry or purchase orders, is the Flexowriter. At the first typing a
punched paper tape is produced which can be filed with the purchase
record card. At subsequent typings the non-variable part such as name,
address, and description would be produced automatically at high speed,
the machine pausing at the appropriate places for the typist to insert
variable data such as date, quantity or delivery time. Later versions use
various computer memory devices instead of paper tape. Even when the
text is only produced once such machines have applications. Long complex
documents are often revised and partly rewritten several times before a
final version is agreed on, and the so-called word processing typewriter
57
reduces both typing time and delays because passages which have not been
amended are retyped at high speed, and only the amendments need to be
manually typed. It is also possible to present the early drafts on VDU's;
only the final draft is printed out as hard copy.
We may distinguish between general applications of electronic data
processing in purchasing and supply, and special applications such as
decision support systems. General applications mechanize the bulk clerical
work; they process transactions, keep records, produce business reports.
Decision support systems on the other hand are intended to facilitate
planning and the making and implementing of decisions, and thus improve
the effectiveness of the individual or organization rather than increasing
clerical efficiency.
Some types of decision support systems have been described as[l]:
(1) file drawer type systems
(2) data analysis systems
(3) optimization systems
(4) simulation models.
A file drawer type system gives the user immediate access to information
stored on a database, just as if he opened a file drawer and extracted a file.
For instance a buyer while talking to a supplier could call up on his VDU
the current status of overdue invoices, overdue orders, rejections, performance rating, or stock on hand.
A data analysis system enables the data to be manipulated. A buyer
negotiating with a supplier could for instance see the effect of a proposed
price increase on annual spend.
Optimization systems include linear programming and some kinds of
project network analysis. Linear programming is a laborious step-by-step
technique, or group of techniques, for optimizing, and it is tedious to do
manually. Using available programmes it can be applied very quickly by
computer. One example is in optimizing coal purchases for !arge bulk
users. Choosing the best supply pattern from a range of coals with
different ash contents and BTU characteristics, available at various prices
and possibly in restricted quantities from pits at various distances, is a
problern which can be solved by the transportation method of linear programming. One regional Gas Board claimed savings of !:40000 a year from
a solution computed at a service centre computer at a cost of !:500.
Another linear programming application is in the manufacture of animal
feedstuffs. Cattle feed cakes are made from a choice of up to a hundred
ingredients such as whale meat, herring meal, soya beans, whey, ground
nuts, phosphorous, skim milk, and cereal by-products. The end-product
must comply with rigid standards for food value, starch content, and so
on, and is sold at a fixed price although possible ingredients vary rapidly in
price as weil as availability. What product mix or recipe the buyer should
buy for at any moment - what proportians of barley or molasses - is a
knotty problern which can justify a computer installation to solve every
58
day a problern in linear programming using the day's market prices. The
same technique is used in blending petrols.
Network analysis is now a very popular method of planning and controlling large contracts, erection of factories or storehouses, movements of
plants, major machine overhauls, etc. Although small networks can be
calculated by hand, large networks call for a computer. The two main
versions of network analysis are PERT (Program Evaluation and Review
Technique) and Critical Path Method (CPM). (CPM was developed for E.
I. du Pont de Nemours for scheduling construction of chemical plants.
PERT was developed for the US Navy between 1956 and 1958, specifically
to co-ordinate and progress the Polaris submarine missile development,
upon which 11000 contractors were working.) The two techniques appear
to be similar in most respects. Both use an analysis of the individual task
required, together with time estimates and budgeted cost, arranged in time
sequence as a network diagram. The 'critical path' is the chain of task
which determine how long the whole project will take. Many tasks do not
lie on this path and so will not delay the project if they run over time. The
network diagram shows each activity as an arrow. The arrows are arranged
in sequence; thus ordering materials must come before receiving materials,
and in some cases storage space must be provided after ordering but before
delivery (for instance when material is delivered to an outside site). The
time required for each activity is also estimated, and the time for the whole
project is determined by adding the time for the arrows along each of the
many paths fanning out from the start of the project and converging again
at, or shortly before, completion. This enables the project manager to concentrate his effort where it will do most good; it also enables estimates to
be made of the amount of leeway in delivery time which can be allowed to
sub-contraetors whose tasks do not lie on the critical path. The computer is
used to calculate path times and so on, to keep the network schedule
continually up to date as conditions change. A strike, bad weather, late
delivery by a sub-contractor, can alter the critical path, when a fresh run
through the computerwill show which plans should be changed and where
extraordinary efforts should be made so the whole project can be kept
within the budget and completed on time.
Case study 4.1: damaged goods
Anson Ltd ordered twelve cast-iron stands comprising base, column and
bracket, at a price of fl2 each, from a machinery maker, Bertram and
Bairstow Ltd. The stands arrived by road at a woollen spinning mill about
ten miles from the main Anson factory. They were required in connection
with a modification to one of the processes at this spinning mill.
The rnill manager had the stands stacked out of the way and phoned the
mechanics' shop at the main factory to fix a time for installation. He
wanted the work done at a weekend to avoid interfering with production,
and the earliest convenient datewas two weeks away.
59
The fitters and the mill manager arrived on site bright and early on the
chosen day. They stripped the brown-paper wrapping off the stands and
found that five were broken beyond economic repair.
Some two months later, Anson's buyer sat down with the following
facts:
(1) The mill manager was quite sure that the stands had not been touched
between arrival on his premises and unpacking fifteen days later. The
darnage must have occurred before arrival.
(2) Bertram and Bairstow were quite sure that the darnage occurred after
despatch. Their inspector, Storekeeper and despatch clerk were allpositive
that each stand had been loaded on to the lorry in excellent condition. Cast
iron is brittle, and in their view the fractures were caused by rough
handling after the goods left their care.
(3) The road transport people were quite sure they weren't at fault. They
had questioned everyone connected with the job and to the best of their
knowledge and belief the goods had been handled with every care. After
checking the facts most carefully they feit unable to make any contribution
to the cost of replacement.
(4) the Supplier's advice note and invoice bore a printed instruction:
'Darnage in transit must be notified to ourselves and to the road transport
firm in writing within three days.' The buyer had written letters giving
this notification as soon as he heard of the damage, which was over three
weeks after delivery.
(5) Anson's order form bore a printed condition: 'Goods must be
delivered effectively and securely packed'. The stands had been packaged
in corrugated paper and brown wrapping to protect them from surface
scratches, and Bertram and Bairstow considered this was adequate for the
12-mile journey from their works. It had been adequate for thousands of
pounds' worth of machinery and machine parts they had previously
supplied to Anson.
How should Anson's buyer negotiate the cost of replacement?
References
Alter, S. (1977), A taxonomy of decision support systems, Sloan
Management Review 19, No. 1, 39-46.
60
Questions for review

(1) Why are buying decisions important in distributive organizations?
(2) What is the main objective in government buying? ls there any basic
difference between practice and procedure in buying for the government and in buying for private industry?
(3) What advantages are claimed for the use of buying consortia by local
authorities?
(4) Discuss the differences likely to exist between purchasing for a massproduction factory making standard products, and purchasing for a
specialist manufacturer of equipment designed specifically to
individual requirements.
(5) In what circumstances would a factory be likely to buy out parts which
it is equipped to make internally?
(6) Is a purchasing manager ever entitled to recommend that his organization should invest in new manufacturing facilities in order to produce
internally items which have previously been purchased?
(7) When one division of an organization makes goods for supply to
another division of the company, what do you consider the best way
to determine prices to be charged for the goods?
(8) What is the purpose of a purchase requisition form? Is there any point
in having special rules for requisitions for plant and equipment which
will be treated as capital expenditure?
(9) How do buyers find sources of supply for things which they have not
previously bought?
(10) There is evidence that many buyers will not change from their best
supplier to a new source able to supply an identical product 'for a
price reduction of less than 50Jo, i.e. on average 27% increase in profitability'. Explain the reference to profitability and account for the
behaviour described.
(11) Do you consider it good practice for every purchase order to state the
price for each item ordered?
(12) The purchase function is concerned with the supply of goods and the
cost of goods; but it is the finance function which deals with the
supply of finance and the cost of finance, as weil as with payment for
goods. Consequently terms of payment are exclusively a matter for
the finance function; the buyer is not concerned with them'. Discuss.
(13) Should sales of scrap and by-product be handled by the purchase
department? Give reasons for your answer.
(14) Explain why the use of small computers has recently been increasing
at a much greater rate than the use of large computers and give
specific examples of purchasing and supply applications of small
independent computers (i.e. not on-line to other machines).
(15) List the advantages and disadvantages of microfilm compared to files
of full-size carbon copies for a record of completed orders.
61
(16) Explain some possible uses in purchasing and supply of:

(i) plain paper copiers
(ii) facsimile transmitters
(iii) teletext information systems such as Ceefax, Oracle, Viewdata
(iv) speech input to computers.
(17) Does the increasing use of information technology in purchasing and
supply decrease the scope for the exercise of skill and judgment by the
buyer?
(18) Chattanooga Railco Inc. expects to increase its rail transport operations as a result of the federal Amtrak scheme and the higher cost of
road transport. This will lead to increased demand for detonators,
and the merits of internal manufacture are being investigated.
Detonators are used to warn locomotive drivers of hazards ahead,
such as fog, darnage and accidents on the line. Currently they are
supplied by Nobel Explosives for $2 apiece. A semi-automatic (SA)
machine could be purchased to produce detonators at a direct cost of
$0.80. Also available is a fully automatic machine (FA) which would
produce them at a direct cost of $0.50. The annual operating cost of
the SA machine would be $1500, as against $3000 for the FA machine.
To assist management to reach a decision, you are required to:
(i) calculate the annual requirement quantity at which total manufacturing cost would equal the cost of buying out, for each type of
machine;
(ii) calculate the expected annual usage of detonators, given the
historical information that 3000 were used in a typical year with a bad
winter, and 1000 in a year with a mild winter, and that in Chattanooga
Railco's area 400Jo of winters are bad; and state with reasons which
type of machine you would recommend;
(iii) state the minimum annual amount of business required from
Nobel to make it worthwhile to instal an FA machine, given that
Nobel want to stop producing detonators and will assign their
detonator orders to us free of cost provided that we buy from them
exclusively the explosives used in detonator manufacture;
(iv) list the advantages and disadvantages of making this requirement
internally rather than buying it out.
(19) The industrial customer is often described as a rational decisionmaker, in contrast to the emotional, impulsive and ill-informed consumer. To what extent do you consider this to be true?
(20) Discuss the extent to which purchasing can be regarded as marketing.
(21) 'The marketing concept- in which the needs of the customer provide
the focus of the business and give it a primacy of values - has
probably been more characteristic of consumer goods companies than
of industrial companies. On the whole, production and engineering
functions, rather than marketing, have tended to dominate the
latter.' (Ray Corey.) To what extent do you consider this statement
62
(a) tobe generally true? (b) to apply to your own organization?

(22) Explain what you understand by marketing and discuss the differences
between industrial marketing and consumer marketing.
5
Better planning of materials flow systems can cut down, or cut out, some
of the stocks which organizations hold. But it is unwise to aim for the
elimination of stocks; things are after all stocked because it pays to stock
them. The optimum arrangements for moving materials, parts, and
supplies from their points of origin outside the organization to their points
of use inside the organization will usually include physical storage facilities.
Storage facilities will normally be of several types. There may be stores
for pre-production parts and material, stores for in-production parts and
work in progress, stores for finished product and spares, and nonproduction stores for tools, stationery, maintenance supplies. There may
be open-access stores, where users help themselves to the contents; controlled stores, where issues and receipts are documented; loan stores, such
as tool and gauge stores; area distribution warehouses, and so on.
Planning the stores for the job it has to do, can make valuable savings in
operating costs as weil as in initial capital investment. Re-planning an existing installation can also be weil worth while; needs change, the volume of
transactions tends to increase, and new equipment is continually coming
on the market.
Planning the storage system
Speedy and simple Operation and the economic use of space and equipment
are obvious objectives. Unfortunately they are not compatible. lt is often
possible to save space at the expense of time, or to save time at the expense
of space. Trade-offs are also possible between manpower and machinery:
64
the automatic warehouses which are common in advanced countries are

not so economical in under-developed countries where large numbers of
people are looking for work and wages are low.
The stores should be located so as to facilitate deliveries of incoming
goods and deliveries of outgoing goods to users or customers. Stores layout
and equipment, and operating procedures, should enable goods tobe offloaded, checked, and put away, and outgoing goods to be picked, issued
and despatched, without queues and delays.
Much information needs tobe collected and evaluated for the design of a
new stores; stock range, transaction volume, space requirements, and the
extent to which mechanical handling is to be used. Four questions need to
be answered:
(1) What things will be received, and in what quantitites? Production
inputs depend on what is to be produced. Each product would need to be
broken up into lists of parts and materials needed to make it, multiplied by
projected production rates, in turn depending on sales estimates. Maintenance requirements depend on the plant to be installed, plant utilization - single shift working or round-the-clock Operation - and the
importance of avoiding breakdowns.
(2) Which of these things will be stocked? Some requirements may be
large enough and regular enough for arrangements to be made for
suppliers to deliver direct into the production process, no stock, or just a
buffer stock being held. At the other extreme, some requirements will be
too occasional to be carried in stock and will be bought as needed. Between
these extremes lies the broad range of stockable items.
(3) What are the average stocks, and the maximum stocks, to be carried
of each item? Volume of usage, supply conditions, stock control policies,
and cost factors affect this.
(4) How much room will these stocks take? This depends on stock levels
multiplied by space requirements per item, and is also affected by holding
and handling arrangements.
The next step therefore would be to plan the racks, pallets, tote-boxes,
etc. in which the stock will be held, and the use of fork trucks, overhead
cranes, conveyors, etc., for handling the stock.
Finally, the layout of goods receiving sections, issue areas, storekeeper's
offices, inspection, and other auxiliary service areas need to be planned,
and the gangway system laid out.
In practice, something like this has to be done when a new warehouse or
a new factory is purpose-built for new products or processes. But when the
new stores or factory is intended to replace or expand existing ones, stores
design often starts with the shortcomings of the present arrangements, and
aims at better ways to solve known problems.
Unit Ioads and containers
When goods are handled in large quantities, there are advantages in
Planning physica/ storage
65
standardizing unit Ioads. The idea is to make a more convenient unit for
handling and storage purposes by loading a certain number of goods into a
container and keeping them in it as long as possible. The number of goods
which make up a unit load depends on: the size of the item, the size of the
container, storage, transport and handling methods, convenient delivery
quantities for the supplier, convenient issue quantities for the user. Ideally
goods are made up in unit Ioads at the point of origin and these are not
broken into until the point of use, remaining in the standard lot through all
intermediate transports, storages and moves.
Containers used with unit Ioads include: pallets, stillages, tote-boxes,
freight containers. No-container unit Ioads are also made up by shrinkwrapping or strapping together such rigid items as bricks or cartons.
Freight containers have been introduced on a very large scale recently.
Special container ships to take them, specially equipped docking areas to
load and unload the ships, rail terminals and container trains, road
terminals and fleets of special road vehicles for container transport have all
appeared on an increasing scale. Freight containers facilitate transport
between places rather than storage in places, but they have obviously
influenced materials handling in the places which send or receive them.
Many pallet sizes, including the standard European railway pallet, will not
fit economically into the standard size freight container; which is 8 ft high
by 8 ft wide by 10 ft, 20 ft, 30 ft and 40 ft long.
Pa/lets and sti//ages

Both pallets and stillages are types of load board, defined thus: 'a load
board is a portable platform, with or without superstructure, for the
assembly of a quantity of goods to form a unit load for handling and
storage by mechanical appliances. Load boards include flat pallets, box
pallets, post pallets and stillages.'
The meaning of the word stillage is less standardized than would appear
from this British Standard definition (BS 2629), and varies from one
industry to another. A common type of stillage is a wooden platform
mounted on wooden or metal skids which raise it six inches or so off the
ground. This is used in conjunction with a stillage truck, often a simple
angle iron frame on wheels with a tow handle. The Operator pushes this
frame under the stillage and pumps it from its low position to its high
position, by a foot-operated hydraulic cylinder or a mechanical link with
the towbar. The high position Iifts the whole assembly off the ground on to
the truck wheels, where it can be towed about. Semi-live stillages are also
common, these are fitted with wheels at one end and the towing arrangement has only a single pair to take the front end Ioad.
Any kind of frame for holding things can be called a stillage, and many
types are made, with special attachments to hold bottles, carpet rolls, oil
drums, etc.
Pallets are defined as 'a Ioad board with two decks separated by bearers
66
or a single deck supported by bearers, constructed with a view to transport

and stacking, and with the overall height reduced to a minimum compatible for handling by fork lift trucks and pallet trucks'. Terms used in
connexion with pallets include:
two-way entry: the bearers allow the forks to enter from two opposite
entry sides
four-way entry: forks can be inserted from all four sides. On two sides
known as 'restricted-entry sides' the truck~s Ioad wheels have to pass over
the bottom slats of the pallet
bearers: blocks or Ionger pieces which separate upper and Jower decks or
support the upper deck if there is no lower deck
deck: top or bottom flat surface
stringer: flat horizontal member connecting the bearers and supporting
the deck
wings: parts of the deck which project beyond the bearers.
Types of pallet include:
flat pallet: usually made of wood or plastic. Can be single decked, if the
goods will not be stacked, or are strong enough to support stacking e.g. wooden crates- or if the pallets are going to be held in pallet racks.
Can be double-decked, reversible, etc.
box pallet: these have at least three metal or timher sides, and are used to
hold items which do not stack easily and would probably fall out without
the sides. The sides can be solid, slatted or mesh; one or more can be
removable to make it easier to put goods in and get them out; all the sides
can be collapsible so that the pallet takes up Jess room when returned or
stored empty.
post pallets: these have corner posts so that they can be stacked on top of
each other, the posts taking the weight rather than the contents. Pallet
convertors can be used to turn flat pallets into the equivalent of post
pallets. The posts are usually made of meta! and fitted with special feet
which help in Jocating one pallet on top of another; sometimes Iifting eyes
or trunnions are also fitted.
expendable pallets: one answer to the problern of getting your pallets
back from the customer when you send palletized unit Ioads to him, is to
use non-returnable or expendable pallets. These have to be strong enough
to stand the various moves and handlings they encounter en route, and are
still in a state of active development. Another answer is the pallet pool: a
group of organizations use a common pool of pallets on hire or loan
arrangements of some kind. A national pallet pool for the UK has been
discussed and investigated for years, but is at the moment not on because
firms are not willing to meet the cost and inconvenience of scrapping the
1200 pallet sizes they are currently using in favour of the two or three sizes
a pallet pool would use. Pallet pools exist elsewhere and the situation may
change as Britain becomes more involved with other European countries.
Pallets can be stacked on top of each other, or where this would
67
overload them or darnage the goods, in pallet racks. (Some pallets are
shown in Figure 5.1.)
REVERSIBLE
FOUR-WAY PALLET
POST PALLET
SINGLE DECKED
FLAT PALLET
BOX PALLET
Figure 5.1 Types of pallet.

Storage racks
An extensive range of standard or semi-standard racks is available from
manufacturers, as weil as various kinds of slotted angle which can be cut
and fitted together to make purpose-designed shelving. The main alternatives are:
(1) No racks; floor storage is used for very heavy goods.
(2) Fixed and adjustable racks; a popular choice is the double-sided rack
7ft 3 in high, 9ft wide, and 3ft deep, allowing 18 in deep shelves each side.
Shelves are 3 ft wide, the racks being made in 3 ft bays bolted together.
Distance between shelves can be adjusted to suit the size of the goods, and
special drawers, dividers and cupboards are readily available. The overall
height is fixed by the maximum reach of the average man standing on the
ground. Heights greater than this can be reached by ladders, or by climbing
up specially reinforced rack fronts, but a better way is to split high racks
into levels with walkways or mezzanine tloors at 7 ft intervals, with at least
two stairways and a gravity chute.
(3) sliding racks; popular for spares required infrequently. Small
68
installations are moved by hand, !arger blocks of shelves can be powered.

Mobile racking saves space for storage, at the expense of time in getting
goods out and putting them away.
(4) live racks; a system useful when items are issued continuously in !arge
quantities, providing automatic stock rotation. In one type, goods are
accommodated on lengths of roller conveyor sloping towards the picking
end.
(5) pallet racks: fixed or adjustable racks designed to hold pallets.
Gangways between racks should be sited in line with windows to exploit
natural light. Artificiallight is best provided by lamps mounted above the
ways, and also above receiving, checking, aad issue points. Columns and
stanchions should be in the rack area, not blocking gangways. Care should
be taken that cables, pipes and sprinklers remain accessible.
The ways between racks and bins are usually divided into main roads
and side streets. Main roads should be wide enough to take trucks and
move the bulkiest goods. 5 ft is the minimum practicable width; 2 yards
wide is a popular spacing for these main gangways. Side streets should be
short to reduce walking, at right angles to main roads, and at least 2Yz ft
wide; a width of 1 yard is easier to work.
When several trucks are in use it is a good idea to make as many gangways as possible one-way streets. The width of one-way gangways should
then be 2ft wider than the widest truck. Two-way gangways should be 3 ft
wider than two vehicles side by side. Provision should be made for trucks
to turn round.
Clear spaces must be provided for receiving, unloading, unpacking,
checking and inspecting incoming goods; for keeping returnable packages;
and for assembling and making issues.
Stores location and centralized storage
Physical storage facilities are part of the organization's manufacturing

strategy, in the case of production stocks, and part of its marketing
strategy, in the case of stocks held for customers. Other considerations as
weil as what is to be stored and how it is to be stored enter into the
decisions on type of building and location of building.
For the location of area warehouses and distribution centres, there are
computer programmes which apply linear programming techniques to
calculate the Optimum location relative to the transport of goods by
various means, from various sources, to various outlets.
The basic principle is to store things where least work will be involved where handling, re-handling and internal transport will be minimized and
journey distances for the stores customers shortest. In a factory producing
a single product or a group of similar products for instance, raw material
might be stored near the first operation machines, work-in-progress
between first and subsequent operations, finished product near the
shipping and despatch area, and small tools and works supplies near the
69
middle of the factory area. In a factory producing different products, e.g.

a textile factory producing jute yarn, woollen yarn, woven carpets, and
operating a dyehouse, each department would store its own raw materials
and central storage would be confined to common use items such as
maintenance and Operating supplies. In an organization operating several
establishments, each establishment except perhaps very small ones would
store its own requirements.
That is one way to do it. There are others. Some very large organizations operating on a world scale, for instance armies and air forces, make
extensive use of centralized storage. Local authorities and government
departments have to consider the extent to which storage should be centralized. Even at the level of a factory it is common to find a single central
store which receives all incoming goods, and makes issues either direct to
users, or eise in bulklots to sub-stores like a wholesaler supplying retailers.
Setting up a central stores of this kind adds another tier to the organization
structure and another set of handlings and transports to the operations
sheet, which must increase costs. Justification for a central stores must
therefore be sought in those factors which may reduce costs by even greater
amounts.
lf common user items are few and the combined demand for them small,
centralization will not pay in the absence of special considerations - for
instance maximum security for certain high-priced and readily saleable
goods, or the need for special testgear and trained inspectors for certain
deliveries.
But if there are enough common-user items, centralizing stocks of them
can save money through lower stocks, lower prices, and perhaps other
reductions in overhead. How can central storage reduce stocks? lf four
departments have independently stocked between three and twelve months'
supply of an item they all use, obviously stocks come down if better stock
control enables a centrat stores to supply them all with two months' stock.
Departmental stores are usually small and their stock control may be
amateurish. Less obviously, if four departments have independently kept
three months' supply, and the item is switched to a centrat stores which still
keeps three months' supply, there can still be a reduction in the quantity
held. This is because the aggregated demand is stabler and hence more
predictable than the four individual demands. The space saving may be
greater than the direct stock reduction; bulk stocks take less room.
A switch to centrat storage should also mean fewer, larger orderswith possibilities of negotiating lower prices. Other considerations include:
(1) increased opportunities for standardization, leading to fewer stock
items;
(2) greater security against pilferage and theft may be possible
(3) overstocking and redundancy is usually easier to see and stop
(4) administrative costs should be reduced, with fewer orders and fewer
deliveries
70
(5) there may be a net saving in space and personnel

(6) materials which can best be bought forward in bulk on long delivery
may be best handled centrally. This need not mean central storage, but
sometimes it is a help.
Considerations which may weigh in the other scale include:
(1) extra transport cost
(2) possible transport delays
(3) possibly worse communications with users
(4) unless there is excellent service and strict control, sub-storeswill build
up private buffer stocks and total stocks will increase, while the expected
saving in space and personnel may fail to materialize
(5) unless operating routines and paperwork are weil designed, administrative costs may actually be increased.
Materials handling
Maximum use of space with minimum waste of time is the aim in planning
storage and handling facilities. lt is easy to save space by keeping goods in
high-bay racks or in mobile racks which have to be moved to gain access.
Whether it is more important to save space, or to save time, depends
mainly on the throughput. For low transaction rates, over-the-counter
service by hand is suitable. For high transaction rates, mechanization and
automation can pay. In some applications goods are off-loaded straight
into conveyor systems which feed production, the stores being represented
by loops and sidings in the system.
Four main types of materials handling are:
(1) By hand. Widely used; goods are picked manually with the aid of
steps, trolleys and ladders, and are carried to the issue point, with the aid
of trolleys, sack trucks, etc.
(2) Overhead cranes and hoists. Overhead travelling cranes have
complete access to the area covered by their long and cross travel, without
needing gangways except for storeman access.
(3) Fork trucks, which are available in considerable variety, both electric
powered and diesei powered, as weil as unpowered. They are used for
moving goods on pallets primarily. Stacker trucks are mainly used for
Iifting or stacking pallets. Counter-balanced forklift trucks are perhaps the
general purpose device for moving as weil as stacking pallets, but there are
several variations which operate in much narrower aisles than the counterbalanced type: for instance the reach truck, whose forks reach forward
within the truck's wheelbase; the rotating-fork reach truck, which can
work both sides of an aisle without the truck itself having to turn, and the
stacker cranes, used in high-bay storage installations with narrow aisles.
(4) Conveyors. These include:
(a) unpowered roller conveyors
(b) powered roll er conveyors
(c) powered belt conveyors
71
(d) chain-driven overhead conveyors, which move goods in carriers suspended from trolleys linked by a chain running on an overhead track or rail
(e) underfloor dragline conveyors, in which trucks or trolleys are drawn
round the floor by a chain in a channel in the floor. These are used in
warehouses, where goods have to be picked from a nurober of different
bays, the trucks being routed automatically to spurs in the bays required.
Other materials handling equipment is also used in stores, for instance
dock Ievellers, mobile cranes, stillage trucks.
To arrange for materialtobe shifted over the shortest route in the safest
manner, by the quiekest means, in the largest convenient unit Ioads, and to
cut out needless movement of men and materials is the objective.
Firms without a materials-handling engineer can obtain expert free
advice from most manufacturers of materials-handling equipment (who
wouldn't however be human if they didn't have an unconscious bias in
favour of mechanical handling), or can call in their own work study and
industrial engineering department, since materials-handling engineers are
simply method studiers with trade knowledge. Some simple rules which
may be worth keeping in mind are these:
(1) Least handled is best handled. Every time parts and materials are
handled, costs increase; and handling commonly accounts for 1507o,
occasionally as much as 85% of final cost. So eliminate unnecessary
handling, and simplify necessary handling as much as you can.
(2) Try not to handle things twice. Some re-handling can't be avoided if
goods are to be stored at all, of course.
(3) Try to cut out bending and stretching, stooping, putting down and
picking up. If incoming goods have to be held between unpacking and
inspection, can they be held on beneh-high roller conveyors? Getting things
out of racks is usually easier than getting them off the floor. Floor storage
usually requires goods to be stacked and lifted by hand.
(4) Avoid manhandling where possible; handle mechanically where
justifiable on a cost basis. Mechanical handling devices include cranes,
hoists, conveyors, fork-lift trucks and their attachments, jack trucks and
stillage trucks, pallets and so on.
(5) Use gravity instead of muscle or motor where possible to move
things. In a two-level stores, a gravity chute will bring things down quicker
and more safely than a man.
(6) Try to handle in unit Ioads. Load standardization can save a Iot of
time in receiving, storing, checking and issuing goods. For goods of
suitable size bought in adequate volume, the ideal is for the supplier to
deliver palletized unit Ioads, which are not broken into until the actual
production operation.
The changeover from manhandling to mechanical handling, apart from
its cost advantages in an economy where men are not to be paid and treated
as beasts of burden, is part of the movement towards humanizing work,
finding human uses for human beings. The jobs which are eliminated are
72
those which require no qualification but a strong back and a weak mind.
One carpet factory which employed 4000 people fifty years ago now
employs on the same site just over 2000, although factory floorspace, value
and volume of output, have all increased. Raw wool is blown through steel
pipes instead of being carted about by labourers; chutes, conveyors and
trucks have mechanized the donkey-work and the jobs employing some
skill have increased in number.
Mechanical handling in the stores improves the storeman's Iot, by taking
some of the donkey-work out of his job. It should reduce labour costs;
whether or not it will reduce overall costs depends on a comparison of the
wages saved, and perhaps other savings in time and space, with the
depreciation and operating costs of the machinery.
Automatie warehouses
It is always interesting when considering the current state of the art in anything, to Iook at the furthest point of advancement; and the furthest point
of advancement technologically speaking in storage is the automatic warehouse. This is defined as:
'a warehouse in which a substantial part of the whole of the receipt,
storage and dispatch functions are performed without manual handling of
the goods[1].'
About 200 of these highly mechanized storage systems were estimated to
be operating, or almost completed, in various parts of Britain and Europe
in 1971, with over 50 operating in the USA and another 100 at an advanced
stage of planning or construction. They are expensive installations, costing
at least {100000 for a small one. They pay only when a very high throughput of goods can be achieved - not less than 10 000 lb per hour according
to one estimate. To facilitate the high rates of data processing needed for
such rates of throughput of goods, electronic recording and processing of
data is normal: 'about 751Jfo are punched-card (probably computerproduced) controlled, and the rest are either on line to computer or
planned to be so later on:J
The history of the first of the automatic warehouses is instructive. This
was designed by Donald Gumpertz for Brunswick Drug Co of Los Angeles
and went into operation in 1957. The dient supplied some 2000 retail outlets with a range of 1800 drug-store items, and increasing delays in filling
orders from the central warehouse prompted the dient to commission the
design and installation of a highspeed automatic warehouse. The design
solutionwas suitable for base stores handling upwards of a thousand issues
a day. Each stock item was held in a steeply canted shelf or chute, loaded
manually at the top by storemen, and unloaded automatically at the
bottom by a solenoid-operated gate with remote control. Goods were discharged on to a system of conveyor belts leading to packing and dispatch
bays.
73
Customers' orders went to a card punch room. The punched cards, or

paper tape, were fed into data processing equipment which sorted the
orders, printed advice notes and shortage notifications, updated stock
records, and operated the gates at the appropriate storage locations. When
the gates opened goods were discharged by gravity feed on to branchline
conveyors, which fed mainline conveyors. Goods furthest from the output
end were picked first, so that the whole order for a given customer would
arrive together at the packing and dispatch bay, at rates of up toten items a
second.
The installation is reported to have worked weil- only ten minutes lost
through equipment malfunction in the first 18 months. But if its technical
functioning was admirable, its economic viability became increasingly
dubious. Los Angeles residents were moving further and further away
from the city centre. So were the retail outlets which served them. Traffic
congestion got steadily worse. Hold-ups in supplying goods to retailers
were the result not of processing delays in the central warehouse, but of
transit delays ia moving goods from the central warehouse. The solution
was to open warehouses in the outskirts of town. This reduced throughput
in the costly high-volume automatic store until it became a white elephant
and was shut down.
The optimum solution in this case turned out to be decentralization
rather than automation. A successful technical achievement was a failure
commercially. Storage facilities should be designed as part of a supply
system. Designing them as a demonstration of what can be done with
available equipment and techniques is technological triumphalism rather
than good business.
Work study in the stores
The objects of work study have been defined as getting the most effective
use of existing or proposed plant; the most effective use of human effort;
and a reasonable workload for the people employed. These objects are as
important in the stores as in any other part of the organization.
Work study has two aspects: work measurement, and method study.
Work measurement consists in measuring and timing work with the object
of setting standards of performance which a man trained for and used to
the job can keep up day after day. These standards can be used for
planning work, defining the size of the labour force, devising financial
incentives and payment-by-result systems, and job costing. Work measurement begins by actually observing and recording what people do. Any
storeman who knows his job could probably write down a Iist of the
operations it entails; but actual observation is required to make the right
allowance for delays, interruptions, waiting time, and frequency of various
Operations. A closely allied topic is job evaluation, or assessing the value of
different jobs in relation to each other.
74
Method study also begins by observing how things are done, but with the
object of devising better ways of doing them. Jobs which have for a long
time been done in one way often turn out on examination to be capable of
being done in a different way which is quicker and less tiring. After all it is
obvious that the Iayout of many stores, factories, offices and indeed
towns, just developed piecemeal, bits and pieces being added here and
there wherever they could be fitted in. These haphazard arrangements have
their own charm but things could be ordered better if thought were given to
the functional aspects. Much work, especially work which is taught on a
craft apprentice system, is equally piecemeal and haphazard in its organization. Method study entails a systematic consideration of proc~ss,
procedure, equipment, Iayout, and anything eise relevant, in order to make
the work less tiring, more effective, efficient, and economical.
The work studier's main tools are analytic intelligence, some ingenuity,
and powers of Observation, together with a mind trained and skilled in
work study. Nevertheless some tools or aids have been developed which all
can use. String diagrams to check travel distances, flow charts to devise
Optimum routes, scale plans and models aid in designing both stores
Iayouts and materials handling.
Ptanning aids
The simplest planning aid is to make a map of the stores; the usual scale is
V.. in to the foot. Walls, windows, doors, roads, railway sidings, lavatories,
pillars and other obstructions should all be marked. Trucks, trolleys and
equipment, racks, bins and fixtures are drawn to scale on thin card and cut
out. The effect of various Iayouts can be tried out by moving the cardboard
cutouts about on the base plan. When a good Iayout has been found the
cutouts can be stuck down with transparent adhesive tape. A more permanent planning board can be made by using balsa wood, which is easy to
cut, for the movable parts; magnets set into the cutouts enable them to be
moved about the metal-based board without falling off. This sort of plan
shows clearly how much room for manoeuvre there is and whether alleys
are wide enough to take trucks; by pushing truck cutouts along alleys you
can tell when spacing between racks has to be increased and where trucks
can go.
Some pins and a piece of string enable the same map to be used to check
walking distances required for various jobs. Investigation shows that the
average storeman spends at least a third of his time walking from point to
point either to get goods out or to put them away, so it is important to
design stores Iayout and locate stock items in a way that will reduce this
walking distance to a minimum.
One washing machine manufacturer used a string diagram to redesign
their stores in this fashion. A scale map of the stores was made and pins
were stuck in points corresponding with issue counters and storage
75
locations. By running astring round the pins corresponding to the points a

storeman has to visit, the distance he covers in doing his work can be
measured. It turned out that to collect parts for the main assembly of the
washing machine a storeman had to walk 3.8 miles.
The string diagram also shows how alternative arrangements affect
travel distances. By better stores Iayout and improved parts location, this
company's work studiers were able to reduce this long walk by one third.
In the course of the investigation they also saved a fifth of the space
required for storage.
Flow charts, diagrams showing where things go and what happens to
them, are equally useful in plotting better Iayouts and improving work
routines or forms routing. Scale models are useful in following threedimensional material flows through multi-storey buildings, in devising
applications for roller conveyors and gravity chutes, and in showing
overhead obstructions and planning high stacks. Perspex, being transparent and easy to work, is a suitable material for walls and floors in the
model, while racks, machines, raised loading bays and so on can be
modelled in softwood. Making the model could be an interesting project
for a management student or apprentice; or it could be made by the firm's
joiners or pattern shop, or Iet out to a specialist firm of architectural
modellers. The standard scale is again Y4in to the foot.
Certain stock items require special treatment. Rubber must be kept dark
and within certain temperature Iimits, paper must be kept dry and clean,
timher so that it will season and won't rot, inflammable and explosive
goods out of harm's way. It is sometimes advisable to code stock items
which call for special treatment, and Figure 5.2 may be useful in this
connection. Security must always be bornein mind when designing stores.
According to the late director of the FBI, J. Edgar Hoover, 25 o/o of factory
employees were dishonestand 25% were honest. He didn't know about the
other half. Even if 75% of employees can be trusted, we would not wish to
put temptation in the way of honest folk.
Obviously thieves do not want to steal everything in the stores. Portability, desirability, cost and marketability are the key factors. Strict security
regulations which would be appropriate for diamonds would not be
suitable for two-ton lathe bed castings.
It is standard practice to keep stock behind a perimeter fence or wall,
with thiefproof windows and locked doors. Nobody is allowed into the
stores unless they have business there which cannot be done over the
counter. Goods receiving bays are walled off from actual storage. Selfservice sub-stores topped up from the main stores, where users can help
themselves without filling out requisitions, seem to be based on a different
approach, but this is not so. Stock which requires special treatment would
not be put into self-service sub-stores.
76
Code
Letter
Keyword
Attractive
Attractive to thieves- portable, high-value, saleable
Breakabte
Easily broken - handle with care - e.g. glass
Corrosive
Acids, other chemicals, which may corrode

contai ners etc
Dry
ltems which must be kept away from maisture
Explosive
Certain chemicals, gas cylinders, explosives
Fire Hazard
Highly inflammable items- petrol, oil, paint
Heat-sensitive
ltems which deteriorate above certain temperatures
Light-sensitive
ltems which fade or deteriorate in strong light
Magnetic
ltems which should not be kept in strong magnetic

fields
Warpable
ltems which bend or break if not supported

properly
Other
ltems subject to special hazards not listed above
Figure 5.2 A code for special hazards to which stock may be subject
References
National Joint Council on Materials Handling (1965), Report on
Automatie Warehousing.
Further reading:
National Economic Development Office, Distributive Trades EDC (1973),
Finding the better way, HMSO, London.
6
Stores operation and procedure
The basic operations in a stores or warehouse are:

(1) receiving goods
(2) storing goods between receipt and issue
(3) issuing or despatehing goods.
The detailed procedures adopted vary, of course. lt is nottobe expected
that a vehicle manufacturer would use the same procedures in the maintenance stores in his main factory as he would in an automated spare parts
warehouse which sends parts from a great range to all parts of the world in
response to requests, mostly urgent. The procedures which would be
appropriate in the central warehouse of a chain store with 2000 retail outlets would not be appropriate in one of those retail stores. Factors which
affect the design of procedures include:
(1) the volume and frequency of transactions
(2) the range of stock items held
(3) the kind of demand on the store
(4) the type of store
(5) the stock control system and whether it is manual or mechanized
(6) the materials handling system- a mobile picking tower with an online computer VDU needs a different procedure from an operator picking
goods by hand against a handwritten requisition.
Receiving goods
Efficient procedures for receiving goods save time and trouble by ensuring
that incorrect or damaged goods are detected on arrival, not at some
later stage such as stocktaking or issue, and that the right quantity of
78
incoming goods is hooked in against the correct description.

The first step is to unload deliveries and move them into the receiving
area. Suppliers should be asked to deliver within specified hours on the
days the store is open for deliveries, and it helps in smoothing out the
workload and obtaining a quick turn-round if regular bulk deliveries can
be scheduled for convenient times. When goods have been unloaded, the
number of packages should be counted and they should be checked for
visible darnage before the delivery note is signed.
Next, the goods are unpacked and checked for quantity and description.
They are cliecked against the delivery note and advice note. Often they are
also checked against a copy of the purchase order. Sometimes the copy of
the order shows the description of the goods but not the quantity; the
checker enters the quantity as found by acrual count and the document
then does double duty as a goods received note.
Goods Received Notes may be handwritten multipart forms rather than
a special copy of the purchase order, with copies going to purchasing,
purchase invoices, production planning and stock control, and the requisitioner. If only a few large orders are received, a Goods Received Register
may be kept, showing all deliveries in order of receipt, instead of preparing
Goods Received Notes.
If technical inspection is required, this should be done as soon as
possible and meanwhile goods should be segregated in a special holding
area.
Damaged goods should if possible be sent back on the vehicle which
brought them. Failing that, they should be stored in a separate area, clearly
labelled, until they can be returned; and supplier and carrier should be
notified immediately of the damage, perhaps using preprinted letters.
After passing through goods receiving, and where applicable technical
inspection, goods have to be distributed, either to the unit which requires
them, or to their proper location in the stores.
Stock /ocation
In deciding where to put particular items in the stores, three basic

approaches are used. These comprise:
(1) Fixed location: every regularstock item has a fixed address or stock
location, and can thus be found by experienced storemen without much
reference to location records. This is expensive in terms of space.
(2) Random location: any goods can be stored in any storage position.
Space is utilized more effectively, but detailed location records are essential. lt is particularly suitable when unit Ioads are handled mechanically.
(3) Zoned location: goods of a particular type are kept in a particular
zone or area. Within the area location may be fixed or random.
Stock location in warehouses is not always considered as carefully as it
should be; 'wherehouse' may not be just a spelling mistake.
79
Fixed location
With fixed location, a specific place is assigned to each stock item, and
again there are several ways to do this. Research has been carried out into
the comparative merits of different ways of assigning fixed locations to
stock. One study in a base stores holding quarter of a million items compared systems which:
(1) arranged items in part number order
(2) grouped products from each supplier together
(3) grouped similar things together
(4) located items according to their size and frequency of issue. The
latter system proved to be the most efficient: fast movers and bulk stores
should be nearest the point of issue, and slow movers furthest away, it was
found. This approach is sometimes called 'popularity storage' because the
most popular items are located in the most accessible positions.
For quick and convenient operation, the following precepts are all
important in deciding what items to put in which rack, though some of
them ~:onflict.
(1) Most frequently issued things nearest the issue point. In a tool stores
for instance the most popular tools which are going in and out all the time
could be kept in bins under the issue counter itself.
(2) Things issued together stored together. This cuts down walking time,
speeds issues and reduces queueing.
(3) Keepthings which are similar to each other near each other. Location
in code order takes care of this automatically if a stores classification code
is in use. But location in code order does not take care of other considerations some of which may matter more. Since deliveries of several similar
items are often made at the same time, time is saved in putting goods away
if like things are kept adjacently; time can also be saved in checking stock,
and in hunting for alternatives.
(4) Store things in issue batches where possible. This is the principle of
the unit Ioad in another guise.
(5) Isolate dangerous stock- inflammable or explosive materiallike oil
or cellulose paint; apply any special regulations which are relevant; can
inert materials like sand be used as natural firebreaks?
(6) Change location when demand changes.
As weil as deciding which rack to allocate to items, whereabouts in the
stores to keep them, we have to decide which shelf in the rack to put them
on - whereabouts in the rack to keep them.
In loading racks, put light bulky goods near the top; put smalls from
waist to shoulder height; and put heavy goods in big compartments low
down. Very heavy goods are best on the floor, not in the rack; for instance
in a clear floor piling area near a hoist. Most frequently required goods
should be in the most accessible position, which is usually between waist
and shoulder height.
80
Random location
Random location means that stock can be stored in any vacant storage
position. In the small store operated by one or two storemen, things are
often put into the first vacant place and the men rely on memory to find
them. When memory fails they make a search. This system, or absence of
system, has little to recommend it. Even in the small store 'a place for
everything and everything in its place' is a good rule. The drawback is a
somewhat wasteful use of space, since when stocks of an item are low the
empty space cannot be used until that particular item is replenished.
Exaggerating a little, it could even be said that the average store using
fixed location can be at the same time half empty- and short of space!
The capacity of each storage location must be enough to accommodate
maximum stock. But item stock is at its maximum only for a short time,
just after a delivery has been reteived and before an issue has been made.
As stock is issued, the Ievel falls from maximum to minimum, and average
stock is halfway between maximum and minimum - leaving a Iot of
storage capacity unused.
Although this exaggerates the position somewhat - there is usually
some floor piling, and for binned or racked goods some overflow on to
adjacent bins and shelves is often allowable - nevertheless space savings
of between 200Jo and 30% have been made by using random location. A
record has tobe kept of where goods have been put. This can take the form
of an indicator board.
One store which handled unit Ioads in pallets adopted random location,
using two-part pallet tickets as the location record. At the time goods are
received the fork truck operator completes the pallet ticket, entering description of goods, quantity, date received, and location. He puts the top
copy of the pallet ticket in a cardholder on the pallet itself as a contents
Iabel, and hands the second copy in to the stores office. A third copy can
also be prepared, for use in adjusting stock records kept somewhere eise,
or for costing and other statistical purposes including payment by results
or productivity bonus calculation. Most stores work is not uniform enough
for payment by results to be applied; but output bonus payments are
obviously applicable to the work of storemen whose job is to drive fork
trucks and get out or put away pallets. The third copy of the pallet ticket
which carries the operator's initials serves to record individual outputs for
this purpose.
For describing locations the grid system is used. For instance if we
painted a grid on the stores floor by marking 26 lines a suitable distance
apart from north to south, and at right angles to these 10 lines from east to
west, we should have 260 locations. If the north-south lines were lettered
from A to Z, and the east-west lines numbered from 0 to 9, each location
would have a 2-element description. Location E3 would be where the
north-south line E crossed the east-west line No. 3. Using two letters and
two-figure numbers of course greatly increases the nurober of possible
Stores Operation and procedure
81
locations. Each location is the site of a pallet rack or stack, so if the pallets
are stacked four high, and the operator knows the location, all he has to do
is to check the pallet labels to see which of the four pallets on that location
is the one he wants.
For filing and displaying the second copy of the pallet ticket in the stores
office the type of board used for employees' clock cards has been adapted
successfully. Theseare fitted with narrow slots for cards or tickets. One
slot is assigned to each description of stock, i.e. each stock item. When
goods are received, the office copy of the pallet ticket goes into the appropriate slot. To find what stock is held of any item, all that is necessary is to
look at the tickets in the slot for that item. To make an issue, the oldest
ticket is taken out and given to the operator, who drives bis truck to the
location shownon the ticket, forks out the corresponding pallet, makes the
issue, and hands both ticket copies back to the office.
Stocktaking is reported to be simple with this system; it is only necessary
to count the contents of the pallet which has been in stock Iongest for each
item. Since issues are always made in order of receipt to ensure turn round
of stock, this is the only one which may have been broken into for issues of
less than a unit load. For the rest of the pallets containing that item, all we
need do is to check that pallets are in the positions indicated by the location
record, without counting their contents, and multiply the quantity of unit
loads by the number of items which makes up a unit load.
Of course random location still provides a place for everything in a
sense. Different lots of the same item may be in different places, but so
long as each lot has a location shown on the indicator board, and is
actually to be found in the indicated location, then there is a place for
everything and everything in its place.
Zoned location
With zoned lncation the storage area is divided into a number of zones.
There may be three zones: one for bulk stock, one for reserve stock, and
one for picking stock. The idea is to get maximum use of space in the bulk
stock area, which might comprise 70 ft high racks, together with maximum
accessibility in the picking area, where goods might be picked manually
from 7 ft high racks, or at two levels from 12 ft high racks. Goods are
initially put in the bulk storage zone, moving through the other two before
issue.
Another approach often used in large mechanized warehouses is to zone
fast movers into a frontal zone, adjacent to the issue and receiving bays, so
as to speed up Operations by reducing the time spent putting goods away
and getting them out again. Medium slow movers are in the intermediate
zone, and slow movers in the rear area.
Yet another approach groups similar products in particular product
zones- all the steel bars together, for instance- with either random location or else fixed location within particular zones.
82
Issuing goods
The simplest way to issue goods is for those who want things to go or send
to the stores and either help themselves or ask the storeman to get what
they want.
Self-servicestorage racks for fitters' sundries are often kept in assembly
bays, and maintenance men usually have a small open-access stores for
their regular requirements. These are usually run as substores drawing
supplies from the main stores; they are topped up regularly, often by some
version of the imprest system described later.
Storeman-controlled stores with counters at which goods are issued on
request are often used for electrician's requirements, maintenance sundries, stationery, and tools. These single-purpose stores are sometimes
open only part of the day - it would be wasteful to keep a small special
stores open all day or employ a full-time storeman there, unless issuing and
receiving goods is a full-time job.
Simply relying on the storeman to control issues and see that requests are
reasonable may suit a small business where the storeman knows his
customers and understands their requirements. The general stores in a
small establishment, or in a !arger establishment specialist stores but not
the general stores, may be run this way. But two complications occur in a
stores of any size.
Firstly, storemen cannot control issues when many varied requirements
are catered for. The obvious solution is to make foremen and department
heads responsible for authorizing all issues to their section, which they can
do by signing a stores requisition chit.
Secondly, as the volume and variety of work increases and job costing
gets more elaborate, cost clerks begin to find that too many delays and
inaccuracies are caused if they continue to rely on lists prepared by
storemen for details of what materials and supplies have been used on
which jobs, or by which departments. The usual solution kills two birds
with one stone by using the stores requisition. Signed by the appropriate
authorizer, this shows what goods are wanted, the job number or cost
allocation, and serves as an issue record for adjusting stock records and for
job costing after it has been dealt with in the stores. In a small to medium
stores, the routine would be:
(1) Section foreman writes out requisition, inserts job number or cost
class, dates and signs.
(2) Section labourer takes requisition to stores issue counter.
(3) Storeman collects and issues specified goods; labourer takes them to
section.
(4) Completed requisition passed to stock clerks, who adjust stock
records to show new balance after issue and copy price from stock record
to requisition.
(5) Priced requisition passed to cost clerks.
Stores operation and procedure
83
This procedure may suit a jobhing shop. But even a jobhing shop tends
to produce certain lines regularly in batches, so that many requisitions need
to be repeated every time a batch goes into production. If your assembly
section is to build three sets of parts a day, you would not want your
assembly foreman to write out the same requisition for three sets of parts
daily in full detail; and you would not want the labourers waiting at the
issue counter every day while storemen hunted round and collected the
issue package. You would use pre-printed issue lists, prepared on office
duplicators or the drawing office copy machine; thus cutting foremen's
writing time and letting them get on with their proper work, and cutting
issue queues by letting storemen pre-assemble issue packages.
For closely timed repetitive work- assembling TV sets or motor cars the notion of the user getting what he wants from the stores when he wants
it, is replaced by the notion of materials planning delivering what users
need to the point of use at the programmed time. Handwritten requisitions
would be required only exceptionally, e.g. to replace scrap.
Visual control
'Visual control' is one way to control stock without recording running

stock-levels. The detail work is transferred from clerks handling paper to
storemen handling physical things. How stores work is affected can be seen
from the following sample operations sheets.
Receiving goods
(1) Help unload goods at delivery bay.
(2) Check quantity and quality of goods.
(3) lf goods short or defective, inform supervisor. If goods OK write out
Goods Received (GR) note.
(4) Take goods to bin. Look at bin card. Segregate quantity equal to
Urge Level shown on card by counting into red bin, tray or bag if
provided, or (usually) by tying up with red tape. Segregate further quantity
equal to Order Level shown on card by counting into yellow bin, tray or
bag if provided, or by tying up with yellow tape. The rest of goods received
together with any stock previously on hand are free stock, not marked.
(5) Write quantity and date received against relevant order number on
bin order card.
(6) Copy unit price from order card to goods received note.
(7) Pass GR note to stock controller.
Issuing goods (over counter against requisition)
(1) Read requisitions, find goods, get out required quantity.
(2) Copy unit price from bin order card to requisition.
(3) if (a) you had to break into Order Level (yellow) stock for this issue,
84
count remaining stock, write this quantity and date on order card, pass
order card with requisition to stock controller;
(b) you had to break into Urge Level (red) stock for this issue, count
remaining stock, write this quantity and date on urge card, pass urge card
with requisition to stock controller;
(c) no stock left, take order card and requisition to supervisor for
emergency action.
(4) Issue material.
(5) Pass priced requisition to stock controller.
Stocktaking
Complete priced lists of stocks are required by all trading companies at

their financial year ends. Both the Inland Revenue authority in connexion
with income tax and profits tax, and the company's Shareholders as
represented by the auditors are interested in the accuracy of these lists,
because stock is an asset and appears as such in the balance sheet. If the
figure shown for this asset is not correct, the profit shown will also not be
correct. Undervaluing stock makes profit appear less than it should be and
sets up a hidden reserve; overvaluing stock exaggerates profits.
The list of items in stock and the quantity on hand for each item can
either be copied from records or obtained by checking the contents of the
stores. If it is copied from records a physical check is still needed to prove
the records are right. This physical check, actually counting or weighing or
measuring everything in stock, must therefore be done at least once a year,
and is called stocktaking.
If detailed records of stock are not kept the whole stocktaking job must
be done at the same time, and while it is being done the stores must be
closed for receipts and issues. All available staff must be drafted on to the
work whether used to it or not. Counting and listing, though not hard, is
tedious, and this together with the volume of work to be got through,
usually over a weekend, does not make for accuracy. Are-check of sample
items, say ten to a rack, carried out during the stocktaking, helps to
encourage accurate work.
Stocktaking is easier to organize and interrupts normal work less when
records are kept. The checking can be spread over a week or two; it can be
done by storemen who know what they are checking; it is less rushed. The
records can be checked in sections so that only parts of the stores have to
be immobilized at a time. The most valuable or marketable goods should
be re-counted by accounting, purchasing, or internal audit personnet as a
cross-check on storemen's honesty, on which the existence of records also
provides a check.
Continuous as opposed to periodic stocktaking is possible when records
are kept. Each week all the year round selected items are checked. The selection of items can be random to prevent pilfering being covered up or items
85
can be checked in sections in turn like a normal periodic stocktaking spread

out in time. Major items should be checked oftener than minor items, and a
labour-saving way to achieve this is to check items when they are re-ordered.
Continuous stocktaking is particularly desirable when records are used
for stock control, because errors then lead both to stock-outs and to
overstocking, and stock records tend to be full of errors unless some
continuous method of detection and correction is applied. Auditors
however may not be satisfied to rely entirely on continuous stocktaking;
they sometimes insist on a once-a-year complete stocktaking as weil, just as
some men wear both belt and braces.
Obsolescence
Every stores suffers from obsolescence. Retailers hold sales to clear their
shelves of material which hasn't sold. Factory stores must also clear out
obsolete and surplus and excess stock regularly, because it takes up space,
makes some demands on stores labour and record-keeping, and contributes nothing to operations.
How does this dead stock cease to be live? Progress, fashion, improvements in available materials may be the reason. Alterations to designs or to
manufacturing policy or in sales are the most usual reasons; these all
change or abolish requirements for certain items. As requirements alter, so
must stocks; new stocks must be bought in, old unwanted stocks disposed
of. There is always the temptation to hang on to the stuff because it's sure
to come in useful one day. So it may; but meanwhile it's wasting a valuable
asset - space - and it's not likely to be improving in stock.
Purchasing should insist on being informed by the department which
institutes a change affecting requirements, at as early a date as possible, so
that goods do not go on being bought after they have ceased tobe required.
Purchasing people themselves should keep reminding other departments of
the importance of this.
But it isn't enough to try to keep up with changes as they happen; some
will slip through undetected and others will happen gradually. Systematic
checks should be made on stock periodically, to identify the items for
which stock levels have got out of step with demand. This is often dorre in
conjunction with periodic stocktaking.
One firm runs a three-way check after each six-monthly stock-taking.
Firstly, the two previous inventory sheets are compared with the one just
completed, and a list extracted of items whose stock-levelwas similar on all
three occasions. Secondly, the chief Storekeeper makes an independent list
of items which to his knowledge haven't moved for months, or are moving
but not fast enough to clear existing stocks inside a year. Third, the stock
record section prepares a similar list from records by comparing stock
balances with consumption. The lists are then compared and reconciled to
give a finallist of surplus.
86
Then steps are taken first of all to see that no more is bought of any of
these items. (This sounds obvious and it is; but it can still happen that some
stock clerk ignorant of the true position will requisition more of an item
which is already overstocked simply because the balance is below a
maximum stock figure or near an ordering Ievel which are no Ionger
appropriate.) Secondly, an effort is made to use up the excess material.
Perhaps the Design Department can suggest a way to use some of it. Sales
Department may also be consulted; it may be possible to dispose of excess
stock occasioned by discontinued or modified products by making a few
more of the old products, perhaps for sale at special prices. Thirdly, if all
eise fails, the rest of the dead stock is sold or scrapped and cleared out of
the stmes.
Variety reduction in stock purchasing
Most industrial stores stock a great variety of things; 10 000 items is quite
common in small or medium-size engineering stores. In many cases this
variety is greater than it need be; items are duplicated or triplicated under
slightly different names, or the range of sizes is uneconomically large. A
determined attempt at variety reduction can then be weil worth while.
Variety is not of course in itself good or bad, and the mere fact that
variety exists is no reason to try to reduce it. As consumers we all want a
choice. One of the early steps in variety reduction, Henry Ford's famous
dieturn that his customers could have their Model T any colour they
wanted so long as they wanted black, was a long step in the wrong
diretion. As now practised, variety reduction may actually increase the
usejul variety of end-products; it is the useless variants it aims to eliminate,
while reductions in the range of components and steps used in the
manufacture ought also to reduce cost to the consumer. Steps in the right
direction are simplification, specialization, and standardization.
Specialization is restricting the range of products coming from a
particular group of productive resources, as when a plant specializes in
screws and studding and refuses to branch out into turned products
generally. Simplification is achieved by reducing the types and sizes made,
although the word obviously has wider meanings some of which are
relevant even in this connexion. Standardization is the process of agreeng
and adopting precise detailed specifications or descriptions, whether or
procedures, products or components. The dimensions, composition, quaIity, performance, method of manufacture or method of test may all be
standardized.
Variety reduction has several advantages for supply work. As the range
of stock items shrinks, the demand per item swells and often becomes more
stable. Demand for items which are components in several end-products is
usually easier to forecast than demaqd for the individual end-products
because consolidating the requirement irons out some of the fluctuations.
87
Fewer stock items means more efficient stock control and lower iotal
stocks. Fewer, bigger purchases means more efficient purchasing and often
lower purchase prices.
Variety reduction in Stockholding is usually tackled by first listing the
current range in all its variety; then classifying the Iist and weeding out;
and finally standardizing. This is often done in connexion with stores
coding, which is considered in the next chapter. Careful procedures for
authorizing new stock items have as their object the prevention of
redundancy. Prevention is better than eure, but unsuspected duplications
and redundancy often exist, so that periodic re-examination of the range of
stock items remains necessary.
88

(1) Briefly explain with the aid of a sketch three of the following:
(a) reversible fourway pallet;
(b) single deck flat pallet;
(c) post pallet;
(d) box pallet.
Indicate briefly the circumstances in which each type of pallet might
be used.
(2) Greanlea Ltd operate a wholesale warehouse which is due for
demolition shortly because its town centre location is affected by
Centreplan reconstruction. You have just been attached to a planning
team which is to work out the details of the new warehouse to replace
the old one. A site has already been acquired, with motorway access,
situated 100 metres from a local railway station on the outskirts of
town. What would you expect the planning process to involve?
(3) Your employer has decided toset up an area distribution centre and
needs to acquire warehouse accommodation for this purpose. The
area in question has been industrialized for a hundred years, and you
are asked for a preliminary report on the relative advantages and
disadvantages of building a new warehouse as against renting or
buying an existing older building. What would you write?
(4) Bulk Stores A is part of the Welsh Electric Motor complex and
comprises a single storey reetangular warehouse measuring 50 x 200
yd. Stock location is random within three zones: fast movers, medium
and slow movers. Stock range comprises full pallet Ioads of purchased
components, manufactured parts and finished products, all handled by
fork truck. Describe one type of stock location file and one type of
stock location code number system which you would consider as
suitable for Bulk Stores A.
(5) Three basic approaches to stock location are: fixed location, random
location and zoned location. Explain and compare them.
(6) How can the concept of 'popularity storage' assist in the efficient
operation of a stores? Do you seen any conflict between popularity
storage and the random storage concept?
(7) Explain what you understand by the term 'automatic warehouse' and
review some current approaches to warehouse automation.
(8) What is a unit Ioad? Why is it considered a useful concept in planning
storage and transport of goods?
(9) Explain the termsmobile storage (with sliding racks) and live storage
(with goods moving in fixed racks) and discuss their applications.
(10) List some of the special hazards to which goods may be subject while
kept in stock and suggest ways of minimizing the risk.
(11) What do you understand by visual control? Is it a system which
makes any particular demands on storemen?
89
(12) What methods would you recommend for the detection and elimination of obsolete, obsolescent and redundant stock?
(13) Discuss the impact which the adoption of freight containers is having
on the storage and transportation of goods.
(14) The Ruritanian Oil Company is a nationalized industry which
distributes oil and supplies central heating systems throughout the
country of Ruritania. Consequently a !arge range of spare parts,
equipment, pipe, and oil need to be available for supply in all towns
and cities throughout the country. It would be possible to carry all
this stock at one central stores for distribution as required; or at five
regional stores, since administratively the company operates in five
regional divisions; or at a greater number of stores. What in your
view are the key considerations in deciding the number and location
of stores?
(15) Describe some simple planning aids which could be used in redesigning a warehouse and explain their application.
(16) List the main considerations in deciding on the location of stores,
warehouse or physical distribution centre.
(17) Outline the kinds of information required to plan a new storage
facility.
7
Code names or numbers are often used for the identification of stock
articles, materials or merchandise and for reference to them. Similar codes
are encountered daily in many walks of life: postal address codes,
telephone numbers, credit card symbols, car registration numbers for
instance.
Such codes can have advantages over plain language descriptions when
the population of people or things to be referred to becomes large. In a
small stores with a limited range of stock it could be better to use plain
language descriptions. But as the range of stock increases there is
increasing scope to save time and avoid confusion by using stock codes.
Plain language descriptions of stock items can become unacceptably
lengthy if they are to discriminate unambiguously between similar items in
an extensive range of stock. For efficient data processing by machine,
efficient coding of the data is essential; and it can also increase efficiency in
data processing by manual methods.
The main advantages of stock coding are:
(l) Brevity: code designations can be much shorter than plain language
descriptions without loss of specificity, thus saving time in processing
transactions as weil as saving space in keeping records.
(2) Certainty: code designations are assigned to things on a one-for-one
basis; a given stock item has one and only one stock coding. In ordinary
language it can usually be referred to by many different names and
descriptions, which can result in misunderstandings. Unsuspected duplication, and apparent shortages of goods which are in fact in stock under a
different name, are all too common when stock is not coded.
Materials coding and classijication
91
(3) Order: codes provide a definite and unique filing order for stock
records.
There are side benefits too. Useful data such as place of origin or rate of
turnover can easily be keyed into the code number for an item. Coding
often provides an opportunity for, or gives effect to, a systematic listing
and classification of parts and material held. Manufacturers of complex
products have found this very helpful in variety reduction.
In devising or revising a materials code, the object of the exercise should
be borne constantly in mind. Want of attention to this obvious and
elementary point results in the very long complicated code designations
sometimes seen. It is also important to think ahead and to bear in mind
that we live in a changing world. Codes need to be capable of accommodating future developments, additions and changes to the range, if they are
not to become obsolete quickly.
Colour codes
Colour codes are useful for simple identification purposes. Some firms use
adhesive colour tabs for age-coding stock articles. Eight different colours
denote the eight quarters of two successive years. This is useful in stock
rotation (issuing the oldest stock first).
Standard colours are also used on gas cylinders, hausehold appliance
wiring, and pipelines. Pipes for general services are painted white for
compressed air, with additional red bands if the air is at pressure of 200
lb/sq. in.; black for drainage pipes; canary yellow for town gas; brown or
pink for various oils; and dark grey for chemicals. Dark grey is also the
ground colour for industrial gases, with the addition of up to three colour
bands to indicate specific gases. For instance a yellow band indicates
methane; a wide black band and two narrow bands of yellow and red
respectively indicate ammonia gas.
Colour coding is often used to identify different specifications of bar
and rod. High alloy steel Iooks just like mild steel to the naked eye but
costs several times as much and has different characteristics. If lengths are
sawn off bars to make issues, some means of identification is required
which will show if a bar has been returned to the right rack, and which will
last right to the end of the bar like the name in Blackpool rock. A stripe of
coloured paint down the full length of the bar will identify the material
when there is just a stub left. With six colours, a single stripe will identify
six different specifications and a double stripe will identify twenty-one
different items (or thirty six ifthe stripes are of different width). Few firms
go further than this with colour codes, although they can convey a
surprising amount of information. Eleven colours in four bands are for
instance used to identify resistors, and this colour code also gives the
resistance value over a nine thousand million to one range and also
indicates which of nine tolerance ranges the resistor is in.
92
Numeric and alphabetic codes
Most stock codes are either numeric, or alphabetic, or alphameric.

Numeric codes use the familiar arithmetical digits to a base ten. (Internally, computers may operate in binary arithmetic, to a base of two.
Binary codes are efficient for internal machine processing but unsuitable
for use by people because the codewords are too long.) Alphabetic codes
use the 26 letters of the alphabet, or a selection from them; letters which
are easy to mistake for other letters may be avoided. Capital letters are
commonly used. lt is a mistake to use lower case letters or italics as if they
were different symbols from capitalletters, since they are pronounced the
same and mistakes are likely to occur. lt is also undesirable to use Greek,
Russian or Hebrew letters, which would baffle those of us who do not have
the advantage of knowing these languages or even how to pronounce their
alphabets. Roman numerals are simply groups of letters and do not extend
the range of available symbols. Punctuation marks are used as spacers but
not as significant symbols.
Alphameric (also known as alphanumeric) codes use both letters and
numerals. For instance, Boots employ a five-character alphameric code for
production items. Codewords have three letters followed by one numeral
followed by a Ietter, e.g. BAC4J. A four-character alphabetic code is used
for merchandise handled by the retail outlets, eg CIOB for Kodak bromide
paper.
A big advantage of alphabetic codes is that codewords are short, and
consequently easy to recognize and remember. There are nearly half a
million four-character combinations of letters. This does of course include
some four-letter words best reserved for moments of stress. But when the
combinations which are unsuitable for use in a materials code because they
have meanings in plain language have been eliminated, we are stillieft with
many more four-character codewords than if we used numerals. Binary
codes using the characters 1 and 0, in contrast, have only sixteen
four-character codewords.
The relationship between the range of characters used, the !ength of
codewords, and the nurober of possible codewords, can be expressed
simply in mathematical terms. Let a denote the nurober of characters in a
codeword, b denote the range of characters used, and c denote the nurober
of codewords possible. Then:
C
ba,
log c/log b.
and consequently
For instance, using the ten numeric digits the value of bis 10. If 10000
codewords are required, the value of c is 10000. The value of a is given by
log c/log b, i.e. 4/1, so that four character codewords are adequate. Or if a
93
million codewords are required using the 26 letters of the alphabet, a is

given by 6/1.415, i.e. 4.25. Five letter words would be needed if all
codewords were to be the same length.
It is common practice in stock coding to make all codewords the same
Iength, but some firms prefer variable length codewords. The approach
often )lSed in house codes in the distributive trade (sometimes called
velocity coding) is to use short codewords such as two figure numbers for
the high velocity lines and keep the Ionger numbers for the slower movers.
In principle the time taken in processing codewords is minimized when the
length of a codeword is inversely related to the logarithm of its frequency
of use.
It might appear that alphanumeric codewords would be the shortest of
all since the 26letters plus the 10 numerals provide a base of 36 characters.
But in practice such letters as I, 0, Q are often excluded since they can
easily be misread as numerals, and in constructing codewords groups of
letters and groups of numerals are normally used, rather than having
letters and numerals freely intermixed. It is apparently easier to remernher
a grouped coding such as AVX703 than a mixed coding such as A7V3XO.
Code construction
Three common methods of devising codes are:

(i) mnemonic
(ii) random or sequential
(iii) classification.
Mnemonic coding chooses codewords so that the letters used suggest the
item referred to.: SB for steel bar, etc. They have been widely used for
stock coding in the smaller engineering works, but they are increasingly
difficult to devise as the range of items increases.
Random coding assigns codewords arbitrarily to items. Sequential
coding uses the next number in sequence when a new item needs to be
coded, and is the most common sort of random coding. In one carpet
factory for instance, all of the thousands of colours and shades to which
yarn is dyed are assigned code numbers. Any new colour is assigned the
next number in sequence, and the dyer's recipe for producing it is recorded
in the colour register under that number along with a sample.
Classification codes are much more difficult to devise, but they have
certain advantages in variety reduction. The best known example of
classification coding can be seen in public and college libraries, where the
stock is arranged in code number order. This automatically groups books
of the same kind together, since the whole basis of the Iibrary code is
classification. A well known library code is the Dewey Decimal.
Melvil (he was christened Melville, but to save time shortened his name
by two letters) Dewey was born in 1851, surviving undaunted to 1931. No
94
doubt partly in the time saved by shortening bis name, he devised a decimal
classification code for the whole of human knowledge so simple and
effective that it has been translated into ten languages including Chinese.
An updated version ofthis, the Universal Decimal Classification (UDC), is
published by the British Standards Institution as BS 1000.
Classification of stock goods can be either by use or nature. If they are
classified by use, all the items used in making a particular end product
would be grouped together. This presents problems when items are used on
more than one end product, and classification by nature is generally
considered better for stock.
Using a decimal base, the first step is to decide on ten broad classes. In
an engineering factory these might be:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
raw materials
made-to-order production parts
off-the-shelf production parts
works supplies (MRO)
office supplies and stationery
work-in-progress
jigs, fixtures and special tooling
packaging
by-product, scrap
general
Next, each dass is sub-divided. Raw materials might for instance comprise:
(11) steel
(12) brass
(13) aluminium; and so on.
Up to ten classes are available at each partitioning. Some can be left
empty. When more than ten are required, two numerals can be used; for
instance if there are more than ten grades of steel 11.32 steel bars to BS 970 En 32B
11.36 steel bars to BS 970 En 36T.
Instead of using numerals to Iabel the classes we could use letters; steel
bar could be SB, steel sheet SS, brass bar BB, brass sheet BS.
Classifying and labelling in this way takes Ionger than may be supposed
and requires considerable intelligence to do weil. Many existing codes are
inept. For those who feel that more time and talent than they have
available would be required, there are consultants who specialize in coding.
Classification codes derived in this way have two main advantages.
First, with practice people remernher the main dass Iabels, so that
codewords become meaningful and hence easier to handle. Second,
classification codes are extremely hospitable; they are, or should be if
properly planned, 'unburstable'. New items can be allotted new codings
which fit into the sequence at the right place.
95
Extraordinary savings are regularly reported to have resulted from the

adoption of a systematic materials code - although it is not the code itself
but the systematic classification underlying it which is responsible. One
concern was surprised to learn that it had been using thirty-two different
names, none of them unprintable, for thirty-two plain discs of sheet steel.
Another found that eight names (axle, bolt, pin, pivot, spigot, stub, swivel)
covered eight components so alike that one could replace the Iot. An
electrical manufacturer reported savings of 3207o on stock-holdings, which
is certainly substantial, by disposing of items they hadn't known were
redundant until coding brought it to light. Of course concerns which have
rhanaged to avoid redundancy and confusion by intelligent and careful
stock control cannot reap these more spectacular savings, which are
reserved for those who have allowed things to get in a mess.
Mixed codes; b/ock coding
These different approaches arenot mutually exclusive. For instance a paint

factory coded its materials in the following way. The block of numbers
from 1000 to 2000 was reserved for liquids; the first 100 numbers in the
block (1000 to 1100) were allocated to alcohols, the next 100 to esters, the
section from 1200 to 1400 for hydrocarbons, and so on. Other main
blocks of numbers were reserved for dryers, plasticizers, pigments, resins,
and so on. This is partly a classification code and partly a random code. If
a new specification of hydrocarbon is adopted it is assigned the next vacant
number in the 1200 to 1400 group; the codeword 1374 teils us that the
item is a hydrocarbon, but nothing more than that since the assignment of
codings within each block is arbitrary.
Selj-checking codes
If in writing the description of an item out in full, two letters are
accidentally transposed, or a word is speit wrong, the meaning is still
usually clear enough. But codewords are so boiled down that the slightest
error can be serious.
Accuracy bonuses to machine operators have been tried to prevent such
errors, and it is standard practice with punched card operations to have all
entries verified. Even then errors occur. If the punch operator hits the
wrong key once in a thousand strokes, and the verifier operator hits the
wrong key also once in a thousand strokes they will both hit the same
wrong key and Iet an error through undetected quite regularly. The
machine itself can introduce errors, perhaps through faulty components or
electrical disturbance or even floor vibration.
The next best thing to preventing errors is to arrange for them to
announce themselves promptly. If you dial 60590 instead of 60950 on your
telephone, you find that you have dialled the wrong number almost as soon
96
as the call is answered. But if someone enters codeword 60590 instead of

codeword 60950 in a stock record system, it may be months before the
error comes to light. Meanwhile a train of resultant errors may be
smouldering away: orders placed too early or too late; costs wrongly
allocated; stock running out or piling up; culminating perhaps in some
colossal and ridiculous bloomer which gets into the papers and adds to the
mirth of the nation.
To prevent this, much thought has been given to so-called self-checking
codes, incorporating check digits.
Check digits
It is Standard practice to incorporate a check digit in codes which are
processed by machine. This is a character derived by calculation from the

other characters in a code designation. The machine repeats the calculation
whenever a codeword is read in, thus detecting errors in the input.
Forexample, supposewehavea codeword (whether denoting an article, an
invoiceor agoodsreceivednote)of 100. Wederiveacheck digit very simply by
including one additional digit arrived at by adding together the other digits.
The codeword 100 would become 1001 and on the same basis 101 would
become 1012, and 102 would become 1023. Now ifthrough operatorerror or
othermistakethenumber 1001 isincorrectlyinputas 1101, themachinewould
automatically repeat the calculation, and on finding that the sum of the
first three digits is not 1 but 2 would detect an input error.
Long before data processing machines were available, a somewhat
similar practice was used by book-keepers. Inevitably errors occurred
either in adding up columns of figures or in transferring totals from one
account to another. Such errors came to light at trial balance, but to locate
them could be very time-consuming. To reduce the time it was common to
post along with a total the number of pence required to make the total
divisible by 13, what would now be regarded as a mod 13 check digit.
Data processing machines do not make errors in adding up figures or in
transferring them from one location to another unless some malfunction or
interference occurs. By far the most common source of errors is in the
input of data. Consequently the usual procedure is for the program to
repeat the check digit calculation as data is read in, and to discard the
check digit in further processing if no error is disclosed.
A common type of input error occurs when an operator inadvertently
transposes two digits when entering a number, inputting 60950 as 60590 for
instance. All the digits are correct although they are in the wrong order,
and a check digit derived by simple addition of the digits would consequently not detect the error. To overcome this, before adding the digits
they are weighted, that is each is multiplied by the appropriate number for
its place. If for instance the simplest series of weights were used, 1 for the
first digit, 2 for the second, and so on, the check digit for 60950 would be
97
6 x 1 + 0 x 2 + 9 x 3 + 5 X 4 + 0 X 5; i.e. 53. Butthis is not one but

two digits. The solution to this is to divide the sum of weighted digits by
some number and to take either the remainder, or the amount required to
make the remainder zero, as the check digit. This divisor is known as the
modulus or mod. Using modulus 9 and taking the remainder as check digit,
53 becomes 8, and the complete code number becomes 609508.
Standard codes jor artic/es and materials
In principle needless duplication of effort may appear to be involved when
manufacturers in the same industry, or suppliers and their organizational
customers (whether users or distributors), separately devise codes for
similar ranges of goods and material. In practice immense difficulties, both
organizational and analytic, exist in the adoption of standard common
codes, and little progress has been made although much work has been
done. A conspicuous exception is the rapid growth of standard article
numbering for merchandise in the retail trade.
The so-called American Universal Product Code (UPC) is an example of
this. The UPC comprises a set of 12 digit code numbers. The first or prefix
digit indicates the subset; e.g. a prefix digit of 0 indicates the grocery
products subset. Within that subset, the next five digits identify a
manufacturer, and the following five digits identify a product in his range.
The twelfth or suffix digit is a check digit.
An increasing number of suppliers preprint the article code on individual
packages in machine-readable form. A bar code is used for this purpose;
the UPC number is printed as a pattern of light and dark bars of various
widths, which can be read backwards or forwards, upside down or right
way up, by some form of electronic scanner. Large retail establishments may
have slot scanners at the check out points. The cashier does not need to enter
the article code by hand, merely to pass the coded package over the scanner.
Hand-held scanners with memories can also be used for stocktaking.
A different but compatible system is being adopted in Europe (the
Universal Product Code not being universal enough) under the name of
European Article Number (EAN). The EAN organization includes representatives of Austria, Belgium, Denmark, Finland, France, Germany,
Holland, ltaly, Norway, Sweden, Switzerland, and the UK, whose representative is the Article Number Association (ANA). Grocery product
manufacturers and distributors including most of the major multiples are
represented on the ANA along with printers, packagers, point-ofsale equipment makers and computer manufacturers.
EAN code numbers comprise 13 digits. The first two indicate the
country, with 50 denoting the UK. The next ten are allocated by the
country in question, and Britain is allocating the first five of these to
identify a manufacturer and the next five to identify a product in his range.
The final thirteenth digit is a check digit.
8
Iuventory management, stock management, inventory control and stock

control are terms which can all have the same meaning. One reason why so
many terms are in use is that there is a very wide range of sophistication
and expertise in this area - from very high to almost non-existent.
'Stock control obviously refers to inventories held on a controlled
max-min basis' said one purchasing manager in a printed interview.
Tactful consultants or operations research workers instead of disagreeeing
with him might simply resort to a different term: 'Ah yes, but what is really
needed now is the installation of proper inventory management.' Asked
what that entailed, they might weil reply with Dr Lewis's definition:
'the science-based art of controlling the amount of stock held in various
forms within a business to meet economically the demands placed upon
that business' [ l).
It costs money to carry stock. Space must be provided to house it,
equipment and people to handle it. Stock is subject to deterioration, theft,
loss, damage; may be superseded and become surplus to requirements;
requires a !arge part of working capital to finance it. Tight money
conditions focus attention on the reduction of the amount of money tied
up in stock and work in progress so that finance can be released for other
pressing demands. But even when liquidity is not a problem, the proper
and economic allocation of resources to alternative uses requires intelligent
control of stocks.
To the financial eye, no stores could ever be good. The only good stores
would have nothing in it, and would therefore be wasting space, which
would not be good. This is an exaggerated view; smooth operation of
production and service to customers depends on having the goods to hand
Principles oj inventory management
99
when they are needed. Unless shortages are kept to an acceptable minimum, heavy costs will be incurred by disrupting or halting production,
disappointing or losing customers.
Things should be stocked only if it pays to stock them. If it costs money
to carry stock, at least it ought always to cost more money to do without it.
Every item in a stores ought to be justifiable; there should be a reason for
stocking it. The fact that the thing is required for production or maintenance is a reason for procuring it; what further reason is there to proeure
it in advance of requirements and keep it in stock?
The right stocks
Stocks are held for two main reasons: economy and protection. Economy
means the savings which can be made by buying or making more than
the immediate need- savings in paperwork, processing and handling,
as weil as savings in price paid. Protection means providing a buffer
against fluctuations in demand or delivery, insuring against uncertainty
and delay. Businesses carry stock because it pays. Either it costs less,
in operating costs or purchase expenditure, to buy for stock rather than
just for immediate needs; or eise the potential Iosses through keeping
customers waiting or having production grinding to a standstill are
judged greater than the cost of safety stocks which cater for changes in
plans and requirements and Iead times.
People with business experience usually find something paradoxical in
this description of inventory as part of a cost reduction effort. Cost
reduction far oftener tries to cut stocks than to create them. But this is
because speaking generally inventories are more often badly managed than
not. More weeds seem to grow in the stores than in other parts of the
organization. Every stock control programme ought to include weedingout routines. Every organization has at times too much stock of some lines,
often at the same time as it has not enough stocks of others; inventories
have a natural tendency to get out of balance, because control procedures
inevitably lag behind changes in the needs they are designed to meet and
the market conditions in which they meet them. The pressure from the
using end is for more and more stock, to get further and further on the safe
side. Hence the financial end feels obliged to apply compensating pressures
for less and less stock. The object of this tug of war is to get the right stocks
- neither too much nor too little - of the right things: those it pays to
stock. The stock controller whose efforts promote this object, far from
being a necessary evil, is making a positive contribution.
Better jorecasting
Better forecasting can cut stock Ievels. Workable plans firmly stuck to,
require less stocks than plans which continually alter. Central stores
100
supplying groups of sub-stores can work on lower aggregates than could

the sub-stores without the central base-stock, because aggregate demand is
less irregular, and so aggregate forecasts are more reliable. Short reliable
Iead times mean lower stocks than long and shaky Iead times. The standard
approach to stock orders, is to place them against extrapolations of past
demand. Future demand during Iead time, which determines order Ievel, is
taken as more or less the same as average past demand. If past demand has
been 100 a month we assume that demandin the near futurewill also be
100 a month; unless we have reason to think that demand is changing,
when we should adjust the forecast. There are several things we could Iook
at in the record of past consumption apart from the average rate of
consumption. We could also check for trend- whether the rate is going
up or down; and for variability- how far actual consumption for a period
is likely to differ from mean consumption for a period ofthat length. But
there isn't usually either enough time or enough data to make elaborate
checks.
The standard approach uses a moving average. We work on the average
of the last few periods, not on the average since records started. A monthly
demand calculated as the average demand over the last six months is a
six-month moving average. If we calculate it by adding actual demands
over the last 12 months and dividing by 12, we get a 12-month moving
average. The Ionger the period averaged, the less weight the average gives
to random fluctuations; but also the less sensitive it is to trends in
consumption. A short-period moving average gives more weight to recent
history, and thus allows more effectively for demands which are creeping
up; but also is more likely to be thrown out by casual bunching up of
demands, and short-term fluctuations which are not significant.
An alternative to moving averages, which has advantages particularly
when stock is recorded mechanically, is exponential smoothing. Instead of
storing data about actual demands for a number of past periods, we store
only the past average, which is up-dated at the end of each period by
adding or subtracting the difference between the past average and the
actual consumption for the period multiplied by a smoothing constant.
The formula is:
new average = old average plus smoothing constant x (new actual
demands minus old average).
Suppose for instance the old average is 100 per period, and the actual
demand in the new period is 102, and the smoothing constant we are
working with is 0.5. The new averagewill be: 100 + 0.5 (102 - 100), i.e.
101. The value of the smoothing constant is chosen according to the weight
which we want to give to recent history as against long term averages. A
smoothing constant of 0.5 corresponds roughly to a three-period average;
a constant of 0.1 corresponds roughly to a 19-period moving average.
Trend figures can be worked out in the same way. The new trend at the
end of a period is calculated as:
101
new trend = k (new average minus o1d average) + (1

k)( old trend),
where k stands for the smoothing constant. The trend figure can be used to
adjust the demand forecast for future periods. These techniques are
discussed in more detail by R. G. Brown[2].
Alternatives to stock
Ways of supplying requirements without holding stocks should be considered regularly. Intermittent and special requirements can often be bought
as needed, as when a set of refractories to reline a furnace are ordered to
arrive shortly before the scheduled overhaul date. Just enough to do the
job is ordered.
Major manufacturing materials and parts can be scheduled in from
suppliers daily or weekly, provided there is enough volume. This substantially reduces stockholdings, but it does require considerably more
administrative effort. Mass production vehicle manufacturers do this
on a !arge scale. 'Morris used to say that the warehouses for his Cowley
assembly plant were the lorries on the road between the Midlands and
Oxford.' Graham Turner states in his book The Car Makers:
Throughout the day and night lorries from all over the country pour
components into the assembly plants - between 500 and 600 arrive at
Longbridge every day. Once unloaded, the components have to be
stored ready for use, a massive operation in itself when Longbridge
carries a stock of 60000 'live' (i.e. in use) parts. Yet Longbridge plant
carries a day's stock, for minor items half a day. When Ford is in full
production, it has only a four hour supply of tyres, the nearby depots
provide a readily available reserve. Rootes holds only enough trimmed
and painted bodies for one shift, and eight body shells arrive from
Pressed Steel's Cowley plant every 20 minutes ...
The stocks of various components (at Vauxhall) vary considerably,
because each part of a car - and there are around 10 000 m the Victor has a different priority. For instance batteries are mounted in the car
with very little processing, so we get regular daily deliveries from Lucas
and Exide. When they arrive they are booked straight into the store and
come out again almost immediately. So they have only 2 days priority as
a rule. But when the crankshaft arrives it has to be heat-treated,
machined and plated before it can be used. The process may take 20
days and we therefore have to keep 20 days supply of crankshafts. All
the different timings have to be phased successfully with the production
process. Don't forget that allowing the line to stop is original sin; if you
loseaminute you have 4000 men idle. We've had to install a computer
which breaks down by part number, priority and month, the entire
requirement for a complete month's schedule.
Purchasing men have given much attention to arrangements under which
102
suppliers instead of buyers carry stocks. Large concerns sign local stockholder contracts with hardware merchants, ironmongers, electrical wholesalers and office supply firms, under which specified items are stocked for
the buyer's exclusive use and delivered weekly as called for. Consignment
stocks, goods supplied and replenished by the seller, kept at the buyer's
establishment and not paid for until sold or used, are another approach
which is increasing in popularity.
'Pareto' analysis
A most useful guide to devising stock control systems is often known as

Pareto analysis (after an ltalian philosopher and economist. The term is a
misnomer but well-established one.) lt is also known as ABC analysis
because it analyses the range of stock items held into three sectors, known
as A, B, and C, as shown in Figure 8.1. The basis of the analysis is usage
value. If all stock items are listed, and for each item the unit cost is
CLASS C
100
w
(!)
90
~
V>
::>
....J
~
::>
z
z<(
70
u..
0
w
::>
....J
<(
>
....J
<(
f-
0
,...
.....
0
w
t)
<(
1-
u
a:.
....
Q.
10
30
100
PERCENTAGE OF TOTAL RANGE Of STOCK ITEMS
Figure 8.1 V sage value distribution of stock items - ABC analysis, ojten
known as Pareto analysis.
103
multiplied by the quantity used in a year to give the annual usage value,
and the list is then sorted by value, we obtain a Iist of alt items in stock,
arranged in order of usage value.
The distribution shown in Figure 8.1 is typical: about 70% of the cost of
materials is due to 1OO?o of the items stocked. These are called Class A. The
Class B items are intermediate; here they account for 200?o of usage value
and constitute 200?o of the items stocked. The Class C items come at the
bottom of the range; slow movers, low value odds and ends. The
significant thing about Class C items is that they are very numerous 700?o bf the stock rangein this example - but account for very little of the
cost of materials stocked - lOO?o in this example. 'One law for the lion and
the lamb is oppression,' wrote Blake. One stock rule for Class A and Class
C is similarly inappropriate.
Because most of the money goes to finance 'A' items, it is economic to
order frequently, control tightly, compute requirements exactly by 'exploding' the bill of materials and the production programme. Shortages are
prevented by energetic chasing and frequent checks rather than by !arge
buffer stocks.
Because very little money is tied up in 'C' stocks, it is economic to order
infrequently, controlloosely, estimate requirements roughly on the basis
of past usage, and prevent shortages by ample buffer stocks. The objective
is tosavetime in dealing with 'C' items, and to save financial commitment
in dealing with 'A' items. In this way we reduce, both the total administrative cost of stock control, and the total stock investment[4].
Order quantities
Many organizations adopt some approach to order quantities based on

ABC analysis. They might order A items every month, B items every three
months, and C items every twelve months, for instance. Such an approach
is more economical than ordering three months supply of everything; it
makes less work and Ieads to lower stocks. However, it Iooks like a
cookbook approach- 'here's my recipe for stock control, I've tried it and
it's good'. Why is it good, is there any theoretical basis, the student will
ask.
The theoretical basis has in fact existed much Ionger than ABC analysis;
it may be found in the theory of Economic Order Quantities (EOQ), which
goes back to the 1920's, while usage value classification was first heard of
in the 1950's. An early application of EOQ theory was at Westinghouse's
meter division at Sharon, in 1947. The highest production volume the
division had ever acliieved was handled by a much smaller supply staff:
buyers were reduced fom 3 to 1, assistant buyers from 6 to 2, expediters
from 3 to 1, and total department staff from 37 to 21. Instead of spending
most of their time progressing orders, purchasing staff were able to spend
most of their time on negotiations. Progressing was actually discontinued
104
for 800Jo of the orders. Yet the proportion of outstanding orders which
were holding up production feil from 11% to 1%, and the stockout-peritem went up to one in 7Y2 years. The improvement in stockout rate
combined with a reduction in progressing resulted from buying as much as
four years supply at a time of the lowest value items. This also greatly
reduced the number of orders placed. It did not Iead to greater stock
investment because of the tighter control and more frequent ordering of
high-usage-value items, the 250 items out of a range of 8000 items which
accounted for between 1/3 and % of the total expenditure on stock.
Changes in order quantity have an immediate and direct effect on
average stocks. A fictitious example may clarify this. Abracadabra
Product Co. stock a whole range of items for which they have evolved a
labour-saving procurement system. Stock is split into twelve groups and a
year's supply of each goup in turn is ordered on the first of each month.
Carbothene comes in group one; a year's requirement, which happens to
be flOO worth, is ordered on January 1st. By June stock is down to f50; by
December the storemen are scraping the bottom of the carbothene barre!
and the buyer is reaching for his order pad.
A 1ittle thought will show that average stock of all items is six months'
supply; for carbothene the average stock is worth f50. How can
Abracadabra cut their stocks by 96%?
The answer is perfectly simple, in theory at any rate. lf instead of buying
fifty weeks' supply at a time, Abracadabra buy two weeks' supply at a
time, their averagestock will drop from twenty-five weeks' supply to one
weeks' supply. Carbothene stock will vary from a maximum of f4 to nil,
instead of from a maximum of flOO. This is a 96% reduction.
And why stop there? Ordering a week's supply at a time would achieve a
98% reduction. Why not a day's supply at a time?
Certain major raw materials can be scheduled to arrive daily. But it just
wouldn't be practicab1e to do this for every item stocked. Even where
practicable it often wouldn't be economic. Apart from high prices for
small lots, a point we shall consider separately, there is an immense
administrative effort required for daily deliveries; detailed, continually
adjusted requirements plans pinpoint control of delivery schedules, more
orders to place, letters to write, consignments to check, invoices to process,
cheques to write and sign and post. All this costs money, and the object of
cutting stocks is presumably to save money.
Consequently, reducing stocks by increasing order frequency saves
money only to a point - the crossover point at which the savings due to
further reductions would be smaller than the cost increases occasioned by
the rising tide of deliveries and orders needed to achieve the reductions.
The aim of EOQ theory is that for each item we choose the order quantity
which gives the lowest total variable cost, including both the stock-holding
costs which increase when we make the order bigger, because this makes
average stocks bigger, and ordering costs which decrease when we make
105
the order bigger because this means fewer orders. This notion of buying
economic order quantities (EOQ's) is still regarded by some practical men
as an abstruse and suspect device for taking half-an-hour to calculate what
quantity to buy when the half-hour could more usefuily be spent actuaily
buying. Others recoil aghast from the mathematical basis of the EOQ, the
pons asinorum of purchasing. In fact the theory is simple enough and the
application can be perfectly straightforward. Even supply men who have
little practical use for the EOQ find it casts enough light on the principles
of their work to rank as part of the basic purchasing tool-kit.
Before we can teil what order quantity will be economic in a particular
case we must Iook at the costs involved in getting and keeping the stock.
This always requires a special cost analysis to identify and explicitly state
the costs which would actuaily alter when stock control policies are
changed.
Stockholding costs
What does it cost to carry stock? The main component is the imputed cost
of locking up money. This may be regarded as the gross return desired on
assets or capital. At the very least it is the 5 to lOOJo the money could earn if
instead of financing stocks it were used to reduce the overdraft or invested
in short-term loans. At the most, when the enterprise has pressing
opportunities to employ capital profitably and perhaps because of a credit
squeeze few opportunities to raise such capital, it will be very much higher:
25% or more. Yet it is easy to overstate the rate; even at 20%, money will
double itself in Jess than four years; and employing an unrealistic
stockholding cost in stock control calculations merely inflates the cost
actuaily incurred.
Of course as weil as the opportunity cost of capital there are other
expenses associated with holding stock. Unquestionably it is expensive to
provide storage space and employ storemen. But relating these expenses to
the size of stocks is not easy. In a smail organization the staff will probably
be a fixed expense, and even in a !arge organization the extent to which
staff will vary with changes in average stock is restricted. As for storage
space, most stores are allotted a fixed area which cannot be varied without
a really substantial alteration in requirements; so that space does not vary
continuously with stock, but rather in widely-spaced steps. For normal
order quantity calculations we can take it that space requirements, and
often staff requirements too, are on a constant-cost plateau; only when
inventories alter so greatly that we are in danger of falling off the plateau
should we take account of these costs.
But this is true only if there are no big differences between the space
requirements of different commodity groups. If f0.35 worth of cornflakes
takes as much room as 05 worth of cigarettes, we may wish to turn our
stock of cornflakes over faster than our stock of cigarettes so as to use
106
available space to the best advantage. This could be done by including a

rentat figure in our calculations; at f0.05 per cu. ft, the rental value for
cigarettes would be o.140Jo and for cornflakes 13.5%, of value[3].
Another consideration which may be relevant is the shelf life of stock.
Many industrial stocks depreciate very slowly, if at all. Others, for
instance, adhesive tape and photographic paper, and paint, have a limited
life. lt might be possible to include an average charge for deterioration,
spoilage and obsolescence in our calculations where applicable. But this
risk has no connexion with stock value, and a better way to allow for it is to
make special rules for special items. The general risk of obsolescence could
be covered by a general rule that not more than twelve months' supply of
any item may be bought at a time without special permission from the
supplymanager, combined with nous and discretion by personnet concerned.
Clearly what Stockholding cost percentage should be applied in stock
control calculations is at least as much a matter for management to decide
as for cost accounting to discover.
Procurement costs
Reducing stock by flOO can save anything from :5 to f25 a year. But when
the reduction is achieved by more frequent orders and deliveries we must
reckon that these cost money too. An extra ten purchases can add anything
from f0.50 to f20 to costs.
We arenot for this purpose interested in average costs, which we could
get for purchasing by totalling all the expenses of running the department,
including prowding office space, lighting and heating it, employing staff
and so on, and dividing the total by the number of orders placed. What
concerns us is the marginal, not the average cost; the expense we can save
by placing fewer orders. The flow of orders is hardly likely tobe reduced to
a triekle so small that we can dispense with a purchase department
altogether, and some of the expenses, probably including office space and
senior staff, will have to be treated as fixed. As weil as purchase
department expenses, associated expenses in other departments should be
included: the costs of unloading and checking goods, processing invoices
and paying bills.
The stationery element can be as high as 15p per order; it will include
postage and forms for internal requisitions, requesting quotations, placing
and chasing orders, writing goods received notes, statements and cheques,
envelopes, carbons and copy paper. The main element is usually the cost of
time: buyer's time, clerks', typist's, and expediters' time.
ICI investigated their procurement cost in 1950 and found the marginal
cost averaged 30p per order. Ten years later this figure was still approximately correct, 'the fall in the value of money having been counterbalanced
by improvements in method'; but for some orders the cost was lower,
about 20p, and for local stockist orders the cost could be 5p or less.
107
The optimum order quantity

lf we save f:20 a year by reducing stock and at the same time spend an extra
i20 a year on more frequent orders, clearly the net saving is nothing and we
are getting nowhere. This can be seen if we return to Abracadabra Product
Co. and assume that a cost analysis has disclosed that procurement cost is
30p per order and Stockholding cost is 150Jo of stock value.
For their original plan of buying DOO of carbothene once a year, the
acquisition cost would be the sum of the procurement cost and the
Stockholding cost. For one order a year the procurement cost would of
course be 30p. The average stock, as we saw, would be worth iSO, so that
at 15% the Stockholding cost would be i7.50. Forthis plan therefore the
acquisition cost would be i7.80.
For the second plan, which reduced stock by 96%, the cost of placing 25
orders at 30p each would be i7.50. Average stock would be worth i2, so
that at 15% the Stockholding cost would be 30p. The acquisition cost for
this plan would also be i7 .80. The entire saving in overheads through lower
inventories and faster turnover would be cancelled out by the need to
employ more people and process more paper in making 25 times as many
purchases per year; and the spectacular 96% reduction in average stock
would not reduce costs at all.
Somewhere between these unsatisfactory extremes lies the optimum
order quantity which will achieve the biggest reduction, not in orders
placed or in stock held, but in costs. We can grope our way towards it by
calculating the cost of a succession of order quantities. One order a year
gave us an acquisition cost of i7 .80. What about two orders a year? These
will cost 60p, and averagestock will fall to i25, so that Stockholding cost
will fall toi3.75. Theacquisitioncost will bef:4.35. This is clearly a step in
the right direction - because it reduces Stockholding costs more than it
increases procurement costs.
Four orders a year would mean a further increase of 60p in procurement
costs and a reduction in Stockholding costs of il .87 Y2p, so that acquisition
cost would still show a net reduction. But eight orders a year would add
n .20p to procurement costs and take away only 94p from stockholding
costs, so that overall costs would increase.
Careful consideration of these figures shows that lowest overall costs are
to be found at the point where procurement cost is equal to Stockholding
cost. This occurs when Abracadabra are placing five i20 orders a year for
this item. With procurement costs of il.50, and Stockholding costs (15%
of HO) also of il.50, the acquisition cost amounts toB a year. This is a
31% cost reduction on either the original plan of one order a year, or the
amended plan of one order a fortnight.
Such a reduction could be very substantial over the whole range of stock
carried by an organization. In one case, stocks were reduced by 28%
without increasing the nurober of orders; in another case, staff were
108
reduced from 37 to 21[3]. Properly applied, EOQ's should always reduce

either the size of stocks or the number of orders, and sometimes both.
160
120
...
80
0
"'
<..>
40
PROCUREMENT COST
0~~------~----~----~---------r
10
30
70
50
JRDER QUANTITY
100
Figure 8.2 Economic order quantity.

The relationship of the various cost figures to order quantity is shown in
a very well-known graph with many applications, Figure 8.2. lt can be seen
on the graph that the minimum of acquisition cost occurs at the order
quantity for which the Stockholding cost and the procurement cost curves
intersect, i.e. where these two costs are equal. From this a formula can be
deduced for the EOQ.
If we write A for the annual value of consumption of an item, and P for
the procurement cost per order, and Q for the value of the order quantity,
then the annual procurement cost is APIQ. Average variable stock is half
the order quantity, Q/2, so that if we write S for the Stockholding cost as a
percentage of stock value, for this item our annual Stockholding cost will
amount to So/o of Q/2, i.e. SQ/200. These two costs are equal when
SQ/200 = AP/Q, and solving this equation for Q we have for the
optimum order quantity Q =y(200AP/S). In words, the EOQ is obtained
by multiplying the square root of the value of usage value by a constant.
Using calculus standard techniques for finding minima are employed.
We differentiate the acquisition cost expression, APIQ- SQ/200, with
respect to Q, getting S/200- APIQ', equate to 0 and solve for Q, getting
the sameanswer Q = y(200AP/S).
The relationship between amount required, order quantity, and associated costs which the above formula expresses, can of course be expressed
by any number of equivalent formulas which transform back to the version
above by substitution. If for instance we state Stockholding cost as a
decimal fraction instead of a percentage, we should get Q = y (APIS)
Principles ojinventory management
109
instead of y'(200APIS). Ifweprefertoworkinphysical quantities instead

of the value of demand and the value of the order, the formula becomes:
EOQ in physical units =
quantity used per year)

~ (' S2Px xunitphysical
price each
Some firms prefer to work in terms of the number of months' supply to

buy, rather than the physical quantity or the value of order. Demand can
also be stated as demand per month instead of per year, and the formula
then becomes: EOQ as optimum numberofmonthssupply = y(24PIMS).
Here S is the Stockholding cost still expressed as a decimal fraction, and M
stands for the value of a month's consumption.
Practica/ application
Calculating each order quantity as the need arose would be tedious, and
unless the calculation can be done automatically as part of stock control by
computer for instance, some kind of calculating aid is always used.
Log-log graphs areeasy to draw, less easy to read. Special slide-rules have
been marketed. An example of a nomogram is shown in Figure 8.3. But the
handiest ready-reckoner for most purposes, and the least likely to Iead to
errors in use, is a pre-calculated table of selected values. This is particularly
suitable in view of the fact that the acquisition cost curve has rather a flat
bottom, which means that costs don't vary much when order quantity is
within 20o/o or less of the optimum. (Outside these Iimits costs start to go
up sharply; cost is inflated much faster by orders which are too small than
by orders which are too big.) An example of such a table:
Table of economic order quantities
K=2
lf monthly usage
Order
Under f:050
E050 to E1
E1
to E2
to E4
E2
E4
to E8
E8
to E16
E16
to E32
to E64
E32
12
lf annual usage
value is:
value is:
months' supply
months' supply
months' supply
months' supply
months' supply
months' supply
15 months' supply
1 month's supply
8
6
4
3
2
Under E6
E6 to E12
E12 to E24
E24 to E48
E48 to E96
E96 to E192
E192 to E384
E384 to E768
More complicated are tables which show physical quantities to buy for
various prices.
110
AMOUNT USED PER
WEE\
No. OF WEEKS' SU PPLY
TO ORDER\
10p worth
Figure 8.3 Universal nomogram for order quantity.
111
Quantity discounts
For some purchases lower prices are offered for !arger orders. There may
be a range of net prices which go down as the quantity goes up, or there
may be a series of quantity discounts. Large orders reduce costs firstly
because the purchase price is lower, and secondly because fewer purchases
are made; but they also increase stocks, and to decide whether or not it
would be to our advantage to increase a particular order we should need to
weigh the increased Stockholding costs against the other costs which would
be reduced and evaluate the net saving.
To do this we calculate the acquisition cost plus the purchased cost of a
year's requirements. We have already calculated that for :EIOO worth of
carbothene the acquisition cost will be f3 .00 if we place 5 orders a year at a
procurement cost of 30p and a Stockholding cost of 15%. So what we
might call the total variable cost is :El03. Now suppose that the carbothene
supplier offers a 511/o discount for flOO orders delivered at one time and
place. Accepting the offer means one order a year at a procurement cost of
30p, and an averagestock of f47 .5 with a stock-holding cost of f7 .125, so
that acquisition cost would rise to f7 .425. The total variable cost would be
this plus the annual requirement of f95, i.e. !:102.425.
Comparing this with the TVC for our normal f20 orders shows that we
can make a very small annual saving, less than \12%, by taking up the
offer. This does not of course oblige us to accept the offer; we should
consider other factors such as whether we have enough room for all this
stock, and whether there could be a demand change leading to obsolescence before it gets used up, or a price change which would nullify the
saving. The slightest doubt about any of these points, and the net saving,
which may be too small to bother with anyway, would be wiped out.
lf the discount offered were 511/o for f50 lots a similar calculation shows
that it would be appreciably more worthwhile; on the other hand if it were
2\12% for flOO lots, accepting it would actually involve us in a net loss.
The best way to handle occasional offers of this kind is to work out the
costs in the way just done. But if problems of this kind come up regularly,
as could be the case in a !arge organization, it is possible to calculate a
ready-reckoner.
Limitations on the use of the EOQ
Choosing order quantities to minimize internal costs is most useful when
requirements are known, prices are stable and deliveries short and reliable.
For highly variable demands alternative approaches may be more suitable.
When price is subject to !arge fluctuations, watehing the market and seizing
the moment can contribute cost reductions much greater than the balance
of internal costs could yield; and when deliveries are unreliable, making
sure of supplies matters more. The EOQ analysis can in theory be extended
112
to speculative markets by including probability functions, but whether

price or delivery is the speculative element the worth of such extensions has
yet to be established in practice.
But even enterprises which buy raw materials in speculative markets also
buy by far the greater proportion of their requirements in stable markets
and have therefore an application for a rapid and simple method of
deciding order quantity and keeping costs low.
In small firms where the size of the purchasing department is almost
independent of variations in the number of orders placed, the application
of EOQ's encounters a theoretical difficulty. Strictly speaking the cost of
time is then a fixed expense, but to exclude it from our calculations would
not give satisfactory results. We can imagine two firms in which associated
costs were equal except that one firm being a good deal smaller than the
other would not regard time as a marginal cost. The !arge firm would
weight the substantial cost of Stockholding agairrst the substantial cost of
procurement to get the best balance between capital investment and
manpower; the small firm would weigh the substantial cost of Stockholding
against the stationery cost only of procurement and would place much
smaller orders, overworking the purchase department simply because the
cost figures imply that purchasing labour costs nothing. To argue that
therefore EOQ's are suitable only for !arge concerns underestimates the
flexibility of cost accounting. Small firms also have to decide how much to
buy at a time, and if they employ the necessary ingenuity they can use EOQ
analysis to solve such problems as when it will pay to engage extra supply
staff, or how to keep output of orders within the Iimits which existing staff
can manage wihtout scamping the work, or how to keep inventories below
a stated ceiling. This can be done by including a carefully studied and
suitably varied figure for the cost of time, or by excluding labour costs and
modifying the resultant order quantities by a suitable multiplier.
Order Ievels
Order Ievel -- also known as order point, reorder point, trigger Ievel - is
the Ievel of item stock, expressed in terms either of quantity or time
coverage, at which a replenishment order is considered. It is equal to
maximum reasonable demand in the Iead time. In some systems the Ievel,
not of item stock, but of stock plus orders, or stock plus orders less
reservations, is used.
Lead time is the total time it takes to get things. It comprises internal
Iead time -the administrative delay in processing the order, which may in
periodical review systems include the period of time until the next review;
and externallead time, which is the supplier's delivery period plus transit
time. The goods will hardly ever appear like a rabbit out of a hat the
moment the order is placed; they may take a day or two, a few weeks, or
several months to arrive. To keep stocks low we should place the order
113
when stock on hand has fallen to a Ievel which is just enough to last until
the order arrives. The problern is, how much is just enough. The only hard
fact is the quantity of stock on hand. Both the Iead time and the quantity
which will be called for during the Iead time are, at the time of ordering,
forecasts. Consequently in practice we try to set the order Ievel at a point
equal to maximum reasonable demand during Iead time rather than just
barely enough to last, which would Iead to shortages because of fluctuations in usage and in delivery period.
Consider an item used at the rate of 100 a month and available on one
month's Iead time. Ifthe order Ievel is set at a stock Ievel of 100, a shortage
would occur whenever the supplier delivered a few days late, and whenever
a little over 100 parts were called for in a month. To prevent this, the
maximum reasonable demand might be estimated as 200, and the order
Ievel set at this point.
Alternatively, we can regard this order Ievel as made up of two
MAXIMUM STOCK:2;iMONTHS SUPPLY
<(
g ______ ~V_ER~~ _S_!0~1<_:_!_1~_9~!:_H_:; _?iJPPLY

',;1!
f<IJ
MINIMUM STOCK: irMONTHSSUPPLY
TIME
Figure 8.4 Minimum stock: Management can reduce average stock by

reducing minimum stock - this increases shortages.
114
components: the average usage in Iead time, which is 100, plus a buffer
stock of a further 100 parts. Buffer stock is a quantity of stock held to
cover variations in demand or delays in delivery while an order is outstanding. Hence it is also the average stock on band when replenishment orders are delivered. Alternative names for buffer stock are: safety
stock, reserve stock, minimum stock.
Most stocks can be analysed into two components, active stock and
buffer stock. Active stock is the part which is regularly used up and
replaced. At least a third of the total stocks carried are usually buffer
stocks. In the last example, if the item used at the rate of 100 a month is
being ordered six times a year with an order Ievel of 300, then the average
active stock is 100 and the average buffer stock is 200, two thirds of the
total average stock of 300 which is being held of the item. If it is ordered
three times a year in lots of 400 a time, then average active stock is 200, the
same as average buffer stock, which now accounts for half of total average
MAXIMUM STOCK: 2 MONTHS SUPPLY
<(
J:
<JI
MINIMUM STOCK: I MONTHS SUPPLY
TIME
Figure 8.5 Maximum stock: management can reduce averagestock by

reducing maximum stock - this increases purchasing workload.
115
stock of the item. Only when the order quantity goes up to 800 does the
buffer stock fall to a third of average stocks.
Clearly there is a temptation, when the pressure is on to get stocks down,
simply to reduce order Ievels, and thus buffer stocks and minimum stock
Ievels. An across-the-board reduction will inevitably increase shortages Figure 8.4. On the other hand, reducing stocks by leaving buffer stocks
where they are and ordering smaller quantities, or reducing maximum
stock Ievels, increases the workload; it means more orders, deliveries and
payments to cope with, Figure 8.5.
A good deal of effort has been put into finding some statistical approach
based on probability theory which would enable buffer stocks to be
calculated more exactly than is possible with the traditional rule-of-thumb
approach. Rule-of-thumb methods, such as setting buffer stock at one
month's supply as in the example, can work weil if they are applied with
commonsense and care, with individual modifications for particularly
unreliable suppliers or particularly variable usage rates. But the computer
cannot apply the nous and discretion which a good clerk will use to bend a
rule to fit an unusual situation; it must apply the rule blindly. Either a
better rule must be found for it, or worse results must be suffered, or
manual adjustments must be made.
Least cost protection
Since we have been considering economic order quantities, it is natural to

ask if economic order Ievels could be determined in some similar way. In
fact we could set buffer stocks at Ievels which would minimize total costs if
we could assign adefinite cost to a stockout. The least-cost Ievel for buffer
stocks could then be determined by compromising between high stocks,
giving high protection, and low stocks giving numerous stockouts. The
problern would be similar to the problern of fixing order quantities so as to
get the lowest total cost when !arge order quantities mean low procurement
costs but high Stockholding costs, and small order quantities mean high
procurement costs but low Stockholding costs. In both cases the lowest
Table 8.1 Economic order Ievel
(order Ievel
m + K ym, where m is mean demandin Iead time)
Numberof
stockouts
per year
Total cost
E
1,49!:)
1,380
1,220
2,312
2,283
2,255
6,830
7,450
8,63.0
1,100
985
872
2,264
2,276
2,288
9,700
10,750
11,800
Minimum stock
E
Value of K
12
16
22
(Optimum Ievel)
28
34
40
116
Ievel of combined costs comes about at the point where the two component
costs are equal. The economic order Ievel, or the least-cost Ievel of buffer
stock, occurs when the cost of Stockouts over a period equals the cost of
carrying safety stock to prevent stockouts.
This is illustrated by Table 8.1, adapted from a computer simulation
based on actual stock issue records.
The 'total cost' in Table 8.1 is calculated by taking the cost of a stockout
as f1 and t}!e cost of carrying stock as 120Jo per annum. Total cost falls to
the optimum Ievel, after which it begins to rise even though the nurober of
stockouts is falling, because to protect against stockouts begins to cost
more than the stockouts themselves cost. In this case and for these figures,
the optimum value of the multiplier Kappears to be 2.2.
One drawback is the difficulty of determining what it costs to run out of
stock. At one extreme the cost might be confined to a little inconvenience
and a telephone call; at the other extreme there could be a serious and
expensive disruption of production. For most items the cost of a stockout
can be assumed to be something like the cost of placing an order perhaps double the order cost but not more. But obviously there are certain
items for which the cost of Stockouts would be much higher.
Reference should be made to specialist texts for detail about such
distributions as the Poisson, the normal, and the lognormal, and the
calculation of standard deviations or mean absolute deviations for use in
this connexion[ 1, 2].
Summary
This chapter has dealt with what are often called the three fundamental
questions of inventory management:
(1) which things to stock
(2) what quantities to order
(3) when to order them.
These are policy questions. Having decided what policies to adopt, we
must institute procedures and practices which enable us to give effect on a
routine basis to our policies.
References
Lewis, C.D. (1970), Scientific Inventory Control, Butterworths, London.
2 Brown, R.G. (1959), Statistical Forecasting for Inventory Control,
McGraw Hili, New York.
3 McLelland, W.G. (1960), The least-cost Ievel of stocks and the rate of
interest, Journal of Industrial Economics, March.
Principles oj inventory management
117
Further reading:
Baily, P.J.H. (1971), Successfu/ stock contro/ by manual systems, Gower
Press, London.
Morrell, A.J .H. (1967), Problems oj stocks and storage, Oliver and Boyd,
Edinburgh.
9
To apply in practice the principles of stock management a great deal of

data has to be produced regularly and reliably. Thousands of things may
be held in stock. Some are held against solid regular needs, others against
doubtful and intermittent requirements. Buyers need to know which items
to order and when to order them. Someone must have enough data about
demand to decide on suitable order quantities. Before stock control
principles can be applied in practice, information systems must be set up
which supply the facts and enable them to be translated into acts.
These stock information systems are so numerous and diverse that it is
useful to have a classification basis of some kind. They can be classified by
data source - either physical check, or referring to manual or computerized records. We can find out what we have in stock either by going and
taking a Iook at it, or eise by referring to records kept by stock clerks or by
various types of machine. They can also be classified by timing - whether
the data source provides continuous signals or is consulted periodically.
We can either check every day, i.e. continuously, what needs tobe ordered;
or eise we can do this at intervals once a month for instance, i.e.
periodically. Continuous systems usually operate by setting trigger Ievels
for each item - one trigger Ievel to initiate an order, another to initiate
progress action perhaps.
This gives a four-way classification. If methods of forecasting demand
and other variables were introduced into the classification it would become
much more complicated. The simple four-way classification is as follows:

Data
Timing
Source
Periodic
Recordscomputer,
manual
Physical
Check
cycl ic orderi ng
imprest
119
Continuous
order-level,
order-quantity
max-min
two-bin
ruled-bin
visual control
Computers jor stock control
Computers arewidely used in connexion with stock controL Large computers

are used for simulation exercises to assist in deciding what rules to apply in
stock control, production control, transport planning, etc. Simulation is the
detailed calculation of what would have happened if various alternative
rules had been used. Both large and small machin es areused for stock records.
The materials area seems a natural computer applications field, because
it involves a large amount of routine transaction posting where both
accuracy and speed are important since out-of-date information Ieads to
inappropriate action just as surely as inaccurate information does.
As weil as maintaining stock records and updating them by posting
transaction data, computer systems can provide a variety of reports and
analyses. High usage value of 'Pareto' analysis is a common computer
application. Slow mover and dead stock analysis can easily be carried out,
usually every six months.
The cheapest bulk data storage medium is magnetic tape, a serial access
medium which has drawbacks for many stock control applications. A large
engineering manufacturer with complex production routines and thousands of stock items would find a random access mode of data storage
much handier, and disc memories or magnetic card flies can pay off here
despite their higher cost.
Some firms use very large computer installations for stock controL A
number of locations in different parts of the world may be hooked together
by communication channels; banks use this approach, with centralized
data processing and remote terminals at branches all over the country.
Chain stores and distributors with area depots often use central processors
and central data storage for stock in conjunction with decentralized data
points. In such systems data inputs or interrogations may arrive at any time
from a number of stations, so that some high-speed automatic equivalent
of the operator is required in the form of an operating system for dynamic
allocation of system resources for multiprogramme working. Job requests
are stacked in a queue, queue priority rules are applied, interrupt facilities
are incorporated to allow information to be given without interfering with
bulk data processing, and when necessary human Operators are summoned
via the console typewriter.
Although successful installations exist, many firms have been disappointed
120
in their attempts to use computers for stock control. Often the hardware
has been oversold and is incapable of producing the work on time.
Computer staff may be technique-oriented or machine-oriented rather
than problem-oriented, committed to the computers rather than to the
business. Control of computer investment and computer staff is often not
as good as control of other sides of the business. Few users could say, as
one chemical manufacturer did in 1971 :
the computer should be treated as a profit centre and like all other
manufacturing plant should be brought to optimum flow sheet output
as quickly as possible. Our 360/65 is manned 24 hours a day, 7 days a
week, and averages 900Jo useful work over the whole period.
Many users would ruefully agree with an American official report: 'after
growing wildly for years the field of computing is now approaching its
infancy.'
However, recent developments in small computers, minis and microprocessors have found many successful applications in stock control. The
increasing versatility and reducing cost of these devices enables them to be
used solely for stock control, thus overcoming the disadvantages of batch
processing. In manufacturing, materials requirement planning systems
require stock control to be integrated with production planning and
control and with purchase ordering, and mainframes operating big systems
are still required.
Manual stock records
Common practice in industry is still to use stock records posted by clerks

working with pieces of paper as a basis for stock control, despite the
increasing use both of computers to automate the paperwork, and of
physical-check methods to eliminate the paperwork.
The records can be housed in various ways, for instance:
(1) vertically one behind another in card index boxes or drawers;
(2) in special loose-leaf books with the lower edge of the records
overlapped to provide a visible index - such as the Kalamazoo range
(3) in visible-edge record trays, agairr with the lower edges overlapped to
provide an index, the trays being wall-hung or cabinet-mounted
(4) in card wheels or rotating drums
(5) vertically in grooves with the edges staggered sideways to provide a
right hand visible edge - the 'Vistem' system.
The basic stock record for control purposes, often known as a bin card
although it is usually kept in the stores office or buying office rather than
on the bin, carries identification of the item at its top and has columns to
enter goods received and issued and the balance on hand, as shown in
Figure 9.1. Sometimes it is convenient to combine this with the buying
record or purchase history, as Figure 9.2.
STOCK
DATE
CHECKED
~~
r--
REF
RESUL T
DATE
f-------
~-
---~+-
----+-~
I
BALANCE
------~---
OUT
-~~-+----
IN
-----
DATE
---+
REF
I
IN
LOW - IONORDER
LOCT'ON
DATE
OUT
PRICE
OESCRIPTION
f--------,---'----T --'---,----J-,----- L-.L____.____L _______L__.L
\.j-- H~
j--~- _j_~ +-
_j
-+--
~~ - ~ t
~-,-
-~-
r---+---t
_L_+- -
-'---t--+------+
--1
r-f--' --
--------------
-------+---
I
BALANCE
10
DATE
11
12
REF
Figure 9.1 Stock record: shows physical quantities, stock check results and dates, and permanent descriptions.
THIS LINE
TITLE IELOW
CMZl-t11
Kalamazoo
ORDER LEVEL
MINIMUM
MAXIMUM
UNIT OF
QUANTITY
CODE
IN
OUT
I
I
BALANCE
OATE
--
OROUI. NO .
TUl MS
D ATE
- + -- H -
REFEIU N CE
IN
1---1-
OESCRIPTION
-1-
-+--
19
II
DA TE
10
---- ---
BA LANCE
----
IN
O UT
II
ll
COD E
--1
BALA NCE:
- --!- - - -'
-1-- ---l
19
1- - - -+ - --+----11- --
REFEIUNCE
--- - - - -ll-- l - ---t-- -t --
PFUCE & TEI\MS
f- -
OUT
---
- -------1 -- t --
I-
1- l
--t- - --11
BA LANCE
-- , , -
----1-- -
SUPPLIE k
I OA.OE~ NO. I SUP. I QU A NTIT'I'
- +-
DATE
- t---- 1- - - -
4,
.L.
Figure 9.2 Stock record: shows physical quantities, consumption record, order record, and permanent descriptions.
LOCATION
II-T -
- - -+-- -1
&
- -----
PRI C.E
OU T
--~:-
IN
---
--+--
REFERE.NC E
-~
____ _
~ --
DATE.
SUPPLIU.
I SUP , I OUA N TITY
-- 1- - -1-
1- -
1.
LOW
I HIGH ----~-h 0 " " ' ~' " l ~IN(
"THii
&UYINCi & STO RES

RE CORD
OltOU LEVEL
MINIMUM
MA XIMU M
UNIT OF QT't'
IN
I OUT
HIGH
IN
OUT
STOCK
I I I
I I
LDW
Iu~ I
LOCiTIDN
-+-- --
+---- I
I
--~
t---~
f'REE
STOCK
DESCRIPTION
10
---+--
II
12
CODE
----
-=rH-r =t--
-+------
--+
---
-+
. ----+ ---+--------+
I =!~'1==!=~----!=---=J=~-~j
I l-+ +t=t.-,
--t--+---+---+--+---- ---+----+----
-+---+--+-+ -----+- --+------+
I I.
-+------+---+-- -+--------+ ---+------+-----+- -----+-----i

f----- +--+---+----+-- -----+------1
--1 -11
BAL
ALLOCATED
QTY
I I I I -l
1=-1-~=t=L~L!=-1=1
---ll--
=t f
t=t
+---- I
BAL.
ORDERED
QTY
---+- ---+~-
----+--- +-- - --+-----------!--- I ~-UJ_=t_J-
BAL
-+-~-+-~+
-+-----tJ-=f--1
----t--+------t-- +----11-------t- -+-------+-- -
I I I
----t~-
!----+---+---+ -----+
---+-------1--- +--+------t---+ ----11----+--- -+ - -
f----
REF.
DATE
--1----+---+---~~+---------+~+---------+ --=!=1~~- ------t- I
REF.
r------t---+--+--+-------+--+----r--r---~~---
DATE
+OR-
QTY
DATE
Figure 9.3 Stock record: shows physical quantities, stock checks, orders, allocations, free stocks, and permanent descriptions.
1HISUNE
nTU IELOW
Kalamazoo
1421-111
ORDER LEVEL
MINIMUM
MAXI
STOCK
CHECKED
MiiMI
UNIT OF
QUANTITY
124
When purchases are to meet a requ1remems programme or a series of jobs

rather than for stock, it is usually necessary to have columns for free stock
and reserved stock, as Figure 9.3.
All these records can show a unit price and be used for pricing issue
documents for costing purposes, if required. A commonly used alternative
is shown for the sake of completeness as Figure 9.4. On this form financial
jo
0
0
0
0
0
0
'-----..
[unitof
quantity
I Dole I
Detail
IReference I
O!Onllly
Rece,ved
Boior.ce
Moimum
-~
M1mmum
--
---
Orderlevel
jft-Et-.cj~~~i~'i
F~i-+==- _-
l~1 --r~.=~t~
-- --
0
0
0
0
0
0
tJ w~.!~r
-- T-
.-----0
Vo'ue
f((
~Fi
------
Stores
tedger
-dr'''h;
:ssurd
-T
- _ll_,Jl
~----~~----
~~~-
f---f---
;!.~;:;:__
"~'
ccw
Go"'""'
"""''"'I
T 111
~-r
t~J-
------~~-_'_'!~~--
' '
Figure 9.4 Stores ledger card. The cost as weil as the quantity is on a
perpetual inventory basis.
columns are maintained parallel to the quantity columns. Keeping this type
of record is laborious. It gives the accountant a great deal of detailed
information, with which however he can do little, and the view is gaining
ground that it is not required to run a business efficiently and is
consequently wasteful in manpower and in money for machines.
Order-level order-quantity
Perhaps the commonest stock control method using stock records is to fix
an order Ievel for each item which is entered on the individual record. Each
time a transaction is posted to the record the quantity on hand after the
transaction is compared with the order Ievel and when stock on hand has
fallen to order Ievel a new order is raised. Often the order quantity is also
decided in advance and entered on the record. The stock clerk advises the
buyer which items have reached order Ievel by use of an order card or
travelling requisition, or eise by making out a daily Iist of items to order.
125
Max-min
The term 'max-min' refers 'to any stock control method in which some
maximum figure and some minimum figure is set for stocks of each item.
Most stock control methods do this so the term max-min stock control is
too general to be useful. S,s is a version of the max-min system in which an
order is placed when stock is at or below the order point, s. Order quantity
is the maximum stock S less the stock on hand[l).
Often max is set at say four months' supply and min at one month's
supply. Such a rule allows for considerable flexibility and discretion in
interpretation, which can work very weil with a competent operator. On
the other hand it can work badly. The rule in any case Ieads to lots of small
orders, because the low value, low consumption items which constitute the
majority get ordered just as often as the big money items. Stockclerks also
reason that they will get into trouble if they allow stock to run out, but they
will not get into trouble if they keep stocks high unless they go above the
laid down max stock figures. Very reasonably they keep stock Ievels
oscillating about Ievels near the upper Iimits instead of letting them swing
from max to min. The result isthat stocks are permanently higher than was
planned and have a poorer stock turn rate than intended. This unhappy
result is achieved by numerous small topping-up orders which are costly to
handle and a nuisance to the buying section. Figure 9.5 illustrates the
different patterns which are possible within the Iimits set by maximum and
minimum stock Ievels.
MAXIMUM STOCK: 3 MONTHS SUPPLY
AVERAGE STOCK
-+-~--\'--t-
z<(
zt M~THS ~PPLY
AVERAGE
-\- + -\-~ STOCK
-\-1 ~
2iMONTHS SUPPLY
~ ~ ~
:I:
::c
U
MINIMUM STOCK: 1 MONTHS SUPPLY
~~----~------~~~~~~~~~~~~~~----------Vl
TIME IN MONTHS
Figure 9.5 Max-min: three stock patterns with the same Iimits of
maximum stock, three months; minimum stock, one month.
The same praiseworthy desire to avoid shortages Ieads to hidden
overstocking by overestimating usage rates. If minimum stock is supposed
126
tobe one month's supply, then it should be 100 parts for an item used at an
average rate of 100 parts a month. But it could be taken to be 200 if in
some months demand has been as high as this. Using the maximum
monthly demand instead of the average monthly demand amounts to the
provision of an extra buffer stock.
Other shortcomings in stock records which are often seen include:
posting delays which keep stock control action lagging weeks or months
behind the physical situation it is intended to control, making inflated
buffer stocks all too necessary; posting errors which make stock control
action inappropriate because based on a wrong picture of the physical
situation; and using outdated figures for max and min - translating a max
of three month's supply into a figure of 300 when 100 a month was the
usage three years ago.
Maximum and minimum Iimits can also be applied to buffer stocks.
When parts and materials are delivered regularly against schedule orders
and bulk supply arrangements, it is necessary to cover the minor variations
which occur between actual usage and planned usage, and also between
actual quantity delivered and scheduled quantity. It is desirable to do this
without too much calculation and comparison and alteration of schedules.
Suppose an item is scheduled for supply at the rate of 1000 a week, and a
buffer stock also of 1000 parts is to be carried. Then Iimits of 1500 max
and 600 min could be set, and as long as buffer stock stays inside these
Iimits no action is taken to adjust deliveries from the supplier. If buffer
stock gets above 1500, the next delivery would be delayed, or reduced in
amount. Max-min buffer stocks in this situation provide some slack in the
system, reducing administrative effort without sacrificing the high stock
turn rate of a closely-coupled supply arrangement.
Cyclic ordering
In its simplest form the periodic-review system of stock control, or cyclic

ordering, is a kind of imprest system. Stock is reviewed at regular intervals
so arranged that different stock groups come up for review on different
days. Instead of fixing the order quantity and allowing the interval between
orders to vary with consumption variations this system fixes the interval
between orders and allows the order size to vary with consumption
variations. (In a strict EOQ system both interval between and size of orders
alter if demand, the value of expected consumption, changes.)
The size of order, in the simplest version of periodic-order, is dictated by
the review period; if we review monthly we order a nominal month's
supply at a time. The initial order is for enough to last until the next order,
placed a month later, can arrive: expected consumption during the review
interval plus Iead time, plus buffer stock. Subsequent orders are normally
for the actual amount used in the previous month to prevent stock getting
out of line.
Stock contro/ practice and procedure
127
The review period sets a lower Iimit on order size, but does not have to
set an upper Iimit. Periodic ordering is a good system when a group of
items come from a single source, so that savings in price, paperwork and
transport can be made by combined orders. A simple example is the system
adopted by one firm to control stocks of paper used on a stencil duplicator.
Eight items were stocked - two sizes in four colours - and consumption
ran from half a ream a month for the least popular item, to eight reams a
month for the most popular item. There was a price break at 20 reams, and
as consumption of all items came to 20 reams in five weeks, this set the
review period. Every five weeks stock was reviewed, and a 20-ream order
placed. All items were reviewed at five-week intervals even though the most
popular was ordered five times as often as the least popular, because items
could be assorted for quantity rates.
The base stores of a large engineering factory carried bulk stocks of
several thousand items, over half of them manufactured in the company's
own machine shop, press shop or foundry. Unit Ioads in pallets only were
issued, received and stored. Once a month everything in stock was listed on
pre-printed sheets, and clerks working from simple rules calculated
requirements and filled in an 'order' column. This took about seven days
each month. Executives then spent one day reviewing the Iist and making
adjustments which could not easily be covered by simple rules - for
instance grouping items for joint manufacture, saving set-up time. (This
was why all items were shown every month, although only major items
were ordered monthly.) This systemwas said to work better and require
less clerical effort and less effort by senior staff than the max-min system
which it displaced.
Such systems provide tight control of costly items, and enable supply to
match a complicated variable demand generated by periodically up-dated
and amended:production programmes. When suppliers need to know your
requirements: at regular intervals to manage their business effectively
because you are taking a large part of their output, periodic review systems
can be used to adjust delivery rates against schedules.
But even the exacting requirements of mass production factories include
a great number of routine low-cost items which are hardly worth buying to
exactly predicted programmes. The review period need not, and th; order
size in terms of months covered should not, be the same for all items.
Critical major items need monthly or fortnightly review; non-critical minor
items, can be dealt with on a six-month or twelve-month basis.
lmprest stock control
The imprest or topping-up system is a method of stock control in which
stocks are replenished up to a Ievel called the imprest Ievel after reviews at
regular intervals, no running stock records being kept. The name is derived
from an old system for controlling petty cash, postage stamps, etc.: the
128
person responsible submits to the cashier at regular intervals details of his

disbursements and receives enough cash to bring his cash float back up to
the 'imprest' figure.
Sub-stores replenished from the main stores, retail shops drawing
supplies from central warehouse, garages stocking a range of spare parts
obtained from the manufacturer whose vehicles they sell and service these are naturals for imprest methods. An ideal application is when a
range of items obtained from a single source is stocked in quantities small
enough to be checked visually. Made-to-order goods, items with complicated purchasing conditions such as variable prices or long lead times, are
not so suitable for imprest methods.
The sole stock control document is a pre-printed sheet showing for each
item its description, code number, and 'normal' or 'target' stock Ievel.
(Normal or target stock Ievels are revised when supply or demand
changes.) Two blank columns are headed 'quantity in stock' and 'quantity
required'. At regular intervals - perhaps one a week - somebody walks
round with the sheet, checks what is on hand and emers it in the 'quantity
in stock' column. Then the 'quantity required' column is completed by
inserting the amount which will bring actual stock back up to normal or
target stock. Adjustments are made if demand is expected to be abnormally low or high. Dated and signed, the document now serves as a stores
requisition or a purchase indem. Extra blank columns enable the same
sheet to be used several times over, and past consumption figures
(calculated from past sheets) are sometimes shown as a guide to ordering.
The term imprest stock is also sometimes used in connexion with stocks
kept at the purchaser's premises but replenished by the seller as required.
These can be on a consignment basis, i.e. not paid for until used or sold.
Two-bin systems
Another group of no-paperwork systems for controlling stock which are
continuous rather than periodic are grouped under the general heading of
'two-bin systems'. As the name suggests, the basic idea is to segregatestock
of an item into two bins - the working bin and the reserve. When the
working bin is empty, the storeman switches to the reservebin and at the
same time advises the buyer, who then considers whether to re-order.
Two actual bins are sometimes used. Two notional bins are more
common: for instance a line may be painted round the bin at a height
corresponding to order Ievel ('Ruled-bin'), or an order card may be
inserted into a pile of stock at the appropriate height. The term 'two-bin' is
best reserved for stock control methods which involve some kind of
physical division of stock into action or trigger Ievels, rather than those
which involve a purely conceptual division.
Visual control is the name ICI subsidiaries and associates use for an
interesting version of this, adopted by many firms not connected with ICI.
Stock control practice und procedure
129
This relies on splitting up physical stock and triggering re-ordering by the

physical act of breaking on to a reserve stock. Stock can be split into three
parts, not two- identified by colour codes, The three parts are free stock,
corresponding to the working bin on the old two-bin system, and order
Ievel stock and danger-Ievel stock, corresponding together to the reserve
bin. A commonly used colour coding is green for free stock, yellow for
order Ievel, and red for danger Ievel.
Fora few items there may be three bins painted the appropriate colours.
Fora few items there may be a single bin, with red, yellow and green bands
of colour inside corresponding to the stock Ievels which require action. For
many items the pieces are grouped into parcels by means of coloured
self-adhesive tapes. Brooms, belts, and items normally delivered in containers such as cans of paint and boxes of screws are taped together in
bundles using the appropriate coloured tape. As long as storemen are
working on the free stock, no stock control action is required. But when they
have to break into theyellow-coded order Ievel stock, they initiate an order by
sending to the buyer an order card kept on front of the bin. If they have to
break into the red-coded danger Ievel stock, they send an urge card also kept
on the front of the bin to the buyer so that the order can be chased.
This apparently simple procedure is compatible with sophisticated
methods of arriving at order Ievels and order quantities. The EOQ
calculated according to the analysis in the last chapter is entered on the
order card. The buffer stock or safety stock becomes the danger Ievel and
is coded red. Buffer stock plus expected consumption during Iead time
equals order Ievel, so that order Ievel stock, coded yellow, consists of
expected consumption during Iead time.
Working stock is not normally recorded with this system, although some
firms do keep a record of reserve (order Ievel and dang er Ievel) stocks which
have not been broken into. The stock control documents are two cards
kept on front of the bins or racks; an order card or travelling requisition,
showing description, code number, order Ievel and order quamity for the
item, and with columns for date, stores manager's initials, date ordered,
order number, and buyer's initials; and an urge card used if danger Ievel
stock has to be broken into, which shows description, code number,
danger Ievel, date, stores manager's initials, and result of urging.
The stores supervisor or manager can quickly check that the system is
working properly. Walking round the stores, he can see at a glance whether
an item is above or below order level. lf below, he can see straight away
whether the order card is away in buying, or has been returned with details
of an order placed, or whether nothing has been done.
Visual stock control gives better control at Iower operating cost where
suitable. Although unsuitable for critical items with complicated requirements planning or purchasing considerations, it provides an economical
and positive system with many applications in the !arge routine area of
stock control.
130
The va/uation of stocks

Part of the financial accountant's responsibility which directly affects the
work of those purchasing officers who have authority over the administration of stocks, is the valuation of stocks. lt is agreed that stocks should be
valued at cost (or at net realizable value in some cases, where that is lower),
but it is not widely agreed how cost should be calculated.
This is a controversial area. Since stocks often constitute a substantial
part of the working capital of a business, the basis of valuation can
substantially affect the net worth of the business. Differences as large as
i4m can exist between one legitimate view of the worth of the stocks of a
business, and another view.
Three well-known approaches to the valuation of stock and the costing
out of issues from stock are:
LIFO - last-in first-out
FIFO - first-in first-out
AVCO - average cost
The choice of method makes a difference to recorded pro fit when lots are
bought successively at different prices. Three lots sold by a business, out of
six lots bought in successive periods of time, would for accountancy
purposes be treated as the last three lots bought, under LIFO. They would
be treated as the first three lots bought under FIFO. Under AVCO an
average price would be derived and applied to the transaction.
Stock rotation
This is a matter of accountancy and has nothing to do with stock rotation.
LIFO does not mean that the most recent acquisitions should be disposed
of first. It simply means that the most recent cost figures should be used, in
stating the cost of issues or sales. Reported profits and stated value of
business can be substantially affected by the basis chosen for valuing stock.
Mr S Tooth started business as a sugar importer in June, and by December
he had bought six lots on a rising market, as follows:
Tonnage bought
10
10
10
10
10
10
60
Price per ton [

24
27
30
40
36
41
Cast, [
240
270
300
400
360
410
f:1980
He then so1d thirty tons at !:50 ton. How much profit did he make?
131
LIFO, FIFO and A VCO

lf he uses the LIFO method, the cost of the 30 tons sold will be f1170. As
the proceeds are f1500, his gross profit is f330. If he uses the AVCO
method, average cost per ton is calculated by dividing 60 into 1980, giving
f33. The cost of the 30 tons sold is therefore f990, and gross profit is f510.
lf he uses the FIFO method, the cost of goods sold is calculated as f810,
and profit is consequently f690.
The initial reaction may weH be astonishment that three recognized
methods of valuing stock can lead to differences in stated pro fit as big as
this. FIFO profit is more than double LIFO profit. A second reaction may
be: where does the extra profit come from?
It comes from stock. If we simplify S. Tooth's balance sheet by leaving
out everything which isn't directly relevant, it looked like this immediately
before the sale:
Balance Sheet A
Capita1
2000
1980
20
Stock at cost
Cash at bank
f2000
:2000
Immediately after the sale his LIFO accountant would have prepared this:
Balance Sheet B
Capita1
Profit
2000
330
810
1520
Stock at cost
Bank ba1ance
f2330
f2330
Unfortunately for him, his AVCO accountant would present this picture:
Balance Sheet C
Capita1
Profit
2000
510
990
1520
Stock at cost
Bank balance
f2510
f2510
While a FIFO accountant would come up with still another picture:

Balance Sheet D
Capita1
Profit
2000
690
f2690
Stock at cost
Bank balance
1170
1520
f2,690
Clearly FIFO takes profit into account sooner on rising markets, and
UFO takes account of it later. A VCO takes an intermediate position.
Fundrzmentals ofpurchasing and supply
132
Falling markets
The opposite is the case on falling markets: as we can see if S. Tooth had
made successive purchases as follows:
Tonnage bought
Pricc per tun [
10
10
10
10
10
10
41
60
36
40
30
27
24
Cost, [
410
360
400
300
270
240
i1980
Let us first make the unlikely assumption that he so1d 30 tons at f50 a ton
at the end of this time. On a UFO basis his profits wou1d be f690, on an
A VCO basis his profits would be f5l0, and on a FIFO basis it would be
f330 - a complete reversal.
On a falling market, the UFO method credits profit sooner, and the
FIFO method takes it later. The A VCO method gives the same results in
this example. The balance sheet on a UFO basis would now be as balance
sheet D above, and the FIFO balance sheet would be as B.
A more likely assumption would be that he sold his 30 tons at a lower
figure- say, f33 a ton. Now his FIFO accountant would inform him that
he had made a loss, amounting to f180. His UFO accountant would be
equally confident that he made a profit, also amounting to f180. According to his A VCO man, he wou\d have made neither a loss nor a pro fit; he
would just have broken even.
Of course while firms are free to select the method of calculating cost
which they believe they can justify as appropriate, they arenot free to chop
and change the basis from one accounting period to the next in order to
fiddle their taxes. This does not mean they can never make a change. When
one company takes over another a change is quite often made. UFO is
however not much used and does not meet with Inland Revenue approval.
The value shown for UFO stocks refers to the procurement cost of those
stocks in some more or less distant period of time rather than in the current
time period and this makes the accounts unrealistic.
Lang term contracts and overheads
It is difficult to arrive at a fair treatment of stocks and work in progress on
long term contracts and for the allocation of overheads. Long term
contracts are those which take more than a year to complete. The
traditional view was that no profit should be taken into account until the
contract had been completed, and work in progress should be shown at
cost. But it is now agreed that this view results in a pro fit and loss account
133
showing results relating to contracts which have by the accident of time

been completed by the year end rather than a true and fair view of activities
during the year. The recommendation is that Jong term contract work in
progress should be stated in accounts at cost plus attributable profit Jess
anticipated Josses.
Case history 9.1: dyestuffs factory
One !arge dyestuffs manufacturing division of a multinational company
achieved substantial savings by applying techniques described above. The
firststage was to devise an 'unburstable' eight-figure materials code for the
23 000 items held at 45 000 stocking points in the Division's factories.
Considerable variety reduction was achieved during coding; 55 000 stocking points were reduced to 45 000. Decisions as to what to stock were tied in
with coding allocations; storesbin card, purchase record card, and buyers'
reference were prepared at the same time as a new item was allotted a
coding, and the existence of a coding implied authorization to carry stock.
The Division had a standards engineer who decides or defines what shall be
standard in the branch of the business, and much of his time was spent on
standardizing stock items.
Second, economic order quantities (EOQ's) were adopted for reordering. This change alone cut stock in half without affecting service.
This substantial stock reduction enabled overflow stock to be brought back
into the stores proper, and gave elbow-room for the third stage: storage
fitments were redesigned for fast access rather than to cram as much
material as possible into restricted space.
Hand-high racks with bins tailored to their contents replaced fourteenfeet-high racks with big fixed bins. Stock Jocation was altered, with fast
movers near the issue points and slow movers in the most distant positions.
Reduced issue times and faster stores operation was the immediate gain.
Fourthly stores records and stock control routines were reformed.
Previously perpetual inventory card records had been used both for stock
control and for pricing requisitions. Keeping these records up to date
entailed posting about 1 400 000 issues and 140000 receipts a year and
recalculating the item balance after each transaction. Errors were inevitable, and apart from their deplorable effect on stock control effectiveness,
their detection and prevention took up a great deal of time in stocktakings.
Altogether twenty-four Jedger clerks had been occupied with this work,
seven of them using accounting machines costing about f2000 apiece.
Almost all this clericallabour was cut out by switching to visual control.
Instead of ledger clerks telling the buyers when a stock balance figure on a
record has dropped to an order Ievel figure, now storemen tell the buyer
when actual stock has been depleted to the point which requires the
contents of a yellow bin to be drawn on, or a yellow tape segregating order
Ievel stocktobe broken. Notification is simple and positive; storemen pass
134
the permanent requisition from the bin to the buyer, who sends it back
after re-ordering.
The Supply Department saved fl2000 a year, mainly by discontinuing
perpetual inventory and reducing clerical staff by a tenth. Further savings
amounting to {15 000 a year were claimed in the stores, which carried lower
stocks and employed fewer storemen while actually improving service to
the factories.
References
Baily, P.J.H. (1971), Successful Stock Control by Manual Systems,
Gower Press, London.
Further reading:
Thomas, A.B. (1968), Stock Contra/ in Manufacturing Industries, Gower
Press, London.
Barrett, D.A. (1969), Automatie lnventory Control Techniques, Business
Books, London.
New, C. (1973), Requirements Planning, Gower Press, London.
135

(1) Welsh Electrical Manufacturing Co. Ltd propose to appoint a stock
(2)
(3)
(4)
(5)
(6)
(7)
control specialist because of dissatisfaction with current inventory

performance. Responsibility for stock control is at present divided
between Purchasing, Production Planning and Control, Stores, and
Sales. You are required to draw up a preliminary description of his
job.
Explain ABC or Pareto analysis with the aid of a diagram, and
outline its application to the design of stock control systems and
records.
One form of stock record shows orders, allocations, and free stock in
addition to physical issues, receipt, and balance. Draw a form of this
kind and enter the following transactions on it:
29 Nov. Opening stock 200. Order P5500 placed for 1000
30 Nov. 500 allocated, batch B920
1 Dec. 50 issued (not previously allocated), requisition R230M
8 Dec. 1000 received, order P5500, GR827
9 Dec. 500 allocated, batch B921
16 Dec. 500 issued, Batch B920
(Note: 'free stock' includes outstanding orders).
Give a short general account of computer applications in stock
control and storage; or
describe in detail one specific computerized stock control system.
Explain the use of (a) moving averages, and (b) exponential smoothing, for routine forecasting of stock requirements, mentioning any
advantages and disadvantages.
'So far as dependent demand streams are concerned, almost all the
assumptions of traditional statistical inventory theory are invalid.'
(New.) Explain this statement and indicate what could be used instead
of traditional statistical inventory theory.
A certain stock item is bought on six-month contracts with deliveries
every four weeks. In successive four-week periods, stock Ievels
immediately before and after a delivery are as follows:
Period
Stock before
Stockafter
Calculate:
(a)
(b)
(c)
(d)
0
50
250
30
230
2
0
200
3
30
280
4
90
290
5
80
230
6
50
250
average buffer stock

average stock
service Ievel
usage rate.
(8) A company purchases 1500 castings a year for use in production at a

constant rate. The castings cost flO each to purchase. The cost of
136
placing an order is f15 and the cost of holdingstock is 20o/o of average

stock value per year. The Iead time is 4 weeks. A buffer stock of 60
castings is to be held. The company works a fifty week year.
Determine:
(a)
(b)
(c)
(d)
the
the
the
the
economic order quantity

number of orders to be placed in a year
order Ievel
total annual cost for the item.
(9) (a) ltem X82 is used at a constant rate of 400 a year, and is available
at f1 each. Ordering cost is f0.60 per order and stockholding cost
30% per annum. What is the EOQ?
(b) The item is also sold in packs of 50 at {48 per pack, andin crates
(one crate = 8 packs = 400 parts) at f380 the crate. Show whether
it should be bought loose, in packs or by the crate.
(10) 'Whenever we take over a business we find invariably that we have to
throw out two-fifths of the items on the shelves- the accumulation
of many years' obsolescent stock'. Outline a systematic procedure to
prevent this situation arising with stocks of materials and components
in a factory.
(11) Stocks in a business often include: purchased parts and raw materials,
semi-manufactured parts and work in progress, finished product held
for sale, maintenance stocks and works and office supplies. In view of
this, discuss the relationship between the stock control function and
the purchase department, production planning and control, sales
department and other departments.
(12) You have been asked to evaluate a suggestion submitted by an
employee that minor items be omitted from bills of materials and
stocked as open inventory on the shop floor. What items would you
regard as particularly suitable, and what items as particularly unsuitable, for this treatment? How could you arrange for such open-access
stocks to be replenished as necessary without keeping stock balance
records?
(13) (a) Distinguish between:
(i) shortage and stockout
(ii) supplier's delivery period and Iead time
(iii) active stock and buffer stock.
(b) ltem X has an annual usage value of flOO. Calculate the EOQ,
given that Stockholding cost is 15o/o of average stock value per
annum, and procurement cost is f0.30 per order.
(c) What would the stock turn rate be for this item, ignoring buffer
stocks, if the EOQ is ordered regularly?
(14) Explain how standardization and variety reduction in the range of
things stocked can help in achieving the objectives of stock control,
and review the practical difficulties such a program often enounters.
Principles ofinventory management
137
(15) Give an account of the 'imprest' or 'topping up' system of stock

control, indicating some types of stores for which it is particularly
suitable.
(16) Explain the uses and limitations of either:
(a) colour coding for stock identification, or
(b) check digits in material codes.
(17) How would you define inventory management? Explain how it differs
significantly from stock control, stock management, and stores
operation, or show how in your view it does not so differ, giving
reasons.
(18) You have joined Taj Mahal Ltd as a management trainee and your
first assignment is to develop two coding systems, one to identify each
cost centrein the company's nine factories, and the other to code each
company product, indicating which it is and what factory produced it.
Seven of the factories are in Britain, one in France and one in
Holland. A factory has at least seven and at most twenty departments. Any department has from one toten cost centres. There are six
product groups, the smallest comprising 20 products and the largest
comprising 100 products. Suggest a solution.
(19) What bin record would you recommend for use with a Visual Control
system in which no continuous record of stock Ievels is kept?
(20) List: (a) two reasons for physically counting or checking stock
(b) two types of storekeeping error which could cause stock
records to be incorrect
(c) two types of error which occur in posting manual stock
records
(d) two stock check errors which would produce apparent
discrepancies.
(21) Explain three of the following terms:
(a) active stock; (b) buffer stock; (c) consignment stock; (d) dead
stock.
(22) Can stock be controlled by 'Visual Control' methods without continuaus record of stock on hand, when the quantity likely to be used in
the Iead time exceeds the normal order quantity? Explain your
ans wer.
(23) As a management trainee with GB Ltd you have just been assigned
the task of 'sorting out thc stores', the previous manager having just
retired early as the result of illness. The main problems in the stores
are explained to you as: excess stocks (general manager); insufficient
stocks and too many shortages (production manager); inaccurate
records and low stock turn rate (accountant); too much work and not
enough pay (stores personnel). What action plan would you adopt?
PARTTWO
Practice and techniques
10
Purehase specifications and
quality control
Many products are supplier-specified. The purchaser needs to select from

what is available, but few problems arise in specifying or in controlling the
quality of purchased goods once the selection has been made, provided
that what is required is within the range of what is commercially available.
Problems do arise, however, with such supplier-specified goods as major
items of capital equipment and complex products which are developed to
meet purchaser requirements. Both supplier and customer are involved in
the specification, although in different ways.
Many goods are also purchased to customer specification. Here problemsoften occur, in drawing up the specification, in selecting the supplier,
and in controlling the quality of supplies. The distribution industry
encounters them as weil as the manufacturing industries, and it would be
difficult to teil from internal evidence whether the following remarks were
made by a vehicle manufacturer under pressure from customers and from
governments to improve reliability and safety as weil as performance in
their products, or by some other manufacturer:
The cost of poor quality, in terms of wasted manpower, production,
transport, handling, and the inconvenience to customers, is very heavy.
The fact that we are efficient in relative terms in maintaining good
quality does not dimish in any way the need to identify the main faults
and eliminate them as far as humanly possible ... Together with our
suppliers we are working to ensure that quality production and quality
control are improved through better methods, better inspection, better
training, and above all through greater awareness and a greater sense of
involvement among both management and staff.
142
In fact they appear in the Annual Report and Accounts for 1972 of
Marks and Spencer Ltd, a large chain store with a good name for quality
merchandise.
The part which purchasing officials play in specification and quality
control varies considerably between organizations. lt may also vary in one
organization according to the type of purchase and the nature of the goods
in question. In some organizations, it is changing; 'price isn't everything
any longer', one job advertisement for purchasing staff stated; 'quality,
supplier relationships, and long range planning weigh every bit as heavily
in every buying decision'. The fact is that price cannot rationally be
considered except in connection with quality in many transactions, and
consequently purchase decisions cannot often be isolated from quality
decisions.
Purehase specijications
Every purchase order must of course indicate what is required in some way
intelligible both to buyer and seller. For many low-value standard products
there is no problern in describing requirements. It is for technically critical
or high-volume or non-standard requirements that specifications are
normally required. The cost of writing detailed purchase specifications,
thoroughly considered and properly authorized, for every single thing that
is bought, would be prohibitive.
Specijication by sample is widely used for certain applications. Such
characteristics as feel, finish and colour car. be specified in other ways but
are often specified by sample. Complicated minor components are sometimes specified by sample to save the time and trouble of making sets of
drawings if the quantity required is small. Reference libraries of samples,
both of current purchases and of possible alternatives, are kept by some
purchase departments, for the convenience of colleagues and as an aid in
negotiating with suppliers. Sampies however can deteriorate; they may not
be or stay uniform; they have obvious drawbacks when several people need
to use them.
Specijication by maker's brand is a simple and convenient method with
many applications. Its drawbacks for repeat ordering are twofold. Firstly,
manufacturers sometimes change their internal specification without
changing the brand name and without notifying all present or possible
customers. An electric motor manufacturer did this and although the
amended specification was technically superior, it had different mounting
dimensions. One customer, a machine tool manufacturer, lost four weeks
production as a result. Secondly, the buyer is stuck with a monopoly
supplier, which has commercial disadvantages. A machine tool firm
changed from maker's brand names to British Standard descriptions for
steel, and found that, to quote one instance, they had been buying a single
description of alloy steel under three different brand names from three
Purehase specifications and qua/ity control
143
different sole suppliers. The change did not reduce invoice price but it
brought commercial advantage by reducing the range of stock items and
increasing the choice of supplier, giving more room for manoeuvre with
less stock investment.
Of courseit is proper that when a supplier provides technical advice and
help in the design process, or even designs a component himself, he should
get the business. But not necessarily for ever; these situations should be
considered individually on their merits.
Approved supplier lists
An alternative to brand specification in certain cases, and to any formal

specification in others, can be a Iist of approved suppliers for technically
exacting or peculiar purchases. Of course many purchasing departments
use approved supplier lists internally. In a !arge department a buyer may
have to obtain his section leader's approval for a new supplier, and in
technically or commercially critical cases there may be a series of tests to
hurdle before a new name is added to the approved supplier Iist. But we are
here speaking of lists approved by the specifier rather than the purchaser.
Both the amount of detail which has to be given in the specification and
the amount of inspection which has to be applied to the product are
affected by the supplier's performance in respect of quality and reliability.
Such lists should be kept confidential otherwise suppliers will know what
competition they are up against. Before inclusion on the approved Iist, a
supplier's establishment should if possible be visited, and his rejection
record assessed. But obviously his delivery performance, after-sales and
service record will also be considered, so that it is hard to separate
commercial reasons for selecting a supplier from technical reasons.
'Neither the approved supplier Iist nor the specifications should be
looked on as a device to subjugate the buyer to the engineer,' writes
one advocate of this poor man's substitute for specification of the
product. 'One of the objects of a specification is to codify and
standardize requirements so that the buyer can get quotations and
samples from the wirlest possible market. It is assumed that the engineers
would have to prove their case for not approving any suppliers who put
up satisfactory samples. lt would be the buyer's job to put forward new
names for approval whenever he thought necessary[l].'
Certainly it is the buyer's job to select suppliers who can meet requirements, having regard to all factors including quality capabilities. Buyers
should know when to consult technical staff in assessing potential suppliers.
Formal written specifications
Formal written specifications detailing exact requirements for major
144
purchases are very useful in standardizing and describing requirements especially to complex organizations. Such specifications make for clear-cut
divisions of responsibility between designer, specifier, purchaser and user;
they may improve the purchasing position by increasing potential competition; and they provide an opportunity to reconsider the range of purchases
which often Ieads to considerable variety reduction.
Whenever possible standard products rather than specials, and public
standards and specifications rather than those peculiar to one organization, ought to be adopted, since this amounts to variety reduction on a
national scale, with more efficient use of the country's resources as one
result - and easier purchasing as another. But there are many purchases
for which public standardsarenot available or not suitable, which can still
be standardized within an organization with economic advantages in
saving time, obtaining consistent quality, and reducing needless variety. lf
possible these company standards should be based on some accepted public
standard which should be mentioned in thefirst paragraph of the company
standard; e.g. 'This specification covers brass strip generally in a..:~:ordance
with BS 265-1936 hard temper, but specially flat and with closer to!erances
for thickness'. The range of specifications available from the British
Standards Institution, the American Society for Testing Materials, and
several other such public bodies is very wide.
The case for standards has been put in a BSI Ieaflet:
(I) In the factory, standards make for increased efficiency, !ess waste of
men and materials, higher productiviry through Ionger runs.
(2) Standards relieve designers and engineers of humdrurn routine,
allowing them to concentrate all their efforts on creative work.
(3) Existence of good standards reduces paperwork in the offices,
simplifies buying, costing and cataloguing.
(4) Standards make for easier stocking in shops, warehouses and
factories.
This shows how standardization can facilitate simpler buying, better
stock control, easier cataloguing and less paperwork. Jt can Iead to fewer
stock items and less waste of materials, alternative sources and more
competition, bigger orders at lower prices. Because of this many supply
departments have taken the Iead in pressing for standardization and the use
of nationally accepted specifications.
Specifications for purchase rnay specify composition or manufacturing
rnethod. They may specify test procedure and sampling so as to establish a
systematic basis for accepting or rejecting goods. They may stipulate types
and sizes; they may be intended to secure interchangeability by specifying
dimensions and tolerances. They may attempt to provide a basis for
assessing fitness for purpose. In any case they should state precisely what is
required, avoiding vague phrases; should be written clearly and unambiguously; should be specific and positive rather than generat and hortatory.
Purehase specifications and quality cantrot
145
'either specify results desired and 1eave methods and properties to the
manufacturer, or eise specify methods and properties desired and assume
responsibility for the result' isanother piece of good advice[2]. An example
of a well-written specification for black whole pepper is this:
Details
Shall be the dried fruit of Piper Nigrum L.
Preferred grade - Sarawak Special.
Will also accept - Sarawak sealed
Ceylon No. 1
Lampong F.A.Q.
Black Pepper shall be subject to our approval of sample before delivery.
General requirements:
(1) Shall have the characteristic colour and appearance of good quality
whole Black Pepper.
(2) Shall have the full characteristic odour and flavour of Black Pepper,
free from mustiness and all other off odours and off flavours.
(3) Shall be free from all harmful foreign matter such as stones and shall
contain not more than 207o by weight of foreign seeds and no more than
0.1% by weight of harmless foreign material.
(4) Shall be free from contamination by rodents or insects.
(5) Shall contain not more than 1.5% of ash insoluble in hydrochloric
acid.
(6) Shall contain not more than 5 ppm Arsenic
HO ppm Lead
(7) Shall comply with the requirements of the Food and Drugs Act 1955
and all subsequent amendments and conform to B.S.4595: 1970.
Standards organizations
Standards are drawn up and standardization is effected by organizations

both individually and collectively. The process can be thought of as
occurring at several Ievels.
At ground Ievel, individual organizations such as manufacturers, contractors, distributors, local authorities and others work internally on
Standards.
At the second Ievel, members of a particular industry collaborate in the
production of industry standards. The SAE standards for steel produced
by the American Society of Automotive Engineers are an example. In the
UK the Axminster standard drawn up by the trade association for the
carpet industry provides a further example; but since the powers of the
trade associations were curtailed by legislation on restrictive practices, it
has become customary for an industry to use the facilities of the national
Standards body.
146
At the third level, standards are drawn up and promulgated nationally.

The British Standards Institution (BSI) is the national standards body for
the UK. Originating in 1901, it was at first concerned with the engineering
industry but now caters for any industry, as well as for non-industrial areas
such as education, science and information processing.
Organizationally, the BSI has a permanent secretariat which services
some 25 000 people working in a voluntary capacity as members of BSI
committees and working parties. Standards are drawn up by specialist
committees and are circulated to interested parties for comment and
criticism before final versions are agreed. Manufacturers and distributors
are well represented, and the voice of the consumer is heard to some extent.
Other countries have similar bodies, for instance AFNOR (the Association Francaise de Normalisation) in France, and collaboration between the
national bodies to produce international or world standards provides a
fourth or highest level for the process of standardization. lt seems likely
that the difficulty of standardization increases with each level and is
greatest at the international level. The advantages in facilitating world
trade have to be offset against the difficulty of reconciling views, the time
and effort required, and the disadvantage of changeover costs.
For instance, electrical goods such as shavers, power drills, refrigerators,
radio sets, televisions and vacuum cleaners are traded freely between
European countries, and it would be advantageous if all countries used the
same colour coding for electrical wiring and the same shape and size of
power plug and socket outlet. The colour coding was standardized in the
seventies, after years of work. Standardizing power plugs involves much
higher changeover costs in those countries which have to change their
codes of practice.
Standards organizations work together internationally in such bodies as
CEN, the European Committee for Standardization, which issues multilingual European standards, and ISO, the International Organization for
Standardization.
Purehase qua/ity control

Specification quality is the particular set of characteristics or attributes
specified, the grade selected, the standard set. Conformance quality is just
as important since there is no point in specifying particular dimensions and
tensile strengths if the supplier's goods do not conform to specification.
The right quality is not necessarily the best obtainable, nor is it necessarily
the cheapest on the market, although it may happen to be either. lt is the
quality which is judged fittest or most appropriate for the particular
application.
The purchase department does not, subject to exceptions in certain
special cases, carry primary responsibility to define the quality required. 'lt
is the business of the technical staff to define or design what is wanted'
Purehase specifications and quality control
147
and of the purchase department to handle the commercial side of

procuring it.
The department which does carry primary responsibility for quality
definition (it is usually one department, in the interests of uniformity and
good order, although all users are concerned with the quality of what they
get) may be the chief engineer, the chief chemist, the engineering design
department or the laboratory, or a standards engineer or materials section
responsible to the chief engineer, depending on the type and size of the
organization.
The purchase department has, however, a secondary responsibility in
connexion with quality definition. In the case of major items for which
standards or specifications are drawn up outside the purchase department,
the purchasing people have a secondary responsibility to inform and assist.
They should inform the specifier of commercial alternative materials; the
effect of market structure; procurement policy where relevant; and availability. They should assist him to arrive at the best specification by making
available to him their special knowledge of the market. In the case of
minor items, it may not be economic to draw up standards or specifications
outside the purchase department; yet the buyers must stipulate to the
suppliers what grade they want, so that the purchase department acquires
by default the authority to define inside the department what quality the
supplier must supply.
There are particular cases where the buyer's task is in fact confined to
procuring the specified quality without having any say at all in specifying
it; but they are unusual. In general, price and quality are closely related;
alternatives which differ in price differ somehow in quality, so that the
basically technical activity of quality specification gets inevitably involved
with the basically commercial activity of buying.
Just as there are particular cases where the buyer has no say in quality,
so there are cases in which he appears to have all the say. Specialist buyers
of paper, wool, timber, typewriters, packaging, may know far more about
their speciality than anyone eise in the organization, and they are often
responsible for choosing the right quality as weil as buying it. General
buyers work to written-down specifications more than specialist buyers,
perhaps, but still often have a wide margin of discretion. lt has been
estimated that 700Jo of purchase requisitions do not state what quality is
wanted. Purchasing is relied on to get the right quality. Of course this is
not by ny means the same thing as allowing Purchasing a totally free hand.
The representatives of design or user departments must have first say in case
of dispute. In the absence of dispute the onus is on the buyer to find and
obtain the right quality. In doing this he is not acting on his own account
but as the agent of his company, and he makes his choice in the company's
interests not from some sectional angle, just as a standards engineer or a
product design department will do with the items which they specify.
Consequently purchasing officers can never know enough about the
148
nature and sources and uses of what they buy, about the real needs of their
organization and the alternative ways of meeting those needs, about
technical suitability as weil as about price.
Four stages are involved in the process of controlling purchased quality:
(1)
(2)
(3)
(4)
define the right quality for the particular application,

select suppliers able and willing to meet requirements,
ensure selected suppliers understand what is required,
check goods delivered, taking appropriate action when called for.
The selection of suppliers capable of meeting requirements and willing to

do so, is dealt with in greater detail in Chapter 12. In the case of new
suppliers, it may be possible to satisfy oneself as to their capability on the
basis of their reputation. Other customers may be asked for reports. Or a
special survey may need tobe made by visiting the supplier's establishment
and examining his production equipment, quality control equipment and
methods, and the standard of work going through. In the case of existing
suppliers, inspection records should be used so that capability can be
assessed fairly on the basis of recorded performance. The purchaser's
Quality Control experts should inform the purchasing officers of technical
matters which :>hould be taken into account, assist in weighing up
suppliers, and take the main responsibility for devising appropriate
inspection arrangements.
Increasingly, purchase quality assurance is seen as a systematic attempt
by the purchaser to make sure that a supplier has the intention and the
capability of complying with his responsibility to assure the quality of what
he supplies.
A useful guide to current practice was issued in December 1974 by the
British Standards Institution as BS 5179, 'A Guide to the Operation and
Evaluation of Quality Assurance Systems'. This was based on the special
problems of vehicle manufacturers wishing to sell their products in the
USA, on defence contract practice and on NATO Standards, but a survey
two and a half years after its publication showed that many firms in
industries which had little connection with vehicles, defence or NATO
appeared to have incorporated !arge parts of it in their supplier appraisal
documents and procedures.
BS 5179 is intended to apply to many types of supply. lt caters
specifically for the industrial purchaser of goods and services which are
purchaser-specified, whether simple or complex and whether supplied by a
!arge or a small firm. It could also be used by distribution firms to as~ist in
assuring the quality of goods and services bought to their specification. To
cope with this range of applications, the standard is issued in three separate
parts, dealing respectively with:
Part One - final inspection systems
Part Two - comprehensive inspection systems
Paret Three- comprehensive quality control systems.
Purehase specifications and quality cantrot
149
The siruplest system and the least costly to operate is the final inspection
system covered in Part One. This might be appropriate for small suppliers
working to fairly simple specifications, where inspection of the finished
product suffices to ensure conformance with requirements. It is confined
to guidance on the assessment of a supplier's final inspection system.
Part Two deals with more complex situations such as sub-contracting.
The supplier has no design or development responsibility, but closer
control is necessary than for Part One, and inspection throughout the
manufacturing cycle is required to assure conformance with contract
requirements. Consequently this part deals with the assessment of comprehensive inspection systems.
Part Three caters for the still more complex situations; here the supplier
may be designing and developing as weil as manufacturing, and may also
undertake responsibility for installation and field trials. Main contractors
for capital equipment, major suppliers of high technology plant, or
products with highly critical attributes in performance or other characteristics, are the target population. Guidance is given on the assessment of
such a supplier's entire quality capability and his comprehensive quality
control system.
In format this standard is a departure from the traditional set of
mandatory clauses which could be invoked in a contract ('the supplier shall
.. .') Recommendations are made; then they are reviewed, with suggested
interpretations; next comes an 'evaluation guidance' section affering some
suggestions to the purchaser's representative as to what to investigate and
consider when trying to weigh up the ability of a supplier to satisfy a
particular recommendation. Finally check lists are provided of typical
questions to be answered.
For instance, BS 5179 Part 2 examines in section 6 the supplier's
purchasing or sub-contracting practices. Recommendations are made in
6.1. They are reviewed in 6.2, which points out that the supplier remains
responsible for the quality of items he has purchased or sub-contracted and
that the purchaser may need to Iook into quality control practice by his
supplier's suppliers. Evaluation guidance is given in section 6.3, and
section 6.4 gives typical questions, such as:
6.4.1 ls the supplier's plan for ensuring the conformance of purchased
supplies and services to contract requirements acceptable?
6.4.4 Are the testing facilities of laboratories used by the supplier
acceptable?
The way in which this standard is applied by one major national
organization is described below.
The first step is the vendor appraisal, which assesses the quality
assurance system - personnel, facilities, organization and procedures
- of the supplier and sets the initial Ievel of control to be exercised by
the purchaser. Since a good quality control system does not guarantee
150
that goods of the required quality will be produced, it is also necessary to

monitor the supplier's actual performance.
In our vendor appraisals, potential suppliers are assessed against one
of the parts of BS 5179 in relation to a specific type or range of products.
Approximately 1800 existing suppliers of engineering products are being
progressively assessed, and 500 appraisals have already been completed.
The most important preliminary decision is the Ievel of BS 5179 at
which the appraisal is to be conducted. In practice it is not possible to
divide companies neatly into the three categories described. The policy is
to set the Ievel as low as possible. For example a supplier with some
but not major design involvement would be assessed against Part 2
supplemented by relevant sections of Part 3.
For all but the largest suppliers an appraisal visit is completed in one
day. First there is an introductory meeting, Iasting about twenty
minutes, between the assessors and the supplier's senior executives. The
objectives of the visit are explained, information is sought on the
supplier's policy, plans and structure in connection with quality, and an
assurance is given that information obtained will be regarded as confidential.
Next, assessors examine procedures and manufacturing and inspection methods. Considerable tact is required in questioning supplier
personnel and in performing spot checks on company procedure, for
example as to material traceability.
Finally, findings are reviewed with a senior executive of the supplier.
Two reports are prepared on the appraisal. The first is a detailed factual
account which is regarded as confidential. One copy is sent to the
supplier, who has the right to dispute any statement of fact. The only
other copy is filed by Quality Assurance and can be accessed by
Purchasing and by user department only on a 'need to know' basis. The
second report is a summary which goes to Purchasing, user deparment,
and regional quality office. It states the supplier grading, describes the
goods appraised, and gives facts and judgments as to the supplier's
quality capability.
Suppliers are graded as A, B or C. Grade A suppliers are entirely
satisfactory in terms of the BS 5179level against which they are assessed.
Grade C suppliers are unacceptable except as a last resort, and particular
problems arise for purchasing when no suitable alternative is available.
About 70o/o of suppliers are grade B, which led us for some time to
discriminate between B +, B, and B-, in order to concentrate our effort
on the lowest grade acceptable, the B- supplier. This was discontinued
because it confused user and purchase departments[3].
Communications between buyer and seller are particularly important in
the case of customer-specified purchases. As the main communications
link between purchaser and supplier, the purchasing executive has some
Purehase specijications and quality control
151
responsibility for ensuring that the specifications are adequate and up to

date. The person who signs the order thereby certifies that what is stated in
the order and in any attached drawings and documents is a correct and
complete statement of requirements. It is tempting to disclaim responsibility on the grounds that another department drew up the specifications,
but the buck has to stop somewhere.
Except in the simplest cases it is considered desirable for the supplier to
nominate a person who can be contacted by the purchaser on all quality
matters. The obvious choice might be the chief inspector, but it is
emphasized that a quality representative needs to have direct access to
senior executive management. In Part Three situations he may need to be a
member of senior management himself, with power to decide; many
departments play a significant part in quality performance, inspection and
quality control being only one of them, and to co-ordinate them and to
resolve inter-departmental conflicts he may require authority and responsibility on a par with that of the heads of manufacturing, purchasing or
design, according to the standard.
The purchasing executive needs to make full use of the technical
expertise of quality control personnel in assessing the quality capability of
potential suppliers; but in the end the decision whether or not to patronize
a particular supplier is a commercial decision. Technical evaluations of
capability are a useful input, but they need to be set in perspective. In the
last resort the quality of the product is what counts, not the quality of the
quality control system. Cases have occurred in which suppliers were ruled
out despite a consistent record of delivering fully acceptable products
on time, simply because they relied on competent people doing their job
properly and managed without the approved procedures and conventional
quality manuals.
Checking goods delivered
What sort of check is made of purchases on arrival may depend on several

factors. Some sort of check should always be made, ranging from the quck
examination to see that goods are as ordered and have not been damaged
which will be appropriate for stationery, standard machine screws, and so
on, right up to 1000Jo technical inspection using test equipment and trained
inspectors which may be required for technically exacting purchases. For
components bought in !arge batches, even if technical requirements are
stringent the best method may not be 100% inspection, which is often
much less than 100% effective and is always costly to carry out.
The whole process by which organizations set and maintain standards of
quality for products or services as weil as purchases is correctly cailed
quality control. But when the term Quality Control is used with capitals it
normaily indicates, as weil as this whole process by which standards are set
and held, a group of statistical techniques applied to the inspection of the
152
product and reaching back into the previous stage of its praduction,
combined with the attitude of mind which insists that 'quality is everybody's business', not the specialist concern of inspectors.
Statistkai Quality Contra! is applied to any repetitive process or !arge
batches of similar items - errars in purchase invoices, weekly output of
purchase orders, complaints, airline reservations, as weil as purchase
inspection. lt provides simple standardized methods, often graphical, for
making decisions in connexion with:
(1) process control;
(2) acceptance inspection.
Process control evaluates future performance, using the control chart

(developed by Walter Shewhart) as a main tool. Sampiechecks of the latest
process results are plotted on the chart to disclose whether actual variations
are within the expected range of variation. The process is 'in control'
statistically if the variations actually occurring are such as would occur in
random samples from a stable population. Contra! charts provide simple
visual indication when results arenot like this, so that steps can be taken to
put right whatever it is that is going wrang with the pracess before much
harm is done.
Acceptance inspection evaluates past performance. Statistical rules are
given for assessing the quality of a !arge batch by inspecting a relatively
small sample. If the sample contains more than a specified number of
defectives, the whole batch is rejected; otherwise the whole batch is
accepted. Such a sampling plan entails a double risk: the seller's risk that a
good batch will be rejected, and the buyer's risk that a bad batch will be
accepted. The operating chracteristic of a sampling plan can be calculated
from the appropriate parameters, and sample size adjusted to give
acceptable risk Ievels in view of pracess or supplier variability. Sequential
sampling not only provides yes-no rules for assessing the batch quality, but
also don't-know rules for increasing the sample to get more data before
reaching a decision.
There is much less risk of accepting a bad Jot if the supplier's process is
known to be 'in control'. For certain purchases some organizations insist
that certified control charts be submitted with each delivery. This enables
their own goods inward inspection to be reduced to an occasional audit
wihtout increasing buyer's risk. Even without certified contral charts,
acceptance inspection can be cut down considerably if supplier and buyer
trust each other and if the supplier has standards of quality and methods of
checking conformance which the buyer knows to be high and reliable.
In many engineering factories, quality requirements for each component
manufactured are shown on the detail drawings which Engineering Design
issue. These drawings show for each part the material, the finished
dimensions required, and the tolerance or deviation allowed from the
target dimension. There may also be for each part an Operations Sheet
Purehase specijications and quality control
153
which shows step by step how to make or process the part, each successive
operation appearing on a separate line. Actual manufacture is organized
by a Production Control department which draws material from stores and
puts it through the indicated processes to meet programmes showing what
products must be completed at what times. Manufactured parts are
checked by an Inspection Department which sees that each finished
component is correct to drawing and its dimensions are inside allowed
tolerances, rejecting or sending for re-work those which are not. Quality
control of the completed product is built up of these checks of individual
components and sub-assemblies, supplemented by performance and
appearance checks on the whole assembly.
Quality control of parts bought out rather than made in is essentially
similar. Quality standards are again specified by Engineering Design.
External supply arrangements are made by the Supply Department.
Bought-out parts are ordered from the chosen supplier to arrive at suitable
times for the production programmes, and on delivery all or some of these
are checked by the Inspection Department. Technical inspection by
Iabaratory or inspection department is never required for every purchase; a
simple check for darnage in transit will do for most branded goods, as weil
as for purchases upon which the quality requirements of the buyer are weil
within the quality standards of the trade, and standard products upon
which defects are few and will be discovered at the time of use. lt will be
required for technically difficult, unusual, exacting purchases.
Statistkai Quality Control isaspecialist study. lt can be a fruitful and a
fascinating one for purchasing officers, who also have to elicit trends from
data which is somewhat scanty and not fully reliable, and have to predict
and extrapolate from small samples. I still remernher my own feeling when
I first acquired a modest acquaintance with some of these techniques: I feit
like a man who is sitting reading the paper one evening when someone
suddenly comes in and switches the light on, revealing that for some time
the seeing conditions have been terrible.
When inspection, whether IOOII!o or on a sampling basis, discovers faulty
parts, the ball is once more in the purchasing department court. Appropriate action must be taken. Short-term action will concentrate on the rejects;
should they be accepted at a reduced price for selective use? Should they be
reworked by the purchaser, with appropriate price concessions? Should
they be rejected or returned for replacement? Long-term action should be
designed to prevent more defective parts arriving by going through the
whole process of purchase quality control again. Have we defined the right
quality or are we asking for too much? Have we picked the right supplier
or should we make a change; Should we press the existing source to
improve, or help him to improve by affering technical assistance? Did we
make sure that our requirement was understood? The supplier is not the
only offender when faulty goods are supplied; the buyer who selected that
supplier and communicated the requirement to him has also fallen down
154
on his job. Renewed efforts are needed to achieve the objective of

supplying goods of the right quality.
References
1 Starr, C.H. (1957), The Specification and Management of Materials in
Industry, Thames and Hudson, London.
2 Harriman, N.F., quoted in Juran's Quality Control Handbook,
McGraw Hili, New York.
3 Private communication.
11
The degree of monopoly or competition encountered by the buyer in supply

markets varies considerably, and there arealso wide variations in the way
price is determined, and the extent to which it is subject to fluctuation. In
this chapter we consider briefly the legal position as regards monopoly and
restrictive practices; examine the elements of market structure and the
relationship between structure and behaviour; and finally consider the
commodity markets.
A monopoly has exclusive possession of the trade in some article or
commodity, whether as buyer or seller. (Some writers prefer the term
monopsony for a monopoly buyer.) Substantial monopolypower can also
be exerted by a cartel, which is an association of manufacturers to fix
prices and/or restriet output and/or control distribution channels.
The legal constraints and requirements as regards monopolies and
cartels are in a state of change and development, and government attitude
to the competition policy the laws are intended to implement is itself deeply
divided. On the one hand there is a drive to increase competition by
breaking up cartels and monopolies, thus preventing the abuse of monopolypower and facilitating Jower prices. On the other hand there is a drive
to rationalize production and concentrate market structures in order to
build up large firms with the resources and the market power to compete
effectively in world markets. This division of view between those who
accept the market system and want it to work better is complicated by
interventions from those who reject the market system and want to destroy
it.
The traditional objection to monopoly power (whether held by one

organization or by a cartel) is that it Ieads to excessively high prices and
156
excessive or monopoly profits. Price is kept high by restricting output. As

Adam Smith wrote long ago: 'the price of monopoly is on every occasion
the highest which can be got. The price of free competition ... is the lowest
which can be taken, not upon every occasion indeed, but for any
considerable time together[l].' If this is true it follows that to achieve fair
prices it is necessary to break monopoly power.
This has been the intention of American anti-trust legislation (trust in
the sense of merger or cartel) ever since the Sherman Act (1890) declared
flatly: 'every person who shall monopolize or attempt to monopolize or
combine or conspire with any other person or persons to monopolize any
part of the trade or commerce ... shall be guilty of a misdemeanour'.
British legislation did not intervene in these matters until the Restrictive
Trade Practices Act (1956) was enacted. This gave British industry, at that
time very heavily cartelized through the means of powerful trade associations, a hefty shove in the direction of competition. Agreements in
restraint of trade as defined in the Act had tobe registered, and by 1961
about 2500 such agreements were on the books of the Registrar of
Restrictive Trading Agreements. Half of them were being discontinued or
varied, because the Act also declared such agreements illegal unless they
could be proved tobe in the public interest before a special court which the
Act established, the Restrictive Practices Court. Large buyers soon found
that they could prise out of suppliers, who had previously presented a
united monolithic front, price concessions which had previously been
described as impossible. Whole industries suffered major uph!.iavals, for
instance the Lancashire cotton industry.
lt must be admitted, however, that Adam Smith's dieturn quoted above
did not appear to have applied widely. The object of most cartels was to
reduce uncertainty, rather than to increase profits per se. If this prevented
the weakest from going to the wall and removed any incentive to reduce
operating costs it resulted in high prices, not because of monopoly profits,
but because of high average costs.
The powers of the Registrar of Restrictive Trading Agreements were
transferred by the Fair Trading Act (1973) to a Director General of Fair
Trading, with wider scope to match his lofty title. The concept of public
interest as applied to this area was also specified more precisely; the
Monopolies and Mergers Commission was required to have regard to the
desirability (a) of maintaining and promoting effective competition between persons supplying goods and services in the United Kingdom;
(b) of promoting the interests of consumers, purchasers and other users
of goods and services in the United Kingdom in respect of the prices
charged for them and in respect of their quality and the variety of goods
and services supplied;
(c) of promoting, through competition, the reduction of costs and the
157
development and use of new techniques and new products, and of

facilitating the entry of new competitors into existing markets;
(d) of maintaining and promoting the balanced distribution of industry
and employment in the United Kingdom; and
(e) of maintaining and promoting competitive activity in markets
outside the United Kingdom on the part of producers of goods, and of
suppliers of goods and services, in the United Kingdom.
The European Economic Community also adopted rules of competition
which forbid restraints on trade rivalry between firms and the abuse of
market power, except for certain minor agreements and those which affect
matters within a member state exclusively. Several member states have
legal controls on monopoly and restrictive practices at least as severe as
those laid down by the EEC, but the Iatter refer to trade between states
rather than within a single state. Yet the intention is clearly that a trader in
any of the nine countries of the EEC can treat all of them as a single
trading area, with all that this implies for traditional distribution arrangements; and that price rings or monopolies will not be allowed to develop so
as to curtail price competition.
The basic Common Market competition policy is defined in articles 85
and 86 of the Treaty of Rome (1957). Article 85 refers to distribution
arrangements. Article 86 refers to the abuse of market power. Both
condemn the imposition of inequitable prices or conditions of contract,
whether by buyer or seller.
Meanwhile the tendency for the economy to be increasingly dominated
by !arge organizations continued, largely unchecked by public policy, and
often positively encouraged by it. In 1900 the largest manufacturing firm in
Britain was J. and P. Coats, employing 5000 people and having net assets
of f5.5m. By 1975 the largest manufacturing firm, Imperial Chemical
Industries, had 200000 employees and assets worth over f2000m. In the
same period the share of net output due to the hundred largest manufacturers increased from 150Jo to 50%[2].
In the 1960s there occurred in Britain the greatest wave of mergers since
the 1920s. There were various reasons for this. One was that restrictive
practices legislatwn induced some firms to merge rather than compete once
they had to abandon the cartel which had sheltered them for so long.
Another was the view popular at the time that only !arge firms could meet
the challenge of the American multinationals. Big firms had economies of
scale, not only in !arge scale production but also in the ability to attract
good managers and employ functional specialists; and they had the
financial resources to ride out economic squalls and to fund long term
research and development. Britain (with its government-sponsored Industrial Reorganization Corporation), and several other countries, adopted
policies intended to produce !arger firms by merger, with the financial and
mnr::~l sunnort ofthe government. Such policies also produced monopolies
158
or market Ieaders with considerable market power. Concentration can

hardly be increased without competition being reduced.
Marke! structure
Markets are sometimes thought of as located along an imaginary line

which runs from the theoretical extreme of perfect competition at one end
to the theoretical extreme of perfect monopoly at the other end. lf the
buyer has many satisfactory suppliers to choose from he might expect
conditions to approximate to perfect competition, while if there are only
two or three suppliers it might be expected that market behaviour would
resemble that of a monopoly. However, we do not in practice find that
few-supplier markets, known as oligopolies, necessarily behave like the
profit-maximizing monopoly of theory.
This is partly because pro fit maximization is not the only objective of the
managements of such firms. More importantly, perhaps, it is because the
nurober of suppliers is not the only structural determinant of market
behaviour. The relative size of suppliers is at least as important as their
absolute number. A hundred-supplier market would still be an oligopoly if.
the three largest suppliers accounted for 900Jo of the output, leaving the
other 97 to share the remaining lOOJo of output, because of its high
concentration.
Ease of entry is another important consideration. It is impracticable to
maintain a high price for long if newcomers attracted by the prospect of
high profits find it easy to enter the market. Barriers to entry take many
forms: in the mass production of motor cars, the immense capital
investment required by the technology; in detergents, the heavy advertising
budgets of the two main producers; in the supply of roadstone, the high
cost of haulage from a distance; in the early days of a new product such as
xerographic copying, patent protection; all these have served as entry
barriers. Domestic producers are sometimes protected from foreign competition by such barriers as tariffs, quotas, prohibitions, and Kafka-esque
devices such as unexplained delays in providing the necessary paperwork.
The buyer who cannot find an alternative supplier may find an
alternative material; high and unpredictable prices for wool have led to
increasing use of synthetic fibres in carpet manufacture, for instance.
Availability of substitutes is thus important. So is the price elasticity of
demand, which expresses the sensitivity of sales to price changes.
Oligopoly sellers are in active competition with their rivals and need to
consider how they would match possible moves by the competition, and
how rivals will react to their own actions. It is a risky situation which tends
to lead to cartels or information agreements unless these are illegal (and
sometimes even when they are illegal, as in the Great Electrical Equipment
Conspiracy in the USA, [3].) For instance, a price reduction by one
supplier of a product which is not differentiated, that is to say, a
159
commodity exactly like that supplied by other firms, needs to be matched

quickly by the other firms if they are not to lose business; but a price
increase by supplier A need not be matched by his rivals, when it is supplier
A who loses business. This accounts for the two-way entry for elasticity in
Figure 11.1. Obviously this tends to Iead to Ievel pricing; prices tend to
Ievel out in the long term, although in the short term suppliers may quote a
high price if they have full order books or a low price if they are short of
work.
Structural
Type
number
of
sellers
Entrv
Barriers
Monopoly
One
Very high Very low
Low
Very little
Differentiated
oligopoly
Few
High
Low
Fairly
high
Some
Undifferentiated
oligopoly
Few
Low
High
High for
increase,
low for
price
decrease
Considerable
Very low
Very high
Very high Very little
Perfeet competition Many
Availability
of
Demand
Substitutes elasticity
Scope for
price
negotiation
Figure 11.1 Types of market structure. A simplified view of supply

markets.
Suppliers escape from this situation and increase their security by
making their product in some way different from what their rivals offer.
Products can be differentiated by technical specification, as with comparable machine tools or motor cars which serve the same purpose but with
different features. Since customers purchase a package in which product
characteristics are only part of the deal, any of the supplier characteristics
considered in Chapter 12 can serve to differentiate the 'product'. Suppliers
can build up a reputation for quality or reliability or superior service after
sales which enables them to retain customers, even when undercut on price.
Product differentiation can even exist almost entirely in the eye of the
beholder, as when advertising creates imaginary differences which seem
sufficient for buyers to form distinct preferences between suppliers.
The four types of market structure shown in Figure 11.1 may suggest a
basis for the buyer to analyse his own supply markets. The most notable
omission from this diagram is the structure on the buying side. There are
two sides to any market, and a further important structural parameter is
the number of buyers and their relative market share. Figure 11.1 states
that there is very little scope for negotiation with a selling monopoly;
but this is not the case for the monopoly buyer.
Examples of monopoly buyers are: for power stations in Britain, the
160
Central Electricity Generating Board (although suppliers also sell abroad);

for much telephone equipment, the Post Office. There are also situations
where an industry has many customers, but one takes such a large
proportion of output as to have considerable monopoly power as buyer;
for instance, conveyor belts and the National Coal Board.
A common market situation for the industrial buyer is bilateral
oligopoly,.in which there are only a few significant firms on both sides of
the market. For instance, many parts and components for motor car
manufacture are purchased in significant quantities within the UK only by
the four major car producers, although some purchases are also made by
the smaller producers, by garages for the replacement market, and by
producers abroad. The number of suppliers capable of meeting the quality
standards and the large quantity requirements of major car makers is
inevitably restricted, so that the market is oligopolistic on both sides.
Such markets, according to Joe S. Bain [4], are characterized by two sets
of active price-making policies, those of the sellers and those of the buyers.
We tend to find a 'total conduct pattern ... of bargairring and negotiation
between buyers and sellers'.
The Monopolies Commission went so far as to find the non-competitive
supply conditions for most motor car electrics were potentially advantageous to the public interest if not abused. Abuse there might be in the
replacement market, where a consumer buys a single replacement component from a garage; but in the original equipment market the countervailing
power of the industrial buyer prevented abuse. Vehicle makers
all appear to be satisfied that the prices at which they are able to buy
and the service they receive in present conditions are at least as good as
they could get by breaking down the monopolies of leading suppliers.
In part this is due no doubt to their evaluation of the advantages of large
scale production and of continuity of service which are features of the
present concentrated structure, but it is also a measure of the pressure
which they can bring to bear on the suppliers without actually setting
up or strengtherring competitive suppliers.
To sum up, important structural characteristics of a market include: the
number and concentration of sellers; the number and concentration of
buyers; product differentiation; availability of substitutes; entry barriers;
and price elasticity of demand. A number of other characteristics are
important in particular cases; for instance, the location and availability of
raw materials, the rate of growth or decline in demand, the type of
technology and whether or not it is capital intensive, the normal purchasing method (sealed bid, negotiation, Iist price with discounts, etc.).
Market policy
We turn now to consider the market policies adopted by purchasers with
161
significant market power in dealing with sellers who also have significant
market power, or who for one reason or another are in a sole source
position. The dangers are that without the stimulus of competition, the
supplier will make unduly high profits, will become inefficient and
overstaffed so that costs are high, will fail to innovate, and that generally
his market performancewill be unsatisfactory, with (for instance) a poor
delivery record and inadequate service.
US government buyers have made extensive use of cost incentive
contracts and mandatory value analysis clauses to motivate defense
contractors to make active efforts to innovate, to reduce costs and to pass
cost reductions on to their customer. The example has been followed to
some extent by other public sector purchasers, in the UK and elsewhere.
In mass production industries, especially vehicle manufacture, cost
analysis (or price analysis) is widely practised. Cost estimators attached to
the purchase department prepare detailed cost Statements for purchased
parts. Theseare used both to strengthen the buyer's hand in negotiations,
and to set price targets for him to achieve. Suppliers are also pressed to
support their price quotations by cost breakdowns. Somewhere in the
background to discussions is an implied threat that if the supplier cannot
make the part on an agreed cost basis plus an agreed profit, the purchaser
will make it internally.
Some large purchasers also practise tapered integration, as it is called
when a firm produces some of its requirement of a particular part or
material internally, and buys the rest externally. The buyer has considerable bargairring power since he knows from internal experience what costs
are and can make convincing threats to increase internal production at the
expense of purchases. In times of shortage he is guaranteed at least some
supplies from the internal manufacturing facility. There is also the
possibility of running internal production at near-capacity constant Ioad,
transferring demand fluctuations to the outside market.
The key feature of these and other policies is that the buyer maintains, in
a market from which active competition is absent or is not strongly
present, the equally effective discipline of potential competition. Potential
competition can be provided as above by the make-or-buy option. It can
also be provided by one form of dual sourcing, where a relatively small
proportion of the requirement for a part or material is bought from a small
supplier. It may be necessary to pay a somewhat higher price because of the
low volume requirement, although this is often not the case. Even when
there is a cost differential this may be a small price to pay for the potential
threat to transfer more and more of the business to the small supplier until
it becomes a big supplier, if the existing bulk supplier does not meet
requirements. Or there may be one main source for most of the requirement, with the rest of the requirement spread around alternative sources
just to keep in touch and to let the main source know that he does not have
a monopoly.
162
Supplier development provides another possibility. At one time, lathe

manufacturers in the UK were concerned by their dependence on a
monopoly source for !arge lathe chucks. Although the quality was excellent
and there was no objection to the price, very long delivery periods were the
cause of much concern. The chuck manufacturer was unwilling to invest in
extra capacity. Several lathe manufacturers then jointly encouraged a
manufacturer of small drill chucks to extend his production to progressively !arger chucks. A similar case occurred when vehicle buyers dissatisfied with the service given by the sole source of crankshafts, persuaded a
!arge manufacturer to diversify into crankshaft production. The incentive
offered was a promise of !arge orders over a two year period. It is of course
prudent not to treat supplier development as a last-ditch crisis measure
(although Leenders reports that this is what often happens,[5)) but to prepare for it if it is to serve the purpose of providing potential competition.
Commodity markets
The primary commodities are the natural products of the earth, which
usually enter into trade in a partly-processed condition. They include
minerals such as copper and tin; vegetable products such as coffee, cocoa
and wheat; and animal products such as wool, bristle and hides. In their
country of origin they are traded in various ways, but they often enter into
world trade through the international commodity markets.
These provide three important services. Firstly, they enable the producers
and the consumers of commodities to make contact, often through
intermediaries, and arrange contracts for physical supply. Secondly, they
provide a means to determine the world price, as distinct from local prices.
Thirdly, many of them provide a form of price insurance by means of
futures contracts.
Organized commodity markets exist in the UK, the USA, Canada,
Holland, France, Japan and elsewhere. In Britain, the London Metal
Exchange provides all three of the services mentioned above for copper,
tin, Iead, zinc and silver. Silver is also traded on the London BuHion
Exchange, and the New York Commodity Exchange (COMEX) isanother
important market for silver and copper. 'Soft' commodities traded in
London include coffee, cocoa, rubber, sugar, soya bean meal, vegetable oil
and wool, for all of which futures markets are provided by the Terminal
Market Associations using the London Commodity Exchange; cotton, tea,
furs, jute and grain. The Chicago Board of Trade is the largest and oldest
of the many American commodity markets and its rules and procedures
have provided a model which several other exchanges have followed.
Typically official trading occurs in short bouts of 'open outcry' in a
'ring', supplemented by unofficial or 'kerb' trading. The London Meta!
Exchange 'ring' was originally a chalk circle, later replaced by an
arrangement of curved benches at which the dealers sit with their assistants
163
hovering behind them. Official prices arrived at during the day's trading
are published widely by the news media. Transactions are typically for
multiples of a standard quantity, of goods of a specific description, for
delivery either immediately ('spot', 'cash', 'physicals') or at a specified
future date, in accordance with the rules of the exchange.
The most striking difference between these commodity markets and the
markets for manufactured products (apart from the actual procedure for
striking a bargain on the floor of the exchange) is the variability of price.
Commodity prices often, though not invariably, fluctuate from deal to
deal, and from day to day; they can move up or down by large amounts
from year to year.
Prices vary in this way mainly because of variations in worldwide supply
and demand. On the supply side, crop failure can be caused by flood,
drought, frost or the incidence of fungus and other diseases. Strikes, war
and political troubles can also affect supply. Demand is affected by the
state of industrial activity in the industrial countries which are the principal
customers. In some years all the industrial economies are very busy at the
same time, driving up prices because of the high world demand. The
increasing use of substitutes and the gradual depletion of natural resources
can also affect the situation.
In theory, both shortages and surpluses are self-correcting: shortages
attract new supplies through high prices, surpluses drive out marginal
producers through low prices and thus reduce supply. But there is a
considerable time-lag with most primary commodities. Minor increases in
the output of a plantation can be achieved by more intensive cultivation,
but to achieve major increases, new trees must be planted. It takes three
years for the Arabica coffee tree to produce a crop and five years for the
Robusta variety. Rubber trees are normally tapped in their sixth or seventh
year. Cocoa trees yield their first crop three to five years after planting, but
take ten years to come to full bearing.
High metal prices can bring more supplies on the market, but it takes
time to reopen old marginal mines and even more time to discover and
exploit new ore bodies. In the same way low prices Iead eventually to a
reduction in supply, but there is always a delay before decisions are taken
to close the marginal mines, root out old trees, cut back production.
During this delay low prices persist, and the result is larger swings in price
than are required to adjust supply to demand, followed by swings in the
reverse direction.
A further complication is that many of the main exporters of primary
commodities are developing countries which rely on the revenue from them
to yield foreign exchange, support paid employment, and provide disposable government revenue to finance development schemes. A fall in price
tends to Iead to demands to increase the quantity sold in order to maintain
export revenues, which would Iead naturally to a further fall in price.
The markets themselves can be over-responsive to expected changes in
164
supply or demand, and when supplies are scarce the prudent make them
scarcer by stockpiling and the speculators by trying to corner them.
These large price variations are unpopular with both the producers and
the users of commodities. Industrial users prefer price stability because it
suits their planning and budgeting systems, and have often said they would
be willing to pay a little more in return for a stable and predictable price.
Commodity producers prefer higher prices but they too are often willing to
make some sacrifice to avoid periodic swings from high to low.
Consequently there have been many attempts to regulate world prices in
the interest either of one or of both sides of the market. Methods used
include producer cartels, bilateral contracts, multilateral contracts, compensatory finance arrangements and international buffer stocks supplemented by export quotas. Several of these have been successful in the short
term, but long term price stabilization has proved difficult to achieve.
A typical arrangement is to appoint a buffer stock manager and provide
him with funds and warehouses so that he can support a falling price by
buying for stock or attack a rising price by selling from stock. The finance
for this may be provided by a producer cartel, or by an international
council with representatives both of buyers and sellers who are allocated
votes in proportion to their market share subject to a minimum. The
controlling body usually sets floor and ceiling prices for the buffer stock
manager to work to, and as long as he is successful in keeping market price
between the Iimits all goes weil. Copper price was successfully stabilized in
this way in the early 1960s. Tin price was held in the f1400 to f1600 bracket
in the early 1970s. But buffer stocks are unlikely to be !arge enough to
prevent price from going through the ceiling when there is a world deficit
of a commodity; by the time the fifth tin agreement was taking effect in the
late 1970s, tin price was about f6000 a tonne. Nor is a buffer stock
manager likely to have a long enough purse to keep prices from falling
through the floor when there is a world surplus, as there was of copper at
the same period. Action must then be taken by the cartel or the council to
adjust production. Apart from the time delays in implementing an
agreement to do this, which have already been mentioned, it may be
difficult even to achieve agreement if individual members find that failure
to agree would better suit their individual interest.
Futures markets exist for many commodities. They started in the
nineteenth century, when shipping delays for commodities which fluctuated in price put traders at considerable risk. They can exist only when
price fluctuates, and there is a !arge volume of trade between many buyers
and sellers, and the commodity is capable of being stored and is sold in
standard grades or specifications. The main purpose of futures markets is
to enable firms to hedge against adverse price changes. Hedging is a
process of balancing a position by making compensating transactions in
futures. Two examples will be given.
The first is an example of a selling hedge. Coply Wiredrawers Ltd is in
165
business to buy copper wirebars and convert them to copper wire and strip
by drawing down. The selling price of their wire products is based on LME
spot price on the day of sale, plus a f25 margin to cover processing cost
and pro fit. Quite a small fluctuation in copper price between the date they
purchase material for conversion and the date they sell the wire products
could wipe out their small operating margin, although it could also
produce windfall profits. To reduce this risk, they hedge by making
compensating future transactions whenever they buy material or sell
product.
For instance, on one occasion 50 tons of spot copper were bought for
f800 a ton. On the same day 50 tons of three-month futures were sold for
f780 a ton. A month later the resulting wirecoils were sold for f775 a ton,
the spot price of copper having declined to f750. On the same day they
bought back the futures contract for f740 ton. The result was that the loss
on material account of f2500 was partially offset by the gain on futures
account of f2000. Overall they were not out of pocket.
The second example is a buying hedge. A flour mill receives in July an
order for 100 tons of milled flour for October delivery at a fixed price
based on the current spot price for wheat, f50. 75. The wheat is required in
mid-September for processing, and meanwhile the flour mill hedges the
risk that wheat prices will rise by purchasing 100 tons of September wheat
at f50 ton. Price does in fact rise and in mid-September 100 tons for
immediate delivery are bought at f61 ton. On the same day the futures
contract for September wheat is sold for f60 ton. The result is that the
hedging profit of f1000 almost covers the f1075 loss on materials account.
How effective the hedge is depends on the relative movement of spot
price and futures price, as shown in Figure 11.2. A perfect hedge occurs
only in the two cases where the price changes in both spot and futures are
in the same direction and of the same amount. In the second example given
lf price mavement
is that:-
Then result will be:lf lang in spat and-
lf shart in spart and -
spat price
future price unhedged
hedged
unhedged hedged
falls
falls
falls
falls
rises
rises
rises
rises
falls same
falls more
falls less
rises
rises same
rises more
rises less
falls
break even
profit
smaller loss
greater loss
break even
loss
smaller profit
greater profit
profit
profit
profit
profit
loss
loss
loss
loss
loss
loss
loss
loss
profit
profit
profit
profit
break-even
loss
smaller profit
greater profit
break-even
profit
smaller loss
greater Ioss
Figure 11.2 Efject oj hedging. Based on a diagram by P. T. Bauer and

B.S. Yamey in Markets, Market Control and Market Reform, Weidenfeld
and Nicolson 1968.
166
above, the buying hedge, this was approximately so; this example corresponds to the fifth line in the diagram, where the firm is 'short in spot' and
thus breaks even. In the first example, the selling hedge, spot price feil by
more than futures. This corresponds to the third line in the diagram; the
firm is 'long in spot' and its hedging operation, although not perfect,
results in a smaller loss.
Spot and futures prices often move in parallel for long periods, although
the one is dependent on current supply and demand, and the other on
expected future supply and demand; and hedging then works reasonably
weil. Futures price is normally higher than spot price, the difference being
known as the contango on some exchanges. The contango is limited in
amount; if it rose above a certain figure it would pay merchants to buy spot
and simultaneously sell futures, warehousing the material until the future
contract matured. Sometimes the futures price is below the spot price if
there is little interest, or if the price is likely to fall. There is no theoretical
Iimit to a backwardation, as the gap between the two prices is then called;
at the time of writing there is a f385 backwardation on coffee.
The form of price insurance provided by hedging is clearly less certain
and calls for more skill and market knowledge than fire insurance or other
forms provided by insurance firms, but it is the only form available. In
practice, as analysis of exchange statistics has shown, futures are bought
and sold, partly indeed for price insurance, partly for speculative purposes,
and partly to exploit favourable relationships between spot and future
prices in order to proeure materials at the lowest prices.
Market policy for jluctuating prices
Manufacturing organizations, some of whose raw materials vary in price

by substantial amounts in short periods of time, have to adopt some policy
for the supply of such materials. They may not trade on the commodity
markets but they are still affected by the fluctuation. For instance copper
fabricators generally buy raw copper direct from the producers. Contracts
are normally placed in the fourth quarter of the year (known to the trade as
the mat~ng season) and include upper and lower quantity Iimits and call-off
arrangements. The purchase price, however, is based on the London Meta!
Exchange price and varies as deliveries are made. Selling price for the coper
(in various fabricated forms) which is their product, is also based on
London Meta! Exchange prices, but they are at risk during the period
between receiving material and supplying product (at least; buyers and
sellers have various kinds of agreement relating date of order and date of
delivery to date of exchange price). Another example is the carpet
manufacturer requiring !arge quantities of wool; this can be bought at the
auctions direct, or it can be bought through a wool broker, but prices will
still vary in the same way.
The classical policy for substantial purchases is to employ an expert
167
commodity buyer. Within trading Iimits set by management, he adjusts the

time and size of orders and the time coverage of stocks according to the
trend of prices. When the trend is down, stocks are used up and small
orders only are placed. When the market trend is up, !arge orders are
placed to stock up. lf for instance the firm uses 100000 lb a month of a
commodity whose price has just increased by 5p a lb, sooner or later
material cost will increase by !:5000 a month. With six months supply in
stock the firm can operate for six months at the old cost basis, saving
BO 000 in comparison to another firm with no stock. lf on the other hand
the price change is a reduction of 5p a lb, it would take six months to bring
material costs into line with replacement price, and the firm with no stock
would be !:5000 a month better off than competitors. lf price changes of
similar or greater magnitude occur not every six months but daily, it will be
clear that considerable market knowledge and skill is required for successful buying.
Success is measured by comparing actual material cost with market
price, over a period, offsetting Iosses against gains. (Nobody wins all the
time, since what the buyer tries to do is to find out what other buyers are
going to do and do it first; to anticipate which way the market will go,
when what makes it go is not only changes in supply and demand but how
these are anticipated by other commodity experts.)
Risk cannot be avoided. Hedging can reduce the risk, but this can go
wrong too. An extreme example of this occurred in 1973. A major British
food product manufacturer revealed that they had lost f32.5m in transactions in the cocoa terminal market. The buyer concerned had exceeded
his authority, but his objective had apparently been to reduce the material
cost of manufactures by futures transactions.
At the other extreme is a safe and simple policy (known as 'hand-tomouth' or 'averaging') which ensures that over a period the average cost of
material used is the same as the average market price over the period, and
consequently material cost must be as low as most other businesses using
the material. This policy consists in buying just the quantity required at
just the time it is required, carrying no stocks and paying the going market
price. The buyer need give no thought to market trends and indeed to do so
might tempt him to depart from the policy. He will not do better than the
average, as the expert commodity buyer tries to do, but neither will he
incur criticism by doing worse than the average.
This policy can be adopted for the purchase of commodities which have
no significant effect on product cost. (For instance, a certain carpet
production process requires the purchase four times a year of copper
fabrications to replace beater blades. lf the price of the fabrications
doubled the cost of the carpets would hardly alter.)
lf the cost of the commodity has a significant effect on the cost of the
product, the policy can still be used if selling price can be based on the
purchase cost of the material used rather than its replacement cost. (For
168
instance, a small paint brush manufacturer used to buy Chinese bristle,

make a batch of brushes and sell them at a price based on what he had paid
for the bristle plus his margin.)
The averaging policy is less suitable when price fluctuations are large,
and it is not applicable to firms which need to carry large base stocks, as
for instance, when raw material has to be shipped halfway round the world
from an area with political problems.
When prices fluctuate in a fairly narrow range about a predictable mean,
there are formula approaches which are said to enable one to buy as well as
the expert without actually having to become an expert. For example, if we
use 100 tons a week, and if the average market price is flOO a ton, we can
beat the market by spending a fixed budget of flOOOO a week (hence the
name 'budgeted buying'). When the price is below flOO this buys more
than 100 tons and increases stocks. When the price is above flOO less than
the week's requirement is bought, the balance being drawn from stock.
This technique will indeed proeure materials at below the average market
price so long as the average is predicted correctly, and the market price
fluctuates around the average and does not develop a trend.
A more elaborate version of budgeted buying has been developed by
operations researchers, using dynamic programming to decide how many
weeks' supply to buy, from nil up to an authorized limit[6].
References
1 In his classic: An enquiry into the nature and causes of the wealth of
nations, first published in 1765.
2 Hannah, L. and Kay, J.A. (1977), Goncentration in Modern Industry,
Macmillan, London.
3 Scherer, F.M. (1970). Industrial Market Structure and Economic Performance, Rand McNally, Chicago, p.l59.
4 Bain, J.S. (1959), lndustrial Organisation, Wiley, New York.
5 Leenders, M.R. (1965), lmproving Purchasing Effectiveness through
Supplier Development, Harvard University Press, Cambridge, Mass.
6 See for instance: Kingsman, B.G. in Farmer, D.H. and Taylor, B.
(1975), Gorparate Planning and Procurement, Heinemann, London.
12
Selecting suppliers: problems and systems
To search out and weigh up, and eventually select, sources of supply is a
very important part of the buying function. Some argue that it is the most
important part.
Making good source decisions is far from easy. Apart from the
difficulties of discovering what sources exist and are feasible for the
specific requirement at the place and time in question, there are further
difficulties in deciding which source would in the long term, as weil as on a
particular occasion, be the best choice. It is of course easy, but foolish, to
pick the cheapest on the assumption that everything eise but price is equal.
A further complication isthat many source decisions are complex, in the
senses that more than one matter has to be decided, and more than one
department has to have its say. Most of the research on this has been done
from the other side of the counter, under the aegis of industrial marketing,
which is naturally interested in knowing the pressure points and the
decision centres in an organization. Rowe and Alexander[l], suggest a
four-way classification of purchasing decisions into those which refer to:
(1) a standard product for established applications - e.g. fork Iift
trucks, commercial vehicles, fractional HP motors, nuts and bolts
(2) a standard product for developing applications - e.g. computer
hardware, plastics raw materials
(3) non-standard product for established applications - e.g. ships,
chemical plants, turbine generators, tendering, contracting and bidding
industries
(4) non-standard products for developing applications- e.g. advanced
computer software, warplanes, R and D.
Sometimes joint development with customer's

staff.
Very low indeed, very

prolonged negotiation.
Buyer will decide almest
entirely on appraisal of
seller's total capability,
organizational ability,
etc. Selling firm must be
No use of distributors.
often financial coOperation with Jending
institutions. ln exports
also credit insurance.
Very low, prolonged
negotiation.
During bidding stage
selling involves much
concentrated technical
and commercial activity.
Selling firm understan-
Rarer use of stockists

or distributors.
Low. Rarely exceeds five

calls a day at maximum
During persuasion stage,
technical approvel highly
important, thereafter
buying department more
prominent. Selling firm
Use of stockists and

distributors probable.
Can be high.
Provided no commercial
innovation is introduced,
buying department of
purchasing firm will be
very important. Selling
Possible methods
of distribution
Call rate
Buying and selling

characteristics
4
Military electronics,
military aviation, highly
advanced computer software, R & D selling,
space research, etc.
3
Tendering, contracting
and bidding industries
Turbine generators.
Chemical plants. Engineering and construction.
Shipbuilding, etc.
2
Plastics, raw materials,
aluminium, substitution
products. Numerically
controlled machine tools.
Industrial gases.
Computer hardware,
Commercial vehicles,
fork-1 ift trucks. Less
sophisticated machine
tools. Standard components, operating equipment and supplies
Fractional HP motors,
industrial abrasives, products made to industrial
Standard specifications.
Developing
Applications
Developing
Applications
Example of products
Established
Applications
Non-standard products
Established
Applications
Standard Products
Probably salary plus

commission.
High degree of control

and analysis of results
required. Sales management must be very conscious of commercial
innovation and breakoost creation. Sales
manager can handle
fairly large numbers of
salesmen.
Salesman reward
Sales Management
More management participation required. Coordinating effort of sales,
research, technical service
and production vital.
Commission possible but

not usual.
Considerable applications
knowledge required. Must
be able to present h is
cas clearly. Technical
back-up very important.
High status. Empathetic.
usually customer orientated.
Management cultivates
high Ievei contact with
the compratively small
number of possible
buyers. Must appraise
whether favourable bidding situation exists.
Co-ordination between
sales and designers very
important.
As each sale is a team

effort, commission
unusual but salaries are
high.
Salesman usually a
negotiator. Must be an
engineer. Often does not
see selling as a lifetime
career.
ably conscious of its

productive and technical
capability. Often inwardlooking because of the
technical difficulties it
has repeatedly to solve.
Co-ordination between
sales and R & D very
important.
Highly salaried technical

staff, usually themselves
management Ievei.
Multiplesales function
using 'opposite numbers'.
Often difficult to say who
salesman is. Often does
not see selling as a lifetime
career.
capable of identification
with customer's problems.
Figure 12.1 Predictive classification of industrial products. (Quoted with permission jrom Rowe, D. and Alexander, I.
(1968), Selling Industrial Products, Hutchinson, London.)
More likely than in the

other classes to be a
professional. Needs good
product knowledge.
Type of salesman
firm is often 'production

oriented'.
172
The buying department is very important for dass 1. For dass 2, technical
approval is vital initially, but after adoption the buying department is more
prominent. For dass 3, prolonged negotiation is normal, with both
commercial and technical selling important. For dass 4, it may be difficult
to decide who is the salesman, and the decision will be based on a total
evaluation of the seller's capability carried out by staff in several departments of the buying firm.
This dassification is given in detail in Figure 12.1. Webster and Wind
have devised a useful dassification of the various roles involved in buying
decision process. They distinguish five roles:
(1) Users - the people in the organization who actually use the goods
and services being bought
(2) Buyers- those who have formal authority for conduding arrangements with suppliers
(3) lnfluencers - people who provide information or criteria for
evaluating alternative courses of action and thus influence the buying
decision directly or indirectly
(4) Deciders- those with formal authority to decide which of various
buying actions is to be taken
(5) Gatekeepers- who control the flow of information and materials in
the buying centre.
They say that:
several individuals may occupy the same role; e.g. there may be several
influencers. Also, one individual may occupy more than one role; e.g.
the purchasing officer is often both buyer and gatekeeper . . . Buyers
often have authority for managing the contacts of suppliers with other
organizational actors, and thus also perform the 'gatekeeper' function.
While the buyer's authority for selection of suppliers may be seriously
constrained by decisions at earlier stages of the decision process (especially the development of specifications), he has reponsibility for the
terminal stages of the process. In other words the buyer (or purchasing
officer) is in most cases the final decision maker and the target of
influence attempts by other members of the buying centre[2].
Research into the buyer's authority relative to that of users and of other
members of the 'buying centre' or 'buying coalition', i.e. those individuals
in the organization who play some part in the purchasing decision process,
has been carried out by Hugh Buckner[3]. He shows that 'most frequently
the final choice is composed of a consensus of individual decisions', and
analyses how much say the purchasing officer has in buying various types
of product. While primarily intended to enable the salesman to horne-in on
the right target, this analysis should also help purchasing staff to clarify
their understanding of their role in purchasing decisions.
173
Criteria in source decisions
Since the people who make decisions about sources of supply are human,
some of the criteria they use will be subjective, such as whether they like
the Iook of the salesman, and some will be objective, such as whether the
supplier has a proved record of meeting requirements on time.
The objective criteria in deciding between alternative sources are performance, delivery and cost. Cost comes last, not because it has least
importance, but because it cannot be evaluated until it is known what is
being provided for the cost.
Performance has at least three elements: specification quality, which is
the difference between two motor cars such as the Rolls-Royce Corniehe
and the Ford Model A, conformance quality, which is the difference
between two suppliers one of whom gets 300Jo of his deliveries rejected, and
the other who gets 1% rejected, and service. Specification quality refers to
the features or characteristics which are called for by the purchaser- what
he is demanding from the supplier. Conformance quality refers to the
extent to which the supplier succeeds in meeting the specification. Service
refers to all that makes for good relations between buyer and seller and the
smooth flow of supplies from one to another. It can include technical
assistance and expert advice before and after the sale. It can include
speedy and effective arrangements to service and repair equipment and
supply spare parts - important for machinery such as vehicles, machine
tools, office machines, but meaningless for raw materials. Ability to come
up with new ideas, carry out research and development, suggest ways to
reduce cost or improve quality, would be highly valued in some situations.
When quoted delivery times can be relied on, promises are not made
recklessly or dishonestly, rush orders are rushed and special jobs get special
treatment, the buyer tends to be pleased with the service. Buyers also
appreciate hearing abbut forthcoming changes in price or delivery time in
time to do something about them.
Early delivery is always an advantage to the buyer. It reduces the amount
of forward planning, increases flexibility, means there are fewer orders
outstanding and less to worry about. Often the best suppliers are the
busiest. But most purchasers prefer a five-week Iead time which can be counted on to the day, to a two-week Iead time which is plus or minus two weeks.
The best suppliers are also often the dearest. Quality does not always go
in step with price, however. Some firms make a better-than-average
product at a lower than average price. It is the buyer's duty to find them
and his delight to encourage them.
Supplier grading and rating systems*
When requirements are satisfied by commercially available goods supplied

*This section is partly based on a 1977 survey of Supp/ier Appraisa//Evaluation
by N. Williarns in connection with the Postgraduate Procurernent Certificate course
at the Polytechnic of Wales, and all quotations are frorn that source.
174
to established standards and specifications, it is commodities that are being

purchased rather than capabilities. But when a purchase requires !arge
initial costs and will cover either lengthy periods of time or !arge quantities
of components, when costly tooling needs to be acquired and an extended
learning period is associated with the supply of the goods, or when
something unique rather than standard is bought, with special design or
reliability features, then it is capability to meet requirements which is
purchased. The assessment of supplier capability may require considerable
investigation as weil as the exercise of informed judgment by experienced
people.
A partial solution was considered in chapter 10 in connection with
quality control. After investigations of the kind described there, many
organizations assign a grade or rating to a supplier: for instance Grade A
- outstanding; Grade B- satisfactory; Grade C- unsatisfactory. As
experience of actual dealings with a firm is accumulated the rating can be
adjusted to incorporate the firm's actual quality performance, with
occasional further visits to provide a continuous assessment.
Although important, quality capability and performance are not the only
features of importance. In the words of one organization's internal
'Buyer's Handbook', 'it is often the less obvious factors of vendor
capability that distinguish sources rather than the apparent ones. For
instance, financial analysis often brings to light business weaknesses that
could make a source of supply unreliable although technically it might be
highly suitable'. Four areas are listed for investigation: technical, financial, production, and management. Management capability is regarded as
name
KEY SUPPLIER PROFILE
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
category
Parent organization & affiliates

Products and markets
Other customers
Financial information
Organization chart
Personality profiles, executives & contacts
Visits: who went, persans seen, dates
Visit reports
Forward plans
Alternative suppliers
Alternative materials
Purehase history: dates, prices and terms
delivery performance
qua Iity performance
Other data
Figure 12.2 Key supplier profile
ref.
175
vitally important. Significant indicators of management ability are 'the

financial state, the effectiveness of internal administration and systems, as
weil as the way in which external relationships are established and
maintained', and also the tone or atmosphere of the organization.
'Discontented employees produce bad work. In any organization it is the
people who make it tick. If the 'atmosphere' in a works is good, the
management is usually doing its job effectively despite personal opinions
of the managers or directors themselves'.
Information obtained and the judgments made after such investigations
into suppliers and potential suppliers must be available to the decision
maker at the time of decision if decisions are to be optimized.
One way to achieve this is to summarize the results in a series of key
supplier profi/es. A typical format is shown in Figure 12.2. This is the
cover of a filing folder in which the detailed reports and charts referred to
are enclosed.
Another way to present the available information which has attracted
much support and much Opposition is to summarize it into numerical
scores. Vendor rating, supplier rating, vendor evaluation and supplier
evaluation are some of the terms used for this system. Suppliers are rated
on their performance (rather than their capability) in a range of supplier
attributes. Two problems with these numerical scoring systems are, firstly,
which attributes to include and which to omit. Price for instance is often
omitted on the grounds that a direct comparison is possible between the
price quoted by Supplier A and the price quoted by Supplier B, while to
compare the delivery performance or the quality conformance of the two
firms it is necessary to examine the records and summarize them into a
score or mark. Secondly, there is the problern of weighting the scores: is
delivery performance as important as quality conformance, and if not is it
twice as important, or 1.5 times as important?
Maximum
points
A. Ouality performance
B. Right time delivery performance
C. Part shipments (made only when required by customer)
D. Ability to carry out paper work correctly (reference numbers
stated on letters and invoices, shipments made according
to instructions, test certificates sent without delay, etc.)
E. Ability to answer telegrams, telex, telephone calls, letters
and orders promptly
F. Delivery follow-up (informing customers in advance of
expected late shipments)
G. Sales pol icy and sales eth ics
H. Performance of the salesmen
I. Ability to assist the customer in reducing costs (value analysis)
Total
Figure 12.3 Supplier evaluation by numbers
30
30
5
5
5
5
5
5
10
100
176
One firm uses the form shown in Figure 12.3 for about 200 suppliers (out
of 1200 to 1500 regular suppliers) who account for 800?o to 900?o of the
purchase spend. Delivery performance and quality conformance are
assessed factually from inspection and goods received records. Certain
other scores are supplied by buyers on the basis of their subjective
judgment. Rating systems in current use range from those which are
completely objective and just summarize in a single number the weiglited
average performance on delivery (ratio of late deliveries to total deliveries ),
on quality (ratio of rejects to total deliveries) and sometimes also on price
(for instance this year's price compared with last year's, or with prices
quoted by competitors), to those which are completely subjective and
simply express the buyer's personal judgment in numerical terms. Most
systems include elements of both, since some features regarded as important cannot readily be evaluated objectively. It is of course a mistake to
assume that a subjective judgment somehow becomes more objective when
it is expressed in numbers.
Supplier evaluation scores derived in some such way are used to some
extent in deciding which supplier gets the business, but perhaps a more
important use is in deciding which suppliers need to improve their
performance. Suppliers scoring below 70 on the form in Figure 12.3 are
urged by the buyers to do better and possible reasons for poor performance
are discussed, as weil as possible methods of improvement. Consistently
low scorers are dropped. Supplier development as wetl as supplier selection
is served by the supplier analysis process.
Another multi-establishment firm calculates vendor ratings once a
quarter. In outline, from 1 to 5 points are awarded on each of three
characteristics: quality, packaging and technical service. The score for
quality is weighted most heavily, being multiplied by 6, and the other two
are each multiplied by two. The figures are then added to give an overall
score between 10 and 50, which is used to classify suppliers into four
groups or grades, A, B, C, and D. Purchasing Department notify a
supplier whenever his rating changes and discuss the reasons for the
change. The same system is used at all their establishments.
Adverse comments from purchasing managers opposed to numerical
scoring systems included the following: 'much of what has been published
is quite impractical or meaningless in an industrial environment other than
repetitive engineering ... Ultimately it is a matter of judgment whether one
buys from a source or not. To this end we try to develop buyers who have
experience in speciai fields, e.g. paper and board packaging, plastics,
chemicals, etc. They have seen many factories producing products in these
fields and are able to assess with reasonable accuracy whether a supplier
has adequate premises, equipment, staff, quality control, etc., to handle
the type of business we intend to place. We would expect at least one visit,
probably several visits with other technical personnel, to be made before
orders are placed ... Let me not pretend that sometimes things go wrong,
177
but these are rare, and we often find at least an element of our own fault in
that we have failed to make clear some feature of our requirement in the
shape of fluctuating quantity or a vital element of quality.'
Another wrote: 'I am not too concerned about how this information is
gathered and kept up to date, because I have not yet found a system which
costs less than it gains', stressing the importance of correct and up to date
information as opposed to a particular form of presentation.
Some respondents expressed no particular view about the usefulness in
general of formal numerical rating schemes but pointed out that for what
they bought such schemes were not applicable. 'In packaging, there are
only three manufacturers of cellulose film in the UK and all three
manufacture to international specifications.' 'In buying steel from the UK
for export, or from overseas suppliers for import or for sales to other
countries, we are guided by previous experience. In the case of new
suppliers we visit the works, then place a trial order.' 'As suppliers of
commercial vehicles and luxury coaches, we have a long association with
our main suppliers and know a considerable amount about their size,
financial status and ability to produce goods of the right quality at the right
time. In selecting suppliers of sundry equipment we have no formal
method of appraising them apart from their general reputation in the
motor trade.' 'Most of the buyers here at Bakery Centre are specialists.
Personal knowledge and experience are the key to success.' 'We do not
have simple forms for evaluation, but in-depth feasilibity studies. Purchasing research evaluates world sources.'
In addition to financial assessment, and the assessment of technical and
management capability, decisions to place business with particular firms
are affected by policies on such matters as geographicallocation, the use of
distributors rather than buying direct form the manufacturer, the allocation of business between one or more sources, and preference for small
suppliers, suppliers in particular areas, or suppliers who are also customers. Supplier development is a further factor.
Financial assessment
Large organizations sometimes have a section in the financial accountancy

department which assesses both suppliers and customers financially, and
produces internal credit ratings. The object in the case of customers is to
assess how likely they are to pay off their bills, and thus how much credit
can be extended to them. The object in the case of suppliers is to assess how
likely they are to encounter financial difficulties in meeting their obligations under purchase contracts.
There is no really satisfactory way to teil how sound a supplier's
financial position is, without employing auditors to make a detailed
examination - which one could hardly do as a preliminary to placing an
order. The difficulty is that all the information one can get is historical. At
178
that it may be better than nothingo The supplier's published accounts are
usually available, perhaps from the salesman or the company secretaryo All
limited companies are required by English law to supply copies of their
audited accounts to the Registrar of Companies, where they are open to
inspection by the publico Balance sheets can be made to yield a little more
information than appears on the face of th,em by ratio analysiso In smaller
firms, purchasing staff should consult colleagues who are qualified
accountants for aid with thiso An important ratio these days is the ratio of
current assets to current liabilities, which indicates how good the company's liquidity position iso Fundamentally sound companies have had to
go into Iiquidation because of cash flow problemso Current assets should
preferably be at least 205 times current liabilitieso If the ratio is 1 or less the
company is usually in troubleo The acid test or quick ratio is the ratio of
cashplus accounts receivable to current liabilitieso It should be at least 105 0
Profit can be expressed as a percentage of sales and also of net assetso
These are figures which vary from one industry to another and also
from year to year, and financial analysts compare them with published
statistics for the industry and the year to see if the firm is more, or less,
profitable than its rivalso One cannot have much confidence in the survival
prospects of unprofitable businesses, which may also be likely to quote low
prices to get contracts and then plead for a price increase to avoid collapseo
Profitable suppliers are a better risko
Local sources
Buyers aim to pick the best source and make the best buy on a national or
continental, or even a world, scaleo The amount of search effort depends
on the amount being spento For !arge orders, long runs, purchases which
require unusual skills of the supplier or which will repeat, it may pay to
cast the net wideo The best supplier may be half a world away But he may
also be just across the streeto
Local sources are preferred when 'other things are equal'; in other words
a local supplier who can supply goods of acceptable quality at competitive
prices is preferable to a distaut supplier who can also supply goods of
acceptable quality at competitive prices unless special considerations exist.
Quicker and more reliable delivery, and faster and eheaper communications (by personal visit or local phone call instead of Ietter or long-distance
phone call, for instance) tell strongly in favour of suppliers in the same
geographical area as the purchaser.
A policy is sometimes advocated of giving preference to local sources
just because they are local, even though on price, or quality, or service, or
delivery they arenot really as good as other sources located further awayo
Public service institutionssuch as local government, area electricity boards,
universities, have to adopt a firm line on requests of this kind, although of
course they have also to give a fair hearing to the representations of
0
179
potential suppliers in their local area. Large organizations which open

factories in non-industrial areas may adopt a policy of encouraging local
sources to improve, in order to achieve a better supply position in the
future, and also perhaps to build up a reserve of skilled labour, gain local
goodwill, and generally strengthen the industrial infra-structure. This is
discussed later under the sub-heading 'Supplier development'. The crucial
feature is that it should not be a permanent subsidy, but a temporary
investment in improvement. Similar considerations are involved in the
'infant-industry' argument for protection by tariff or quota Iimitation of
imports; infants are protected so that they can grow up safely, not so that
they need not grow up.
Distributor or manujacturer?
Often there is a choice between dealing direct with the manufacturer, or

dealing through an agent or stockholder. The stockist normally has all the
advantages just adduced for the nearby source, plus the further and
considerable advantage of immediate delivery. Drawing on the stockist
instead of holding your own stocks saves space, capital outlay, handling,
forward planning, paperwork and obsolescence and increases flexibility.
Theseare genuine advantages; but do not Iead to any general rule. Instead
of deciding to deal direct whenever possible, or to deal with Stockholders
whenever this will reduce stocks, the rational course is to investigate the
facts, which vary from trade to trade as weil as by areas, and decide each
case to the best advantage.
Buying direct from the manufacturer ought to be eheaper, because
stockists have their own expenses to cover and their own profits to make.
When the price reduction outweighs the savings which immediate delivery
could bring, then it is worth dealing direct; and this is most likely to apply
to !arge regular purchases. Small occasional purchases, or purchases which
Iook small to manufacturers, are welcomed by stockists, who can often
handle them eheaper as weil as quicker than a manufacturer, geared to
larger-scale operations. A further advantage of the stockist is that he often
stocks a range of similar items, so that he saves you the buying effort of
dealing with a dozen different sources for a dozen small value purchases
which it isn't worth spending much time on.
Buying direct from the manufacturer ought tobe cheaper, but even for
!arge purchases it isn't always. Of course many of these considerations do
not apply to made-to-order purchases, which are hardly ever sold through
agents; they apply mainly to sundries, maintenance requirements, consumable shop supplies, stationery, and standard supplies in generalas opposed
to specials.
180
One or more?
For major purchases, organizations have to decide whether to rely on one

supplier exclusively for an important material or product. Once again, it all
depends. There is no doubt that most people with purchasing experience
are not happy to rely on a single source for a major item.
But there may be no choice, because one supplier has a monopoly. Or,
there may in practice be very little choice, because one supplier is
outstanding. Or there may be an initial choice, but once having made the
choice you may be stuck with it for a considerable time because of the
expense of making a change. This happens when special tooling, dies or
moulds have to be made at high cost. Even when the special tackle becomes
the buyer's property it may not be immediately suitable, or not suitable at
all, for use by another supplier.
Sole source buying often can't be avoided when long co-operation
between buyer and seller is needed to develop something new and
complicated -like a new tank, aircraft, rocket. But it is difficult to strike
the right balance between commercial and technical considerations when
what is bought is not a standard product or component but design talent,
research results, and unique manufacturing capability. The buyer's purchasing and engineering staff must then work very closely together.
When there is a choice between having one supplier or more than one,
the choice must be made on the facts which apply; including the relative
bargaining strength of buyer and seller, the type of purchase, the set-up in
the industry, and the amount ofbusiness the buyer has to place relative to
the supplier's turn-over. When the volume of business Iooks small to
prospective suppliers, vital though it be to the buyer, it may be advisable to
make it Iook as !arge as possible by giving it to one supplier. A supplier
who knows he is getting all the business available may be encouraged to
contribute useful ideas for product improvement or cost reduction.
Progressing certainly and quality control possibly are simpler when there is
a sole supplier; and bulking purchases may bring price advantages,
especially when the volume is really too low to split.
But competition between suppliers may also bring price down and
stimulate suggestions for improvement. And there's a Iot tobe said for not
having all the eggs in one basket. When strike, fire or breakdown cripple
the main source, it's often a Iot easier to build up supplies from an existing
secondary source than to find a completely new substitute source. Whether
or not it is easier to maintain deliveries from a sole supplier who knows you
have to rely on him, or from several, when supplies are scarce, is again a
question without a general answer. A big regular buyer may get priority
over small buyers whether or not he has to rely on a single source.
The question is not particularly important when several suppliers are in
existence who are about as good as each other, and it may then be best to
stick to one supplier at a time, without closing the doors on the others.
181
When this is not so, most buyers feel uneasy. They worry about continuity
of supply. They wish they had more than one supplier so that the
knowledge that the business was being shared and the performance
compared with competitors would keep them all on their toes as to price,
quality and service. Often they are then willing to go to a good deal of
trouble to build up an inferior second source until it can compete on level
terms with the main supplier.
Small firms as suppliers
When standard products which can be manufactured in bulk are required,

the technological economies of large scale production and long runs, and
in-depth support in research and development, make the prices and products
of the large firm very attractive. Even then, relative smallness is sometimes
put forward as an advantage. The second largest car hire firm in Britain
ran advertisements claiming that because they were not the largest they had
to try harder. In 1972 Amco advertised 'our one big advantage over other
oil companies: we're smaller than they are .... Take a big company with its
thousands of supply contracts. The big company can afford to rest on its
Iaurels, and often does. Whereas ... we have to work extremely hard to
keep the contracts we have got and to win the ones we haven't.'
Smaller firms should be less bureaucratized, with faster response time,
greater adaptability, better communications and a more direct contact
between customer and managcr. A Marks and Spencer representative told
a 1971 conference that suppliers with less than 1000 employees seemed to
be more successful in meeting Marks and Spencer standards, adding
provocatively that '500 employees would seem tobe the optimum size for a
supplier plant'.
In reply to questions from the Bolton committee,
a large London department store indicated that virtually all its turnover
of women's fashions and half its sales of top quality clothing were
supplied by small firms. Of the suppliers to the furnishing accessory
divisions of the same store, 8507o were small firms. One of the largest
diversified manufacturing companies had 950 suppliers of which 40%
were small firms. A tractor manufacturer replied that 60% of the parts
and components entering its main plant came from small firms. A Iarge
rubber company estimated that 35-40% of its total purchases were from
small firms 'from local tradesmen supplying canteens, etc, through to
specialized equipment, small chemical firms, builders, garages, etc.' One
of the Big Four motor manufacturers had 1200 suppliers of which 13%
were small firms accounting for 3 Yz% of total purchases, although
small/medium sized companies, just outside the Committee's terms of
reference, accounted for very much more. A division of one major
aerospace company had 76 suppliers in the United Kingdom
182
manufacturing parts and components under sub-contract, and of these

4307o were small firms; of its 104 material suppliers 12% were small
firms. Most of the !arge companies praised small firms for their low
prices, speed, flexibility and service, and one company claimed that it
could not operate without them[4].
Apart from the immediate advantages of the small rather than the !arge
firm, there are long term advantages in cultivating today's small firm
which could be tomorrow's !arge firm.
Sight should not be lost of the long term goals for society to arrive at:
dispersion rather than concentration of economic power, and decisionmaking; plants near optimal size; short lines of communication between
head office and factory floor ... the individual's freedom of choice
and satisfaction, as consumer and producer of goods and services[5].
Of course it can be argued that the industrial buyer should not Iet the
long term goals of society take precedence over the short term goals of his
employer when taking purchasing decisions. Such questions of the manager's social responsibility are difficult. But in this case it is surely clear that
the purchasing organization should in its own interests include among its
goals the establishment of supply markets comprising several satisfactory
suppliers instead of supply markets in each of which there is left only one
powerful monopoly with a take-it-or-leave-it attitude to customers.
The purchasing officer who treats such long term considerations of his
organization's interests as outside his scope is confining hirnself to the
organizational roJe of price buyer. If his firm is to optimize its purchasing
position, it will devolve on others in the buying coalition to take a lnger
view and to consider the broader aspects of supply market structures.
Government buying policies and the small firm
In some countries, for instance the USA, Japan, and France, there are
ministers or agencies of government, to counteract the tendency of the
continuously growing importance of the public sector as a buyer of goods
and services to be detrimental to the small firm sector. Recommending
similar action in Britain, the Bolton Committee stated that:
It would be easy for the present, broadly satisfactory, state of affairs
in this country to worsen dramatically without anyone in Government
being aware of the fact, simply because procurement officers are not
required to consider the effect of procurement policy on the structure of
industry. We believe that the Government's power, for good or ill, as a
major purchaser of many goods and services is so great that it should not
be exercised with an eye simply to the pursuit of economy. In fact of
course, major departments do have regard to other considerations: for
example the Ministry of Defence have traditionally used their buying
power to support and preserve strategically important United Kingdom
183
suppliers, and the Ministry of Technology sought to influence the

structure of various industries, for example computer manufacture,
through its procurement policies. The preservation of a competitive
industrial structure is also a proper object of policy, and we therefore
recommend that all major department should be required to have regard
to the effects of their buying policies on the structure of the industry in
general, and particularly on the small firm sector. We do not believe that
this necessarily conflicts with the pursuit of economy. The use of the
widest possible range of suppliers and contractors ought in the long run
to keep prices down, even if in the short term it were necessary to accept
some slight additional costs through the letting of contracts in small
units, for example[4].
This recommendation has been accepted and implemented by the UK
government.
Suppliers in high unemployment areas
From Italy's Mezzogiorno to certain parts of the Highlands of Scotland,

pockets of depression and areas of high unemployment exist. It has been
argued that public sector purchasers ought, in the public interest, and other
sector purchasers should from moral duty, give preference to suppliers in
these areas.
The argument for doing this is, in the case of the public sector, quite
straightforward. Since public money and public effort are already being
poured into the encouragement of new business to move to these areas,
since businesses in these areas already receive substantial public assistance,
it is said, preferential treatment in the award of contracts can be seen as yet
another form of aid and encouragement to increase work opportunities.
Where a premium has to be paid, this could weil be eheaper than outright
subsidies to firms, or welfare payments to unemployed people.
The argument against is also clear enough. If firms in the areas in
question can win contracts without quoting competitive prices, where is
their incentive to become competitive? It is surely inflationary to place
orders at high prices in order to keep men in jobs when the work can be
done better by other men in other parts of the continent.
The position in 1971 in Britain was that firms, in what were designated
as DevelopmentAreas, were given every opportunityto tender for public contracts. Where price, quality, delivery date and other considerations are equal,
government purchasing departments, nationalized industries and other public bodies, place contracts with firms in these areas in preference to those elsewhere. In addition, government purchasing departments operate a scheme
under which Development Area firms, which have been unsuccessful with
their first tender, may be given an opportunity totender again, for up to 25%
of the requirement, at a price that will not increase the total cost.
184
Redprocity
Choosing the suppliers who will serve your company best becomes much
less Straightforward when their value as customers is allowed to affect their
choice as suppliers. There is a substantial sector of the economy which is
not troubled by such considerations; including monopolies, whether
statutory or de facto; concerns selling consumer goods to the public, and
manufacturers of medical or military supplies whose output goes to
government departments. But an even more substantial sector comes up
against reciprocity (the principle that I'll scratch your back if, and only if,
you scratch mine), with painful regularity. It is easy for those who have not
been involved in such situations to dismiss them with the remark that good
sales departments don't want, and good purchasing departments don't
offer crutches of this kind. An American estimate based on replies from
well over a thousand executives was that over half the purchasing
departments in private industry were subjected to reciprocity pressures,
applied at all levels from the threshold of audibility to the threshold of
pain. Some firms give their salesmen lists detailing sales to, and purchases
from, concerns which happen to be both customers and suppliers; some
allow their purchasing officer to set a ratio between the amount of business
they give to a firm and the amount they get from that firm. Naturally it is
the businesses which both buy and sell to other businesses which are mainly
concerned; and what makes reciprocity such a knotty problern is that it
involves an apparent conflict of interest between sales and purchasing
departments, and between short- and long-term considerations. Moral or
ethical issues appear to be at stake and more than one department is
involved, so that top management has often to decide the matter.
In its siruplest terms, the question is: should youjavour your customers
as suppliers? And the loaded word is 'favour'; there's no harm in having
some customers as suppliers, and indeed it would be astonishing if none of
the National Coal Board's suppliers used coal, or if none of Ford's
suppliers drove cars made by their customer. There's no harm in the
legitimate use of trade contacts to get introductions which may lead to
sales. No one could object to a letter which a carpet salesman sent to his
carpet factory after calling on one of his customers, a wholesaler who had
started a subsidiary to make point-of-sale equipment: 'They are using some
of this equipment to display our products in their showrooms, and would
be very pleased to quote for any such fittings we may require. They assure
me they are competitive on price; and they ask no favours, only that they
may have an opportunity to quote if ever the occasion arises.' Few would
object to the letter one purchase department sends to all customers asking
for details of current products and undertaking to put them before the
buyer concerned: 'should we at any time have a requirement for something
you supply we most certainly want you to have an opportunity to quote'.
The company rule isthat 'no premium is to be paid for reciprocal business
Se/ecting suppliers: prob/ems and systems
185
nor shall any sacrifice be made in the way of price, quality or service'.
Some purchasing managers think that dealing with your friends (in the
corporate shadow-sense of this misleadingly personal phrase) makes for
better relations. Consequently when they have to select a source for
standard products at standard prices they prefer the firm they deal with
already - whether they deal with him because he supplies something eise,
or because he is a customer. But the matter is more difficult when the
product is not standard, or the price is negotiable, or possible suppliers are
few. Favouring customers may then involve a hidden premium by way of
higher price or worse service.
The premium is hidden because few are the firms who will actually
purchase worse goods at higher prices in the hope of making a sale (and
they are probably past helping). Your customer may be willing to make a
price concession to meet the competition; but for later purchases price may
creep back up again. and the competition, having heard that the business
was awarded reciprocally, may lose interest.
Further to entangle an already knotty situation, an astute purchasing
manager may happen to serve a top management which the most dazzling
display of purchasing virtuosity impresses less than a good sale. So he tours
his top twenty suppliers and comes back with thousands of pounds worth
of orders in his pocket. However he extorted them, and whether or not the
function for which he is responsible has benefited, the man hirnself is likely
to benefit from this demonstration of business ability. This may be why,
according to the estimate previously cited, not only do more than half of
industrial purchase departments undergo reciprocity pressures, but more
than half of them are the instruments through which pressures are applied.
The professional attitude is that whether or not a potential supplier is a
potential customer is irrelevant to the question of whether or not to deal
with him. No account whatever is taken in choosing suppliers of actual or
potential sales to them. Having chosen suppliers no pressure is exerted on
them to become customers, or bigger customers.
But reciprocitv is not a matter of ethics, or what is right or wrong; it is a
matter of expediency, or what pays. Many firms arenot in a strong enough
position to ignore the external market structure and balance of power
questions. Reciprocal arrangements are common when a firm sells products which are relatively undifferentiated (i.e. very similar to what
competitors sell) at relatively standard prices (i.e. very similar to what the
competition charges) to other businesses rather than to the public or the
government; and tricky three-way and even four-way deals have been
struck in these intermediate-product markets. (Firm X, for instance, a big
customer of Firm Y, uses its buying power to induce Y to place a
substantial order with Firm Z. Pure charity is not the motive; Firm Z now
undergoes considerable pressure to place its business with Firm X. The
business goes round and round, but only in the charmed circle where
reciprocity rules.)
186
There is also some evidence to suggest that an increasing proportion of

trade is carried on between companies connected by direct investment.
Purchasing executives should press their point of view. They should
insist that costs and benefits are weighed up with some care before any
reciprocal agreement is made. In weighing them up it is important not to
forget the intangible factors. lntangible factors include anything left out of
the quantitative evaluation which still will affect future trading; service,
continuity, keeping enough competition alive to provide a price audit, and
the risk of buyers losing heart and abandoning the attempt to get value for
money, for instance. If the decision is made to sign a reciprocal agreement,
factual records of performance should be kept, and the reason why the
supplier was chosen should be recorded. Negotiations must and can be
done without impairing goodwill or antagonizing a potential customer,
and without losing sight of the objective, value for money. Ten thousand
pounds of extra sales, it should always be borne in mind, often add less to
profits than a purchasing cost reduction of flOOO.
Supplier development
Organizationally, explicit recognition is sometimes given to supplier development as an objective of the purchasing function. Just as management
development programmes aim to develop the sort of managers the
organization believes it needs, so supplier development programmes aim to
develop the sort of suppliers the business needs.
Supplier development by British food factories in search of bulk supplies
of tomato paste led to vast irrigation projects in Spain and Morocco. ltaly,
once the major producer, lost its leading place to Portugal, where a whole
new crop producing and processing industry came into existence, shipping
50000 tons to Britain in 1970. Peasant farmers had been persuaded to
switch to the new crop, given seedling tomato plants, fertilizer, and full
growing instructions, and guaranteed a market. Increasing demand, and
certain complications - political and other - in Portugal, is making the
food industry buyers fly more and more frequently to Turkey, which may
become the volume producer of the later seventies.
The basic idea of supplier development is that supply markets are not
treated as given, but as something to be shaped; suppliers themselves are
regarded as capable of being improved. Hehrman reports that in Australia
'US affiliates have demanded of their suppliers a higher quality of raw
materials and have assisted them in producing such qualities; they have
insisted on prompt delivery and have helped reduce delays; they have
helped in the construction of the supplier's plants and equipment Iayout,
even assisted in the purchase of production equipment[6]'. Supplier
development in this sense is a planned process of getting suppliers to
produce the things the purchaser wants, to his quality standards, in the
quantities and to the delivery schedules he requires, by providing technica/
187
assistance and advice, commercial assistance with transport, procurement

of materials or equipment, long term supply commitments, and perhaps
evenfinancial assistance in the form of loans or investment to pay for new
tooling or equipment.
The Marks and Spencer programme which has been mentioned previously is a good example of supplier development, although Marks and
Spencer do not use this particular term. The supplier quality assurance
programmes pioneered by Ford Motor and widely adopted in vehicle
manufacturing is another example of supplier development.
Supplier development in the wider sense involves a planned process of
shaping the supply markets of the future while allocating the orders of the
present. Instead of merely picking a card from the hand offered, we try to
make sure that a better hand will be offered next time. Economists have
shown that markets tend to become more concentrated. As one distinguished economist puts it, 'competition is always in course of bringing
itself to an end. At any moment in prosperaus modern industry the number
of firms is tending to fall and competition is becoming more oligopolistic[7]'. Purchasers who do not wish to end up with a monopoly supplier
must support new entrants to the market and keep smaller firms alive.
British motor car manufacturers all seemed to become aware of the need
to do this at the beginning of the 1970's. As one report puts it:
If one firm could supply lOOOJo of a manufacturer's requirements of one
particular part, then by all the logic of volume production, it could do so

more cheaply than several suppliers. The inherent danger in this was the
monopoly situation enabling the supplier to maintain false price Ievels.
This was appreciated from the earliest days and in the most blatant cases
the motor firms tried to combat it by financing the establishment of
competition. Faced with this sort of threat the monopoly or nearmonopoly holders quickly came to terms with them and prices were fixed
on the basis of an agreed percentage of profit calculated after joint
examination of detailed statements of production cost. Multi-sourcing
really got under way last year after a series of strikes at key component
firms[8].
Out of Chrysler UK Ltd's 900 production suppliers in 1971, less than 4%
controlled over 80% of the intake of production parts. 'The !arger seller
can undoubtedly apply price pressure and ignore appeals from the buyer,
where the medium or smaller size company makes an effort to accommodate his customer ,' and the internationalization of suppliers, with its
attendant in-depth knowledge of price-levels in other countfies was not
making things easier for buyers[9].
As Leenders argues, 'a company can, through its marketing efforts,
develop new customers. Exactly the same opportunity exists on the
procurement side. A company can, through its procurement efforts,
develop new suppliers[lO]'.
188
12.1 Case study: selling electric motors
Two weeks after receiving a fairly !arge order for machine tools from Top
Electric, Rosthwaite and Orange were visited by the electric motor
salesman for Top Electric. 'Why don't you buy our motors, we buy your
machines and fair's fair,' said the salesman. 'We've been through all this
before,' said the Rosthwaite and Orange buyer. 'Y our motors cost more
than Waters, to begin with.' 'But ours are better motors,' replied the
salesman. 'You make one of the best machine tools of its dass on the
market, and you owe it to your customers to fit the best motors. When it
comes to quality, Topmotorsare tops.' 'We've read your ads,' said the
buyer. 'And we've tested your motors. And we think that Waters make a
better machine as weil as offering a better price.'
This more or less ended the preliminary skirmish. The interview was
perfunctory because both parties expected the real engagement to occur at
higher Ievels. Sure enough, Rosthwaite and Orange's Design and Development Director shortly was visited by Top Electric's chief sales engineer.
The interview went to a similar pattern with more figures.
Next, Mr Bullock, the managing director, received a lengthy phone call
from Top Electric's sales manager, who claimed to be very worried by
what he thought of as an obstinate and unreasonable opposition to his
motors by one of his company's valued suppliers. To get a fair trial for the
motors without cost to Rosthwaite and Orange, he proposed that Top
Electric should pay for the machine tools they had ordered by supplying an
equivalent value of electric motors. This, he pointed out, would enable
Rosthwaite and Orange to sample a superior motor and thus improve their
own sales prospects; but it would also entitle them to preferential treatment
in the allocatin of machine-tool orders for a major re-equipment programme currently under way at Top Electric.
Electric motor manufacturers were not an important market for
Rosthwaite and Orange, and Bullock turned this down on the spot, with
expressions of indignation at the mere idea of choosing electric motors on
any basis other than quality, service and price, and with reference to the
fact that his terms were net cash thirty days and not kind. He then dictated
two memos to his own sales director.
The first stated that Top Electric were engaged on a major re-equipment
programme with opportunities for bulk sales of machine tools, according
to a telephone message from Top's sales manager today; report please.
The second noted that Rosthwaite and Orange's electric motor purchases from Waters averaged so many tens of thousands of pounds a year
for the last five years, and asked what had been done to get a corresponding amount of machine-tool business from Waters.
(1) How would you have handled the situation?
(2) How should Top Electric's sales manager react to an approach from
Rosthwaite and Orange's sales director requesting preferential treatment in
189
the allocation of machine-tool orders for the major re-equipment programme on the grounds that Top Electric have already recognized the
superiority of R and G products by placing the current order, given that
Top Electric's sales manager knows nothing about any such re-equipment
programme and believes that his company's cash flow position precludes
any machine-tool purchases this year?
(3) What plan of campaign should Rosthwaite and Grange's sales
director adopt in approaching Waters?
References
2
3
4
5
6
7
8
9
10
Rowe, D. and Alexander, I. (1968), Selling Industrial Products,

Hutchinson, London.
Webster, F.E. and Wind, Y. (1972), A general model for understanding
organisational buying behaviour, Journal of Marketing, 36, 12-19.
Buckner, H. (1967), How British Industry Buys, Hutchinson, London.
Bolton, J.E. (1971), Small Firms, HMSO Cmnd 4811, London.
Moos, S. (1971), Research Report 13, Committee of Enquiry on Small
Firms, HMSO, London.
Behrmann, J. (1970), National Interests and the Multinational Enterprise, Prentice Hall, Englewood Cliffs, N.J.
Robinson, J. (1969), The Economics oj lmperject Competition, preface to second edition, Macmillan, London.
Webb, C. (1971), The Times, London, 29 November.
Kennedy, G.C. (1971), article in Modern Purchasing.
Leenders, M.R. (1965), lmproving Purchasing Ejjectiveness through
Supplier Development, Harvard University Press, Cambridge, Mass.
13
'The criteria on which a successful purchaser should be judged, spring

from his ability to shop araund and select good suppliers and not his ability
to shoparaund for cheap buys' (Derek Rayner, Marksand Spencer Ltd.)
'Surely supplier and user should be in partnership so that each can prosper
through the other' (Lord Nelson, English Electric Co Ltd.) 'We regard the
relation between buyer and supplier as a true collaboration, not as a kind
of duel in which one seeks an advantage which the other does his best not
to concede' (A. Rambaux.). 'We expect the supplier to behave like one of
our own plants. In return we would not demand from him more than we
expect from our own plants. The relationship should be cordial without
sacrifice of integrity.' (British vehicle manufacturer.) These quotations
from various sources indicate a common view of the basic attitude the
successful purchaser adopts to suppliers. lt is one of 'partnership' or
'collaboration' rather than antagonism or 'duelling', although there must be
occasions when the interests of supplier and buyer are in conflict, at any rate in
the short term. The need then is to negotiate a solution which is so far as possible mutuatly satisfactory, without losing either 'cordiality' or 'integrity'.
Roy Hili and Terry Hillier refer to the 'art and science of source
management[l]'. Human judgement is involved in the art of source
management; the scientific side refers to the systematic collection of
quantitative information. An artistic and entrepreneurial approach, they
argue, is just as important in purchasing as in marketing, since both are
involved in areas of commercial uncertainty. They state that organizations
which 'have developed a high degree of co-operation have usually found
this to be to their mutual advantage, very often leading to the establishment of long-term relationships'.
191
Evidence for this has been published by David Farmer and Keith
Macmillan[2]. They show that industrial purchasers not only stay with the
same major suppliers for years, but prefer to stay with them even when
valid alternative sources are open to them, and claim a number of benefits
from so doing. Of course there is a need to ensure that long-term suppliers
remain competitive, and that continued relationships are not simply the
result of inertia or of some improper influence.
There was much evidence published in the later seventies, from congressional enquiries and other official investigations, and reports of court cases,
that improper influence of various kinds, ranging from somewhat excessive entertainment to enormous bribes, had been used by many organizations (including some very reputable ones) to gain orders and contracts for
certain types of business, especially in certain parts of the world. After
much discussion, the Institute of Purchasing & Supply adopted the Ethical
Code shown in Figure 13.1. This specifically refers to the advantages of
continuing relationships with suppliers, while advising members to avoid
any arrangement which might in the long term prevent the effective
operation of fair competition.
Salesmen
Purchasing officers come into contact most often with the supplier's sales
representatives, although they also meet others in the supply organization.
(This varies with type of purchase, as we saw in the last chapter.) Salesmen
make, on average, three to five calls a day and this is the main part of their
work. Purchasing officers may receive also three to five calls a day, but it is
quite a small part of their work. It is an important part, though; Hugh
Buckner found that all groups of executives involved in buying decisions
considered technical salesmen their most important source of information
on products.
Buyers learn from salesmen about new products, changes in the market,
possible new sources of supply. Salesmen hear from buyers of possible
business, complaints, queries, changes in the customer organization or
prospects. This two-way exchange of information is valuable and most
buyers will see any caller between ten and four even though it is not always
convenient to break off what one is doing. Many purchasing departments
have one day a week on which they do not see callers without appointment.
The practice of having only one day a week on which they do see callers is
not recommended.
It should not need to be pointed out that callers ought to be treated with
courtesy. There is however evidence that both purchasing staff and sales
staff look bigger outside their organization, when trading with other
organizations, than they do inside. This can lead to wishful and compensatory behaviour. 'A salesman is got to dream, boy. It comes with the
territory,' as Arthur Miller's character says in the play 'Death of a
Salesman'. One still comes across buyers who are extremely rude to callers,
192
..----THE ETHICAL CODE OF-----.

THE INSTITUTE OF PURCHASING AND SUPPLY
lntroduction
I. In applying to join the Institute, membcrs undertake to abide by "the Constitution, Memorandum
and Articles of Association, Rules and By-Laws of the Institute". The Code set out below was
approved by the Institute's Council on 26 february, 1977 and is binding on members.
2. The cases of members reported to have btcached the Code shall be investigated by a Disciplinary
Committee appointed by the Council; where a case is proven, a member may, depending on the
circumstances and the gravity of the charge, be admonished, reprimanded, suspended from membership or removed from the Iist of members. Details of cases in which members are found in breach
of the Code will be notified in the publications of the Institute.
Precepts
3. Members shall never use their authority or office for personal gain and shall s<ek to uphold and
enhanoe the standing of the Purchasing and Supply profession and the Institute by:
(a) maintaining an unimpeachable standard of integrity in all their business relationships both
inside and outside the organisations in which they are employed;
(b) fastering the highest possible standards of professional competence amongst those for whom
they are responsible;
(..::) optimising the use of resources for which they are responsiblc to provide the max.imum benefit
to their employing organisatlon;
(d) complying both "ith the Ietter and the spirit of:
(i) the law of the country in which they practise;
(ii) such guidance on professional practice as rnay be issued by the Institute from time to time;
(iii) contractual obligations;
(e) rejecting any business practice which might rcasonably be deemed im proper.
Guidance
4. In applying these precepts, members should follow the guidance set out below:
(a) Declaration of i11terest. Any personal intercst which may impinge or might reasonably be deemed
by others to impinge on a rncmber's impartiality in any matter relevant to his or her dutics
should be declared.
(b) Confidentiality and accuracy of in[ormativn. The confidentiality of information received in the
course of duty should be respectcd and should nevcr be used for personal gain; information
given in the course of duty should be true and fair and never designcd to mislead.
(c) CompetiJion. While bearing in mind the advantagcs to thc mcmbcr's employing organisation of
maintaining a continuing relationship with a supplier. any arrangcment which might, in the
long term, prevent the elfective operation of fair competition, should be avoided.
(d: Business gi{ts. Business gifts. other than iterns of very small intrinsic valuc such as busincss
diaries or calendars should not be accepted.
(e) Hospitulity. Modest hospitality is an accepted courtesy of a business rclationship. However, the
recipient should not allow him or herself to reach a position whereby he or she might bc or
might be deemed by others to have been influenced in making a business decision as a consequenoe of acoepting such hospitality; the frequency and scale of hospitality acccpted should
not be significantly greater than the rccipient's employer would be likely to provide in
return;
(f) when it is not easy to decide betwee!t what is and is not acceptable in terms of gifts or hospitality,
the olfer should be declined or advice sought from the member's superior.
S. Advice on any aspect of the precepts and guidance setout above may bc obtained on written request
to the Institute.
6/77
Figure 13.1 The ethica/ code of the Institute of Purchasing and Supply.
193
refusing to see them, keeping them waiting, treating them like dirt if they
condescend to see them. Such people should be made to write out 2200
times the Biblical quotation 'he that hoardeth up corn shall be cursed
among the people, but a blessing upon the heads of them that sell', and
then transferred to less exacting work. One also quite often comes across
salesmen who are more skilled in talking than in stopping talking. Buyers
have to learn how to terminate a discussion without giving offence. Often
they just stand up and thank the caller for his call. Occasionally they have
to take his arm, and smiling a big smile Iead him to the door and close it
behind him.
Most buyers see any salesman on his first call, at which they try to agree
a frequency for repeat calls. Some representatives should not need to call
more often than once a year, although they will be reluctant to accept this;
others may need to call monthly.
Ethical problems in supplier relations
Purchasing work requires people of integrity. The men who spend millions
of pounds on behalf of their organizations are exposed to temptations
which few of their colleagues face. No organization can be expected to
profit from the employment, as buyers, of people who are chiefly
concerned with getting rich quick.
Graft occurs, and there is no point in pretending that it does not. With
local exceptions, however, purchasing officers seem to have a better record
than non-purchasing executives, whose position enables them to influence
some. purchasing decisions. This is unlikely to result from chance. It is
more likely to be the case in firms which:
(1) Select for responsible buying posts, conscientious people with firm
characters. If purchasing officers are in fact more honest than the general
population, this is presumably because honesty is one of the characteristics
for which they are selected.
(2) Instal departmental routines which discourage improper behaviour.
The choice of suppliers should be documented with quotation records,
rejection records, shortage sheets and supplier evaluations, partly because
these things help in selecting the best rather than the cheapest source, but
also to provide documentary justification when the supplier selected is not
the cheapest.
(3) Make some kind of outside check, by internal audit or even the
company's outside auditors. This is more efficient than rigorous and
elaborate rules for handling tenders. A suitable check is to pick at random
any six orders over ilOO placed in the last six months, and require the
buyer responsible to justify the price paid and the supplier used. This check
has to be applied by someone with common-sense, and advance warning
should be given so that suitable records can be kept.
194
The legal and moral duty of those who act as agents for their
organizations is now considered to be, to decline any gift or favour which
goes with the award of a particular contract, or puts them under obligation
to a particular supplier, or amounts to a secret profit.
We do not have to go far back in time to find a different standard.
Readers of Pepys's Diary know that this conscientious public servant,
although described by his contemporaries as 'discharging his duty to his
Prince with a religious application and perfect integrity, he feared no one,
courted no one, neglected his own fortune', did not in fact neglect his own
fortune quite as scrupulously as would be expected today from those
responsible for naval procurement.
Nor do we haveto go far from these shores to find a different standard
today. The entire world exists under the same space satellites, but not in the
same age. Some parts of the world are still in something like the Pepys era,
even though with transistors. Multinational companies have to allow for
the custom of the country, and in some countries personal commissions
and handsome gifts are customary in connection with the award of
contracts.
American purchasing textbooks appear to recommend a strict no-gift
policy such as is adopted by government purchasing staff, yet an astanishing research survey was published some years ago by 'Purchasing Magazine' of New York. 'One buyer stated that his company's no-gift policy
was not realistic, not f~ir, and he had no intention of complying. Another
buyer said 'Any gift regardless of size may be accepted without violating
purchasing ethics so long as it is accepted after the purchase is made'. A
third buyer regards gifts from suppliers as a fringe benefit of his job. *'
Part of the difficulty is that gifts and favours, which it would be
perfectly proper for the proprietor of a business to accept, cannot properly
be accepted by an employee who is not a principal but an agent. In a !arge
organization a further consideration is that the greatest care must be taken
not to give scandal to colleagues in other departments who do not have
outside contacts. Nor is it always easy to distinguish between gifts or
favours which are intended as a kind of bribe to gain business, and those
which are intended as commercial civility. Of course suppliers want their
customers to feel that it is a pleasure to do business with them; and Dean
Ammer warns American buyers that they must adapt 'to foreign business
customs. In Japan, in particular, business is mixed up with a great deal of
*The locus classicus of the golden fringe benefit is described in Frank Gibney's
book The Operators. ASears Roebuck dress buyer was found to have fittedout his
job with fringe benefits so plush, and including such a touching care for the aged
and inform, that they amounted to a one-man welfare state. Suppliers not only
made regular payments to him; they fed him, clothed him and his family, partly
furnished his home. He assigned one supplier to take his aged parents out to dinner
almost nightly, suggested to another that an employee be detailed to push his
father's wheelchair. He had twenty-seven bank accounts at the time of his dismissal,
and his total take exceeded a quarter of a million dollars over the years.
195
wining and dining . . . In fact, while American buyers usually grow

genuinely fond of their Japanese suppliers, they often return from visits to
Japan in a state of complete exhaustion from the continuous hospitality of
their hosts ... lt is not at all uncommon for businessmen to exchange gifts
in Japan and Europe. The American buyer who visits Japan, in particular,
should have a gift for each of his hosts which he can present at the time of
his departure. The practice is also not uncommon in Europe[4].' This may
seem hard on the American buyer, precluded by his company ethics from
receiving gifts but required by the custom of the country to give gifts; still,
as we know, it is more blessed to give than to receive.
The business lunch
Even the harmless businesslunch comes in for hard words from those who
are not in a position to enjoy what they describe as expense-account
junketings. Discussions which run into the lunch hour can conveniently be
concluded over the luncheon table. Salesmen, being professionally sociable
creatures, usually prefer to eat their meals with acquaintances, and in a
strange town the only people they know may be their customers. The
selling company pays the bill, which makes some buyers wary: they would
rather take turns to pay than feel under an obligation. As they don't see
why they should pay out of their own pocket when the other man is paying
on his expense account, they arrange for their own company to accept such
hospitality as legitimate expense.
Some buyers get so many lunch invitations that they decline them all,
either because they object to spending the lunch hour as captive audience
for a salesman, or because they don't want to give scandal to colleagues in
other departments, or toset an example to their junior staff, who might be
found reeling into the office at half past three reeking of Bisquit Dubouche
and Osso Buco unless their chief adopted a hard line. Some companies
with impressive executive dining rooms insist that any entertainment of
other companies' representatives must take place on the premises. Quite
commonly it is left to the purchasing manager to lay down sensible policies
in this trivial matter. Given a sense of proportion and the will to avoid the
appearance of abuse as well as the reality, no competent manager should
find any difficulty in defining a sensible policy for his department and his
circumstances.
Christmas presents
Whatever Christians feel about the commercial Christmas, it seems to be
something we have to live with, dating back as it does to the pre-Christian
Saturnalia of ancient Rome, and embraced with enthusiasm as it has been
by the non-Christian Japanese. One feature of the commercial Christmas is
that buyers, specifiers, and senior managers are apt to receive whole
cargoes of unsolicited gifts, from calendars in questionable taste and
pocket diaries packed with useful data about the phases of the moon, to
whisky, cigarettes, and even more lavish aids to festivity.
196
The donors, who are suppliers, explain this open-handedness (which

doesn't arnount to a row of beans in relation to turnover), sometimes as a
trade custom; sometimes as a token of esteem, although there must be
many people they esteem who do not receive tokens; and sometimes as an
acknowledgment of prompt and courteous reception of their representatives. They do not explain it as an attempt to induce buyers to give them
more business since this would expose them to prosecution; and few of
them view it in this light either.
The professional attitude is that only gifts of nominal value or which are
advertising in character are acceptable. Even advertising novelties such as
pencils, diaries and calendars are usually declined by the purchasing staff
of central and local government. This may seem needlessly prissy, but the
buyer for a small firm adopted the same policy in his second year with the
firm. In the first year he was given thirty pocket diaries. He put them on a
tray and sent his secretary round to all the foremen and the offices of his
colleagues. There were not enough to go round, and the foremen and
colleagues who didn't get a diary were so annoyed that he had to buy a Iot
more out of petty cash. This annoyed the company secretary, and in
addition the buyer had to suffer a Iot of cracks about the presumed gifts he
had not shared out. After that he sent everything to charity with a polite
note to the donor and a copy of the note in the files. 'I've got to live with
these people,' he said. 'lt just isn't worth it.'
The legal position is that no buyer is entitled to accept items for his
personal benefit without the consent (implied or explicit) of his employer,
although any buyer is entitled to refuse even trivial gifts. In !arge purchase
departments some buyers refuse gifts with considerable indignation while
others would be equally indignant not to receive them; which makes the
distribution of the seasonal largesse a delicate task, unwelcome to the
sensitive salesman. lt also makes the position of the purchasing manager
quite clear. He must lay down a no-gift policy, not because he suspects his
staff of corruption, but because others will. It is sad that a harmless and
pleasant sign of the Christmas spirit, which has helped to humanize
business transactions, should have tobe out-lawed like this. As one reader
wrote to Purchasing Magazineafter its 'annual attempt to slaughter Santa
Claus':
Why don't you quit hounding purchase agents about the insignificant
little gifts they get at Christmas? You should take a crack at executives
who set up their own small companies and force their purchase
departments to buy from them.
Conflict of interest
Buying from relatives, and owning shares in a supplier, are other situations
of a similar kind in which a conflict of interest occurs. The transactions are
not in themselves dishonest, but they put the agent in a position where
197
his private interest rnay be at odds with the interest of the principal on
whose behalf he is acting.
The chief buyer of a rnachine tool rnanufacturer was found to be buying
large quantities of supplies frorn several suppliers unknown to the trade.
These firrns existed; they were cornpanies registered and owned by the chief
buyer hirnself. In effect he was buying goods on his private account, and
then selling to hirnself as the rnachine tool cornpany's agent. This was of
course just a swindle.
The buyer for an iron foundry while walking over the rnoors one
weekend happened on a patch of sharp sand. He hired a lorry, engaged
sorne labour, and went into business as a foundry sand supplier. As he was
also engaged as a buyer of, arnong other things, foundry sand, he rnight
appear to have had it both ways, going and corning, with jarn each side, as
the saying is. In fact he had cleared the whole deal with his rnanaging
director, he sold at standard price or lower, and (rnost satisfactory of all,
to his colleagues) he rnade little or no rnoney out of it. This was not a
swindle, but it was a conflict of interest situation.
Anyone responsible for placing advertisernents would be pleased to find
an advertising agency which always gave hirn priority, always rushed his
rush jobs, for which at least one custorner - hirnself- was always right.
A certain rnarketing director brought about this desirable state of affairs
by running his own agency. When it was discovered that he had channelled
a large part of his advertising budget through his own advertising agency,
he was forced to resign - rnuch to his annoyance; he brought an action for
darnages. * Again, such a situation involves a conflict of interest, in which
the agent's private interest is bound at tirnes to clash with the interest of the
principal on whose behalf he is acting.
Especially in the larger organizations, it is irnportant to avoid behaviour
which arouses the reasonable suspicion of one's colleagues. As an old
Chinese proverb says, 'when passing through a neighbour's rnelon-patch,
don't bend down to tie up your shoe-laces'. There is no difficulty if a
purchasing officer who owns 100 shares in ICI Ltd buys 100 gallons a year
of paint frorn ICI Paints. The situation becornes suspect when the orders
placed are significant in relationship to turnover and the shares held are
significant (30Jo or rnore) in relation to capital.
Negotiating with suppliers
All the scientific aids of Operations research, the elaborate calculations and
*This was part of a notorious row in Chrysler, then third biggest car maker in the
world and ninth biggest business in the USA. The newly appointed company
president flew by company plane to a New York board meeting. There, only ten
days after a press conference to explain his plans for the company in the coming
year, he resigned all his offices in the company and the six-figure salary that went
with them, flying home by commercial air service. It was later announced that he
had agreed to refund to Chrysler private profits exceeding ;(150000 which he had
made from interests in suppliers.
198
the expensive computer hardware which can be employed in making

arrangements with suppliers, do not alter the fact that at the bottom two men
have to strike a bargain. In many cases the price, the terms, the inspection
arrangements, and a variety of other matters have to be negotiated.
The word negotiation is sometimes misunderstood. A romantic scene
from the sordid bazaars of the gorgeous East springs at once to the minds
of some people. Cross-legged on the floor squats the seller, praising his
wares to the skies and demanding four times what they are worth. The
buyer, an even more dramatic figure, calls heaven to witness the rubbishy
character of the same wares, and the charitableness which induces him to
make his offer - a sum one sixteenth of their worth. Gradually, and
noisily, the margin is narrowed. An impasse is reached when the buyer is
offering 300Jo below, and the seller is asking 300Jo above, the right price.
Eyes flash, shoulders shrug, palms extend perhaps in search of grease,
starving children are pathetically mentioned. Tears, curses, prayers, hollow laughs and histrionie groans Iead eventually to the bargain struck, the
hand clasped, and the good time had by all.
A somewhat simplified view, of course. lt assumes that the right price
exists, somewhere in the background of the bazaar-style bargaining. In
practice it is not easy to define the right price except as the price which the
two parties consider to be right, and it therefore emerges from the
discussion rather than underlying it. lt would be convenient if a Platonic
ideal existed for every commodity of its justurn pretium. We could lay it
down by law and save a Iot of effort. If the world stayed put this might be
feasible, but with continual changes in technology, tastes, and the value of
money, the right price changes too, all the time.
The four main price negotiation situations are:
(1) the established supplier wanting a price increase
(2) the established supplier under pressure to reduce price
(3) the potential supplier given a chance to get in and oust the
established supplier
(4) the new purchase where there is no established supplier.
Price increases and negotiated reductions
Negotiations about price increases and price reductions usually turn on
costs. Suppliers in a position to dictate price do not need to negotiate.
Suppliers who do negotiate need to put up a reasonable case. Typical
of the sort of case which is usually made, either by sellers seeking a price
increase or by buyers seeking a price reduction, are the British Prices and
Incomes Board criteria as set forth in a 1967 White Paper[5]. Seilers are
urged to absorb cost increases where they can. Price increases should not
be approved unless:
(1) output per employee cannot be increased sufficiently to allow wages

and salaries to increase at a rate consistent with the criteria for incomes;
199
(2) there are unavoidable increases in the costs of materials, fuel,

services or marketing costs per unit of output;
(3) there are unavoidable increases in capital costs per unit of output;
and unless in each of these three cases there are no off-setting reductions
either in labour, capital, or non-capital costs per unit of output, or on the
return sought on investment; or
(4) after every effort to reduce cost the enterprise is unable to secure the
capital required to meet home and overseas demand.
Enterprises will be expected to reduce their prices if:
(1) output is increasing faster than the rate of increase in wages and
salaries which is consistent with the criteria for income;
(2) costs of materials, fuel or services per unit of output are falling;
(3) capital costs per unit of output are falling, and unless in each of
these three cases there are no offsetting and unavoidable increases in other
costs per unit of output; or
(4) if profits are based on excessive market power.
The annual confrontation between buyer and seller at which prices and
terms are settled foranother year's trading is a major event in the working
Jives of the buyer, who usually makes a report on the savings he has
achieved, and of the seller, who can always get more business by cutting his
price. The buyer often attempts to reduce matters to a factual discussion
about what costs were incurred, supported by estimators and other costing
personnel, and implying a threat to switch to other suppliers. The seller
makes as much as he can of the break costs he has built into the contract,
stressing the risk which the buyer incurs by switching to new and untried
suppliers.
Buyers should be strongly discouraged from inventing non-existent
competition or pretending that other quotations are Jower when they are
higher. Such practices are dishonest. The un-wisdom of encouraging
buyers to act dishonestly needs no emphasis.
Negotiated prices
As well as negotiating changes to existing prices, purchasing officers have
to negotiate some new prices, usually as part of a complex contract
negotiation. This happens when there is little or no choice of supplier,
when the supplier is nominated or decided before the specification is
finalized, when complex new items have to be developed, or manufactured
specially to customer specification, - all situations when a straight price
comparison is difficult. Negotiation may also be called for when suppliers
have different packages to offer - different technical or functional
characteristics, different time scales, etc.
As weil as price, purchasing staff are often involved in negotiations on
other aspects of contract; terms and conditions of contract, tooling,
200
transport, quality control parameters and supplier's inspection responsibility, Stockholding arrangements, in fact all kinds of special arrangements
and commercial innovations offered by suppliers or requested by buyers.
Of course purchasing and selling personnel are not the only people who
negotiate. Unions and employers negotiate pay and conditions of employment - and long, complicated bitter negotiations they often appear to be,
with threats of strikes and go-slows. But there is some evidence to suggest
that the appearance is different from the reality, and that these big
well-publicized negotiations have elements of game and ritual in them.
Certain moves have to be made, certain arguments have to be used (and
reported), because membership expects it, or the government, or the
public.
lt is possible that some of the confrontations on price between large
purchasing organizations and powerful suppliers are also increasingly
played this way, rather like agame in which a series of moves have tobe
made. A purchasing officer in one of the divisions of a vehicle manufacturer described the situation when the representatives of a firm which also
supplied goods to all other divisions came to see him with a request for a
ten per cent price increase.
I say no. Obviously I can't say yes. All the other divisions say no. Pause.
The supplier is waiting for one of us to break. We know that if one of
us does concede anything at all, all the others will have to concede as
much. The supplier now threatens to apply his ten per cent increase to
the next invoices, and to withhold supplies if not paid. Pause. The
purchasing director at corporate headquarters now steps lightly in. After
due discussion he setdes for five per cent. He's saved our company
half of the requested price increase, and that Iooks pretty good. Some of
us suspect that five per cent was what the supplier wanted all along, but
this is the way it's got to be played.
Between two reasonable men who want to reach a mutually satisfactory
agreement quickly, upon a matter which they both understand, negotiation
is not a difficult business. What makes negotiations so lengthy and
arduous in many cases, is that so many people are not reasonable, and
supply negotiations often affect, or include, large numbers of people in
buying and selling organizations.
A common weakness is failure to prepare thoroughly enough. We march
ahead through life, taking the burdies as they come; all very weil as a
general attitude, but in situations of any complexity, planning and
preparation could get better results for all but the most gifted negotiators.
Inadequate preparation is usually blamed on Iack of time, but it must be
admitted that everyone has at his disposal all the time there is. Nobody has
more than 24 hours in his day. Faulty allocation of time might be nearer
the mark.
Another common weakness is trying to score a great victory instead of
Trading with supp/iers
201
arriving at a mutually satisfactory solution. Trying to win every point is the

result of not thinking the situation through. Most commercial negotiations
occur between buyers and sellers who intend to continue trading with each
other; whose objectives cannot rationally include leaving the other party
stone cold dead in the market; who cannot therefore be said to have
succeeded in achieving their objectives unless the other party is also
reasonably satisfied with the outcome.
Preparation jor negotiations
Objectives, and tactics, are the two areas where advance planning and
preparation can pay off.
In considering objectives, the major issues and the minor issues should
be spelled out. The other parties' needs should be considered: what are
they really after? How can we satisfy some of their needs? What do we
stand to lose or ga.in, and what do they stand to lose or gain, if settlement is
not reached? What are the relevant facts and figures? Often these have to
be collected and collated in consultation with colleagues in other departments- in finance, engineering, production or sales. Long term objectives
such as the future supply pattern should not be left out of account when
planning a short term negotiation such as the price to be paid or the
supplier to be chosen for a particular contract.
In fixing objectives for a negotiation, some margin for manoeuvre
should be left. We might for instance aim at a Settlement price of noooo,
while hoping to settle for :8000 and being willing to agree at most to
fl2 000. Theseare precise figures but do not send the negotiator into battle
with his hands tied.
In considering the tactical plan, we have to consider relative bargaining
strengths. How much the seller needs the business, how sure he is of getting
it, and how much time there is to reach agreement; how much the buyer
needs the seller's product, what alternatives are open to him, how much
time he has to develop alternatives, how much business he has to give the
supplier, and what cost and price data he has; these are particularly
relevant. Time and location of meeting have to be settled. The home player
has a small advantage. In negotiations between governments, this sometimes gives rise to a pre-negotiation negotiation to ensure that the main
bout occurs on truly neutral ground. But governments have to think about
how their arrangements will Iook to other governments and to their own
voters, as reported in the media. Buyers and sellers may occasionally have
to plan consciously for such effects on prestige and 'face', and on relative
bargaining power. But usually, in most transactions, the small advantage
which accrues to the man whose secretary brings in the tea can be ignored.
lt is hardly ever big enough to justify making a fuss about booking a hotel
room to make sure of a neutral meeting ground.
In fixing the tactical plan, whiit questions to ask, and how to word them;
what approaches the other side may come up with, and how to counter
202
them; and the order in which issues will be tackled, are the main things to
plan.
Conduct of negotiations
The standard advice for the conduct of negotiations is simply a prescription for reasonable behaviour. The reasonable negotiator begins on a
positive friendly note, perhaps by referring to a past history of mutually
satisfactory transactions. He shows clearly that he intends if at all possible
to come to a mutually satisfactory settlement of the points at issue as soon
as he can. Hedeals systematically in succession with the various points. He
concludes by recapping what has been agreed, and he confirms this in
writing the following day. He does not attempt to put one over on the other
side by smuggling into the confirmation matters which were not mentioned
in the recap. His plain and evident intention is to reach agreement on terms
which satisfy both sides, rather than to strip and pillage the opponent; and
provided that the other party is also reasonable, it is on the whole a
pleasure to do business with him. lt cannot however be denied that
unreasonable negotiators sometimes enjoy an undeserved success.
Many problern situations have no objectively calculable solution. Now if
both parties insist on obtaining their own arbitrary solutions, which are
incompatible, all that happens is that negotiations reach an im passe. But if
one party can be conned into maintaining a reasonable attitude while the
other appears to be unreasonably committed to an arbitrary solution while
secretly trying to find what is the very least his reasonable opponent could
be pushed into accepting, the result could be much to the advantage of the
awkward one. The danger of brinkmanship of this kind is that the other
party could be provoked into losing his reasonableness. Falling off the
brink could mean no agreement or disadvantageaus agreement, as weil as a
poor initial position for the next negotiation.
Some practical advice, based on the author's experience with negotiating
training and simulation in many firms:
(1) DO give plenty of thought to the other party's probable objectives,
tactics, and attitude.
(2) DON'T waste time scoring debating points, proving your opponent
wrong, or otherwise showing off.
(3) DON'T Iet emotional reactions such as rage or pride cloud your
thinking.
(4) DON'T do all the talking; ask questions, Iisten to the answers.
(5) DON'T keep your eyes on the papers. Watch your opponent's eyes.
Watch his physical attitudes and facial expressions. Most people signal
their feelings and attitudes quite clearly, even while saying verbally
something rather different.
(6) Be ready to modify your approach.
(7) Ifyou seem to reach an impasse on one point and you don't seem to
203
be getting anywhere, switch to another point; say 'Let's leave that one for
the moment. How about ... ?' When the less controversial point has been
settled, the sticky one may Iook less sticky. Or eise suggest a break for
coffee, conference, referring back.
(8) Have a Iist of points at issue and work through it systematically,
ticking off points as they are dealt with and recapping periodically.
(9) If you gain an important concession, think of something you can
concede in turn. If on the other hand you have had to yield on some major
point, use this as a Iever to gain some quid pro quo.
(1 0) The alternatives are not win or lose, as Gerry Nierenberg has
pointed out. 'The creative negotiator is where there are no wars, no strikes,
no Iockouts. The old cliches of the playing field, I win, you lose, survival
of the fittest, winner take all, don't apply to commercial negotiations in an
advanced cultural system.'
Buying abroad
World trade is no Ionger something which the average buyer or purchasing

officer can safely disregard as a matter for the specialist. The increasing
internationalization of business often means that his purchasing colleagues
in associated companies or division work in other countries. Multinational
corporations which employ people and operate factories in several countries usually make an attempt to optimize at least part of their sourcing and
supply arrangements on a worldwide basis[6, 7]. They may for instance:
(1) set up an international procurement committee which meets periodically to review sourcing and supply, the meetings usually being held in
the various countries in turn;
(2) appoint an international purchasing coordinator to circulate and
collect information and to persuade the purchasing managers in various
countries to make use of the information;
(3) establish a corporate central staff with authority to insist that
national purchasing managers take sourcing decisions in the best interest of
the corporation on a worldwide basis.
Such decisions can be very complicated. When relatively small amounts are
involved it is easy to overlook a number of matters which can convert an
attractive quotation into an unattractive final invoice. When !arge amounts
are involved, governments may take a hand, and as weil as the national and
international interests of the company, the national and international
interests of governments and international governmental bodies may be
involved.
The European Economic Community (EEC), for instance, was founded
partly to further the interest of the consumer and user, rather than the
employer and employee. It aspired to unite the warring states of Europe
into one common market on the American model. The United States of
204
America however enjoy a single common language and federallegal system

and constitution. The European states speak many languages, have
different legal systems, have different standards; and their national
governments tend to sub-optimize internationally by boosting their own
economies at the expense of foreigners, exemplified by the upsurge of
protectionism in the later seventies.
The language barrier is less serious than may appear at first. Fluency in
foreign languages is not essential to the conduct of international transactions; translation facilities are available, and anyway English is almost as
much the lingua franca of international business as French is or was the
international language of diplomacy.
Letters and documents can readily be translated. The Institute of
Linguists can provide names of qualified translators and recommended
fees. But a working knowledge of the appropriate foreign language is a
definite help in travelling to visit suppliers in other countries, in telephoning
to them, and, by no means least, in the social and informal contacts which
oil the wheels of business.
Even if you are negotiating with someone who speaks your language
very weil, you will find it helps if you speak his language a little. It helps
when he cannot find the right English word for so mething he wants to say,
for instance.
Excellent language courses are available in most parts of the country, at
Polytechnics and other colleges, at private institutions, at University
extension classes, and so on. lf enough people in your organization want to
learn or practise a language, you can probably arrange for classes to be
held on your premises by making a few phone calls to local colleges.
Sources of information
A number of sources of information exist which can be used to assist in
searching for sources of supply abroad - although it is probable that the
traditional main source of information, that is the salesman or agent from
the potential supplier knocking at the buyer's door, will remain predominant.
The United Nations Industrial Development Organization (UNIDO) is
particularly concerned in the development of trade between advanced
industrial nations and the developing nations. UNIDO keeps a roster of
potential sub-contractors in developing countries, which often have
reserves of under-employed labour and excess capacity. UNIDO provides
technical, economic and legal assistance as weil as locating suitable
sub-contractors for metal-working, motor-car parts, optical equipment,
clothing, footwear, furniture, etc.
The Commercial Departments of British Embassies, High Commission
Officesand Consulates can help the British businessman travelling abroad.
They may be able to provide introductions and advice on local conditions.
205
The Department of Trade and Industry has 'Hints for Businessmen'

booklets available for many countries. Contact should be made either to
the Export Services Division at Export House, 50 Ludgate Hili, London
EC4, or to a convenient Regional Office.
Service International d'Informations pour !es Achats is a new organization which offers free sourcing advice for certain European countries, and
this sort of service is likely to develop.
Many foreign suppliers with an interest in the British market open
offices in this country or appoint English agents.
There is no substitute for seeing for oneself, however, and before placing
a !arge order for manufacture abroad for the first time, it pays to go and
vet the factory and the organization.
Repercussions on the home market
One difficult aspect of going abroad for supplies which were previously
purchased in the home market, is the effect that this may have on the home
market.
Can we import foreign goods without importing unemployment, and if
not, what then? If a decision to buy abroad could inflict Iasting darnage on
a domestic industry, many buyers argue that the threatened industry ought
to make its case not to them but to the government, which has in the past
had powers both toprod the industry into putting its house in order, and to
protect it against dumping. As far as other countries in the EEC are
concerned, the case is slightly different. It is feit that there is little point in
eliminating tariff barriers to international trade if non-tariff barriers are
allowed to take their place. Governments of member countries are going to
find it increasingly difficult to maintain an indigenous watch, computer, or
aircraft industry by hidden subsidies and secret preferences.
None of these restrictions on international trade is ever in the short-term
interest of the consumer or the purchaser. After all, English soil won't
grow everything. Insisting on domestic sources for every industrial product
regardless of cost or quality is certainly not good economics and probably
not good politics either.
The long-term interest of the purchaser is a more complicated matter.
Supplier development considerations, the infant-industry argument in
economics, and the long-term supply market structure desired, are things
which should not be ignored. Domestic suppliers who are losing trade to
foreign competitors fight back, as in the following advertisement:
Once deep in the forest there lived an industrious beaver. He not only
felled trees and built dams, but on the land he cleared he grew produce
for a hungry family of rabbits. How they loved his fat, juicy carrots!
But one day Father Rahbit found that by crossing over the river on a
fallen tree he could buy carrots more cheaply from a raccoon who lived
206
on the other side. Soon he was racing back and forth across the river.
The beaver shrugged his shoulders and went into the dry goods business.
Then came a terrible flood. The fallen tree was swept away and the
rabbits could only gaze longingly across the river. They went back to the
beaver, who said: 'Sorry, folks, but I'm out of the carrots business.
Could you use a dozen hand towels?'
One cold day Mr Beaver met Father Rahbit foraging for food. The
rabbit was near starvation. He looked at the beaver with tears in his
eyes and wailed: 'Where were you when I needed you?' And the beaver
replied: 'Where you you when I needed you?'
Whether your needs be carrots or steel, your safest, most reliable
suppliers are right here at home. To serve you, and serve you well, is
our primary concern - not just today and tomorrow - but year after
year.
Checklist for buying abroad
Some of the points to check before sourcing abroad are listed below.
(1) Legal system: is the contract subject to English law or to some other
legal system? Should legal advice be taken on contract terms? Is the
relationship with the supplier such that difficulties can be sorted out
without lawsuits? If the relationship deteriorates, have we recourse against
the suppliers? Is there an arbitration clause?
(2) Language: if the contract is not written in English, have we a
certified translation?
(3) Mode ofpayment: is payment tobe made on normal domestic terms,
such as 30 days after date of invoice or satisfactory receipt of goods,
whichever is later; or is it tobe by letter of credit (revocable or irrevocable),
or by bill of exchange, or by cash against documents? Several modes of
payment are used for international trade, some more advantageaus to the
seller, some less so.
(4) Currency: in what currency is payment tobe made? In what currency
is price stated? Is the rate of exchange likely to change appreciably, and if
so which partywilllose by it, and should any special arrangements be made
to reduce or share the loss? Is any action required to ensure that currency
will be available when needed to meet the obligation?
(5) Tax and other regulations: many transactions are subject to import or
export tax, duty or tariff, to exchange control regulations, to customs, to
licensing or other quantitative restrictions. Are the goods subject ot quota?
Are they liable to duty /tariff? Is an import license required? Are there any
special regulations which apply?
(6) Transport: how are the goods to be moved from the supplier's
premises to ours? Have we considered air freight? Have we consulted
several forwarding agents?
Trading with supp/iers
207
(7) Price: in comparing delivered price with quotations from local

sources have we taken account of transport, insurance, shipping, unusual
payment terms, currency exchange risk, tax, and incidental expenses?
(8) Lead time: have we fully allowed for possible late delivery due to
frontier delays through incorrect documentation, incorrect description or
other breach of regulation, as weil as loss or darnage in transit, strike, bad
weather, and delays in port or customs where applicable? Do we need
special buffer stocks as insurance?
(9) Terms: it is important to establish who is liable for insurance,
freight, and loss or darnage at various stages, and also when the buyer
becomes the legal owner of the goods. A number of standard terms have
been in use for many years, such as F.O.B., F.A.S., C.l.F., C. & F.,
tagether with their variationssuch as F.O.C. (Free on container). Although
these terms are widely used there are local differences in their interpretation, which can be avoided by the adoption of the standard definitions
published by the International Chamber of Commerce in Paris as Incoterms : 9~i3.
13. l Case study: token of esteem
Dring and Co. buy about f9500 worth of brass casting a year from Edgar
Brassfoundry, whose establishment is about forty miles away. Dring's
buyer, James Bruce, is not at all anxious to changebis supplier, since this
would entail moving about 100 patterns from one faundry to another, with
inevitab!e delays which could affect production at Dring and Co. Edgar
Brassfoundry's service is excellent, and Dring and Co. are well satisfied
with the quality of their castings, although there has been trouble with two
recent additions to the range. However James Bruce feels that in view of
the amount of money being spent on brass castings he is duty-bound to
make sure, at least every two years, that the price is right. On the 20th of
November he sends details of a normal twelve-month requirement of the
castings, accompanied by blueprints of each item, to two foundries,
Fleming and Fearless, and Grandison Ltd. He feels confident that either of
these firms could meet Dring and Co. 's needs. He also sends the
twelve-month requirement to Edgar Brassfoundry with a Ietter asking if
any price change is expected in the coming year.
Edgar's reply states that a new faundry manager, a Mr Ahle, has just
been appointed. He would like to call on Dring and meet Mr Bruce. The
price position and also the state of the patterns is being investigated and
they will write again.
Mr Able arrives on the 14th December after lunch. He brings a Iist of
eighteen patterns in need of repair or renewal and a quotation for doing
this work in the Edgar pattern shop. In one case he proposes that one of
the new patterns which has been giving trouble should be scrapped and
replaced by a moreexpensive pattern which will reduce both the piece price
208
and the risk of wasters. In five cases he is willing to reduce the piece price
for castings when the new patterns are available. Apart from these detailed
reductions, he wishes to increase all prices by 2 Y2 OJo. During the discussion
it emerges that Mr Ahle knows that Bruce has asked for quotations from
other foundries and is anxious to know why. Bruce explains why, and adds
that he has not yet finished analysing the quotations but will get in touch
with Ahle as soon as he has. He arranges for Mr Ahle to tour the Dring
factory and meet the machine-shop foremen and design personnel. Ahle
arrives back at Bruce's desk at 5.15 and invites him to dinner, saying that
he would like to take this opportunity to get to know the man on the other
side of the counter personally, as a human being, with a little - or as much
- shop talk as Bruce feels like. Instead, Bruce has Ahle to dinner at his
own home. They don't talk any shop because they discover that they both
have a passion for music - early church and modern jazz - so they play
records and discuss hi-fi apparatus.
On 20th December Bruce writes to Edgar Brassfoundry accepting the
price increase and enclosing an order for pattern work as quoted. The
lowest of his two new quotations would have increased the annual bill for
brass castings by f500, even though prices for one or two items were lower.
On 22nd December Bruce receives at the office a calendar from Edgar
Brassfoundry, very similar to the calendars he also receives from Grandison
Ltd and Fleming and Fearless. At hisprivate address he receives a f60 tape
recorder with a personal note from Mr Ahle saying that it is a token of
personal esteem, in acknowledgement of a very pleasant evening. What
should B do?
13.2 Case study: all friends
James Bruce buys allsmall tools required by his company, Dring and Co.,
from one source, Fairfax and France. Fairfax and France stock nearly all
the small tools Dring ever want, and as their establishment is three
minutes' walk from the Dring factory they can- and do- give very quick
deliveries, amounting to a twenty-four hour average delivery period and
ten minutes for urgent requirements. Also their manager, Harry France, is
a personal friend of Bruce's; they play golf together, equally badly.
Once a year Bruce sends out enquiries for the range of small tools he
buys regularly. After considering the replies he places a twelve-month
contract for the supply of small tools with Fairfax and France. Contract
prices are always as low as anyone else's; if Fairfax and France happen to
quote high on some items, Bruce has a word with Harry France, who
re-quotes to meet the competition.
This seems to mean the other firms never really have a chance, and their
efforts and expenses may enable Dring and Co. to reduce their costs but
will never lead to orders being placed with them. ls James Bruce acting
ethically? How else could he prove that he is not paying a high price to
209
trade with a friend? Once the other firms have sized up the situation, what
should they do about it?
13.3 Case study: do we need an aircraft industry?
Aircraft purchases raise for most governments (except the American) these
questions of the domestic v. the foreign supplier, and of the monopoly
supplier, or how much it is worth paying nottobe in the hands of a single
supplier. Most aircraft industries would collapse if their governments
withdrew support.
Readers who are not personally involved in these particular decisions can
still pro fit by study of the Plowden Report on the Aircraft Industry (Cmnd
2853), with its thoughtful consideration of such arguments as national
prestige, unemployment, technological fall-out, balance of payments
considerations, military and foreign policy strategy, the difficulty in
stabilizing an expanding or contracting industry at a viable size, and the
difficulty of quantifying the costs and benefits of alternative policies.
Domestic suppliers who don't want to lose your business when you have
found a better supplier abroad, will naturally use any arguments that might
help their case. And, as the report points out, there are some markets in
which 'an injunction to act simply as a competitive buyer is ambiguous and
impossible to formulate as a clearcut policy ... Where relatively few big
producers are making extremely complicated products to the detailed
specifications of a handful of big buyers, buying and selling must
necessarily involve complex judgments. There is the difficulty of making
useful cost comparisons between products which often differ greatly.
There will be elements of monopoly power on both sides; sellers will try to
undercut rivals and drive them out of business with the aim of securing the
advantages of monopoly or near-monopoly in the long run, and the buyers
will seek to prevent this. In situations such as these, a purchaser has to do
much more than merely apply simple market-place tests to particular
transactions.'
(1) When a decision to buy abroad could bring substantial unemployment by putting a domestic supplier out of business, would you buy abroad
to get the best value, insist that the domestic supplier puts his house in
order and gets competitive within a year, or buy from the home supplier?
How does full employment affect your answer?
(2) The Government should not aim either to destroy the aircraft
industry or to keep it going. 'It should simply act as a hard-bargaining
customer in buying its defence needs, and encourage the airline corporations
to do the same with their purchases. If this policy causes the domestic aircraft
industry to prosper, weiland good; if the result isthat most British orders go
abroad so that the British industry withers away, it is a pity but nevertheless
the best thing for the nation in the long run.' Discuss critically.
210
Practice and Techniques
(3) In what circumstances if any should public subsidies be paid to

private firms in a declining industry?
(4) 'Foreigners are most likely to be willing to buy British goods if they
sei! aircraft to this country; for example a government which decided to
buy all British defence needs from abroad should be able to negotiate
something of a quid pro quo with the new supplier.' Do you agree?
References
1 Hili, R. and Hillier, T. (1977), Organisational Buying Behaviour,
Macmillan, London.
2 Farmer, D.H. and Macmillan, K. (1977), How to buy together, Management Today, July.
3 Buckner, H. (1967), How British Industry Buys, Hutchinson, London.
4 Ammer, D. (1974), Materials Management, 3rd ed., Irwin, Homewood,
Ill.
5 White Paper (1967), Prices and Incomes Policy, Cmnd 3235, HMSO,
London.
6 Davis, Eppson and Mattson, (1974), Critical Factors in Worldwide
Purchasing, Harvard Business Review, Nov-Dec.
7 Farmer, D.H. (1974), Corporate planning and procurement in the
multinational company, Journal of Purchasing and Materials Management, 10, No. 2.
14
Purchasing departments which deal in world markets have to make

contracts in many countries. Each country has its own set of Jaws to
regulate commercial transactions for the sale of goods, services and landed
property. The legal systems of common Jaw countries derive from the law
of England and have a Iot in common, even though they have diverged to a
considerable extent. The legal systems of England and France have much
less in common, although geographically the two countries are separated
by a few miles of water only. Non-European countriessuch as Japan have
even less in common legally. Yet contracts have to be signed which bind
both parties.
English buyers cannot even know English law in detail, contained as it is
in 'some 3000 Acts of Parliament, the earliest of which dates from the year
1235, in many volumes of delegated legislation made under the authority
of those Acts, andin over 300000 reported cases ... The result is that it is
today extremely difficult for anyone without special training to discover
what the law is on any given topic.' Fortunately ordinary commercial
transactions do not call for detailed legal knowledge, and in the case of
industrial purchases rarely Iead to Iitigation - although arbitration under
the Arbitration Act 1950 is resorted to rather more frequently. Nevertheless purchasing officers who commit their companies contractually should
understand what they are committing their principals to, and indeed
whether they are committing them at all in the legal sense. They should
know when to get professional advice from legal specialists e.g. when
drawing up special terms and conditions for large international contracts,
large non-repeating contracts, and contracts where large sums of money or
unusual requirements are at stake.
212
The term 'contract' incidentally is sometimes used in commercial

practice to mean a large value or long term agreement, but in law it simply
means an agreement which gives rise to legal obligations. These can either
be enforced, or eise entitle one party to 'damages', that is monetary
compensation for breach of contract.
Orders and contracts
For an agreement to be legally binding, it must to begin with be an

agreement: one party must have made an offer (whether an offer to sell,
such as a tender, or an offer to buy, such as an order) which the other party
accepts without qualification. If the other party introduces new terms he is
making a counter-offer rather than accepting the offer made to him. lt is
not always appreciated that when organizations place orders, quote prices,
and accept orders on their standard forms with printed sets of terms and
conditions on them they may in law be simply exchanging a series of offers
and counter-offers without ever reaching a technical agreement.
Agreement can however be implied by conduct without having been put
in writing or uttered by word of mouth. In a 19th century case coal had
been supplied for some time without formal agreement. Eventually the
purchasing firm sent a draft form of agreement to the supplier, who
inserted the name of an arbitrator in the space provided and returned the
document marked 'agreed'. When later a dispute occurred, he adduced this
fact and argued that no agreement had been concluded since his insertion
constituted a counter-offer to which he had received no formal acceptance.
lt was held on appeal that 'a contract came into existence either when the
company ordered its first Ioad of coal from B on those terms, or eise at
least when B supplied it'.
lt will usually be the last document sent, whether the purchaser's order
form or the seller's acknowledgment form, which the parties will be
considered to have agreed to by proceeding with the contract. lt is always
possible to deprive an agreement of legal force by some phrase such as 'this
contract is binding in honour only and not in law', but usually the parties
wish the agreement to be legally binding even though they do not wish to
go to law about it.
lt is not the intention in this chapter to cover legal aspects of purchasing
in any detail. Types of contract, and contract clauses, must however be
considered; and they must be considered in the light of how they will be
interpreted in the courts of law. lt is much better to set forth as clearly as
one can what one means, than to copy out some Iegai-sounding rigmarole
in the erroneous beliefthat this will go down weil with the judges. In a 1953
case N. wrote to S. affering to buy a Iot of steel bars, and S. wrote back
thanking N. 'for entrusting this contract to me', adding 'I assume that we
are in agreement that the usual conditions of acceptance apply'. S. failed
to supply the steel and was taken to court, where he argued that his
213
counter-offer ('the usual conditions') had not been accepted, so there was
no contract on which he could be held liable. The Court of Appeal found
that the phrase 'the usual conditions of acceptance' meant absolutely
nothing, and 'I do not accept the proposition that because some meaningless words are used in a Ietter which contains an unqualified acceptance of
an offer, these meaningless words must or can be relied on by the acceptor
as entitling him to obtain a judgment in his favour on the basis that there
has been no acceptance at all'.
Terms and conditions
One survey of purchase order forms showed that over a quarter of them
had no printed conditions on them at all. Reasons given included this: 'we
try to deal with our sources of supply in such a way that we can depend on
them ... without a Iot of fool conditions'. Many purchase order forms have
some printed 'conditions', so-called, which turn out on examination not to
be conditions of the order at all; they are general instructions or requests,
as for instance that invoices be dispatched the same day as the goods, that
documents referring to the order or the goods ordered should quote the
order nurober, and that the company will not be responsible for work done
or goods supplied which are not authorized by an official order. This latter
rightly appears on the order form if it is the practice of the company, but it
can hardly be a condition of the purchase in question which obviously has
been made on an official order form. A minority of orders state that they
are subject 'to our standard conditions of purchase', a formidable
document supplied separately, or eise they are covered back and front with
a multitude of conditions in small print. Many suppliers use official
acknowledgment forms or sales documents over which proliferate also in
small print their conditions of sale. Mr Justice Winn spoke harshly of one
of these documents (a lighterage contract) in Derby Cables Ltd v.
Frederick Oldridge Ltd, 1959, saying:
It may be remarked in passing, without any suggestion that the
defendants irrtended their text to be a trap, that it conforms to
customary mercantile practice at least in the regrettably normal respects,
(I), that it is legible only by eyes with an acuity unlikely to be enjoyed by
any individual possessing sufficient maturity of mind to understand it;
(2), that it is verbose, tautologous and obscure; (3), that by internal evidence it has not been constructed but merely thrown together as an amalgam of phrases recklessly as weil as fortuitously culled - with scant
regard it may be for copyright - from other sets of trading conditions.
Often conditions prepared by either buyer or seller independently are

not, and are not intended to be, fair at all; they are intended to relieve the
party in question from alllegalliability and thus leave him free to adopt in
any dispute which arises whatever solution appears to him justifiable
214
without risk of being forced to adopt a solution by process of law.

An example of the sort of condition which many sellers adopt if not
challenged is this: 'Because of fluctuations in material and labour costs, we
regret we are unable to guarantee delivery at the prices quoted, and
consequently this order is accepted on the understanding that the goods
will be invoiced at the prices prevailing on the date of despatch. All
agreements are subject to strike, accident, and other delays beyond our
control. We endeavour to execute all orders within the time specified, but
as scientific instruments are built largely to order we cannot guarantee the
date of delivery nor assume responsibility for loss resulting from delay. No
orders are subject to cancellation unless cancellation charges are borne by customer. Prices are subject to correction for stenographic errors. All descriptions, illustrations, drawings and other particulars supplied are as accurate as
possible but none of theseform part of the contract.' And so on. We are left
wondering what does form part ofthe contract, since price, quality, delivery
date and even the description of the goods are all excluded.
Statutory terms
Some of these sets of conditions expressly exclude the various safeguards

which law and custom have brought in to protect the buyer. Any normal
contract is subject to a number of terms and conditions implied by tacit
consent of the parties, trade custom, or statute. The main relevant statute
is the Sale of Goods Act, 1893.
S. 12 of this act states that any contract for the sale of goods implies a
condition that the seller has the right to sell them.
S. 13 provides that if the goods are sold by description 'there is an
implied condition that the goods shall correspond to the description, and if
the sale be by sample as well as by description, it is not sufficient that the
bulk of the goods corresponds to the sample if the goods do not also
correspond to the description.'
An important term in contracts for the sale of goods by description is
implied by the provisions of S. 14. When the buyer 'expressly or by
implication makes known to the seller the particular purpose for which the
goods are required so as to show that he relies on the seller's skill or
judgment, and the goods are of a description which it is in the course of the
seller's business to supply, whether hebe the manufacturer or not', then
there is an 'implied condition that the goods shall be reasonably fit for the
purpose'. This does not apply if goods are bought under a patent or trade
name, unless the seller has specifically recommended them for the purpose,
by that name.
In addition there is an implied condition that goods sold by description
shall be of merchantable quality, except that 'if the buyer has examined the
goods there shall be no implied condition as regards defects which such
examination ought to have revealed'. 'Merchantable' really means saleable
215
but the courts interpret it within the context of the Act to mean suitable for
the use to which the goods are normally put. In one case the plaintiff
bought some Coalite which exploded when put on the fire. There was
nothing wrong with the Coalite itself but it was mixed with some dangerous
foreign matter, and it was therefore adjudged not of merchantable quality.
When goods are sold by sample, there are implied conditions that the
goods shall correspond with the sample, that they shall be free of any
defect not apparent on reasonable examination of the sample and which
would render them 'unmerchantable', and that the buyer shall have a
reasonable opportunity to compare bulk with sample.
All these implied terms are conditions. Now the Sale of Goods Act
defines a condition as a Stipulation in a contract 'the breach of which may
give rise to a right to treat the contract as repudiated', as distinct from a
warranty which is a Stipulation 'the breach of which may give rise to a
claim for damages but not to a right to treat the contract as repudiated'.
Hence breach of any of the implied terms entitles the buyer to reject the
goods and cancel the contract. But if he has already accepted the goods (by
doing something inconsistent with the seller's ownership of them, S. 35),
then the breach of a condition 'can only be treated as a breach of warranty
and not as a ground for rejecting the goods and treating the contract as
repudiated unless there be a term of contract express or implied to that
effect' (S. 11).
But these terms are implied only if they are not excluded. Many firms
incorporate such exclusion clauses as the following from the set quoted
above:
the company assumes no liability for consequential darnage of any kind
and the purchaser by acceptance of this equipment will assume all
liability for the consequences of its use or misuse by the purchaser, his
employees or others. This warranty is expressly in lieu of all other
warranties, guarantees, obligations or liabilities, expressed or implied by
the company or its representatives. All statutory and implied warranties
other than title are hereby expressly negatived and excluded.
It is hard to decide which is more deplorable, the seller's attitude to his
customers, or his use of language.
Inflation and prices
Inflation, that is a steady and persistent increase in nearly all prices which
is equivalent to a reduction in the purchasing power of money, has become
endemic in the West. In politics andin economics discussion tends to turn,
not on how to halt inflation which is assumed to be insoluble, but on how
to hold the rate of inflationdown to a tolerable figure. The real danger isthat
as people realize what is happening they will take measures to protect their
own position against inflation which will increase the rate of inflation.
216
Thus sellers have been advised to increase their prices even more than
they think they need to. ('One effect of inflation which affects all firms is
that it is almost impossible for financial accounts not to overstate
profitability . . . The overall net rate of return on equities in the UK,
including capital gains as weil as dividends, has been around 80Jo p.a. After
tax and allowing for the rate of inflation experienced in 1970 and 1971,
suchareturn would give arealrate of return near zero.') Unions have put
in enormaus wage claims in the hope of winning some real gain desplte the
erosion in the purchasing power of their pay packets. Governments have
taxed purchasers to mop up the excess purchasing power which was
thought to be forcing up prices, thus attempting to eure rising prices by
putting up prices. Buyers are not to blame, though. If they had their way
they would stop inflation at a stroke by holding all prices Ievel.
Most organizations prefer to place orders at firm prices. The invoice
price will then be the same as the price agreed or understood to apply at the
time of ordering. For orders which can be completed quickly, or which will
not involve much money, this does not present much difficulty. But for
large orders on long delivery it may be difficult to arrive at a firm price. lt
may also be difficult to determine the cost in advance when design and
development work is required. Continual increases in the cost of labour
and materials make estimating difficult when the cost today is known, but
the cost required is that which will apply two or three years ahead.
'Cost-plus contracts' cope with this by making the buyer liable for all
costs actually incurred by the seller, plus a percentage of costs by way of
profit. Unfortunately the bigger the amount incurred in costs, the bigger
the resultant profits. The seller is financially motivated to waste money.
Cost-plus-fixed-fee contracts have also been signed, paying all audited
costs to the seller plus a fixed amount rather than a fixed percentage as
profit or fee. This provides no financial incentive to boost costs, but none
to reduce them either. lt subjects the buyer to the administrative inconvenience of not knowing how much his expenditure is going to amount to,
and of having to audit his supplier's books.
But cost-plus contracts do not compel the seller to include in his quoted
price large safety margins against the risk of wage and material cost
increases, which is the drawback of fixed price contracts in conditions of
inflation.
Price adjustment c/auses
Fixed price contracts are administratively more convenient than contracts

which do not specify the amount eventually payable. But adjustable-price
contracts, which instead specify a method of calculating the amount finally
due, may be a better buy under inflation.
A consequence of inflation is that costs cannot be forecast far ahead.
Fixed price contracts have obvious drawbacks when the seller sees labour
217
rates and cost of materials rising continually and knows that he cannot teil
at the timehe prepares his tender, what costs he will have incurred by the
time he has completed the contract. The seller's estimators work out a
contract price on the basis of today's costs, and then apply various
corrections and safety factors to cover possible increases in costs. Unless
the seller's management are very keen to win the contract and are aware
that they fact stiff competition, it will pay the buyer to Iook for an
adjustable-price contract rather than a fixed-price contract if the contract
period extends much further ahead than a year.
Such contracts incorporate price adjustment clauses, which refer to
published indexes of labour and material costs and provide a formula for
calculating the change in price due to increased costs. They enable the
buyer to check the price increase by referring to such sources as 'Trade and
Industry' and 'Department of Employment Gazette' (HMSO), without
having to wade through the seller's confidential cost records.
Index-linked contracts of this kind are often based on a formula devised
by the British Electrical and Allied Manufacturers Association (BEAMA)
as long ago as 1940. This assumes that a contract price can be regarded as
the sum of three parts: one part which varies with labour costs, a second
part which varies with material costs, and a third part which is treated as
invariable. Weighting these parts at 400Jo each for the labour and the
materials elements and 20% for the non-variable part, and making the
further assumption that most of the materials are paid for in the first 60%
of the contract period, and most of the wages bill incurred in the last two
thirds of the contract period, we arrive at the formula:
Final price =
40 LB
)
tendered price (40MB
- - - + - - - + 20
MA
LA
100
where MA is the electrical machinery materials index last published before

the tender date by the Department of Trade and Industry, and MB is the
corresponding index three-fifths of the way through the contract, and LA
is the national average earnings index at tender date, and LB is the corresponding figure averaged over the last two-thirds of the contract period.
BEAMA clauses have the advantages that:
(1) they areeasy to understand
(2) either party can readily calculate or check what price adjustment is
due from publicly available data
(3) they provide a warkable approximation to actual increases in the
cost of paying employees or buying materials without making unwarranted
additions to profit.
In some circumstances they have disadvantages which can be overcome
by varying the formula. For instance, when Iead times are long, part of the
contract period is waiting time while the contractor is busy with other work
and has not actually started work on the contract; in this case it is argued
218
that for calculating the adjustments, the contract period should be deemed
to start at the date of commencement of manufacture, as agreed between
buyer and seller, rather than at the date of the contract as in the standard
clause. Also, intimes of severe inflation it is argued that simply by delaying
delivery, the contractor can collect more money due to the rises in labour
and material costs which will have occurred during the period of lateness;
to avoid this, the contract period could be deemed to end at the delivery
date originally agreed, rather than at the date the equipment is ready for
despatch or handing over, as in the standard clause. Another matter for
dispute concerns the relative weighting of the three parts (labour, material
and invariant) into which contract price is divided for adjustment purposes. From 1958 to 1972 the 40-40-20 weighting quoted above was used.
As British inflation got worse the weighting was changed to 45-45-10, and
in 1975 a further changewas made to 47.50Jo labour, 47.5% material, and
5% non-variable. Some buyers argue that this last version is unduly
favourable to the seller, and make counter-offers, usually in the form of an
earlier version of the formula.
Very much more complicated formulas have been devised for building
and civil engineering contracts. Reference should be made to specialist
works for details of these.
Penalty clauses and Iiquidated damages
Considerable inconvenience and expense can be caused to the buyer by

failure on the part of the seller to deliver the goods at the agreed time.
Regular production can be halted, complicated main contracts brought to
a standstilL Because of this the law has long recognized that in the absence
of special provisions to the contrary 'time is of the essence' in contracts for
the sale of goods. In other words a Stipulation as to delivery time is a vital
condition, breach of which entitles the afflicted party to treat the contract
as repudiated. This applies whether delivery is late or early.
But the right to cancel a late order is poor consolation if it leaves the
buyer still further from getting hold of the goods he wants. Many buyers,
especially when negotiating from strong positions, have succeeded in
getting sellers to accept penalty clauses which exact penalties of say f50 a
day for lateness. Such clauses can work wonders in reforming delinquent
suppliers.
But the courts disregard penalty clauses which in order to terrorize
suppliers into meeting contractual obligations impose fines. Actions for
damages for late delivery or other breach of contract are of course
common, and the courts encourage and will enforce clauses which lay
down amounts agreed in advance for the probable amount of such
damages.
'Liquidated damages'- the term used for such agreed amounts- must
be genuine estimates of the cost to the buyer of lateness, allowing for loss
219
of profit and other expenses. The estimate need not correspond with the
actual expenses occasioned to the buyer by reason of the late delivery so
Iong as it corresponds with what the parties considered at the time the
contract was made Iate delivery would cost if it occurred; it must be a
genuine pre-estimate of cost. Same possible costs can only be guessed but
an educated guess based on information available at the time of contract
will be accepted and enforced by the courts. For this reason if lateness may
perhaps occasion very high costs of uncertain value it could be financially
more profitable to sue for d<'mages when the occasion arises rather than
include pre-estimated damages in the contract. But this would forfeit the
main practical benefit of damages dauses, which is the psychological effect
they have on the seller: the knowledge that lateness, instead of possibly
giving rise to action for damages will certainly cost him money, at a
substantial and clearly stipulated rate.
Incentive contracts
lncentive contracts are in a way the opposite of penalty clause contracts;
instead of penalizing the supplier for failure of some kind, they reward him
for success. The idea is not entirely novel, since Pepys incorporated
delivery bonuses and penalties inship building contracts 300 years ago, and
the American War Department included a performance incentive in an
aircraft contract with the Wright Brothers in 1907 - a 100/o bonus for each
mph increment above 40 mph (18 m/s).
The most common type of incentive is that used in cost incentive
contracts. But there are other areas apart from cost in which incentives, or
indeed penalties, can be applied. There is the question of delivery on time.
Just as it is possible to penalize Iate delivery, so it is possible to reward
early delivery. This would only be appropriate if early delivery were
particularly desirable. Same contracts are not required to be completed
before the stated date, and it would be embarrassing if they were; but in
certain cases delivery incentives have been arranged, varying with early or
Iate delivery in relation to a target date. Then there is the question of
quality. This can have quite a number of parameters. In the case of a
missile, one parameter would be the range- 1000 miles, 1200 miles, and
so on. Another would be the accuracy - within one mile of the target,
within five miles, for instance. Another quality criterion would be reliability - the probability of system malfunction or breakdown. And there
are several others.
It can be seen how complex the negotiations about contract terms have
to be when multiple incentives are to be embodied in a contract; because
quite clearly the more time is spent developing and improving the design
before production is actually embarked upon, the more likely we are to
achieve performance objectives - and the less likely we are to get delivery
on time. The more likely cost is to over-run the target figure, too. So there
220
is the problern of balancing one desirable objective, such as high performance, against another desirable objective, such as early delivery or low
price; and the difficulty is, that if one is not careful in setting and balancing
the monetary rewards embodied in the incentive clauses, then one will
motivate the contractor to aim at a balance or pattern of objectives which
is not the one preferred by the customer.
A multiple incentive contract is one which has incentive provisions
relating to"delivery time and/or performance as well as cost incentives.
Terms used in this connection include:
cost: prime cost and overhead, excluding profit or fee
prime cost: cost of labour and material charged directly to the project
overhead: costs which are apportioned to projects on some basis such as
the ratio of direct labour costs of the project to total direct labour costs of
the factory
fee: contractor's profit or monetary reward expressedas a lump sum
fee spread: the difference between greatest and least fees a contractor
can earn
cost incentive range: the band of costs over which the cost incentives
apply
delivery incentive range: the delivery period over which the time
incentive applies
performance incentive range: the performance range, e.g. range of
speeds, over which incentive provisions apply.
Share formula: the expression normally in percentage terms e.g. 80/20,
of the basis of the customer's and contractor's cost sharing arrangements.
The first figure is the customer's share (80117o) and the second figure is the
contractor's share (20%).
Target cost (TC): the cost estimate used for devising a cost incentive
arrangement for the sharing by the contracting parties of excess costs and
of savings.
Target fee (TF): the fee payable if actual cost equals the target cost.
Trade-off analysis: the assessment of the effect on the net fee which a
contractor could earn under a multiple incentive contract if he took a
course of action which would result in an increase in the fee for one
incentive element, e.g. by achieving an improvement in delivery, but a
decrease in his fee for another incentive element, e.g. by reason of an
increase in costs.
Trade-off break-even point: the point at which the increase in fee which
would be earned by achieving an improvement in one incentive element
would be exactly compensated by a reduction in fee due to a worsening of the
position on another incentive element in consequence of that achievement.
The basic cost incentive contract
The parameters of a cost incentive contract therefore are:
221
(1) target cost- the best estimate at which the two parties can arrive of
what costs will be incurred in executing the contract
(2) target fee - the amount of profit which the contractor will earn if
the costs come out at a target cost
(3) a share formu1a, which determines how excess, or cost saving, in
relation to the target cost, will be shared between the two parties.
If costs exceed the target cost, then the contractor gets his actual cost,
plus his target fee, less a proportion of the excess cost, in accordance with
the share formula. lf costs are less than target cost, he gets his actual cost,
plus the target fee, plus a proportion of the saving he has made. For
instance, suppose the target cost is flOOOOO, and the target fee is flOOOO,
and the share formula is 80/20. lf actual cost is flOOOOO, the contractor
receives a total sum of fllO 000. lf actual cost is f120 000, he is paid a total
of f126 000, his fee being reduced by f4000, his 200Jo share of the cost
over-run. This simple arrangement is shown in Figure 14.1.
22
20
15
e...
0"'
...
10 ____T~~g_e_!:!':_e_~--------- Share line
eoj20
LL
'
Target cost""-.:
I
I
I
o+-~~~--~--~~--~--~--~~--~~
40
50
60
70
so
90 100 110
COST EOOO's
120
130 140 150
Figure 14.1 Cost incentive contract; simple 80120 fee structure.

It is common practice to set maximum and minimum Iimits on the fee,
although the unlimited share arrangements are also used, and sometimes
different share formulas are used for cost over-run and for cost saving, as
shown in Figure 14.2. This gives the contractor a greater fee for savings as
weil as greater protection for over-run, which he might require if the target
cost were considered tight. If target cost is not too reliable, and actual cost
could be considerably higher or lower, a 90/10 share formula would give
less risk of loss as weil as a lower profit incentive.
222
Maximumfee
16+---------------._
Share line 70/30
12
"'
:::
"'u.
Target fee'-..
10 ----------------------,
Share 1ine 80/20
8
Target cost
""i'
Minimumfee
0+-~--r-~-~-T-4--~~--r-~~
40
50
60
70
80
90
100
110
120
130 140 150
COST f OOO's
Figure 14.2 Cost incentive contract; more complex jee structure.

Multiple-incentive contracts
It is more difficult to set appropriate incentives for performance. For
instance, a contract for a hovercraft might provide for a minimum

acceptable speed of 40 knots and a maximum likely speed of 55 knots.
Performance incentive range is 15 knots. The incentive might be, f6000
increase in fee for each three-knot increment in speed above 40 knots.
Contracts have been negotiated in America with as many as 20 different
performance criteria, and when cost incentives and perhaps delivery
incentives are incorporated as weil, the trade-off analysis becomes extremely
difficult.
Building and civil engineering contracts
Building and civil engineering contracts are too !arge a topic to treat even
in outline here, and reference should be made to specialist works. Duncan
and Wailace's work 'Building and Civil Engineering Contracts' runs to 473
pages and is simply a commentary on the four principal RIBA forms of
contract, the FASS subcontract form, the RIBA fixed fee contract form
and the ICE contract form. Although the comprehensive and weilconsidered sets of contract clauses which make up these standard forms are
a great help and time-saver, 'a factor common to ail these forms,' say these
authors, 'is the reaily startling obscurity and difficulty of the language
used'. They add that in the ICE conditions 'there are many places where
the obscurity of the language is such that no view or opinion as to its
meaning can usefuily be expressed'.
Local authorities are big buyers of buildings, and many of them have
been officiaily reproved for their attachment to the open tender method of
awarding contracts. 'The Banweil Report on the placing and management
of contracts observed that although open competition had been strongly
criticized it remained in widespread use. Other methods such as selective
223
tendering, negotiation, package deals, two-stage selection, serial contracting and continuation contracts had many advantages but were insufficiently
used partly because of rigid adherence to out-moded procedures.' These
are all approaches to the problern of appointing the contractor.
Selective tendering means that the customer or dient invites tenders
from contractors selected for the purpose. An ad hoc Iist may be specially
drawn up, or the names taken from a standing Iist of approved contractors. Negotiation in this connexion refers to discussing the contract with
one or more firms and finally negotiating the details with a single selected
contractor. In a package deal the chosen firm takes responsibility for the
whole design and construction of the scheme from beginning to end. The
two-stage procedure is used to get the contractor into the design team at an
early stage. In the first stage outline proposals from several firms are
considered in the light of their capacity, management ability, prices,
overheads and labour rates. In the second stage the chosen contractor
works as a member of the team while details are developed, and bills of
quantities drawn up, submitring a detailed tender at the end of this period.
Serial contracting is a form of standing offer, whereby a contractor
undertakes to make a series of lump sum contracts on the same terms and
conditions, and continuation contracts are new contracts negotiated with
existing contractors on similar terms to an existing contract in order to
benefit from continuity of work.
Integrating case for part two: Halberd Aviation Ltd
John Harington, a senior buyer for Halberd Aviation Ltd, was having
problems with the supply of galleys agairrst current aircraft orders.
Halberd A viation Ltd was a long established aircraft manufacturer. lt
has been famous in former days for its military aircraft: the Cutlass
interceptor, the Assegai close support and medium range bomber, and the
Pike heavy strategic borober had their place in the annals of the Royal Air
Force. In recent years the firm had turned to commercial aircraft, and the
Harpoon, a trijet passenger aircraft, had been their most successful
product.
A year ago things were looking pretty black, however. The last orders
for British and European airlines were being completed; the only order to
come in for months had been for a single aircraft for an oil sheikh, which
welcome though it was, would hardly keep the business going for long.
Then to general rejoicing a cable from the sales force in Zembla announced
that after six months hard bargairring and in the teeth of fierce competition
they had won an order for six Harpoons tobe delivered in twelve months'
time. Later the same customer, Zemblan Airline System (ZAS), ordered a
further fourteen aircraft. Halberd Aviation were determined to give every
satisfaction on these two orders, because they considered that the Harpoon
still had potential for several years as airliner for such countfies as Zembla,
224
and the recommendation of a satisfied customer would help sales. Also, as

the export sales director put it, 'the small print on those orders is a
minefield of penalty clauses, guarantees, warranties, you name it. Absolutely no problern - so long as we comply absolutely with the contract.'
John Harrington was remembering that remark as he reviewed his
records on the galleys. Each aircraft was fitted with four galleys plus
related loose equipment such as food containers and water heaters. John
had obtained four quotations originally, as follows:
Airchef: fl2000 per set of four galleys plus f2000 for equipment;
Sabia Schnapps: price in Swedish kronen equivalent to fll 500 per set,
plus f2200 for equipment, FOB Gothenburg, at exchange rate in force on
date of delivery;
Quinn Models: fll 000 per set plus f2000 for equipment.
Overall specification was stipulated in the contract, with maximum weight
and construction in light alloy laid down.
However, detaildesignwas to be done by the supplier. Consequently,
design capability in conjunction with aircraft experience was important.
The supplier was also required to offer ultimate product support: if
anything went wrong with his product anywhere in the world he should be
able to fly competent people there at short notice to put it right.
Quinn Models had two things in their favour: their price was low, and
they had supplied galleys for executive jets using the specified construction
method. But they were a very small outfit. John Harington had visited
their premises in company with a quality control representative, and the
two men had agreed that Quinn had no quality control system as such; they
relied on the personal conscientiousness and skills of a handful of key
workers to reach the standards required, and although their customers had
no complaints, John had ruled them out as too big a risk when he had only
six sets to supply. Now he had twenty sets to supply he feit sure he had made
the right decision.
He was not going to admit it to anyone, but he feit he had been a bit
sloppy in ruling out Sabia Schnapps. They supplied !arge quantities of
galleys for Swedish military aircraft as weil as to shipbuilders. But they had
no representative based in Britain, and John was not weil up in the
implications of 'FOB Gothenburg', and the English they used in their sales
correspondence was a bit quaint ... Fortunately the rate of exchange soon
moved in such a way that their price when converted to sterling was higher
than Airchef's. John wondered if a quick phone call to find out what they
could quote today for the same specification would be worth making.
Airchef had been the firm he favoured. Halberd had dealt with them for
years. Also, they supplied the main British airline and had equipped all the
Harpoons in service with that airline with ga!leys and loose equipment.
Also they were on the point of being short of work; they were completing a
big contract and had been very keen to get a new contract which would
225
keep their design and manufacturing personne I busy. On the other hand,
they had no experience with the stipulated construction method. The
galleys they had made for Harpoons previously had been welded together
from solid hunks of stainless steel.
On the whole, John feit that his decision to source with the most
expensive supplier was justifiable, even though he was now in trouble both
on price and on specification.
Interview with the boss
At 10.30 John was talking to his boss, Jeff Hart. He was due to meet
Airchef representatives at 11.00, and Jeff had just apologized for not being
able to 'back up' John in the meeting with Airchef because he had another
meeting about a crisis in the magnesium castings supply situation.
'Any guidelines you want me to follow, Jeff?'
'Weil now, what exactly is the specification problem?'
'The galleys were overweight by about 130 lb. But it can be solved
without too much difficulty,' said John. 'If they drill some holes and
remove a number of catches which don't appear to be of much importance
the weight can be got down to spec. Of course they have to send men to our
factory and spend quite a bit of time rectifying the galleys, but that only
applies to the initial order for six; the next fourteen should be delivered to
spec without difficulty.'
'That's good, I hope you're right about that,' said Jeff Hart. 'As I
understood it, you placed the first order for six sets, the ones which have
been delivered overweight, on a fixed price basis, but they now want to
negotiate a big increase in price for them. You also placed the second order
for fourteen sets, which aretobe delivered later this year, on a fixed price
basis but at a higher price, and they want to re-negotiate that one too, is
that right?'
'That's right,' said John. 'My feeling is that they panicked a bit at the
thought of sending fitters to our factory to rectify the first Iot. However,
they are talking about a 200Jo increase in price, they say they are losing
thousands of pounds.'
'I expect you've seen the report of their Annual General Meeting in the
Financial Times; here it is. In the year ending 31st December last, they lost
;(14000 on gross sales of BOOOOO. They are losing thousands all right, but
not on our orders, which were not delivered in the period in question.
However, we must bear in mind that if they lose money on our orders too,
let's face it, they could go out of business. I would be sorry to lose a good
supplier, John. There arenot many left of aircraft standard.'
'I agree,' said John. 'Still, our contracts with ZAS are fixed price
contracts too. Any increases we concede to Airchef come out of our own
pocket; we don't have a hope of re-negotiating the ZAS price. My
impression is that Airchef simply failed to allow for the very high rate of
226
cost inflation we have suffered here this year. They weren't keen to accept
a fixed price contract at all for the second order. I argued that they had
already done the detail design, which was the same as for the first order,
and that both labour and material costs ought to come down for this
second, !arger, batch. We agreed eventually on fl3 800 per set plus f2300
for equipment, that's 150Jo above the original price for the first six. I don't
see that a further 20% on top of that is justifiable at all.'
'Good Lord, isthat the time?' said Jeff Hart. 'You'll have to excuse me,
John. See me at five p.m. and Iet me know how you did. I'm sure you've
got the main considerations clear.'
Interview with the supplier
John walked slowly back to his office, reviewing the possibilities. Option
one, he thought: switch to another supplier. It would have to be Quinn or
Sabia Schnapps, and they would have to get replacements for these first six
sets here within one month, eise the penalty clause in our ZAS contract
comes into effect. That isn't really a practical possibility.
Option two: take the first six from Airchef after they've got the weight
right and find someone eise for the next fourteen. No, that's not on either;
all twenty aircraft have to be to the same modification standard.
Option three: get tough with Airchef. Insist on our legal rights. They
must deliver acceptable galleys as per contract, and we pay the price
originally agreed, as per contract. Then it's goodbye one more supplier of
aircraft standard.
Option four: go soft with Airchef. 0 good and valued supplier, I give
you what you ask. Airchef is back in the black, Halberd is not really in the
red. Personally, I don't want to start Iooking for another job just at
present, though.
Option five: negotiate a price which I can justify to Jeff Hart and he can
justify to the sales force and the finance people and which Airchef will
accept. I must spend twenty minutes working out the figures for that.
John opened the door of his office and found Keith Matthews,
managing director of Airchef, already there with his sales director. Some
intelligent girl had provided them with cups of coffee.
'I'll put it to you straight, John,' said Matthews after the usual civilities.
'On the first order for six sets we are going to lose f8000 unless you agree
to a price increase. It's partly our fault. Wemade the things too heavy, no
excuses, we have to rectify them. Apart from that, the cost increases both
for labour and for materials have really been astronomical. I went along
with your insistence on a fixed price contract, against my better judgement
if I can say so, and the price just does not cover the cost increases we are
having to meet. The second order, weil that's even worse. We can't afford it.
Ifl losemy nice little business and my employees lose their jobs and you lose an
old supplier, who gains? Even the Inland Revenue will be out of pocket.'
'Lend me a handkerchief, someone,' said John. 'To wipe away my tears.
227
Seriously, though, Keith, I'm going to help you if I can; but you've got to
realize that I'm in a tricky position too. I have to ask you: on the original
price you quoted, did you expect to make a profit?'
'We aimed at five per cent. Not much, but we wanted the work. On the
revised price for the second order for fourteen, we kept the five per cent
profit margin but we hoped that your arguments about reduction in
manufacturing costs with the increased volume would in fact add to that.
Unfortunately, the latest figures I have- and I'm not blaming you, who
could foresee the cost increases which have hit us this year? - the latest
figures indicate that far from making even 50Jo profit we stand to lose at
least 3%, that's over f400 for every set we deliver to you. Do you want to
ruin us?'
Some questions
(1) Penalty clauses are said to have no force in English law. Why are
they so common then? Why in this case are they considered important?
(2) Was it right to rule out Quinn Models because their quality control
system was not of the kind considered appropriate? What is the purpose of
a quality control system?
(3) Should more consideration have been given to the Swedish supplier in
this case? What counter-proposal could have been made, to their quoted 'rate
of exchange in force on date of delivery', to reduce the exchange rate risk?
(4) What is meant by 'FOB Gothenburg'? Would it Iead to any
complications apart from increased cost as compared with an offer to
deliver goods to customer's works?
(5) What response should be made to Airchef's request for an increased
price on the six sets of equipment already delivered on a fixed price
contract?
(6) What response should be made to Airchef's request for a revision of
the fixed price in the contract for the fourteen sets to be delivered later in
the year, given that it will be nine months before the last set is due for
delivery and that the wholesale price index is likely to increase at an annual
rate of 20% in that period?
(7) If some concession is made to Airchef on the price for the next
fourteen sets, would it be appropriate to use a CPA clause? Suggest the
form such a clause might take.
(8) It seems to be taken for granted in Halberd's purchase department
that a legitimate purchasing objective is to keep good suppliers going, and
that in furtherance of this objective price and other concessions may be
appropriate. Would you agree with this, either (a) in the aircraft industry,
or (b) in any industry of your choice? Would you agree that it is desirable
to support a good supplier, (c) when no satisfactory alternative is known,
(d) when there are one or two satisfactory alternative suppliers? lf you do
agree, what Iimits would you set to the kind and duration of support which
should be given?
228

(1) Explain the steps which might be taken to ensure that purchased
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(ll)
(12)
goods or components comply with detailed quality specifications,

either in a !arge chain store selling clothing and food products, or in a
mass-production manufacturer selling consumer durables.
Discuss the merits and disadvantages of any two of the following
types of specification for purchases:
(i) specification by sample
(ii) specification by brand
(iii) specification by British Standard.
What part does the purchasing department play in specifying and controllingthequalityofpurchases, inany specific industry of your choice?
Explain the difference between capital and non-capital expenditure,
state what you understand by the terms first cost, total cost and lifecycle costing in this connection, and summarize the nature of the
contribution which the purchasing department can make to capital
expenditure decisions.
Most countries have their national standardization bodies. Briefly
describe the standardization organization for the UK (or for your own
country), and explain why collaboration internationally between such
organizations is both difficult and desirable.
Distinguish between specification quality and conformance quality
and discuss the part played by the purchase department in connection
with each of them.
Explain the main aim of purchase quality control and discuss the
approach suggested in current British standards for the achievement
of this aim.
In what circumstances would you consider it desirable for a supplier
to nominate one of his staff to act as quality representative? What
authority should such a representative be given?
Why is it important for the purchasing officer to understand the
structure of the markets in which he buys? What are the significant
structural characteristics?
What do you understand by workable or reasonably satisfactory
competition in a supply market?
How can cost analysis by the purchaser help in keeping the seller's
price realistic?
Explain three of the following terms used on the London Meta!
Exchange:
(i) prompt date
(ii) Jending
(iii) borrowing
(iv) contango
(v) hedging.
229
(13) Steep rises have occurred recently in certain commodity prices. Detail
the reasons for these and indicate whether the trend is in your opinion
likely to continue.
(14) Certain commodity markets regard their hedging services as important facilities which buyers would use more extensively if they knew
about them. Explain what hedging means, what hedging services are
offered by any one market, and what help they could be to the buyer.
(15) 'Contangos favourthe forward seller, while backwardation favours the
forward buyer.' Explain this statement.
( 16) People from several departments and from various Ievels in the organizational hierarchy may take part in the purchasing decision to buy from a
particular source. How is this affected by the nature of what is bought?
(17) In what circumstances is it important to weigh up supplier capability?
Describe how this can be done.
(18) Some firms use a system of vendor rating which summarizes facts
and judgments about supplier performance into a single numerical
score. Briefly describe one such system and discuss the advantages
and disadvantages of its use.
(19) What do you understand by an organized commodity market? What
conditions must be satisfied before futures can be traded on such
markets?
(20) 'Profitable suppliers are a better risk' for the purchaser. Does this in
your view imply any duty on the purchaser's part to ensure that a
supplier does not lose money on a particular order he has to place?
(21) The IPS has published an 'Ethical Code' setting forth some precepts and
guidance on ethica1 matters, and some firms include similar guidance
in their internal buyers' handbooks or departmental manuals. Describe
one such code and argue the case for and against their use.
(22) Western economies seem to be increasingly dominated by !arge
organizations. In view of this do you consider that the small supplier
has much prospect of surviving?
(23) 'Fixed price contracts are finished' in periods of inflation. What
alternatives to them are available in placing contracts involving !arge
sums of money and long Iead times?
(24) State with reasons whether in your view it is socially and economically
desirable for government procurement officials to give preference to
suppliers in depressed and high-unemployment areas.
(25) Give three examples of matters which might require negotiation
between buyer and seller and explain how a buyer could prepare
carefully for a major negotiation.
(26) Describe the essential features of a cost incentive contract, explaining
the terms target cost, target fee, and share formula.
(27) Define supplier development, describe when it is important to do this
and explain some of the approaches adopted.
(28) Listed below are a nurober of tasks or decisions which may contribute
230

to the specification and control of quality. Delete those which do not
apply to your organization, and state for the rest which department
carries the primary responsibility, and which department(s) have a
secondary responsibility to contribute to the task or decision in some
significant way. Briefly comment on your statement.
Outline definition or design of requirements

Detailed specification preparation
Constructive criticism of specijication if needed
Suggested alternative specijication if appropriate
Survey supplier quality capability by visit
Grade supp/ier for qua/ity capability
Approve new supplierl se/ect supplier
Negotiate price and terms
Negotiate inspection and QC arrangements
Communication with supplier:
of orderl contract requirements
on test and inspection arrangements
about defective goods delivered
Inspection of incoming goods if needed
Decision to accept rejects at reduced price
Decision to rework rejects with price concession
Grade supp/ier for quality performance
Achieve better quality performance
(29) 'Level pricing can bethe result either of keen competition or of collusion
between suppliers'. Explain; and discuss any differences you consider
likely in the Ievel of the Ievel pricing resulting from the two situations.
(30) Explain why prices of copper and tin fluctuate up and down while
prices of steel and aluminium do not.
(31) Opinions sometimes differ sharply as to whether it is in the buyer's
interest for !arge contracts which require a year or more to complete
to be on a fixed price basis. Outline the arguments on either side and
explain the sort of price adjustment clause often considered a better
alternative in times of cost inflation.
(32) 'When making decisions, priceis ratedas the most important factor, followed closely bytechnical specifications. Nevertheless, other factors are
sufficiently important to ensure that approximately half of the persons
involved in purchasing would not change from their best supplier to buy
anidentical product from anew supplier for a pricereduction ofless than
50Jo, i.e. an average 270Jo increase in profitability. Approximately
one fifth would not change for less than 10% reduction in price.'
(a) Explain what Hugh Buckner means by 'an average 27% increase in
profitability' in this quotation from 'How British Industry Buys'.
(b) Account for the purchasing behaviour described in the quotation.
PARTTHREE
The management of
purchasing and supply
15
Planning
The process of management has been analysed into various parts or

functions, such as:
(i)
(ii)
(iii)
(iv)
planning
staffing
organizing
control.
Other recognized parts of the management process, such as communication or motivation, are sometimes considered sufficiently important to
stand alongside the four mentioned above. Without disputing that this may
be correct, we shall nevertheless use those four as chapter headings for Part
III of this work.
Systematic planning requires the systematic collection of data, the
determination of aims and objectives, and the formulation of plans, both
general and detailed, to achieve objectives within policy and other constraints. In the case of purchasing and supply, planning is part of the
responsibility of purchasing management, sometimes assisted by full-time
research or purchasing services personnel.
Corporate planning
There has recently been considerable interest in corporate planning, which

could be described as a systematic attempt to plan the future of the
organization as a whole; to foresee the threats and promises which the
future holds in store on various assumptions as to the form the future
might take; and to devise strategies meant to ensure that the organization is
234
The management ofpurchasing and supply
advantageously placed whatever happens. Long term planning, long range

planning, and strategic planning, are other terms which in practice appear
to have similar implications.
Such planning is most needed by !arge organizations in changing
environments. If the future is going to be much like the present, forward
planning can still be useful, but will tend to carry a lower priority than
when conditions are subject to rapid change.
Most companies in the earlier 70's which practised long-range planning
did not include purchasing and supply in the plans, either as a provider of
input information or as a target area for planning. It was feit that
purchasing problems were tactical rather than strategic, administrative
rather than long-range. Indeed, in the developed countries for the whole
quarter century from 1950 to 1975, supply markets had been successful in
meeting all major demands, apart from a few temporary hiccups. Consequently it was natural to assume that whatever product !in es were adopted,
whatever sales were projected, purchasing would crn.<! up with the
materials and supplies required as they normally did.
Then in the mid-70's a combination of events led to severe shortages and
extended Iead times for many materials, products and components, and in
many industrial countries. This in turn led to a reconsideration of long
range supply prospects. The fivefold increase in oil price hammered home
the fact that the quantity of oil is finite, and could weil be completely
exhausted within one lifetime: a !arge price increase is a most convincing
argument. Cheap transport and cheap plastics had been largely the result
of cheap oil; but oil was no Ionger cheap, and would become a scarce
commodity in the foreseeable future.
The energy gap, between projected future demand for energy and
expected future availability of energy from oil and all other sources, is not
the only supply gap which appears to Ioom ahead. The extractive industries
have already in many cases extracted the rich lodes. Some mines which a
lifetime ago extracted ores with 500Jo or 5% meta! content are now down to
0.5%. Some countries which rely for their income from abroad on the
production of one or two basic raw materials have realized, like the
oil-producer countries, that they have been living on capital, and they may
restriet supplies to husband resources which are now widely recognized to
be finite. If industrialization spreads from the relatively small part of the
world at present industrialized to the much !arger part at present agricultural, there will be enormous increases in the world demand for energy and
materials, and it is hard to see how severe long-term shortages can be
avoided.
Long-range strategic planning may consequently need to consider the
input of materials as weil as, and sometimes before, the output of
products. The purchasing function needs to collect more information, Iook
much further ahead and generally devote more effort to planning if it is to
make a useful contribution to the forward thinking of the organization of
Planning
235
which it is part; and indeed if it is to make its own plans for long-term
supply security, rather than spend most of its time on immediate problems
which could perhaps have been avoided.
This was no doubt one reason for the increased interest in purchasing
research, which occurred in the UK towards the end of the decade.
Purchasing research
Purchasing research is defined by Fearon as: 'systematic investigation and

fact-finding to improve purchasing performance[l]'. A certain amount of
systematic investigation is done as a normal part of the buying process.
Before dealing with a new supplier, or selecting a contractor for a major
project, or taking the final decision on costly capital expenditure or on the
adoption of some novel material, a competent purchase department would
be expected to undertake a 'course of critical investigation; endeavour to
discover new or collate old facts' - which is a dictionary definition of
research.
Emergency investigations arealso undertaken to solve problems, such as
a sudden shortage or an unacceptable price increase; or in response to
other exceptional situations, such as a change in the law governing
commercial transactions or in the rate of exchange.
But there is a problern for purchasing management in organizing
research which goes beyond what is a prerequisite of some complex new
purchase decision, or a crisis response. Rapid developments in technology,
changes in the structure of the economy and continual evolution in the
complex environment in which purchase decisions are made have made this
problern more urgent. How can purchasing management make available to
the buyer information which will improve purchasing performance now?
How can future purchasing performance be improved by looking ahead,
studying trends, exploring options, when buyers are fully occupied with the
problems of today? The development of new systems, techniques and
methods is another area which is difficult to handle on a part time basis.
Consequently, there is an increasing tendency for the !arger purchase
department to include, alongside the buying staff, people who are employed
full time on 'systematic investigation and fact-finding to improve purchase
performance'.
Full-time research workers of this kind go by a variety of names,
including: purchase analyst, cost analyst, systems analyst, value analyst,
commodity specialist, cost estimator, supply market analyst, purchasing
research, purchasing services.
They are often grouped together in a separate section or department
known as: Purehase Planning and Research, Purchasing Research, Purchasing Services. Such a section may provide other information services
such as catalogue library or the preparation of management reports or
expenditure budgets.
236
The management oj purchasing and supply
The technical qualifications of such personnel vary considerably and will

depend on the nature of their work; see for instance the jobs considered
towards the end of the next chapter. Their personal qualifications are just
as important. In providing a useful and appreciated service to buyers and
to purchasing management, their technical qualifications should be adequate to ensure that the service is useful; but to make it appreciated they
need social or inter-personal skills. If buyers get the impression that
research personnel are going to interfere with the way they buy, criticize
their buying decisions and generally act as back-seat drivers instead of
helping them, then the back-up service provided by the section is not going
to be fully used.
Personnel in other departments may contribute to research in the
purchasing department, for instance quality control engineers often assist
in supplier evaluation, marketing research personnel sometimes help with
supply market investigation, and systems or 0 and M people may be called
in on systems and methods. Outside consultants are also used.
In organizations which do not employ full time purchasing research
staff, two methods are used by purchasing management to ensure that
purchasing research is not confined to ad hoc or emergency investigations.
The first is an individual approach, and the second is a collective approach.
The individual approach is to agree with individual buyers special
projects. By an agreed date they must each complete an investigation and
put forward recommendations, for instance on revised conditions of
contract, on acceptance of hospitality, or on new sources. These projects
arise from or are related to the normal work of the people concerned but
are additional to it. In management by objectives, staff development
schemes, and graduate training programmes such special projects are
common.
Collective approaches usually attempt to focus the attention of all the
buyers on one problern at a time. One purchasing manager refers to this as
the 'roving spotlight'. Each month he turns the spotlight onto a new
problern area. Particular aspects may be assigned to individuals but the
whole department is expected to concentrate on the general problem.
The best way to keep interest alive may be to have a number of different
approaches operating simultaneously. One !arge organization had one
group looking at supplier appraisal methods while another group worked
on system development with the computer specialists and a third group
discussed long-term prospects with the corporate planning staff. Meanwhile all buyers were encouraged to read trade and commercial publications, attend exhibitions, visit suppliers, and contribute to planning and
policy formation. Graduate trainees spent at least six months in purchasing
research, and often did work which was of noticeably high standard but
was not seen by the buyers as a threat to their prerogatives or an attack on
their status.
Having organized a purchase research effort, either by full time or part
Planning
237
RESEARCH AREA ONE: FUTURE CHANGES WHICH COULD AFFECT

OPERATIONS
Market structures: monopoly, oligopoly; supplier development
Developments abroad and market trends
Legislation: likely trends
Shortages: where they are likely to develop
Prices: probable futu re trends for major purchases
Exchange rates: the future buying power of the f
New product development- purchasing engineering; relative cost of alternative
materials and availability
Long term forecasting and planning
RESEARCH AREA TWO:PRESENT FACTS USEFUL IN BUYING DECISIONS
Current legal position
Current position on taxes, tariffs, import licences and duties, etc.
Economics of procurement: make-or-buy studies,
lease, rent or buy studies
Financial information about suppliers
Other information about suppliers
Source data bank
Alternative sources
Alternative materials
Cost analysis of purchased parts: target buy prices
Buying patterns: how many sources to use
Economic statistics and cost indexes
RESEARCH AREA THREE: TECHNIOUES AND METHODS
Developing more efficient purchasing and supply techniques
Reducing paperwork: cash-with-order, small order methods, etc.
Value analysis, materials analysis
Standardization and variety reduction
Computer development and applications: systems analysis
Capital expenditure appraisal: DCF, NPV, IRR, life cycle costing
Contract price adjustment (CPA)
Technical vendor support
Supplier vendor support
Supplier appraisal techniques
Measurement of purchasing performance
Cost-effectiveness of purchasing research
Communications: management reports, relations with users, specifiers, suppliers
AREA FOUR: PURCHASING SERVICES
Purchasing library
Training, staff development
Preparation of departmental budget
Preparation of management reports
Expenditure audit and preparation of performance appraisals
Etc. (a wide range of services from low Ievei such as typing and fil ing, through
expediting, to high Ievei such as working with Operations Research or
Systems Analysis is currently provided under this heading).
Figure 15.1 Same targets jor purchasing research.
The management oj purchasing and supp/y
238
time contributions, a further task for purchasing management is to select

topics or subjects for research. These can be grouped into three main areas:
(i) future changes which could affect Operations
(ii) present facts which could be useful to buyers
(iii) systems and methods.

In the special case where purchasing research is undertaken on a full time
basis by specialists, there is the further question: what eise could they do?
What other information services, or other services, could the section
provide?
Fig. 15.1 shows a number of topics suggested at seminars conducted by
the author. lt is intended to stimulate ideas rather than provide a definitive
Iist.
Under the heading of future changes, for instance, may be seen a
number of topics similar to those previously considered in the discussion
on corporate planning: what changes and developments are likely to occur,
what threats and opportunities they may offer, and what defensive or
attacking strategies could be adopted? This area is the one referred to in
C.F. Kettering's neat and bracing definition of research as 'an organized
process of finding out what you are going to do when you can't keep on
doing what you're doing now'.
The second heading covers the collection and interpretation of data from
a variety of sources to clarify the basis on which decisions are taken and to
strengthen the buyer's band in negotiations. There are indications that
much of the present purchasing research effort in the UK is allocated to
this, and to the third heading: the continual search for better techniques
and methods in purchasing and supply.
Value analysis
In an engineering factory, the business of manufacturing is to make, and

of purchasing to buy, what the design department design. Just as the
manufacturing people can often suggest detail modifications which reduce
manufacturing costs, so too the purchasing people can suggest design
changes which reduce the materials bill. A completely non-technical buyer
who simply sends drawings and specifications prepared by his company's
experts to other companies' experts for quotation, will often receive from
them suggestions for improving the specifications, making the item more
producible or giving better value.
But buyers in many organizations have taken the Iead in pressing for
standardization. The advantages of bulk buying cannot be achieved
without standardization. Many firms buy specials when standards would
work a~ weil, cost less, be delivered quicker, save administrative time in
purchasing and designer time, and enable stockstobe cut. Because of these
economic advantages, purchase departments often urge their designers and
Planning
239
specifiers to adopt standard sizes, or preferred ranges of sizes commercially

available, or standard commercial specifications instead of specials, and
attempt to reduce needless variety in purchases.
Price may be the buyer's special concern; but price alone means little, it
is what you get for the price that matters; and the buyer who aims at the
best buy, the most value for money, is therefore obliged to consider the
technical features of the thing purchased alongside the purchase price.
Shortly after World War II this consideration began to be systematized
into a thorough-going design and methods review of purchased parts under
the name 'value analysis'. The namewas invented by Lawrence D. Miles,
then employed in General Electric's purchasing department in the USA,
and later manager of Value Service for the same company; Ford Motor
and government procurement agencies in the States were working on
similar lines at that time.
Value analysiswas introduced into the United Kingdom in the late 50's
and early 60's, when it was somewhat oversold. A nurober of firms
introduced it because it was the in thing, and subsequently dropped it for
some other fashionable technique. But it seems to have been very
successful in organizations which applied it seriously. It is commonly
stated that cost reductions running into hundreds of thousands of pounds
are achieved without reduction in quality and at a cost in salaries and
expenses which is returned eight, ten, and in one case (Boeing Aircraft)
twenty-eight times over.
At least three-quarters of the value analysis now being done is applied to
bought-out parts and components. Process industries such as coal, steel,
oil, power, chemicals, offer less scope for large-scale cost reduction
through VA than manufacturing industry which purchases thousands of
made-to-order parts.
Ten tests jor value
L.D. Miles defines value analysis as 'an organized creative approach which
has for its purpose the efficient identification of unnecessary cost; i.e. cost
which contributes neither quality nor use nor life nor appearance nor
customer features'. Originally this approach is applied by a group of men
with suitable trade knowledge and skills, a team from design, manufacturing and procurement, sitting round a table considering specimen parts in
the light of ten questions - ten tests for value. The actual questions vary
slightly between firms; one Iist is thus:
(1) Can we cut it out altogether?
(2)
(3)
(4)
(5)
Can we simplify it; does it need all its features?

ls there anything better for the purpose?
Can we replace it, or parts of it, with a standard part?
Is it made on proper tooling considering the quantity required?
240
The management ofpurchasing and supp!y
(6) Would some eheaper material do as weil, or a dearer material be

better?
(7) Would some eheaper produetion proeess give a satisfaetory part?
(8) Do material, labour, overhead and profit add up to its priee?
(9) Can we find a eheaper supplier who will be satisfaetory?
(10) Is anyone buying it for less?
In this Iist the first two questions ask what funetion the item serves, how
eise the funetion eould be aehieved and whether it is worth what it eosts.
Question 6 is illustrated by Figure 15.2. The eighth question is priee
COST
WEIGHT
I
I
I
SAVING1
75%
STEEL
GLASS
FtBRE
...
STEEL
GLASS
FIBRE
Figure 15.2 Value analysis: alternative materials for a fan shroud.

analysis - building up a purehase estimate of price to eompare with the
quoted priee, in order firstly to isolate the items whieh are high-prieed, and
seeondly to give the buyer a faetual basis for his negotiations. The last
question applies mainly when other faetories in a group are buying similar
eomponents.
It is no aeeident that many of these questions resemble closely those
asked by industrial engineers in a systematie method study. One work
study questionnaire starts off:
'Purpose - WHAT is aehieved? WHY? ls it neeessary? If yes - why?
Means- HOW is it aehieved? Why that way?' - and goes on to ask
WHEN, WHO, WHERE?
Suppliers are often eanvassed for their suggestions. A motor-ear steering
faetory (whieh ineidentally spent five-and-a-half times as mueh on purehases as on direet labour) did this by displaying on a peg board in the
entranee hall the fifty eomponents on whieh the most money was spent. A
notice addressed to visits read: 'We invite your suggestions. Theseare some
of the eomponents we purehase. Can you suggest ways to improve their
quality or reduee their eost? A deseription of how eaeh part is used may be
found in the handbook at the foot of the display. Our buyer will be happy
Planning
241
to discuss your ideas.' Other departments within the organization were also
asked for suggestions. These efforts do of course bring in usable suggestions, but they have the even more important effect of helping to get
everyone value-conscious.
Value analysis must not be seen as a misguided attempt by commercial
people to usurp prerogatives of technical people. It is a team job. Nearly
always it is carried out interdepartmentally. In some !arge organizations
value analysts have been attached to the purchasing department, which has
initiated and organized the value analysis programme; but the final say in
specifications must remain with engineering design, which has also been
responsible for initiating value engineering programmes in some firms.
One British firm organized value analysis by setting up fourteen teams,
one for each of eleven major products, and one each for plastics,
diecastings, and boxing and packaging. Each team had representatives
from four functions: product engineering, design engineering, factory
administration, and purchasing. All teams met fortnightly and reported
through the four executive directors responsible for these functions to the
deputy managing director. Considerable savings in cost and some improvements in quality were reported to have been achieved by the constructive,
cost-conscious review of design and method these teams carried out; and
the changes in the attitudes and skills of those involved may have been at
least equally valuable. It will be obvious that design people can gain much
useful information about commercial considerations such as relative price
of alternative materials, price variability and relative availability of
materials; purchasing people can learn a great deal of technical and
product knowledge; and both can gain new understanding of each
other's objectives and skills. Often purchasing people also benefit from a
radically new sense of participation. As one man said, 'I have been a buyer
for many years now and have seen new ideas come and go. Never in my
whole career have I met one idea which has had as dynamic an effect on
buying as Value Analysis.'
Materials Analysis
A planning and research technique which has a Iot in common with Value
Analysis is Materials Analysis. It is intended to improve purchasing
performance or stock control performance by systematic investigation,
fact-finding and the generation of testing of creative proposals.
Six steps are taken in the application of Materials Analysis:
(1) Decide whether to aim at lower purchase cost or reduced inventory
(2)
(3)
(4)
(5)
(6)
Set up Materials Analysis team

Select target items after analysis of range of purchases or stocks
Collect data on target items
Analyse and evaluate data, formulate and present recommendations
Follow up and review.
242
The management of purchasing and supply
In taking the first step, the number and seriousness of problems

perceived in purchasing and in stock control will be relevant. Both areas
make substantial demands on financial resources. Materials Analysis
concentrates on the stock items which tie up a Iot of money, or on the
purchase items which cost a Iot of money. It aims to reduce costs on the big
money items.
The Materials Analysis team is a group of representatives of various
departments, at middle management Ievel, selected from people whose
knowledge, skills and attitude enable them to make a contribution, and
who are motivated to do so by reason of their interests or the effect
proposals will have on their work. In a manufacturing firm the Materials
Analysis team normally includes people from Purchasing, Production
Control, Inspection and Quality Control, Receiving, Stores and Handling.
There may also be representatives from Engineering Design, Marketing,
Operations Research, etc.
The third step is to pick the targets. Pareto analysis or ABC analysis is
the normal starting point. This has been previously discussed (p.102). lt
turns out, apparently by a law of nature, that most of the annual
expenditure on stock replenishment goes on replenishing less than ten per
cent of the stock range- Group A. ABC analysis is often used as the basis
of stock control policies such as, for instance: order C items once a year, B
items four times a year, and A items once a month unless it is possible to
cover them by a contract for several months supply with monthly, or
weekly, or even in the case of very high volume items daily, deliveries. Such
policies imply a caretaker role for the C item stock controllers and an
executive role for the A item stock controllers. Materials Analysis is
intended to provide guidance for the executive role.
ABCanalysis can also be applied to average inventory value rather than
to annual usage value, and this has advantages in certain cases. Apart from
high inventory value and high annual expenditure, other criteria may
justify inclusion of certain items on the Materials Analysis target Iist.
There may be a policy decision that certain items must never be out of
stock; life-or-death drugs in a hospital for instance. There may be policy
decisions that large stocks or special reserve stocks of certain items will be
held, for instance:
(i) those imported from a country halfway round the world with
political problems
(ii) those with an exceptionally long Iead time
(iii) those where the risk of supplies being interrupted by strikes is acute.
Such policy decisions can be reconsidered. It may be possible to devise
some more economic way to achieve the end in view.
In the case of purchase programmes, the same sort of analysis can be
made of purchase expenditure to see where the money goes, and many
organizations extend the ABC classification which has become weil
Planning
243
established for stock purchases, to all purchases. Both invoice price and
quantity required affect this. Hospitals use costly nitrous oxide as weil as
inexpensive X-ray film; but they tend to use a Iot of X-ray film, making it
an A item in spend analysis, and not very much nitrous oxide, making this
aB item. They also use paper clips, but it is difficult to conceive of any way
they could use enough of this low cost item to get it out of Class C.
A preliminary Iist derived by spend analysis will be amended by crossing
off items where there seems little chance of effecting any worthwhile
saving, and adding on items which while not perhaps among the most
expensive, do for one reason or another offer opportunities or challenges
for cost reduction.
Having decided the main priority, nominated the materials team, and
selected a short Iist of target items, the next step is to collect information.
What information do we need, is a question which the team should
tackle at an early stage. Organizations in similar lines of business often
have considerable commonality in their C items (for instance all engineering manufacturers use lubricating and cutting oils, bar steel and machine
screws), while having little or no commonality in the A items which are the
main targets for Materials Analysis. Consequently reference can be made
to textbooks or consultants for generally applicable advice on how to
economize on C items, while for A items particular recommendations have
to be devised for specific organizations in their unique environments.
Consultants can help to structure the process of reaching a solution, or to
professionalize the presentation of a recommendation, but the solutions
and the recommendations are best devised by the organization's own staff.
Each target item can be allocated a filing pocket or folder. In this, data is
collected for subsequent circulation to the Materials Analysis team under
such headings as the following:
(l) detailed specification
(2) applications: what do we use it for?

(3) usage: what quantity was used last year, this year? Future usage?
(4) source: where do we buy it? Where eise could it be bought, and why
not?
(5) conformance: what is the rejection percentage or scrap rate?
(6) inventory: how much do we hold in stock, what Stockholding costs
are incurred, how frequent are shortages, how were policies determined?
(7) transport: how does it reach us, what transport alternatives are
available?
The next stage, after collecting the data, is for the Materials Analysis
team to get down to detailed work on the target items and to come up with
some constructive recommendations.
If the first priority is purchase cost reduction, areas which may be worth
examining include these:
244
The management ojpurchasing and supply
(l) value analysis
(2)
(3)
(4)
(5)
(6)
alternate sources of supply

alternate materials
transport
ordering practice and payment method
in-process loss and other losses.
One shipbuilder found that the major cause of trouble in the purchase of A
items (defined in this organization as equipment items costing rsooo apiece
or more, and constituting 60-700Jo of material cost per ship), was delays in
the drawing office. It could take as long as nine months after signature of
the ship contract for requisitions to reach Purchasing complete with full
drawings. The original quotations from suppliers which had been used in
Estimating would be out of date by the time purchase orders could be sent
to them, and new quotations would invariably be at a higher price and
often at a Ionger delivery time.
One line of attack would be to ask the drawing office why these long
delays occurred. Some delays might be avoidable. Another line would be a
look at the ordering practices. Some kind of Ietter of intent or provisional
order could be used to book capacity or indicate requirements to the
supplier, although of course the official order should follow as soon as
possible.
If inventory reduction is the prime target, experience suggests a different
selection of areas for examination:
(l) Operational effectiveness
(2)
(3)
(4)
(5)
(6)
Safety stock and reorder Ievel policy

Work-in-progress rules
Order quantities
Stock location
Special factors.
As the folk-saying goes in Cambridge, Mass.: optimizing sub-systems

can mean sub-optimizing the system. For instance, the chief inspector of
one manufacturer had optimized his sub-system by keeping a sixteen day
backlog of work at the inspection bay. He could plan work in advance, his
inspectors had a nice steady workload. But he had not realized that
inventory is normally shown in the accounts either from invoice date or
from delivery date, rather than from date of clearing inspection. The
materials team got the backlog reduced from sixteen days to seven.
Inventory was reduced by fl20000. The chief inspector was amazed.
Safety stock and reorder Ievels are affected by lead times, both their
length and their reliability. At least a third of the averagestock holding of
production parts and materials is normally attributable to safety or buffer
stock, so substantial inventory reductions can be achieved if shorter and
more reliable Iead times can be arranged. Three lines of attack here are:
Planning
245
(1) To Iook for new suppliers with shorter and more reliable delivery
periods.
(2) To exert pressure on existing suppliers to improve their performance, for instance by complaining to representatives, and sending a
quarterly Ietter comparing their actual delivery performance with that of
other suppliers, and taking the matter up with them if their performance is
getting worse.
(3) To explore with suppliers the reasons for their unsatisfactory
performance and to work with them to improve matters.
For instance, suppliers could be advised to prepare a monthly internal
report showing date goods were despatched against date originally promised. In many firms executives simply do not know how bad their
performance is. The BIM Survey Report 35, published in December 1976,
found that 4007o of the respendent plants did not measure delivery
performance against delivery promise. This simple step could Iead to much
better performance. Frequent change of schedule by customer is another
cause of poor delivery performance, and if we are the offending customer
the remedy is in our own hands.
What tends to happen when deliveries are perceived as unreliable is that
all along the line people set up private emergency stocks, from exaggerated
estimates of usage rates to a physical emergency supply under a foreman's
desk, so stock location may be worth looking into - actual, as opposed to
planned, location!
Group interaction by the members of the materials team needs time to
develop; the group needs to play itself in. It is a good idea to start with some
knownproblemarea wherethereis a widely feit need for a better solution and
a good chance of finding a better solution. Friendly, non-critical consideration of various alternatives - the 'What if we tried x' approach - should
help tostop representatives of the various functional areas being defensive
about the possible discovery of skeletons in their closets. It should constantly
be stressed that this is a fact-finding, not a fault-finding, exercise.
The aim is not to unearth old mistakes but to invent new solutions.
Normally proposals will need approval by higher management. Since big
money is likely to be involved, it is worth spending time and effort on a
professional and persuasive presentation.
To summarize the vital features of materials analysis:
(1) Team approach.
(2) Education of team members and others.
(3) Consensus decisions.
(4) Presentation by analyst.
Simplifying paperwork
The purpose of paperwerk is to provide a compact and convenient means
246
of communication and semi-permanent record. This blameless object has a

splendid aspect, for it is after all on paper that our present civilization is
founded. Few of the age's great achievements would have been possible
without the written or printed word. Yet paperwork has a fault.
The vice of paper is a tendency to breed. Forms and records and reports
unless firmly checked can multiply like rabbits. Many purchasing people
handle fifty or more standard forms; a !arge concern has hundreds. One
major aircraft manufacturer in the USA once stated that the tonnage of
paper.consumed by his factories was greater than the tonnage of aeroplanes they produced. How can this deplorable tendency be reversed?
Textbooks are not always free from blame; they sometimes present as if
for general use elaborate routines, records and forms which only special
circumstances could justify. In practice too, forms are often designed in
haste, to be repented at leisure; or to become so consecrated by the customs
and traditions of the organization that no one in a position of authority
would dream of tampering with the design and only the baffled tyro is fully
aware of its faults.
'Every form,' Peter Drucker has written, 'should stand trial for its life
every five years.' Regular reports too should be stood in the dock; the
trouble here is that report receivers can usually recall some occasion when
the report proved useful and may therefore oppose any move to simplify or
abolish even though nine times out of ten they have no time to read the
thing and have to 'file and forget'. Those who prepare the reports also tend
to acquire a vested interest in their product, and may resent reform as an
attack on the value of their work. Personal prides and the force of
tradition may make a really major effort necessary before any improvement can be effected. But many organizations are less hidebound; and
indeed it is sometimes possible to put trainees on the job of tracking
information flows down to their source and suggesting improvements. At
worst this will further a trainee's training; at best, it willlead to worthwhile
improvements.
Common sense and careful thought are the main requirements in this
sort of task. Most paperwork can be considered from three aspects:
(1) as a document;
(2) as a flow of information;

(3) as a sequence of operations or piece of work.
Considered as a document, some useful questions are these:
Has it got its name at the top? Can its function be understood without a
Iot of information given verbally? ls it clearly printed on suitable paper? ls
the Iayout clean, uncluttered, logical, such that data can be entered in
natural sequence? Does it use abbreviations where there is room for full
names? Is there enough room to write in data; if it is typed is the spacing
typewriting spacing; is it easy to read when completed?
Is it on the right weight of paper - flimsy for temporary forms like
Planning
247
advice notes, durable for forms like invoices which are kept Ionger,
impressive for letterheads? Is it too big, or too little for what has to go on
it? The size should be consistent with average rather than exceptional use.
Does the size cut without waste from standard printers' sheets? Does it
comply with published standards?
Can we cut it out altogether? Simplify it? Combine it with some other
forms? Does it need all its features?
Having made a preliminary examination on these lines, the next stage
might be to study the form in its native habitat, trace its life-cycle,
interview people who use it or make it out. A useful visual aid is the flow
chart, which maps out on paper where the data comes from, where it goes
to, and how it gets there. Some questions are these:
Is all the information which is given, needed? (e.g. on a goods received
note, do we need supplier's address as well as his name?) Is more needed?
Do all who get the form need it? Do all who need it get it? Is it in the most
suitable form (e.g. would a Iist of items needing re-ordering be better or
worse than a batch of separate requisitions?) are codes used, what sort of
codes, why are they used, do they make more work than they save? If
codes aren't used, do they make more work than they save? If codes aren't
used, should they be? How long is the record filed, and how often is it
referred to? Who refers to it, what for, is there any other way of getting the
facts, is it worth the trouble and cost of keeping?
Whole files can turn out to be redundant when these questions are
seriously considered. According to one estimate, 450Jo of the files kept in
the average purchase department ought to be thrown away at once, and a
further 30% should be shifted to some low-cost storage area such as attic
or basement. About five cubic feet of records per employee - less than
three file drawers - is apparently bogey; but most purchase departments
are lumbered with far more, and think that because other purchase
departments have similar set-ups their must be all right. 'This is a kind of
mass hypnosis. All it proves is that just about everyone's paperwork is in
rotten shape.'
Many firms employ specialist departments to study work in order to use
human effort to the best advantage in the organization. If your firm
employs trained experts for work study, it would hardly be using your own
efforts to best advantage to study routines yourself. If not, well after all
method study can really be done by anyone - just like purchasing. (Done;
not necessarily well. Although exceptional talent, whether for purchasing
or for 0 and M, isn't always associated with exhaustive training.)
The first stage in method study is usually to find out just how a job is
being done now. Break the job down into all the separate operations it
entails, and Iist in numbered sequence who does what to which, including
sort, compare, write, type, pass from one desk to another, temporary
storage, collating, and filing. Study ofthe operations sheet in this form can
often suggest a better way to do the job; for instance by combining two
248
The management ofpurchasing and supp/y
Operations, or by doing one operation in a slightly different way which kills

two birds with one stone and enables another Operation to be cut out
altogether.
It is also instructive to chart the route the form follows around the
office. The ideal is for work to flow straight forward from desk to desk,
and for each worker to have conveniently positioned within hand's reach
any files or material he requires for his stage. Compromises are often
necessary; for instance if one person marks off receipts on outstanding
orders, it would simplify his work to file outstanding orders in a filing
drawer of hisdeskor on a shelf just above it; but this would complicate the
work of others who needed to refer to orders while they were outstanding.
One solution is to file outstanding orders in vertical filing pockets in a
mobile trolley. The whole file can be wheeled to any desk in the office as
required.
Purchasing systems planning
Lack of time is the reason commonly given by purchasing executives for

their inability to participate fully in long-term planning. This Iack of time
may be due to some personal inability to manage time; or it may be the
result of defective systems planning.
The most common defect in planning purchasing systems is to assume
that a single system can be adopted for all purchases, when some purchases
are complicated and expensive, and many purchases are relatively simple
and inexpensive. Most orders tend to be small orders. These small orders
legitimately include special requisites for design and development work,
small tools, and the numerous odds and ends required for factory
maintenance. Systems which handle such necessary small orders as quickly
and as cheaply as possible should be devised. lt is advisable to make sure
that small orders are not produced by bad practice in the supply department. Some purchasing departments make a rod for their own back by
adopting a rigid policy of dealing direct with the manufacturer whenever
possible. The right policy is to deal direct when this is economic; and with
the intermediary (stockholder, wholesaler, even retailer) when in the
particular situation, having regard to purchase volume, price structure,
service and convenience, it is the intermediary that gives the better bargain.
Some stock control systems generate flocks of small topping-up orders.
Here the eure is better stock control.
Individual small orders present few if any problems; but in the aggregate
they do add up to a problem. Failure to find satisfactory solutions can have
unwelcome consequences. Suppliers very sensibly strike back at smallorder-senders by charging small-quantity extras, or imposing minimum
charges per order, or charging carriage costs on small orders while
delivering !arger orders free. This adds to the cost of purchases. Users who
want some Iow-cost item off the shelves of local stockholders and who are
Planning
249
made to wait weeks while their small immediate requirement goes through
the mill of an administrative system intended for !arge long-term requirements will complain that poundsworth of administration effort are squandered on the procurement of penceworth of goods. The administrative
expense of handling a transaction should not get out of proportion to the
value of the transaction.
The 80-20 law
Better internal systems can eliminate some small orders, but in the nature
of things there will still be plenty left. A well-known rule of thumb is that
about 80o/o of any organization's purchase expenditure tends to go on
about 20% of the items it purchases. At the other end of the scale, more
than three-quarters of the orders placed tend to account for less than a
fifth of the total expenditure. Buyers will obtain the best value for money
and maximize their contribution to profitability when they spend 80% of
their time on the relatively small number of high-volume high-cost items.
Knowing that there is little scope for significant cost reduction by giving
time to the purchase of toilet rolls, carbon-paper, envelopes, and hardware, we may tend to give no thought whatever to the purchase of these
minor items. With the ridiculous result that most of our time is in fact
taken up with their purchase!
Administrative effort always tends to allocate itself in proportion to the
numerousness of transactions rather than in proportion to their value or
importance. But by taking thought this tendency can be reversed. Systems
can be devised for handling small orders which will save us thinking abut
the individual small order for a year at a stretch. Such systems may employ
standing orders, blanket orders, cash pick-up, or blank cheques enclosed
with the orders.
Standing orders and blanket orders
Standing orders are arrangements under which a supplier delivers something until told to stop. In our private capacity, most of us use standing
orders for newspapers and milk. Service and maintenance arrangements
for typewriters and weighing machines are often on a standing order basis
in factories. But the system has many other applications: to carbon-paper,
for instance. Instead of placing two or three orders a month for carbonpaper and wasting hours saying no to carbon-paper salesmen, we go into
the whole question in depth once a year only. We then place standing
orders calling for deliveries every six weeks and forget the whole issue for
another year. Similar methods work for lubricating oil, coolant, cleaning
rags, etc. Lower prices can be negotiated because the order is now
reasonably !arge; stocks are no higher because deliveries are frequent; a
host of small routine orders have been eliminated in favour of one or two
properly investigated annual orders.
250
Blanket orders are period contracts with one supplier to deliver a variety
of items as called for. The preliminary spadework takes time, but the long
run improvement in service- and saving in time! - can be substantial.
First, Iist things obtained locally, showing estimates of annual requirements for each item. Next obtain quotations. In comparing them such
factors as willingness to guarantee deliveries, convenience of depots,
frequency of deliveries and service aspects generally, and payment termsone consolidated monthly invoice may bebest- will be appraised. Having
made the choice we sign the contract - and need place no more orders for
a year. Releases against the contract can be by telex, or by telephone, or by
simple two-part order forms hand-written by users, or by a modified
version of the original requisition.
Sometimes these releases do not even pass through Purchasing. Production Control, or Maintenance, or other user department are given special
order pads marked 'Not Valid for Orders over f20' and are authorized to
order direct. Some purchasing managers think this is letting too much
control slip away. But it can be a very convenient way to handle small
routine requirements, such as transport spares for a medium to small
transport department and garage, or routine canteen requirements. The
cash Iimit obliges !arger orders to go through normal procedures. As the
orders are really releases against blanket or other annual contracts, they
are being placed with suppliers chosen by Purchasing and at prices
negotiated (during contract renewal) by Purchasing.
Other firms have a junior buyer or order clerk who handles all purchases
of this type. Dealing exclusively with local Stockholders against contracts,
he can handle upwards of sixty orders a day, many of them collected by
company transport or by the person requiring the item. Since such orders
are calls against contracts, they can be placed by telephone or telex, or the
purchase requisition can be suitably drawn to do double duty as an order.
Many widely varying figures have been quoted for the cost of placing an
order. One department found the average cost to be f6.50, derived as
follows:
Cost of placing 100 orders:
L
40 buyer hours at t5
30 typist/clerk hours at 0
overheads
depreciation of office equipment
consumab1e supplies
total
200
90
300
10
50
t650
Hence cost of p1acing each order averages t6.50

But this is unlikely to be the same as the marginal cost of placing one
more order, since some of the cost elements will stay the same while others
251
Planning
increase if the output of orders increases. The same department found that
for relatively small increases in the number of orders p!aced, the cost of
placing each extraorderwas only f3.40, derived as follows:
Cost of placing 101 orders:
40.4 buyer hours at ;[5
30.3 typist/ clerk hours at :3
overheads
depreciation of office equipment
consumable supplies
total
;[
202
90.90
300
10
50.50
:653.40
Hence cost of placing each order averages f6.47 (found by dividing 101
into f653.40). But the cost of placing the one extra order is only f3.40
(found by subtracting the cost of 100 orders, f650, from the cost of 101
orders, f653.40).
These figures are given by way of example; many organizations calculate
the average cost of p!acing an order at considerably more than the figures
given. The marginal cost, i.e. the cost of placing one extra order, may in
some cases be lower. With simplified small order systems it can be
substantially lower than the figure given above; it is wasteful to spend more
money on processing an order than on paying for the goods ordered.
Purchases for employees
How far should the purchase department extend itself in making purchases
for the private use of employees? Some companies encourage this; some
prohibit it; most restriet its use to senior executives. It is a matter which
company policy must regulate.
The typical employee purchase takes longer, and therefore costs more to
handle, than the typical regular purchase. It is outside the usual routine, an
isolated transaction rather than one of a series. The buyer will probably
make a special effort to oblige his colleague who asks for something to be
got for him wholesale, because of its propaganda value. The accounting
will probably be more complicated than for regular purchases.
However most companies provide a whole range of fringe benefits for
staff. These include subsidized sports facilities, subsidized canteens, legal
assistance, help with tax problems, loans for house purchase, group life
assurance, cash wedding presents, retirement pensions. Why should not a
company add discount purchasing to the range if it chooses? But the
purchasing time and processing associated paperwork ought to be charged
to personnel or welfare rather than purchasing overheads. And it may turn
out that the cost ofproviding the service is more than it's worth. Making a
50p charge per transaction for the service will be found to simplify the
situation considerably.
252
Cash purchases
Every business pays cash for some purchases; it isn't worth while opening a
credit account for a small isolated purchase from a firm one doesn't normally deal with. But in addition many firms set up regular cash purchase
systems, not so much to save the inconvenience of new credit accounts which
won't be used often, but mainly to save time and money on internal paperwork- accounting and purchasing documentation and cheque-writing.
Regular cash purchase systems are usually combined with regular local
pick-up arrangements by company transport. One man is normally made
responsible for all purchases out of petty cash. He keeps an imprest petty
cash book supported by receipt vouchers initialled by the persons who
received the goods. An upper Iimit is always set for petty cash purchases,
and because of the low ceiling price, purchase authorization can also be at
a low organizational Ievel.
Check Iist
Have we recently considered:

(l) purchase requisitions: use of travelling requisitions; numbering and
filing requisitions; simpler procedures for low cost routine needs?
(2) purchase order forms: if we can save two minutes in order preparation we can save one typist in a department placing a thousand orders a
week. How many copies? Filing methods for open orders? For closed
orders? Progressing reminder systems? Can special small-order systems be
used to reduce purchasing and accounting work and Iet requisitioners get
what they need faster? Can repeat typing be cut out on repeat orders - by
Flexowriters? Edge-punched cards with automatic typing? Azoflex system
with translucencies?
(3) goods receiving procedure: can we use a combined order/goods
receiving note? Or issue pre-printed goods received notes in some other
way as a by-product?
(4) stock control procedures: could we use visible record computers?
Larger computers? Simple manual methods? No-paperwork methods such
as two-bin or visual control?
(5) When did we last do a Pareto analysis? Of stocks, and of purchases?
What use could we make of a usage value classification?
(6) How can stock records and stock control documents be improved?
Do they show too much detail? Are the same records used for all items
irrespective of value?
(7) Are there a Iot of errors in records? If so, what can we do about it?
(8) What happens to old records which may be needed for reference, but
not very often? Have we considered microform?
(9) How areorder quantities decided for stock items? Isthat the best way?
(10) When was the last time that surplus, damaged, obsolescent and
obsolete stock was listed? What action was taken?
Planning
253
(11) What do other departments really think of us?

(12) What do suppliers think of us?
15.1 Case study: registrar electronics
Frank Cartmel, purchasing manager for Registrar Electronics Ltd, took

pride in the service his department gave to other departments in the firm.
But he was puzzled by the fact that operating costs seemed to be rising. In
the last five years his staff had increased by only 80%, while the nurober of
orders placed had increased by 100C1Jo, from 1000 a week to 2000 a week.
Despite this, it now cost f3 to place an order, and the departmental budget
was creeping up faster than purchase expenditure. The chief accountant, in
pointing this out to Cartmel, had suggested that this was the opposite of
what ought to be happening - in !arger firms, the cost of running a
purchase department should be a smaller percentage of total purchase
expenditure than in smaller firms - and had advised him to call on
Registrar Electronics' Management Services Department for an 0 and M
study.
Frank had done this, not without misgivings. Now he was sitting across
the desk from Tom Boyce, the 0 and M analyst assigned to this job, who
had spent three weeks examining forms and procedures, interviewing staff
and poring over records.
'Before we go any further, I wonder if you would just glance through
this description of your present purchase order routine,' said Boyce,
handing over the following account.
Requisitions. Every order is initiated by a requisition. About 70% of
these come from the stores, the rest from 12 other departments. The
requisitioner enters on the standard two-part form the following details:
date, description of goods, part nurober, suggested supplier, quantity
required, usage during past 30 days, stock on hand. The chief Storekeeper or head of department signs it; the top copy is sent to purchasing
and the requisitioner retains the second copy. Most stores requisitions
are for items which are re-ordered regularly, usually in the same quantity
and from the same supplier.
Purehase orders. Orders are typed by electric typewriters on a
standard 12-part orderform with one-time carbon interleaving. The first
two copies go to the supplier; no. 2 is the acknowledgment copy. Copies
3, 4 and 5 stay in Purchasing, as described below. The next four copies
go in a set, with carbon still interleaved, to the goods receiving bay, and
serve later for goods received notes and inspection reorts. The three
remaining copies go to the requisitioner, to Production Control, and to
Accounts, for information.
Frank Cartmellooked up when he got this far. 'We're quite pleased with
this order form,' he said. 'We adopted it only last year and it's cut out
254
about three separate forms in Goods Receiving and Inspection. You surely
don't propose to alter it so soon?'
'I'm afraid so, at least for the majority of your orders.'
Cartmel snorted. 0 and M reports were purely advisory. The manager
being advised was responsible for accepting or rejecting them as he saw fit.
He read on.
The three copies retained in Purchasing are dealt with as follows:
No. 3 is filed in numericalorder with the requisition and any quotations
or correspondence.
No. 4 is filed in alphabetic order, for cross-reference only.
No. 5 is the follow-up copy, filed in due date order by the section buyer
concerned. lf copy No. 2, the a~:Knowledgment copy, is not
returned by the supplier within five days, the section clerk sends a
routine follow-up card. Records show that 550?o of acknowledgment copies are returned without follow-up, and 20% are never
returned at all.
Instructions are that section clerks urge all orders two days before the
due date for delivery. They arealso supposed tobring to the attention
of the section buyer any order which is still outstanding two days after
the due date, for the buyer to take appropriate action by phone call,
Ietter, or personal visit. However, records show that not one of the
stores orders placed in the past three months was followed up. In
practice about 5% of orders only are followed-up intensively.
Frank Cartmel frowned heavily. 'Presume you've checked these figures
carefully,' he grunted. The rest of the account was quite short.
Analysis of suppliers shows that 200 orders a week are placed with three
local wholesalers, for miscellaneous works and office supplies. A value/
volume analysis shows that 240 orders a week, out of 2000, account
for 70% of the expenditure, while 450 orders a week are for amounts
less than f30. All orders are priced. Price is taken from purchase record
cards for items previou,:y purchased, and quotations are obtained (if
necessary by telephone) for any item not previously purchased. Prices on
purchase record cards are checked every six months, by postal enquiry or
telephone.
When an order is completed, copies 2, 4, 5, are destroyed. Copy 3 is
transferred to a numerical-order closed-order file, with requisition still
attached to prove authorization.
'I presume you're going to suggest some kind of simplified procedure,'
said Frank.
'Yes, I am,' said Tom Boyce. 'It's just a question of adapting procedures
to the bigger scale on which you are now operating. I feel sure we can cut
opeating costs without making the department less effective.'
Planning
255
'Weil, that's splendid. But bear in mind that we spend a Iot of money
now, and I don't want to lose the close control I've got with the present
system. It's my job to see that we don't waste the firm's money.'
Questions
ls Registrar Electronics' acknowledgment-of-order system worth the
administrative effort it involves? How eise can they be sure what time
the supplier will deliver?
2 Can you suggest a way to cut the work involved in making out and
processing requisitions? Would it improve the service rendered to other
departments or the reverse?
3 What are the advantages and disadvantages of a single standard
purchase order procedure for all purchases? Can you suggest small order
procedures which would reduce administrative work and costs without
sacrificing control? How would they affect the quality of the service
given to other departments? What follow-up system do you propose?
How would you deal with the pricing of orders?
References
Fearon, H.E. (1961), Purchasing Research in American Business, Ph.D.
thesis, Michigan State University.
16
Personnel
To achieve superior purchasing and supply performance it is necessary to

recruit, train and develop personnel with the capability and the motivation
to do better work. ('Have better people - and try harder!' - an old
prescription for success.)
One common approach to this is to begin by defining the tasks to be
carried out: a job description, or a more precise job specification. From
this one may proceed to a 'person specification': a statement of the
characteristics which should qualify a man or woman to perform weil in
the job as specified.
The scope and content of purchasing and supply work is indicated
generally throughout this work. Many organizations have also developed
their own detailed job specifications based on analysis of their particular
requirements.
A useful general guide was published for the Department of Employment in 1972 under the title Classijication of Occupations and Directory oj
Occupational Titles (CODOT). Based on 20000 detailed job studies at
firms throughout the country, supplemented by background research and
consultations with a !arge number of organizations, CODOT provides a
system of defining and classifying occupations which is generally compatible with other national and international classifications. An occupation
is defined as a collection of jobs which are sufficiently similar in their main
tasks to be grouped under a common title for classification purposes.
There are many thousands of different jobs, but only 3500 occupations are
identified in CODOT.
Among the occupations included in CODOT are many in the purchasing
and supply area. Purchasing and Procurement Managers and Executives
Personnel
257
are shown in unit group 061, part of major group II (professional and
related occupations, supporting management and administration). The
occupations mentioned include Manager (purchasing and procurement);
various kinds of buyer, including buyers for retail distribution, for
wholesale distribution, buyers of advertising space and time, facilities
procurement officer (television and film production), and others.
Purchasing work
The CODOT version ofthe Purchasing Officer is shown in Figure 16.1. He

Reference 06130: PURCHAS/N OFF/CER
essential characteristics of the occupation:
Buys raw materials, plant, equipment and other items from manufacturers,
wholesalers and other suppliers on behalf of an industrial, commercial or public
undertaking
important tasks normally carried out in the occupation:
Ascertains the type, quality, quantity and cost-ceiling of items required and the
dates by which they must be available;
determines whether orders, or part orders, can be met from current supply
contracts, whether new or renewal contracts should be negotiated with suppliers,
whether orders should be put outtotender and whether it would be more
economical for the organization to manufacture certain items themselves;
examines suppliers' literature, price lists, samples, etc and as necessary obtains
price, quality and delivery quotations from one or more suppliers; evaluates
terms and selects most suitable suppliers; negotiates new or renewal contracts
with suppliers, endeavouring to obtain the mostadvantageaus terms possible;
draws up orders and contract documents specifying type of items, quantities,
qualities, delivery requirements and other relevant factors;
finalizes orders and contracts within his authority or submits them to a finance
committee, board of d1rectors, or other authority for finalization; arranges for
incoming suppliers to be checked for quantity and quality and for items which
fall below specifications to be returned to suppliers; arranges for, or undertakes,
the expediting of orders when delivery delays occur; interviews suppliers'
representatives and visits trade fairs, exhibitions, etc.; notes any change in
standards likely to affect future purchases; keeps appropriate records and
prepares reports as required, for example expenditure analyses.
specializations within the occupation and additional tasks frequently associated
with it:
May (01) recommend stock Ieveis to be held
(02)
negotiate contracts for the production of items on sub-contract
(03) undertake centralized buying for a group of tactories, works, etc.
(04) specialize in raw materials
(05) specialize in production equipment
(06) specialize in components
(07) specialize in castings
(08) specialize in office supplies
Figure 16.1 The purchasing occupation.
258
buys raw materials, plant, equipment and other items from manufacturers,
wholesalers and other suppliers on behalf of an industrial, commercial or
public undertaking. A list of important tasks normally carried by the
purchasing offleer follows. Also, he may specialize: in castings, components, raw materials, production equipment or office supplies; he may
undertake centralized buying for a group of factories, etc.
It is interesting to compare this with the description of the retail
distribution buyer. He buys merchandise from manufacturers, importers,
wholesalers and other sources for resale through retail distribution outlets.
The important tasks normally carried out by the retail distribution buyer
are as follows: Buys merchandise from manufacturers, importers, wholesalers and other sources for resale through retail distribution outlets.
Attends trade fairs, shows, displays, etc. to Iook over new lines; interviews
trade representatives calling at store; decides on range, type, quantity and
quality of merchandise to be bought, taking into consideration such
factors as store policy, budgetary limitations, customer demand and
fashion trends; places orders with appropriate suppliers, endeavouring to
obtain the most advantageous terms possible; checks that goods delivered
comply with orders, returns any unsatisfactory items to suppliers and
authorizes invoices for payment; decides on economic selling prices for
merchandise, ensuring that current purchase tax rates are quoted; watches
movement of stock in department(s), placing repeat orders for fast-seHing
lines and arranging for special sales promotion or price reductions for
slow-selling lines; arranges 'sales', marking down surplus, discontinued, or
end of range stock, and buying in special sales lines; keeps appropriate
records and prepares reports as required, for example, sales forecasts,
budget estimates.
He may specialize in various types of merchandise, such as household
goods, sports equipment, foodstuffs; he may control other buyers within
the organization or undertake centralized buying for a group of retail
outlets. He may be known as group buyer in that case, or merchandise
selector.
The work of the purchasing officer and the retail distribution buyer are
similar in some respects and are clearly related, but considerable differences also exist. However at the higher Ievel of purchasing manager the
differences may be less significant.
The purchasing manager's job is stated to be to plan, organize, direct
and co-ordinate the work of buyers, purchasing officers or related workers
and the resources appropriate to purchasing and procurement activities.
He performs the normal functions of any manager, but in his case in
relation to buying or otherwise procuring merchandise, materials, equipment or other items and services. He usually specializes either in buying for
retail sale or for wholesale sale or in buying for production. He may be
involved in the preparation of estimates, financial Statements and reports
on the department's operations. There are variations between purchasing
Personnet
259
managers in the number of purchasing and other staff they control, and in
the extent of their authority in financial, staff and organizational matters.
Some control stores departments as weil as purchasing, when they may be
known as Supply Manager. Some negotiate with workers' representatives.
The !arger purchase department includes, in addition to purchasing staff
and their typing and clerical support, other specialist staff of various
kinds. For instance, one !arge multi-plant manufacturer had a total
purchasing payroll of 550. The breakdown was as follows:
21
purchasing management
190
buyers
engineers and estimators 156
183
other support staff
550
This was an unusually high proportion of support staff. 'Our engineers

get out in the field ensuring that our suppliers' tooling is adequate for our
needs and that it will be ready in time. They also act as consultants to
suppliers facing serious production difficulties,' it was said.
The purchasing cost estimators were recruited from people with formal
qualifications in mechanical engineering and at least five years' experience
in manufacturing, preferably gained in work study and estimating. Their
main task was to study and evaluate suppliers' manufacturing methods in
order to advise buyers and assist them in negotiations. They also prepared
cost estimates for the external manufacture of complex components and
assemblies, established price objectives for negotiators, surveyed technis;al
publications and kept in touch with costs and production methods by
factory visits.
Purehase analysts were recruited from economics graduates or persans
with accountancy qualifications. Their main task was to evaluate price
trends and economic changes, and they were required to have experience in
estimating and in industrial engineering. They also compared costs,
reviewed delivery performance, and consulted suppliers; developed
methods for compiling price indexes; prepared, presented, interpreted and
evaluated statistical data; computed purchasing savings and attended
meetings of purchasing staff to discuss savings; assisted buyers in price
negotiations, especially where complex analysis was required.
Stores staff
The relationship between Purchasing and Stores must in any case be close,
since one buys what the other keeps, one originates requests the other
meets. Common practice in most non-manufacturing organizations and in
many manufacturing organizations, is to make the stores part of a unified
supply department which also includes buying. As weil as widening the
promotion opportunities for stores personnel, this enables the many
260
activities which involve both stores and purchasing staff to be performed

efficiently without inderdepartmental delays.
Admittedly at the lowest Ievel, stores work is labouring and handling
work with some clerical element, perhaps the least skilled work in the
supply structure. If stores workers are engaged, dismissed and paid, often
by the hour, on a similar basis to factory workers and on a different basis
to office and administrative workers; if the stores premises are part of the
main factory and if it accommodates numbers of made-in parts and
work-in-progress with which Purchasing is not concerned directly, then the
simplest option may be to manage the stores as part of the factory. The
Purchasing manager may however, retain a considerable degree of functional control, especially when he is responsible for stock control.
Stores operation, or store-keeping, means the physical handling and
housing of material and parts before and after processing. It includes the
provision of suitable places - warehouses, stockyards - and equipment
- cranes, fork trucks, pallets, racks; the employment of suitable staff; and
the Operation of suitable procedures to receive, store and issue goods
securely and economically. The CODOT occupational descriptions for
industrial Storekeeper and stores manager give a clear picture of the work
involved.
The stores manager, for instance, plans, organizes, directs and Coordinates, usually through or with the assistance of foremen, the receipt,
issue and Storage of raw materials, components, finished products and
other items in an organization's stores.
He performs the appropriate functions of any manager, and in addition
is normally responsible for the following important tasks. He:
(1) decides on optimum stores Iayout, ensuring as far as possible that
items are kept in good condition and that accessibility relates to demand;
(2) arranges for the recording of items in and out, the maintenance of
inventories of items held and the regular inspection of stock for deterioration and damage;
(3) controls the issue of required materials, components, tools, etc., to
production departments;
(4) notifies purchasing department of items to be reordered;
(5) constantly reviewsstock Ievels and suggests to stock control manager
any changes in Ievels considered necessary;
(6) implements security procedures against theft and darnage by fire,
flood or other cause;
(7) prepares reports on expenditure and storekeeping activities and
advises on future storekeeping policies.
He may also control internal transport; undertake quality control
inspection of incoming goods; arrange for sale of obsolete, used or
damaged goods; negotiate with employee representatives; and undertake
some or all of the functions of the purchasing officer.
Personnel
261
Other factors affecting his job include the number of foremen and other
workers controlled; the extent to which computers and other forms of
information technology are applied in storekeeping procedures; and the
amount of authority delegated to him on finance, staff and organizational
matters.
Stock Cotltrol
Buyers, purchasing officers, production planning and control personnel,
accountants, Storekeepers, stock checkers, stock control clerks and stock
control managers may all take part in stock control. Academically it is a
somewhat anomalaus area. The theory is very learned and mathematical.
The practice often ignores the theory.
A clear distinction between stock control at clerical Ievel, and at
manageriallevel, may be found in CODOT. The stock control clerk (ref.
314.15) essentially checks and records details of stock movements and
maintains records of stock held. His main tasks are typically to examine
delivery documents for incoming goods, prepare record cards and/ or enter
details in stock records, check requisitions and receive vouchers for goods
despatched and adjust stock records accordingly, prepare requisitions for
stock replenishment, report on damaged goods and stock deficiencies. He
may also carry out physical checks of stock against stock records for audit
or stocktaking purposes; handle enquiries or routine correspondence from
suppliers or customers; and collect samples for Iabaratory test for quality
control purposes. Other titles for this occupation include: docking clerk
(warehouse); kitchen clerk (hotel); goods inward clerk; stock records clerk;
stores clerk; warehause clerk.
Many organizations do not appoint a stock control manager, his
functions being performed by the purchasing, stores, or other manager, or
in some instances not being performed at all. If there is a stock control
manager, (ref. 277 .34), the essence of his job is to plan, direct, organize
and co-ordinate, usually through or with the assistance of other managers
or foremen, procedures and resources for maintaining stocks of raw
materials, components, finished products and other items at optimum
Ievel, and for ensuring their availability when required.
In addition to the functions appropriate to any manager, he also
normally:
(1) ascertains, by discussion with production, sales, maintenance and
other managers the materials, parts, finished products and other items
required for current and future production programs, sales commitments,
and other activities, and the dates by which they will be required;
(2) makes allowance for possible contingencies which could affect
requirements;
(3) develops stockholding policies to ensure minimum investment of
262
money, space, labour and other resources while achieving maximum

satisfaction of requirements;
(4) advises purchasing department on type, quantity and quality of
supplies required and dates by which they must be available;
(5) ensures that adequate records are kept of all items held in stock;
(6) if there are several stockholding centres, decides on optimum
distribution of items among those centres;
(7) develops and implements systems for automatic reordering of standard items;
(8) advises on parts and material standardization;
(9) prepares reports on expenditure, draws up department budget for
approval, and advises on future stock control policies.
He may also undertake some or all of the functions of the purchasing
officer or the stores manager av.d arrange for the expediting of supplies
when suppliers do not deliver on time. Stock control managers differ in the
number of foremen and other workers they control, the extent of their
authority on financial, staff and organizational matters, and their computer experience. Alternative titles for the stock control manager include:
inventory control manager, inventory controller, materials control manager, materials controller, stock controller.
Recruitment of staff
Purchasing and supply departments recruit staff from several sources:
school leavers, recent graduates, other departments in the organization,
other organizations. Most responsible purchasing jobs are at present held
by men, but an increasing number of women are entering purchasing, and
some of the top jobs (especially in retail distribution) are held by women.
In selecting staff for the more senior positions one needs to decide, not
only what the job is, but also what personal characteristics are likely to
Iead to effective performance. Some organizations do this formally (as
previously mentioned), drawing up first a job specification to state in detail
what the job is, and then a person specification to specify what sort of
person is required to do it.
Most purchasing jobs are strongly commercial and should appeal to
people who enjoy being in the thick of things, can cope with desk work but
prefer not to be tied to the desk, and like the cut-and-thrust of the market
place; but there is also scope for the planner, the investigator, the thinker.
Buyers deal with people all the time, inside and outside their organization;
like salesmen they need to communicate, persuade and convince. They
work with facts and figures, like accountants and engineers. They are
expected to deal honestly, fairly and courteously with colleagues and with
representatives of other organizations. In senior positions particularly they
need to take a long view and plan ahead, like corporate planning
Personnet
263
personnet For some positions a detailed specialist knowledge is required of

a commodity or product group, and its supply market.
As specified by purchasing officers, the purchasing officer seems to be a
paragon of all virtues, with just that dash of vice that makes him
businesslike. As described by salesmen, he is a less attractive figure. 'A
man who knows that ninety-nine pence is less than apound and that's the
only damn thing he does know' -weil, they exist. 'A man past middle life,
spare, wrinkled, bald, passive, intelligent, cold, non-committal; with eyes
like codfish; polite in contact but at the same time unresponsive; cool,
calm and as damnably composed as a concrete post or plaster of Paris cast;
minus bowels, passions or sense of humour. Happily they never reproduce
and all of them finally go to hell.' The source is American, possibly Elbert
Hubbard. The subject may be the purchasing officer but it could be the
auditor. In either case of courseit isn't true.
Talertt, character and experience are the three things one wants to check
in appointing someone to a post. It is difficult to check character in an
interview - except character-in-interview, which is largely irrelevant and it is almost impossible to check talent. Experience is easier to check,
although neither what the applicant says nor what one is told by referees in
firms he has worked for can be treated as completely reliable.
Ability to work under pressure, a firm character, a clear conscience and
an open mind are desirable characteristics. A keen interest in the job is
most desirable. Arithmetic reasoning ability and numeracy should be
above average, though not necessarily to the same extent as market
researchers or accountants. Communication skills, persuasiveness, persistence and a resilient temperament are required; salesmen probably require
these characteristics even more than buyers, and some firms rotate people
between sales and purchasing as a form of staff development. The buyer
should not be so introverted as tobe incapable of teamwork, nor should he
be so extroverted as to be incapable of sticking to principle.
Kostishack and South (1973)[1] have published an interesting Iist of
performance criteria which they consider useful to personnel recruiters and
purchasing managers in reviewing an applicant's qualifications, as weil as
in designing performance appraisal and training and development programmes. They developed a Iist of 35 descriptive statements, such as:
(1) Properly applies company purchasing policy in the performance of
his job
(2) Works effectively with members of other departments
(3) Keeps his office and/or desk neat and orderly ...
(35) Keeps abreast of current academic developments by attending
evening classes, seminars, etc.
This was sent to managers of multiple-buyer purchase departments in

service, distribution, and manufacturing organizations. The managers
were asked to rate each statement on a scale from: 5 - highly descriptive,
264
to 1 -not descriptive, and to do this three times: once for an outstanding

buyer, once for an average buyer, and once for a below average buyer.
Clusteranalysis techniques were used to group together those statements
which had a high degree of correlation. Table 16.1 shows the first-order
duster analysis result. Respondents' judgments were also tested for
consistency. The Kuder & Richardson 20 test was used, and the figures
obtained are shown in brackets; complete consistency would give a K-R
score of 1.00 and complete inconsistency would score 0.00.
Neatness, getting to work on time, and being good at detail work did not
correlate weil with any duster and did not differentiate between outstanding buyers, average buyers, and below average buyers.
References
Kotishack and South (1973), The composltion of industrial buyer
performance, Journal of Purchasing, 9, No. 3, 50-63.
Table 16.1
THIRTEEN FIRST-ORDER CLUSTERS
(1) Personal Appearance (K-R 20 = .99)
9 ls weil groomed
27 Dresses weil
(2) Interpersonal Relations (K-R 20 = .95)
4 ls weil likes by members of other departments
12 Has the ability to get along weil with people
31 ls weil liked by fellow purchasing employees
(3) lndependence and Resistance to Work Pressures (K-R 20 = .92)
8 Can initiate and proceed with project without continued direct Supervision
15 Makes sound decisions under conditions of stress or pressure
28 Readily accepts additional responsibility
(4) lnnovativeness (K-R 20 = .90)
13 ls inquisitive as to the reasons for, or the end use of, the products he
purchases
17 Suggests new or improved purchasing methods or procedures
23 Develops new sources of supply
(5) Personal lnsight- People (K-R 20 = .90)
30 ls a good judge of character
33 ls weil liked by Supervisor
(6) Work Follow-up (K-R 20 = .88)
26 Fellows up work and reacts to feedback
32 Fellows supervisor's ordersweil with little need for continuous checking
(7) Communications- Speaking and Writing (K-R 20 = .92)
10 Communicates weil by writing
11 Communicates weil by speaking
(8) Product- Market- Price Knowledge (K-R 20 = .89)
7 Adequately communicates the company's requirements of price, quality,
and service to vendors
20 Has a good knowledge of the characteristics of the market of products for
which he has the responsibility of purchasing
29 Gives assistance or advice to fellow purchasing employees
Personnet
265
(9) Ethics and Morals (K-R 20; .94)

18 Has high moral standards
24 Exhibits ethical behavior in his job performance
(10) Rules and Policy Adherence (K-R 20; .86)
1 Properly applies company purchasing policy in the purchasing area
5 Keeps work current
22 Shows savings achieved in purchasing as measured against previous costs,
Standard costs, or market costs
(11) High Work Output (K-R 20; .80)
14 Has high work output based on the number of purchase orders issued.
16 Has high work output based on the dollar value of purchase orders issued
(12) Knowledgeable lnterdepartmental Communication (K-R 20; .81)
2 Works effectively with members of other departments
19 Has a good knowledge of the legal aspects of purchasing
(13) Professional Development (K-R 20; .72)
34 Attends Purchasing Management Association or other trade association
meetings frequently
35 Keeps abreast of current academic developments by attending evening
classes, sem inars etc.
17
Organization
The purchasing function includes the whole process of deciding and

specifying what to buy, in what quantities, at what time, from what
sources, and by what procedures, as weil as the implementation of these
decisions and procedures by requisitioning, authorizing, ordering, progressing, receiving, and paying for the purchases. It is convenient to refer
to this process as the purchasing function, but it should be noted that parts
of it are cross-functional in the sense that other functional areas such as
design, production, user departments, not only participate in the process
but may carry prime responsibility for elements in it.
Personnel who spend half or more of their time on purchasing work can
be described as purchasing staff. Organizations which employ several
purchasing staff at one establishment normally group them together in a
purchasing department. The first topic in this chapter is the organization
of purchasing departments in firms of varying size. Increasingly today
there is discussion of various approaches to departmental organization
which group together with purchasing certain related activities having to
do with the flow of materials- supply, logistics, materials management.
This is the second topic in this chapter.
The smaller firm

The number of small firms is very !arge, and their roJe in the economy is
important. In manufacturing, firms employing up to 200 people could be
called small, and they constituted 940Jo of UK manufacturing firms and
provided 20% of total employment. In non-manufacturing industries, a
small construction firm would have not more than 25 employees, a small
Organization
267
road transport firm would have 5 vehicles or less, a small retailer would be
a retailer with a sales turnover not exceeding {50 000 a year, and a small
wholesaler would have a sales turnover of f200000 a year or less[l, 2].
The majority of firms which areassmall as this, cannot employ full-time
purchasing staff because the amount of purchasing they do does not
constitute a full-time job. The purchasing is undertaken either by the head
of the business personally or eise by the non-purchasing executives.
Moving up the scale a little, at the top end of the small firm sector and
the lower end of the medium size firm sector, we have a !arge number of
organizations with from one to six purchasing staff: the average or modal
purchasing department.
The work involved can be planned, organized and allocated to people in
a number of ways, and the people affected can be grouped into departments also in a number of ways, none of which is perfect. No single
standard model for structuring the organization of purchasing and related
activities, which would be equally suitable for all applications, can be
devised.
Allocating buying work
For instance in a factory processing agricultural products, a food manufacturer or a textile firm with a big demand for raw wool, there will exist - if
the organization is !arge enough to have a high degree of occupational
specialization:
(1) raw material buyers who purchase the agricultural products, and
(2) general purchasing officers who obtain maintenance, repair and
operating supplies, plant and equipment.
There is a case for grouping the raw material buyers with the general
buyers in a single purchase department. Both sets of people are engaged in
purchasing, that is dealing with people outside the organization to arrange
for the supply of goods and services in return for a price. Both are placing
orders, handling similar documents, causing invoices to arrive which must
be checked, approved and paid.
But there are considerable differences in their work. The raw materials
buyer typically spends more money by a factor of ten or more, than the
general buyer. He is directly involved in drawing up specifications and may
be personally responsible for specifying what he buys, and he is an expert
in the narrow range of commodities he deals with. The general buyer
handles hundreds or thousands of different purchases, cannot have expert
knowledge of more than a few of them, and his specifications are normally
drawn up by others. The raw material buyer often spends !arge sums in
price-variable markets where his performance can materially affect the
trading results of his firm, so that he may be a member of the top
management team, and his efforts are in any case highly visible to top
management. The general buyer deals mainly in administered-price markets
268
The management of purchasing and supplies
and tends to become visible to top management mostly when his work is
unsuccessful, and causes manufacturing stoppages or product quality
problems. Some firms considerthedifferences more important than the similarities and set up aseparate raw materials buying department; others have a
single buying department both for raw materials and for everything eise.
In assigning purchasing work to purchasing staff, some ways in which it
can be divided up are:
(1) by type of material; e.g. one buyer deals with castings, another with
fabricated parts, another with office supplies and printing, another with
packaging.
(2) By end-product, with a buyer serving a particular manufacturing
department or product division.
(3) By value of order, with one buyer specializing in quick service on
small orders, another handling only big orders such as machine tools or
construction.
Another factor is the time-span of decisions. Purchasing includes a !arge
nurober of routine transactions, a smaller number of less routine or
non-routine transactions, and a very few transactions which affect the
future of the firm for a long period of time. The organizational Ievel at
which such transactions can be decided with full knowledge of the
implications, must depend on the type of transaction as well as the type of
organization. This is, for instance, the basis of the distinction between
capital expenditure which represents a Jong-term investment, and revenue
expenditure which represents a short-term commitment and is authorized
at a Jower Ievel. This is also why Peter Drucker, looking at a business from
a top management viewpoint, writes:
The decision whether the raw material requirements of a speculative
commodity such as copper should be bought according to production
schedules or according to a forecast of price fluctuations may involve a
good deal of money and a complex analysis of many factors. It may in
other words be both a difficult and an important decision. But it is
almost immediately reversible; all it commits the company to is the
duration of a future contract which can be sold every business day. Such
a decision, despite its importance and difficulty, should therefore always
be pushed down to the lowest Ievel of management on which it can be
made; perhaps the plant manager or the purchasing manager.
Progressing orders
It is often necessary to follow up or progress orders, depending on how
urgent they are, how important it is to obtain delivery at particular times,

and how reliable suppliers are. Standard practice is to treat order progressing as partofthepurchasingtask, but mass production vehicle manufacturers
mostly adopt a different approach, explained by one of them as follows:
Organization
269
We recognized that between follow-up operating centrally in purchase

and the widely dispersed manufacturing activities, there would exist the
natural tendency to blame each other. When shortages occurred purchase
could point to a bad stock check made by manufacturing; manufacturing could reply that the release figuring was wrong; also, manufacturing could cry purchase shortage, to cover a machirre breakdown or its
own labour problems. This sort ofthing goes on in every manufacturing
company.
We therefore decided to transfer the specification, releasing and follow-up activities from purchase into production control and to make
manufacturing, through its production organization, autonomaus for
material control.
Organization centres around our definition of production planning
and control, whose purpose is to 'ensure that the right material is at
the right place at the right time and in the right quantity'. Rephrased
this is - 'to ensure that the flow of parts and materials is such that
the timely production of customers' requirements will be satisfied from
planned inventories'.
Our definition of the objectives of purchasing is 'to buy parts,
materials and supplies of the required quality from suppliers with
adequate capacity and capability for the supply and delivery of materials
at the scheduled time, and to negotiate the lowest economical cost
consistent with quality and delivery requirements, which will permit
efficient suppliers to retain a fair pro fit'.
In a typical structure of Production Planning and Control which
occurs in varying form at central staff, divisional and plant Ievel,
controls cover 40 000 different parts, of which 30 000 are bought.
Schedules at 3000 vehicles a day, using 3000 components each, gives us a
daily usage of about 9 million parts, valued at fl million.
We do not, in the motor industry, set our sights on a twelve times a
year turnover merely to Iead the parade, since the costs of controlling
inventory very closely, particularly where a variety of parts are concerned, can sometimes equal or exceed the investment earned by having
more capital freed from stocks. However, in the motor industry high
stocks give high obsolescence risks since modellife is short and getting
shorter, and modifications in design to improve image, reduce cost, or
ease manufacture are constant. In our company we have 400 engineering
changes a month.
In small companies, all the elements of scheduling, follow-up, receiving, warehousing, and feed to production, can be covered by purchase.
On the other hand, !arge companies have separate components of
organization for scheduling, releasing, follow-up, receiving, storing,
cycle counting, line feeding, traffic, internal transportation, data processing and inventory planning. In such organizations, purchasing is
freed to buy.
270
When purchasing knows exactly where it can buy most economically

those materials which their company uses, and is aware of present and
future economic trends for bulk users of raw material sometimes on a
world-wide basis, and know the manufacturing and marketing policies
in their specific industries, they can and do shape procurement policy.
In practice, wherever purchasing and production control find themselves slotted in a company's organization structure, there has to be a
regular co-ordination. In some companies this is done by a twin policy
committee, one on sales which takes a view on forward estimates, and
the other on inventory and purchasing policy which established the
procurement programme.
Formost organizations, an inherent part of the purchasing process must
be, to take whatever steps are required to make sure that the purchase is
duly delivered where and when it is required, and it may be significant that
while scheduling and follow-up of production supplies was done by the
production planning and control department, the buyers of coal, iron ore,
faundry and blast furnace raw materials, timber, building and construction, and machinery, which are non-production purchases, were not
decentralized to production divisions and handled progressing of orders.
Invoice processing
The staff who process purchase invoices are sometimes found in the
purchase department, because they are dealing with purchases and using
purchasing documentation, and sometimes in the accounts department,
because they are concerned with payments and are using accounting
documentation. (My view is that if the purchase department is primarily a
clerical order-placing section, the invoice people should form part of it; if a
more dynamic and contemporary roJe is assigned to purchasing, then as
much clerical work as possible should be removed so as not to confuse the
picture, and the invoice people should then be in the accounts department.)
Multi-establishment organizations
Although there are at least 1\4 million small firms in Britain, employing
more than the entire public sector and contributing with their output nearly
a fifth of the Gross National Product, the !arge firms have been playing an
increasingly important part in economic affairs. They are the big employers
- over 800Jo of manufacturing employees in Britain work for firms which
employ 100 or more people. They are also the big buyers - 97% of
industrial purchases in Britain are made by firms employing 100 or more
people, and the relatively small number of firms which employ 500 or more
account for 88% of industrial purchase expenditure[l).
One aspect of departmental organization in the !arger firms was looked
at in the last chapter: the small supply department with four or five
Organization
271
members must employ generalists, but the !arge supply department with
100 or more people can employ specialists. Not only specialist buyers, but
non-buying support staff with a variety of specialist professional qualifications are found: economists, cost accountants, contract lawyers, value
analysts, quantity surveyors; as weil as the non-professional specialists
such as purchase analysts, purchase cost estimators, and Iiaison engineers.
Another aspect is the problern of how to devise an appropriate organization structure for purchasing and supply when the firm operates several
establishments. Some of these may be local offices or distribution centres,
which do not present much of a problem: minor consumables can be
bought locally out of petty cash, and everything eise can be put through
head office. It is when a large number ofpurchased items are required for a
branch establishment that the problern becomes difficult.
Weil over half of the firms which employ 500 people or more operate
more than one establishment. With the increasing internationalization of
business, major establishments may be located in more than one country.
Very iarge bsinesses do not always run very large factories; quite often
they 1anufacture a variety of products in a number of factories strategically located in several countries.
When one firm operates more than one establishment, three basic types
of purchasing organization are possible:
(1) Complete centralization of buying, with all purchases made through
one central office;
(2) Complete decentralization, with all purchases for branches or divisions made locally by the branches or divisions;
(3) A mixed arrangement, with some purchases made locally and some
centrally. This arrangement can take a variety of forms.
Complete centralization is really only workable when the number of

orders originating locally is relatively small. More or less complete
decentralization can be observed in several organizations which operate a
number of factories each of which has its own product range and its own
purchase department. There is still some scope for these departments to get
together to sign group contracts for such common use items as vehicles or
typewriters and perhaps even for production materials, but there is not
enough scope to keep a central office busy. Informalco-operation between
the chief buyers in the various establishments and a joint buying committee
meeting every three months seems to be quite a common arrangement in
medium size organizations.
Large corporations
Really large firms nearly always have some kind of centrat or corporate
purchasing office in addition to supply departments or purchasing departments at the main establishments or divisions. What jobs are assigned to
the various Ievels in a purchasing hierarchy of this kind, how much
272
authority and responsibility is given to purchasing and supply managers in

the varous divisions and locations, is of course a matter of company
policy, and varies considerably between firms.
Credit for the development of the multi-division firm is usually given to
General Motors in the 1920's, although Sears Roebuck, Standard Oil, and
Du Pont may have been working on similar lines. These were the largest businesses Americahad ever seen. To organize them into conventional functional
departments produced departments the size of quite Jarge firms, but without
the commercial motivation of firms since each department dealt with a
specialist function. The solutionwas to split the business into product divisions or operating divisions, organized as quasi-firms. The functional departments such as purchasing, manufacturing and sales existed in the new
structure but they existed within the divisions. The managers of divisions
were held primarily responsible for operating decisions and trading results,
but head office staff performed advisory and audit functions in this
connexion. Major strategic decisions such as the allocation of resources
between divisions were reserved for the generat staff at headquarters.
It is easy to make out cases for centrat control of purchasing, as also of
finance, marketing, Jabour relations and personnet policies and other
functions; the end result would be a reversion to the old model. Managers
of divisions must be masters in their own houses to a considerable extent if
the divisionalized firm is to succeed in the objective of enforcing a
businesslike attitude throughout. How much centralization is desirable, or
feasible, or suitable for a particular business at a particular moment in time
is a question of great complexity. Not surprisingly it is possible to find
examples of all kinds of structures, from the centrat purchasing coordinator with a secretary and little more in the way of staff to the very
!arge central office. One large firm bad a director of purchasing with a
centrat staff of about sixty people. The firm was taken over by another
firm and a year later the centrat staff was down to six. Then the purchasing
director left - and was not replaced.
The basic objective of the purchasing departments is to supply the
factories with what they need when they need it. The men on the spot, the
divisional buyers, are best placed to attend to this. Centrat or corporate
purchasing may be able to assist, advise and encourage them. A further
objective is to buy economically, and here the headquarters staff may be
able to do better than divisional staff. Indeed, if they cannot, it is hard to
see how their existence can be justified.
Headquarters staff can only do better than divisional staff when they are
able to aggregate requirements from several divisions for the purpose of
negotiating contracts. They may then be able to employ a specialist whose
exhaustive knowledge of a particular market and skill in dealing in it get
better results than a generat buyer could. They arealso often in a position
to negotiate group contracts at lower prices or at better terms than the
divisions could arrange separately.
Organization
273
Group contracts
Normally the group contract covers a !arge part ofthe group's requirements,
or even the entire requirements of all the divisions in the group. lt is
negotiated centrally and covers a longish period of time: twelve month
contracts are by far the most common. Group contracts can be arranged at
lower prices because:
(1) the supplier's costs are reduced
(2) the supplier, threatened with the loss of substantial orders, may be
willing to make do with a lower profit margin
(3) the several divisions of the purchasing firmarenot pushing up price
or delivery by bidding against eacli other, as it were.
Group contracts can reduce the supplier's costs by guaranteeing him a

substantial volume of business which he does not need to go out and drum
up and can plan and provide for; it may weil reduce the variety of products
he needs to offer and the amount of selling he has to do, and it probably
means a bigger order than he would otherwise be able to get from the
purchasing firm even though it may be for delivery at various times to
various places. (For instance, explaining Marksand Spencer methods at a
conference, one M and S speaker said: 'suppliers need no advertising, no
salesmen, little office space and equipment and only one invoice a week to
cover deliveries to 246 stores'. (Modern Purchasing March/ April 1971
p. 50.)
Direct savings through bulk buying and specialist talent are the main
reason for having a central office, but indirect savings should result from
various assignments a central office may undertake in order to improve
service or efficiency. Useful studies could be made of organization and
methods for the benefit of the whole concern; of paperwork procedures
and the design of forms, work routines and filing requirements. It could
obtain and supply expert help on legal matters, special contract conditions
for particular circumstances, import and export questions requiring special
knowledge.
The central purchasing office can spread word of new products,
processes, techniques. On the personnel side, it can help to devise a
comprehensive scheme for recruiting and training staff. Training may
include sponsored attendance at colleges and outside courses, planned job
rotation within the firm, and in-company seminars and conferences often with contributions by outside purchasing training consultants.
Group-wide promotion opportunities and common salary structures and
job descriptions are often devised.
Standardization of stock and the establishment of a common language
or vocabulary for regular purchases, perhaps also the drafting of company
specifications may be eminently worth doing in some businesses; the
National Coal Board for instance put a Iot of effort into it. In other
businesses no evident advantage would be gained.
274
Best use of scarce materials in difficult tim es could be a task to be done

centrally - the efficient use of dispersed stocks in the interest of the
company as a whole, preventing one factory going short of something of
which another has more than its needs, perhaps, and a joint attack on
suppliers rather than separate approaches by which branches compete with
others for available supplies.
One danger with group contracting is that branch buyers may lose heart
if they are not left enough freedom of action. Individual buyers should be
able to feel that their own contribution to the prosperity of the group can
be identified and rewarded. Some groups allow branch buyers to opt out of
group contracts wherever they can give sound reasons for so doing; such as
the need for quick delivery in emergency, or even finding a better buy which ought to Iead to a better group contract. Most groups allow branch
buyers full discretion for purchases below certain figures, unless there is a
group contract for the item. More than one contract is drawn up whenever
this is economically practicable, so thai the factory buyer has some choice.
Like every specialist service in the large enterprise, Purchasing has to
steer between the reefs of too much responsibility and the whirlpool of not
enough. Many arts and studies can be pursued for their own sake, but
purchasing is not one of them; it is weil done only inasmuch as it
contributes to the good of the business. Too much authority can result in
specialist departments getting obsessed with their specialism, losing sight
of the real objects and their proper part in achieving those objects for the
sake of flourishing their professionalism. Too little authority is just as bad;
a purchase department hamstrung by excessive Subordination and Iack of
recognition is unlikely to turn in a superior performance. This applies not
only to the amount of authority entrusted to Purchasing relative to other
functions, but also to the amount of authority branch buyers have relative
to head office. Making decisions centrally enables the best advising and
deciding talent to be used. But those who have to implement plans should
be involved as much as possible in formulating them. This produces better
plans. lts main advantage however is in the better communication and
motivation which in turn makes the plans work better. Branch purchasing
staff should be consulted before plans are decided centrally, and so far as
possible they should be actively involved in making the plans.
Multinational organizations
Although some small firms operate in more than one country, and some
!arge firms operate in one country only (for instance National Coal Board
and British Rail), the typical medium and large firm is operating internationally or multi-nationally.
The term international, literally between nations, is an old word, while
the term multinational, literally many nations, is a new one. A firm which
sells its products in several countries is operating internationally. A firm
which manufactures, as weil as sells, its products in several countries is said
Organization
275
to be operating multinationally. The phenomenon is not new, but the

frequency of its occurrence has increased so strikingly that it amounts to a
novelty and may perhaps call for a novel word.
The multinational firm employs people who are nationals of several
countries, it trades with suppliers located in several countries, and its
Operations are affected by the decisions of several national governments.
For example the American government has systematically interverred in the
purchasing decisions of those multinational companies whose headquarters are located in America, with a view to furthering the foreign policy
which the American government of the day happened to favour. In 1966
the United States government came down strongly against trading, by any
US company, with a French company which had bought some materials
from Cuba. The French company was partly owned by the French
government which therefore feit obliged to retaliate. Arab governments
have tried hard to discourage people from trading with Israeli organizations.
Purchasing Operations in the multinational firm are complicated by
these political considerations - how the various governments within
whose jurisdictions they operate will react. They are also complicated by
variations in local conditions: taxation provisions, exchange rates, transfer
pricing and its opportunities to reduce taxation liability or exploit changes
in rates of exchange. A multinational manufacturing business can shift its
Operations around the world, phase out of awkward markets, slow down
expansion in areas where the government or the labour force are stroppy,
and aceeierate expansion where people and government appear to want it.
At least it can do this if central direction is sufficiently powerful.
American based multinationals have swung strongly towards lOOOfo
ownership of their foreign subsidiaries in recent years; shareholders of for
instance IBM (UK) Ltd and Ford of Britain have been bought out. This
enables the firms to take whatever action they feel is desirable to
co-ordinate or optimize Operations.
The decisions that are being centralized in the parent company include
the location of production facilities so as to eliminate duplication; the
product mix for each affiliate or region; the extent of intercompany sales
of semifinished or finished products; the pricing of products not only in
inter-company sales but also in retail and export; the sources of raw
materials, components and packaging; common purchasing of bulk
materials; and the co-ordination of marketing techniques and territories[3].
Farmer argues that 'few areas will demand greater creativity than supply
management in the multinational situation during the next decade', and
draws the following conclusions from an extensive research programme.
'The multinational company should:
276
(1) Recognize that each location has a different environment.

(2) Work to improve forecasting skills and sources of intelligence about
pending politicalleconomic/sociological changes in company-world supply markets.
(3) Analyse and consider (1) supply markets, (2) process methodology,
(3) make or buy, and (4) politicalleconomic/sociological implications very
carefully prior to making a plant location decision.
(4) Work towards a policy of corporate involvement when and where
necessary to achieve company-world objectives.
(5) Ensure adequate capability and organization to meet specific needs
in all company locations.
(6) Recognize the entrepreneurial role of the purchasing manager in a
new country location relative to developing suppliers.
(7) Develop effective communication between the headquarters office
and the company-world locations.
(8) Consider the skills and attitudes necessary to carry out the company
purchasing role. Devise development programmes to help to meet local
needs.
(9) Recognize the many local implications of adherence to rigid specifications in the planning stage of a new plant location.
(10) Consider the benefits of product grouping by location.
(11) Consider setting up a small high-calibre mobile task force to: (1)
give aid as necessary to company locations in the operation, organization,
or training of local staff or in the development of suppliers, and (2) carry
out surveys on new supply markets and plant locations.
(12) Where necessary, produce detailed policy and procedure guides to
meet local conditions.
(13) Encourage liaison between purchasing managers at various locations by exchange visits or regional or international conferences.
(14) Consider designs at the conceptual stage against the companyworld and not local-market backcloth[4].
The quasi-sma/1 firm
Management literature records several examples of attempts to run large
firms as if they were small firms, the best-known probably being Ford in
America in the days of the original Henry Ford. An extraordinary example
ofthiswas given in the British Houses of Parliament in 1957. It concerned
British Rail, then in the early days of nationalization and in the process of
spending f1200m. on re-equipping.
'lt appears', said one member, 'that on occasions certain experienced
firms which have been contracting with ... (the railways) for long periods
are employed without alternative tenders being invited. I can understand
the reason for that. Engineers and technicians with long experience
know what their requirements are, and they may have been dealing with
Organization
277
one firm for a long time, and it may be far easier for them to continue
dealing with that firm because they know that if they do they will obtain
the quality that they require. But that is not good business.'
He went on to say that the system of making technical staff responsible for
placing contracts had been inherited from pre-nationalization railway
companies which had 'no supply or services organization with the qualifications for buying the goods or placing the contracts'.
Another member pointed out the dangers of a situation, in which very
!arge sums of money had to be spent with few suppliers in an overloaded
industry. Heillustrated this by relating that an order had been placed with
a well-known firm which had supplied the railways with equipment for
years to their satisfaction. The order was for about a million parts used in
connection with a new vacuum braking system. 'The quotation of BO per
unit was accepted in the first place, but before it was confirmed ...
competitive tenders were sought. It was then found that other firms of
equal standing were prepared to quote between f20 and f24 for that article.
Hearing of that, the original firm reduced its price to f23 [5] '. This was a f7
reduction per part, and a million parts were to be ordered.
Seven million pounds is a staggering amount of money to save, at the
last minute, simply by obtaining a few quotations. Replying, the government spokesman said things were being reorganized on the basis the
'purchasing should be regarded as a special technique, that it should be in
the hands of specially experienced men, that it is the business of the
technical staff to define or design what is wanted and that they should be
relieved of the commercial dealings involved in its procuring'.
Anti-purchasing
When organizations, whether small or !arge, are restructured in a way such

that the organizational roJe of the purchasing department is stepped up, a
considerable anti-purchasing feeling may be generated. Some reasons for
this are pride, a feeling that any change implies a criticism of the way thing
have been done in the past; inertia, the tendency to continue in a state of
rest or uniform motion in a straight Iine until force is applied; fear, that
price-chiselling and substitution of inferior materials will interfere with the
flow of materials or otherwise hamper operations. There is nothing more
annoying for an executive than to back the appointment of a purchasing
clerk to take some of the tedious paperwork off his desk, only to find later
that the man is insisting on procedures which are even more tedious than
the original paperwork, and is getting the backing of top management
because of some trifling savings he has been able to make. Such savings are
soon converted to Iosses when customers with defective products insist on
having their faulty cut-price components put right at your expense. In his
book 'Up the Organization', Robert Townsend sums up the anti-purchasing
278
case in the swingeing style which made the work a best-seller: 'Fire the
whole purchasing department! They cost ten dollars in zeal for every dollar
they save through purchasing acumen. And that doesn't count the massive
unrecorded disasters they cause.' Rueful amusement at a recognizable
caricature of certain purchase departments is a common reaction of
purchasing staff to this.
Relations with other departments
The purchase department works with almost every other department in the
business, either daily or occasionally. Everyone in the firm should Iook to
Purchasing for advice and assistance on such matters as what to purchase,
when, from whom, and at what price. Many purchase departments
maintain up-to-date indexed libraries of catalogues and standards, and
perhaps also sample rooms, for the convenience of their colleagues_ Other
services apart from actually purchasing include circulating data on new
developments, price changes, market trends, new products or processes;
arranging for technical experts from suppliers to call for discussions with
design or Operatingor maintenance personnel; participating constructively
and analytically in discussions at the early stages of projects and designs.
Even at the time of purchase most buyers are encouraged to review
requisitions and suggest any alterations which will be for the good of the
company - though they should not alter requisitions without consulting
the requisitioner.
Purchasing managers give a good deal of thought to co-ordinating
activities with other departments. This sometimes presents problems. User
department may requisition parts too late for purchasing to do a proper
buying job, too Iate even for the fastest supplier to deliver them on time.
Specifiers may commit the company to accept particular offers or deal
with particular suppliers. Buyers may be blamed for troubles not of their
making but caused by inadequate planning and consultation by colleagues
in other departments. There is little you can do to make others co-operate
with you, but a whole-hearted willingness to co-operate with them is a long
first step in the right direction.
'We've found two ways to get co-operation,' wrote Walter E. Willett

in Purchasing Magazine for 18th July, 1962. 'First, prove that you can
get what they want when they want it. And quit crying about every rush
job. Other people have problems too. Get the goods- that's purchasing's job. Nothing builds confidence like performance. And second, give
credit where credit is due. It's rare to be complimented, isn't it? Weil,
try it on the other fellow. When we make a saving, we send a note to
the person concerned with a copy to his boss. This note usually includes
a sentence like this: "Thank you for enabling us to make a cost
reduction of ... "'
Obviously it's no use just sitting in an office waiting for requisitions to
Organization
279
come in and then complaining that they don't allow enough time. Clear
explanations of what lead time to allow and what data is required should
be given. If this doesn't work, further thought should be applied. A
fast-growing firm in a fast-changing, rapidly evolving industry, which
purchases vast quantities of made-to-order components of considerable
complexity, cannot use the wait-for-the-requisition approach, even if
requisitions may still be required for every purchase as part of the
authorization procedure. Often sach firms attach to the purchase department several 'procurement Iiaison engineers'. These men work with
technical groups on preliminary pricing, on investigation of standard
components to determine which will best perform the desired function at
lowest cost for its value, in the formulation of specifications, and in
arranging close working relationships between engineering design and
suitable suppliers; and they keep buyers posted with advance information
about forthcoming purchases, so that thanks to this early warning buyers
can go ahead immediately the project is approved - or even make
tentative commitments before then, subject to confirmation, if this is
necessary to get a place in the queue. The job of purchasing is to help, not
to hinder, others in their work; and effective purchase departments lean
over backwards to give the best service possible, consistent with their duty
to buy well and control expenditure.
Lateral relationship tactics
Considerable frustration is experienced by purchasing staff who feel that

they are not allowed to give of their best because of the attitudes and
expectations of top management, line management, and in some instances
departmental management. Individuals work of course for their private
ends as well as for the official objectives of the organization. These private
schedules of objectives typically include the achievement of more status,
recognition, security, pay and promotion. Good management is partly
concerned with producing congruence between the organization's schedule
of objectives (survival, growth, profitability, etc.) and the private objectives of its staff. When the organization recognizes the importance of
skilled and economic purchasing by appropriate rewards to purchasing
staff, this supports and reinforces their efforts to buy well. The purchasing
manager is able to achieve his private objectives of recognition, advancement, etc., by working for the organization's objectives, by seeking out
value for money and giving a superior service to other departments. When
this is not the case, when buyers do not get this organizational support,
their behaviour could be described as dysfunctional, although George
Strauss managed to avoid this dreadful word in his research into this
situation[6, 7].
It appears that the saintlier buyers may do good by stealth, as it were,
slipping in a superior bit of performance whenever the set-up allows them
280
to. Butthis is unusual. When purchasing staff are treated as order-placers,

tightly restricted by detailed instructions as to what to buy and where to
buy it, denied a voice in the relevant decisions and the chance to use or
develop skill and judgment in buying, they have been observed to bend
most of their energies to gaining some kind of recognition within the
organization. They could adopt, for this purpose, the patient and humble
tactic of doing the best they can in the hope that someday someone will
notice. But the research showed that a touch of vindictiveness tended to
creep in.
Rigid formal procedures are prescribed for initiating purchases. By
manipulating these procedures buyers are able to exert power of a kind
over their colleagues. They may even punish executives or departments
who bypass them, by delaying order processing. Such buying departments
do not buy particularly weil; they are preoccupied with internal politics,
and much too busy to develop and apply buying ability. Nor do they give a
particularly good service to the rest of the organization; but they can
hardly be called to account for this, since they stick rigidly to the approved
rule-book or purchasing manual.
They are trapped in a vicious circle. Managements which believe their
buyers are capable of nothing but clerical routines will not allow them to
do more. Frustrated buyers then tend to perform the routines in an
aggressive and restrictionist fashion, leading management to conclude that
the buyers they have can't even do clerical work very weil. Stewart Lauer
has written:
I think that the relatively low Ievel of expectation on the part of general
management, of their purchasing operation, is one of the most significant problems we have to face. Unfortunately many of our purchasing
people are satisfied to meet this low Ievel of expectation despite the fact
that major opportunities are available to them to contribute to the
profitability of the business. There is little chance that significant
changes will occur in a purchasing operation until management becomes
aware of and defines the impact that purchasing can have on product
costs, and sets objectives for purchasing to meet.
The purchasing manual
Some !arge companies issue purchasing manuals which lay down rules for
Purchasing's relations with suppliers and with other departments and
prescribe the procedures to follow. The foreword is usually written by top
management, without whose backing the whole project is a waste of time.
Subsequent contents can be classified under the headings: purpose,
principles and procedure. That is, for each activity the purpose, or scope
and object, is stated; under 'principles' the rules for making decisions are
set out, and often the persons entitled to take the decisions are named;
Organization
281
und er 'procedures', details of how things are done - though not too many
details - are given.
The readership for a purchasing manual comprises, first, supply department employees; secondly, employees outside the department; and thirdly,
suppliers. Within the department, the manual's main purpose is to
standardize work, save time in handling jurisdictional conflicts and in
dealing with problems which come up rarely but regularly. A subsidiary
purpose may be to help train newcomers. Of course the risk in this is that
instead of clarifying procedures the handbook may consecrate them into
rituals; if it is to remain a reliable guide, regular revision is a must.
As weil as telling people inside the department who does what and how,
the manual will teil colleagues outside the department what services are
available from Supply and how to get them. This is especiaily useful in
fast-growing firms whose annual intake of senior staff is high. One manual
comprises a set of two-page Ieaflets, each a general description of some
aspect of procurement, foilowed by a two-part procedure guide: 'What
You Do' side by side with 'What Procurement Does'.
Finaily, the manual may teil suppliers how to deal with the company and
who to contact. Visitors to a !arge concern find it a convenience to get a
booklet teiling them what the company makes, what it buys, which people
are responsible for which purchases, where the establishments are sited,
and what rules must be followed in calling on the company.
Writing such a manual demands skills which are less widely available
than is sometimes supposed. lt also demands a deal of hard work and hard
thought, and a Iot of co-operation with other departments.
Although the effort may be justifiable when changes are being instituted, to Iet everyone know where they stand, Robert Townsend's advice
(in 'Up the Organization') is worth considering: 'If you have to have a
policy manual, publish the ten commandments'.
Materials management and PDM
So far we have been talking about the problems of devising a suitable

organization structure for organizational purchasing without paying much
attention to the related activities. These include transpoft inwards getting the goods from suppliers to the purchaser's establishment; storage
and materials handling; stock control and possibly production control; all
these before manufacture occurs and the purchased parts and materials are
converted into finished product. When the product is finished, similar
activities which are in principle part of marketing rather than of purchasing, have to be carried out: transport outwards - getting the goods from
the manufacturer to customers or distribution centres; warehousing and
materials handling; stock control and possibly sales order processing.
The speed-up in business Operations and the increased use of automatic
data processing and management information systems which ignore the
282
The management of purchasing and supp/y
departmental divisions of the people who use or process the information,

have led to a new Iook at the way people are grouped into departments.
New organizational structures areernerging which are intended to facilitate
a total flow concept, either of materials inwards, or of products outwards,
or even of both.
The term materials management is widely used in the USA, usually
to denote the broad range of activities concerned with procuring, moving, storing and handling materials from the supplier to the end of the
production line, considered as a functional group to be managed
integrally. It sounds a loose term, and research shows that it is used
loosely.
The term physical distribution management is used even more widely to
denote the broad range of activities concerned with supplying, moving,
storing, and handling the product from the end of the production line to
the customer, considered as a functional group tobe managed integrally.
Although some firms have both materials managers on the input side,
and physical distribution managers on the output side, other firms make
do with one manager, who may weil be responsible for some of the
activities of his missing opposite number. It has been argued that a single
manager should be responsible for materials administration on both the
output and the input side.
Dag Ericcson for instance states that in Sweden the term 'materials
administration' denotes the philosophy and principles whereby we attempt
to plan, organize, coordinate and control the flow of materials from raw
material supplier to consumer of finished product[9]. The inflow, the
internal flow and the outflow of materials, parts and finished products are
all parts of this flow and the outflow of materials, parts and finished
all parts of this flow of materials according to Ericcson, and substantial
economic advantages are claimed for treating this flow organizationally
as a single process.
Rather than regarding materials administration or materials management as the wave of the future, other authorities prefer to distinguish
between the situations of firms in different industries. For instance,
physical distribution is more complicated and more important for a firm
engaged in the mass production of consumer durables than it is for a
shipbuilder. Physical supply is more complicated and more important for a
firm which uses considerable tonnages of raw materials than it is for a
hatmaker or a producer of fashion goods. These differences have been
examined with particular reference to the engineering industries by S.E.
Lauer, who considers how the various sub-functions of materials management should be grouped, and whether or not purchasing should be one of
them in several cases -long-run production or small batch, cost reduction
potential in purchasing considerable or insignificant, etc.
lt can be argued that while there may be internal advantages in grouping
physical supply, storage and stock control, materials handling, production
planning and control, and physical distribution together in one !arge
Organization
283
department or group of departments with a single head, in order to plan,

organize and control the flow of material from source to consumer, there
are also advantages in keeping the externally directed, market oriented
functions or purchasing and marketing out of this materials group. In
certain market situations these may call for entrepreneurial gifts and
abilities to come up with commercial innovations which are not required
for the production-dominated physical supply and distribution areas.
Case study 17.1: The Alpha Group
An amalgamation has been arranged between four companies. These are:
Company
Alpha
Beta
Gamma
Delta
Location
Employees
Business
St Albans
Welwyn
Birmingham
Coventry
4,000
1,500
600
200
Light and medium engineering

Light engineering
Iran-castings, plastic mouldings
Spin dryers, washing machines.
The parent company will be Alpha. There will be joint production

control of Alpha and Beta, which are about twenty miles apart. Gamma is
a major supplier of the other companies; it will be run as a separate
division, with about 200Jo of its output sold outside the group. Delta's
product range is to be completely re-designed. lt will also be run as a
separate division, assembling, finishing and marketing a range of kitchen
machinery, and most of its components will be produced by the other
companies in the group. lt is hoped to increase Delta's labour force from
200 to 900 within eighteen months.
The purchasing manager at Alpha is requested to make a preliminary
report on how the supply function is organized in the four companies, and
what changes he suggests. His own department employs forty people.
Beta's purchase department employs only eight, but is not responsible for
stock control, which is a production planning responsibility at Beta. Beta's
purchasing chief reports to the Beta works manager, as does the production planning chief. Gamma's supply office comprises Mr H. Amma, a
Gamma family director who willleave when the merger is complete, one
buyer/materials controller, and one assistant buyer/expediter, and a
clerk/typist. Delta has a two-man-and-typist purchase department answering to the company secretary, who will move to St Albans to join the
Alpha secretariat shortly.
How much purchasing should be done centrally, how much locally?
How should the new Supply department be organized?
References
1 Bolton, J.F. (1972), Cmnd 4811 Sma/1 Firms, HMSO, London.
284
2 Davies, J.R. and Kelly, M. (1972), Small Firms in the Manujacturing

Sector, Research Report No. 3 for the Committee of Enquiry on Small
Firms, HMSO, London.
3 Behrman, J. (1970), National Interests and Multinational Enterprise,
Prentice Hall, New York.
4 Farmer, D.H. (1972), Source decision-making in the multinational
company, Journal of Purchasing, 8, No. 1, 5-18.
5 Hansard, 10 July 1957.
6 Strauss, G. (1962), Tactics of lateral relationships: the purchasing agent,
Administrative Science Quarterly, 7, Sept.
7 Marrian, J. ( 1965), discussion of Strauss in The Marketing of Industrial
Products, ed. Wilson, A., Hutchinson, London.
8 Ericcson, D. (1974), Materials Administration, McGraw Hili, Maidenhead.
18
Control
Any system of control will:

(i)
(ii)
(iii)
(iv)
set standards of performance

measure deviations from standard
identify reasons for such deviations
take corrective action.
It is easier to record costs than it is to appraise benefits, and the collection of

departmentalstatistics should not be confused with a cost-benefit analysis of
the department. Certain data essential to the proper assessment of buying
work can be supplied only by the buying staff themselves.
It has been argued that the usefulness of a purchasing section to the
organization it serves, is directly related to the confidence which management
has in it, and the authority which is vested in it. This would mean that it is in the
interests of both the organization and the purchasing staff to ensure that
sufficient data is available for adequate assessment of performance.
Whether or not the data is available, it is inevitable that the assessment will
be performed. People in an organizational hierarchy are continually being
assessed and evaluated, weil or ill, by whatever means are available. The
assignment to an executive of authority and tasks, extra staff and changes in
his jurisdiction, salary increases and promotion all depend to some extent on
how his performance and his potential is assessed.
It has been suggested that the general objectives of purchasing can be
grouped under two headings:
(1) To get the goods; to go after the materials, parts, supplies and services
which are required and to produce them on time, with as little fuss and
286
inconveniencetoother departments as possible, and with economy in its own

administration.
(2) In getting the goods, to buy wisely and weil.
Success or failure in achieving the first objective is reasonably easy to
measure. Production people tend to use a single measure: how many orders
arrive late, how many shortages and stockouts they suffer. Accountancy
people tend to favour a different single measure: how much it costs to
operate the department. Naturally people Iook most closely at the particular aspect which concerns their functional interests. By putting
together various measures of this kind, a reasonably comprehensive picture
could be constructed, but it would still not teil enough about the 'buying
wisely arul weH' objective, which is extremely difficult to assess.
Good buyers make good buys. To assess their work on the basis of how
little it costs to employ them, how many requisitions they process, or how
far they get the goods in on time, without taking note of their ability to
make good buys, seems to leave out of the picture the characteristic
contribution to the company's survival and prosperity in competitive
markets which is due to buying skill.
Savings reports
To correct this, many organizations require cost reduction achievements to

be listed on savings reports. Precise rules must of course be set for what is,
and what is not, a saving. If three quotes are received, the high bid being
300Jo higher than the low bid, how much does the buyer save by accepting
the low bid? Nothing, of course, since he never meant to accept the high
bid. Ifthe bottom dropsout ofthe market, how much credit can the buyer
claim for lower prices? None, of course, since none is due to his exertions;
he can't take credit for sunshine in the summer season.
The objections which many buyers have to savings reports are summarized in a cartoon in a purchasing magazine, which shows Jackson
striking a huge gong marked 'Another J ackson Cost Reduction! ', while
one of his colleagues teils another: 'J ackson likes management recognition'. Savings reports may also be criticized as likely to encourage price
chiselling, and as easy to falsify.
Before deciding to call for savings reports, therefore, management
should decide what they are for. Savings reports arenot valuable as sources
of data useful to run the business- they are after all past history; they are
valuable only in so far as they enable management to identify and
encourage the specific contribution to overall productivity made by the
buyer, andin sofaras having to report an activity tends to develop zeal in
performing that activity. Often targets for cost reduction are set, and the
savings report then becomes a report on target achievement. Some firms
set up a cost reduction committee which includes representatives of design
Control
287
and manufacturing as well as of purchasing. Each department submits

proposals, and early in the year approved cost reduction targets are
announced along with the budget for the ensuing period. The purchasing
department, in submitting its proposals, may consider budget variances for
the past year: make-or-buy decisions; sole source and tied source procurement; price trends for fluctuating commodities; and the advisability of
building up new sources.
Sometimes cost reduction targets are set more generally; especially when
a continually changing purchase pattern of made-to-order production
parts to complicated special designs offers continuing opportunities for
cost reduction. Westinghouse Electric Corporation's vice-president for
purchases once proposed a double target for purchasing: every year
purchasing should reduce costs by 20fo of purchase expenditure, and every
year BOOO to !:5000 should be saved on purchases for every nooo spent on
purchase salaries and other departmental operating expenses, a 300% to
500% return on what it costs to run the department. Such a target would be
quite unrealistic in some businesses, perfectly practicable for others.
Another company has a negotiated Savings Programme through which
purchasing contributes to company profits.
This is built up, buyer by buyer, against past performance, and
against what we think is likely to happen in that particular market; in
total it tends to be around I to I Yz% of buying turnover. When you
install systems which give the buyer a Iot of help which he has not had
before, immediately he will make considerable savings; very quickly you
get the cream off the top of the milk, and you get a declining percentage
as the years go by. But when you tell company management that you got
2% last year and you are only going to get I Yz% this year, they want
it the other way round. This is a battle that I'm sure we all have.
Although valuable, these attempts to encourage and publicize the cost
reduction potential of purchasing can be dangerous. Getting more usable
value for the money spent is what matters, not cutting price paid. Too
much pressure on prices can Iead to Iess value for money through
unsatisfactory service, disgruntled suppliers, inadequate quality.
Cost ratios
Control of the operating expenses of a supply department is probably best
applied in the simplest way, by periodical reviews of what it costs to run the
department in conjunction with assessments of the work it does and the
contribution it makes. The cost of running the department includes
salaries, stationery and supplies, phone bills, travel and entertainment; in a
!arge department these expenses, or the major ones may be subdivided by
work groups - buyers, typists, expediters, etc. - or by commodity
groups. The simplest index to the amount of buying work done is the
288
number of orders placed; others are the numbers of requisitions and

invoices processed. (In a stores a similar index would be the number of
issues and the number of receipts.) Performanceindexes for buying include
shortage sheets, late ratios, rejection ratios, and savings reports.
A large supply department is more expensive to operate than a small
supply department, but it bandies more transactions and spends more
money. Two cost ratios sometimes used as indicators of purchasing
efficiency relate the department Operating costs, firstly to the number of
transactions, and secondly to the total spend.
These two ratios are the average cost of placing an order, and the
average cost of spending l100. With an annual spend of flOm, and a
purchasing operating cost of f.75 000, the cost of spending flOO would be
f.O. 75. With an output of l3 330 orders in the year and an operating cost of
f75 000, the average cost of placing an order would be f5 .63.
These ratios ought to facilitate inter-firm comparison, but one snag is
that the work assigned to the purchasing staff varies from firm to firm.
Some of them are mainly clerical people, who type orders as requested and
process invoices and other paper. Both ratios will be low; because
department operating costs will be low in departments which employ clerks
rather than qualified purchasing officers. But the low value ratios do not
indicate that the buying is being done efficiently. Since the buying is mostly
done outside the purchasing department, the ratios in this instance teil very
little about the real cost of doing it.
Another snag is that while comparisons between these ratios, as calculated in successive periods of time, do indicate variations, they do not
indicate whether the variations are in the direction of economy or the other
way. Consider for instance a small department spending !:500000 a year
and costing f7500 a year to operate. Two men from design and manufacture are transferred to purchasing to carry out value analysis. They
generate cost savings (gross) of f20000 in the first year at a salary cost of
f5000. Other things being equal, the annual spend will fall from f500 000
to !:480000. Operating costs would rise to fl2 500 a year. The cost of
spending flOO would go up from fl .5 to f2.6. The cost per order would
have gone up in a similar way, since operating costs have risen without a
corresponding rise in the number of orders placed.
If a firm pays excessive prices over the whole range of its purchases, on
the other band, the cost-of-spending- noo ratiowill fall, since the same
operating costs are spread over a bigger spend. If a firm overhauls
purchasing procedures and manages to reduce the number of orders placed
through more use of blanket orders, standing orders, cash purchase, and
group ordering of related stock items, this increase in administrative
efficiency will show up in an increase in the cost of placing an order, since
fewer orders are now being placed to handle the same spend, even though
this piece of work simplification might have made it possible for existing
staff to handle an increased workload without recruiting additional people.
Contra/
289
These anomalous results are quoted to show that these cost ratios if
compiled for successive periods of time can indeed show that a change has
occurred which may be worth looking into. But they do not in themselves
show whether the change is good or bad.
When using the ratios for inter-firm comparisons it should be remembered that it usuaily costs the smailer firm more to place an order, and
more to spend flOO, because it has to place more smail order~. An
American survey showed that the average purchase Operating cost, as a
percentage of the purchase spend, was 1. 72 in firms spending less than $5m
a year, but feil to an average 0.39 in firms spending over $10m[l).
The head-count
Another thing to watch is how many people are employed in the department - the head-count. This can be related to several indicators of work
Ioad, for instance total spend, output of orders, total number of employees
in the organization. An American firm said that '500Jo of the sales doilar is
spent by the 0.5% of employees in Purchasing'. A British firm said that
they had one person including clerical labour for nearly .f250 000 spent.
Professional men would be one per .f600 000. It is a dangerous figure to
rely on; it depends where you park your clerical staff. Many purchasing
offices check invoices but in some firms the accounts office deal with these.
Economies of scale apply here too. The American survey previously
referred to found that purchasing employees as a percentage of total
employees ran from 1.11 in concerns with gross incomes below $5 million
to 0.44 in concerns earning over $100 million. Differences between
industries were here greater than differences due to the size of the
undertaking. Military electronics had a staffing ratio of 6%; data processing machine manufacturers had 4.66%; and silver-plated dinnerwarewas
right down with 0.2% of employees engaged on purchasing work.
Late ratios and reject ratios
A big company with a heavy expenditure on purchases will want to watch
this expenditure and the relatively smail department which handles it, and
should find the cost of keeping this watch comparatively slight. It's a
different story in a smail company; but often the purchasing chief will
want enough figures to teil whether or not he is doing a better buying job
this year than last year.
Forthis purpose the good old description of the objectives of buying as
to arrange for the delivery of goods of the right quality at the right time
and for the right price suggests three ways of checking on performance:
were the goods of the right quality? Did they arrive at the right time? Was
the price right?
A simple ratio which checks on quality is the ratio of rejected deliveries
290
to total deliveries. Certainly quality means more to the buyer than just
getting his purchases past inspection, but the reject ratio is a convenient
index even if it teils only part of the story. If goods-received notes and
rejection reports are numbered serially the reject ratio can be extracted
very quickly. Some firms set targets, such as 950Jo acceptance, and buyers
work to get all suppliers as weil as the general average up to this standard.
It usually appears that a small fraction of suppliers and a small fraction of
items account for most of the rejects.
The simplest index to delivery performance is the Iate ratio- the ratio
of late deliveries to total deliveries. This will have to be specially extracted
from the records; and it will first be necessary to decide how Iate is Iate.
This depends on the requirements of the particular firm; two or three days
late may be serious for a mass-production firm; thirty days Iate may be just
outside tolerance for another type of business. Long deliveries are Iikelier
to go adrift than short ones, so that the Iate ratio shou!d be considered
alongside some state-of-the-market indicator such as an average Iead time
calculated from the Iist of Iead times issued to stock control and production.
Other indexes to prompt delivery are, in an organization buying mainly
for stock, the stockout ratio; in an organization buying mainly direct for
manufacture, the 'short sheets' or shortage Iists compiled by internal
progress departments or production control.
By watehing the trend of these indicators a purchasing chief can tell
whether or not buying is doing a better job or a worse job. Again, they are
not much help forinter-firm comparisons. Materials have differing degrees
of variability, so that some will have a naturally higher rejection ratio than
others if requirements are exacting; and in some cases the specifier's
requirements may make such demands on the current state of the art that
rejections are bound to be high. But by reconsidering the specification,
discussing matters with the supplier, and searching for better suppliers the
buyer ought to try to do better all the time. Similar tactics help with the
minority of suppliers who are unreliable on delivery.
There is no simple way to tell whether the price is right. Savings reports
with all their shortcomings seem the best way. While some improvement in
quality and delivery performance may be expected from year to year, at
least for a considerable time, it gets harder and harder to make big savings
as time goes on, because the cream has been skimmed off in the earlier
years; but there is always scope for savings and improvement, as requirements change, technology progresses, and the market alters.
General appraisals
A good driver is aware of the information displayed by his instruments,

but he knows too that a Iot can go wrong with his car or the way he is
driving it which won't show on his instruments. Supply managers of !arge
Cantrot
291
departments, however little or much they require in the way of regular

performance checks and ratios and trend charts, know that these indicators, useful as they may be, cannot teil the whole story.
Very occasionaily it may be necessary to attempt a fuil qualitative
appraisal of the whole structure and performance of a supply department.
The only qualification for mo>king such an appraisal is exceptionaily good
judgment based on thorough knowledge of supply work. Making the
appraisal objectively- i.e. so that several assessors would arrive independently at the same verdict - is not easy. Some of the many facets of
departmental work which would have to be considered are: the state of
long-term supplier relationships; the extent and quality of interdepartmental co-operation; whether the department is adequately staffed with people
of sufficient ability who are adequately trained in the details of their work;
whether duties are sensibly ailocated and clearly defined; whether forms
are weil designed, systems and work routines efficient and sound and go
with a swing, i.e. flow instead of by turns slipping and sticking; whether
the department is achieving the results required, making a real contribution
to efficient operation of the company, and improving its performance over
the years.
Budgetary cantrot
The term budget originated in the central government of Great Britain. lt
refers to the statement presented annuaily by the Chancellor of the
Exchequer for the approval of the House of Commons, and the term is
also used in other fields to denote any statement or estimate relating to a
future period. Under budgetary control a manager within an undertaking
is given financial Iimits within which he plans the activities under his
command in accordance with the policy of the undertaking. Results are
accounted for in such a way that continuous comparison is possible
between actual and forecast results. If remedial action is necessary it can be
taken at an early stage. Alternatively the budget objectives can be
reviewed.
The standard definition of a budget is; a financial and/ or quantitative
statement of the policy to be pursued during a defined period of time for
the purpose of attaining a given objective. A manpower budget may be
expressed in hours of work or number of men; an output budget may be
expressed in product quantities, yards, or weight. Most budgets are in
money terms because this is the simplest common unit. Despite this a
budget is basicaily a programme of work to do and resources required to
do it, even though it may be convenient to express it in money terms.
The budget is reaily a master-plan for the ailotment of scarce resources.
There seem always to be more things worth doing than money and other
resources permit. Those in authority must decide between the claims of
more hospitals or more schools, better roads or bigger universities, guns or
292
butter. Their decisions are incorporated in the budgets which then govern
and authorize expenditure by spending departments during the ensuing
year.
Budget procedure in local authorities and in centrat government departments entails three successive stages. First, requirements for the period are
estimated: how much money it wants to spend and what it wants to spend it
on. Second, the appropriate body considers the budget proposal and either
accepts or amends it. The Treasury and the Cabinet (andin theory, though
not in practice under our present two-party system, Parliament) are the
appropriate body for central government; the Finance Committee and the
Council are the appropriate body for local government. Third, the budget
as approved becomes the department's authorization to spend, and it
becomes possible to check on the department's work seeing that it does
work to its budget.
All three stages involve much detailed work and many decisions. For the
first stage all the department's activities must be costed out in detail. New
projects must be weighed carefully; they have to be approved in competition with similar requests from other departments; they will not be judged
solely on whether they will increase the service offered by the department.
After preparation, and often in the course of preparation, experts outside
the department who are employed as the public's watchdogs will subject it
to detailed scrutiny. The final scrutiny of expenditure and the initial work
of preparing the budget have turned out to be valuable aids in managing a
big department, quite apart from their original purpose of enabling those
who pay the piper to have some say in calling the tune.
The business budget
But while government budgets normally begin with proposals to spend
money, business budgets normally begin with proposals to earn money.
The plans of a trading organization are usually limited by demand how much ofits products it can sell and what the customer will pay for them
- and the sales estimate is therefore the foundation of the whole budget.
Profitability is a simple criterion for assessing alternative proposals, and it
could be wished that some similar criterion could be applied to government
budgets. Profitability is less simple than it may seem, of course; it is
long-term survival and prosperity of the organization rather than the
maximum short-term profit which is the aim. Maximizing income and
minimizing outgo are quite inadequate as guiding rules. In fact for such
things as research, employee welfare, publicity, it is almostimpossible to
assess demand and profitability, and management must allot resources
under these headings in the same way as a government allots national
resources to alternative claims.
The sales budget, then, is an estimate of what will be sold in the period,
and of what it will cost to sell it - in salesmen's time and expenses, in
advertising and other sales promotion activities, and so on. Next comes the
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293
production budget, a detailed plan for producing the things shown in the
sales budget, with costs of materials, labour and overheads. Cash budgets
and capital budgets will also be prepared, and there will be a budgeted net
pro fit.
What is this all for? To enable management to navigate by chart and
instrument instead of by the seat of its pants. Obviously no one imagines
that events during the year will fall out exactly as forecast in the plan, but
the merit of an exact plan is that the unexpected, the exceptional, the
operation which is not going to plan, can be identified.
Fixed budgets are only applicable to operations whose input and output
can be tightly controlled. They are suitable for many government applications but few business applications. Even fixed budgets need some
procedure such as supplementary estimates by which they can be adjusted
if the occasion arises. But trading budgets must be flexible rather than
fixed. An airline for instance made their budgets flexible by basing them on
a standardvariable cost per flight. They are adjusted to changing market
conditions by leaving standing charges and overheads at the same gross
figure as shown originally, but adjusting variable costs to the number of
flights flown. Manufacturers' budgets need similar provision for adjusting
to actual sales if these differ from the estimate. Thanks to his budget the
manufacturer is in a position to assess the effect of changes in conditions
- in costs, capacity utilization, price, as weil as sales.
Supply perjormance and standard costs

The materials budget is part of the production budget in a manufacturing
firm. Often standard costs for materials are calculated for each product,
and the monthly materials budget is worked out by multiplying the
quantity of each product which is to be made in the month by the standard
materials cost for that product. Each month actual expenditure is compared with the budget, and if there is a discrepancy, or variance as it is
called in budget jargon, the purchase department may be called upon to
explain it. It has been suggested that: 'Material price standards can be used
to control purchasing and even influence the Purehase Department to
introduce new materials so that standard prices can be obtained.' A
material variance might appear in the budget Statement like this:
Month: April
Product: Widgets
Material consumption:
Budget
.L52 500
Actual
.LSl 700
Variance
-.L800
This is small enough. But there are two components in a material

variance; either the quantity used may differ from the quantity budgeted,
or the price paid may differ from the standard price. In this particular case
we might find that the materials budget is based on a budgeted widget
output of 100000 with a standard usage of 0.5 lb of material per widget at
a standard price of f1.05 per lb. We might find that in April actual usage
294
was 47 000 lb of material at an actual cost of f5l 700. The material variance
would then be made up of both a price variance and a usage variance.
The price variance is the difference between actual and standard price
multiplied by actual usage. Since we have found that actual price multiplied by actual usage is f51 700; and since actual usage of 47 000 lb of
standard price of f1.05 lb comes to f49 350; the material price variance
must be the difference between these figures, that is f2350.
The usage variance is the difference between actual and budgeted usage
at standard price. In this case, actual usage is 47 000 lb and budgeted is
50 000 lb. The difference is 3000 lb, and at the standard cost of f1.05 per lb
this gives a usage variance of f3150.
In summary, we now have:
E
material price variance
+2350
material usage variance
-3150
net materials variance
-800
These figures disclose a 50Jo price rise, which is certainly large enough to
be looked into; even though its effect on material costs has been masked by
a 60Jo drop in consumption of material, in itself a discrepancy big enough
to call for investigation.
As a purchasing yardstick, the price variance is incomplete. It does not
indicate how effectively supplies have been maintained, what price savings
buyers have achieved, what improvement in service or quality they are
responsible for. It fails to disclose how wisely buyers have bought. But it
does measure how the materials cost of the product compares with what at
some time in the past it was expected to be; and this is a most important
fact, since company planning, in particular of prices, is based on it.
For one thing the budget helps to focus purchasing effort where it will do
most good. If steel bar contributes 400Jo of a product's factory cost, then a
lOOJo price rise for steel adds 40Jo to product cost. Doing something about
that matters far more than shaving another twopence a ream off typing
copy paper cost. Costs can often be reduced even though prices are
inflexible. In the case of steel we could ask if the right quality is being
bought; could a different specification meet requirements and reduce
costs; are there too many specifications, to that variety reduction could
bring visible savings? Are the right sizes used and stocked? Is bright bar
bought when eheaper black bar would do as well; or black bar where bright
would more than save its extra cost through reductions in machining time?
Can something be saved in price, terms, or carriage costs by switching
from manufacturer to stockholder or vice versa? Since steel comeseheaper
in !arge lots, are quantity discounts fully exploited? Can the buyer
negotiate special terms of some kind? Can the product be modified to use
less steel, or some other material be substituted?
By drawing the buyer's attention to price changes which affect product
Contra/
295
costs significantly, budget variances enable the major purchasing effort to

be directed at the right targets. By showing management how material
costs are varying from expectations, they provide a means of encouraging
good buying performance. But they should be regarded as a means of
encouraging good performance and not as a measure of the performance
achieved. Otherwise buyers will get more credit than they deserve when
prices are failing, and less than they have earned when prices are rising. In
the latter case the variance may weil remain unfavourable even though
alert buyers have succeeded in keeping price rises below those suffered by
competitors. On the other hand the constant nagging resulting from
unfavourable variances may weil be a sharp spur to alert and effective
buying. An account of purchasing budgets in vehicle manufacture has been
given:
The purchasing budget can be defined as the part-by-part projected
cost of bought-out components for a future product, computed before
management approves that product, for the purpose of assessing its
profitability, and for subsequently measuring the buyer's performance
in buying the individual parts. Ford Motor Co. places a great deal of
emphasis on this purchasing budget, because about two-thirds of the
cost of the company's sales comes from bought-out components.
We use current economic Ievels at the time of the budget. We find
that it is not feasible or practical to forecast part-by-part economic
changes ahead between budget date and the production of the raw
product, so we ailow as a below-the-line adjustment in one lump sum
an economic variance covering all material and labour cost changes due
to estimated economic differences over this period ...
The estimators work within the purchasing department, alongside the
buyer. Each budget objective calculated by the estimator is signed by the
buyer, so that together they present to the purchasing director an agreed
purchasing budget ...
The total purchased parts, to a particular design and economic Ievel,
are approved by the managing director as the company's purchasing
budget for bought out parts on a new product. This is ail done perhaps
three years before the vehicle comes into production. After approval is
given to the purchasing department and to engineering, detailed development of the product is started. During development, individual parts are
released by engineering to purchasing for buying on the open market; at
the same time as these parts are released to the buyer the drawings are
given to the purchase estimator who works upon the same base he used
for his budget.
The difference between the budget and the released designs becomes
the responsibility of engineering. This is a design variance and is perhaps
the most important part of any new model budget. lt does not
particularly affect the buyer because this is a variance caused by
296
engineering designing and releasing a part which cannot be bought to

the same price as the original budget. There are of course swings and
roundabouts, especially when you have a new product with perhaps 2000
new parts on it in addition to carry over parts from old models. But
where any substantial part is released by engineering above the original
budget, then it is purchasing's and the estimating department's job in
particular, to put up the red flag and shout to management that design
engineering have released the part above the original design budget.
Management then have the opportunity of telling engineering to redesign
the part or accepting the overrun.
In actual fact, we try and get a pretty good look at the design before
the part is released to us, but the estimate is made at a time that the part
is released for production; design engineering frequently have to redesign a part. The problern of redesigning at that stage is time.
The point I want to get home forcefully is that purchasing's job is to
estimate the desired cost of the car and that they have to inform the
management when it is over-running the budget. Management then have
the chance of initiating a redesign, which again becomes the buyer's
price objective. Any difference between that released objective and the
actual price paid by the buyer becomes his responsibility as a variance.
The estimating department, within purchase analysis, shout to purchasing managers when the buyer is over-running, since purchasing management have to report monthly to company management that their budget
is on target.
All this work takes a tremendous amount of time within the purchasing department. Even though we have about 110 estimators and about
another 20 analysts working within purchase analysis and giving the
buyers these objectives and measuring the buyers' and engineers'
performance against those objectives, it is not possible to do this in
detail for every single part.
We come back once again to this wonderful 80120 business .... And
it works. Wehave what we call a key parts concept: by covering only
200Jo of the parts in detail, we cover 80% of the cost of a vehicle.
The other 20% of the cost is covered by all the nuts and bolts and bits
and pieces - 80% of the parts. Because we deal with fairly expensive
consumer goods, our breaking point for key parts is lOp per model,
although in one of our component divisions the breaking point is only
2p.
One very successful vehicle then in volume production had been bought
within 25p of the original purchase budget.
Performance and operafing budget
Large supply departments often have an operating budget. This is agreed
between the accountant and the department manager, and it covers such
297
Control
expenses as salaries and wages, travelling expenses, postage and stationery,

telephones and telex, furniture and equipment, etc. lt provides an accounting check on the cost of operating the department, not of course on the
performance given by the department.
Stock control and storage performance

Three aspects of stock control performance are:
(1) the extent to which stocks meet demands
(2) the financial investment called for by stock

(3) the administrative cost of Controlling stock.
The first is measured in several ways, none of which is particularly easy
to apply. Stock controlliterature refers to the service level, defined as the
fraction of demand, in terms either of quantity or value, routinely met
from stock. lt is sometimes calculated for relatively small stock ranges of
finished goods held for sale, but it is very unusual to find this particular
measure applied to raw material and component stocks held for manufacture. The usual approximation is occasional frustrated-requisition counts
or shortage lists.
The second is very often measured by means of the stock turn rate,
which related the amount of money tied up in stock to the rate at which
stock is being used up. Stock turn rate is the average stock over a period
divided by, or divided into, issues from stock over that period. lf an
organization had average stocks worth f400000 over a period of a year, in
which issues from stock totalled fl600000, the stock turn rate could be
expressed as:
1 600000
400000
i.e. 4.
Alternatively it could be expressed as:

400000 i.e. 14 of a year's supply.
1600000
Because stock is turned over four times a year, the stock on hand averages
three months supply. A high rate of stock turn indicates efficient stock
control, since the demand is being supplied with relatively low capital
tie-up; the money invested in stock is being turned over faster; unless low
stocks are bought at the price of frequent shortages. The average manufacturer has a stock turn rate in the 4 to 6 region, equivalent to two or three
months stock, but mass production factories achieve 10 to 12. The
important criterion if you want to know whether your rate of stock turn is
creditable or not, is how does it compare with previous rates you achieved,
and how does it compare with similar organizations of a comparable size.
298
The management of purchasing and supp/y
Management by objectives
Management by objectives (MbO) is a very popular approach to management which is suitable for application to purchasing. In consultation and
agreement with his manager, the buyer develops a plan of operation in
which a number of specific tasks or objectives are defined and time-tabled.
MbO has also been applied to stock control. In one example, 'the
conceptual weaknesses, system deficiencies and operational shortcomings
of the system of stock management were analysed to a limited extent using
consultant specialists in operations research and data processing, and then
a strong multi-discipline project team was established to investigate
requirements and to devise the next-generation system'.
The targets or specific objectives agreed between the person concerned
and his manager should be related to his normal work but should be
something extra or something new or something which had been neglected
in the past. Discussion with other departments will often be necessary since
there are nearly always interface problems in supply improvement plans:
for instance in changing specifications, materials, suppliers, procedures
and paperwork, working capital requirements, etc.
These targets act as incentives and provide yardsticks against which
performance can be measured objectively. Properly administered, MbO
can provide the individual with an environment in which he can grow,
achieve high job motivation, and monitor his own performance instead of
being policed by cost ratios and Supervisors.
Materials department as a projit centre
Ambitious purchasing men have claimed for many years that their function
contributes to projits. This is not always appreciated outside purchasing.
But see Fig. 18.1 for the possible scale of contribution.
It is of course true that the purchasing department as such does not make
profits. Nor does the sales department or the manufacturing department.
It is the organization as a whole which makes profits. But some qualification of this is needed in large organizations.
For measurement and motivational purposes it may be desirable to
attribute portions of the profits earned to those departments which are
primarily responsible for earning them, provided that this can be done
without distorting the concept of profit. But this can only be done if the
'department' is one which can be regarded as a quasi-firm. A multinational organization would normally treat each of its national 'departments' or subsidiaries in this way. A multi-product organization may be
organized in product divisions which are treated in this way, as quasi-firms
with their own profit figures.
It is not possible to treat a pure buying department in this way, but
supply departments and materials departments can be treated as quasi-
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299
BE FORE
300 000
AFTER
PROFIT
.i.lOO 000
10%
--P-R-0-FlT-
122%
OVERHEAD
OVERHEAD
30%
30%
DIRECT
LABOUR
160 000
16%
MATERIALS
440 000
S%SAVING
E 122 ooo
(2.2%incrao.se)
300 000
D1RECT
LABOUR
160 000
16%
MATERIALS
AND
AND
PARTS
PARTS
44%
418%
418 000
E. 1 000 000
Figure 18.1 Ejject of cost reduction. A 5o/o saving on the cost of

purchased parts and materials can increase projits by 22%
wholesalers. The pure buying department is right to point out that it oft.en
has considerable opportunities to reduce material costs. A net cost
reduction constitutes a contribution to profits, other things being equal;
but it is misleading simply to equate cost reduction with profit increase.
Buying personnet who favour the 'profit-makin g' view of their work often
stress the positive and creative side of it - seeking out new sources or new
specifications, commercial innovation by new types of supply arrangement, etc. These things can indeed Iead to a more profitable Operation.
When the buying department is combined with storage, stock control
and transport, to form a materials department or supply department, it
becomes possible to treat it as a quasi-firm which can earn profits or make
losses, like a captive whdlesaler. The purpose of doing this is to motivate
supply people to behave like profit-minded businessmen instead of costminded service personnel. The argument has been presented in detail by
Ammer[2].
References
1 American Management Association, Research Study 45.
2 Ammer, D. (1974), Materials Management, 3rd ed., Irwin, Homewood,
111.
300
Integrating case for part three: United Vehicle Co. Ltd

United Vehicle Co. Ltd is a !arge manufacturing company engaged in the
mass production of motor vehicles. UVC, as it is usually called, consists of
four divisions, each of which are profit centres. Three are production
divisions; they vary considerably in size, and some of the rivalries which
existed between the various independent companies which merged to form
UVC still survive. The fourth is the Spares Division, which carries a wide
range of spare parts for all vehicles produced at present and within the last
seven years, at its !arge automated warehouse. These parts are supplied to
distributors and garages in most parts of the world, sometimes at very
short notice.
About fourteen months ago in the course of anti-pollution research,
UVC engineers had developed quite a simple device which reduced exhaust
pollution. An important side-effect was that it also reduced fuel consumption. Car owners were very conscious of the high cost of fuel, and
consequently UVC had fitted the device, which they called the detoxer, to
all passenger cars made in the past year and had featured them heavily in
their advertising. Conserving the environment while saving money seemed
a winning combination. Consequently many owners of older UVC cars had
arranged to have their cars fitted with detoxers in the course of routine
servicing, and Spares Division had supplied the devices to the trade to meet
this demand.
John Mitchell was the Spares Division buyer who dealt with detoxer
orders, among many others, and as he drove to work one sunny autumn
morning he was thinking about the annual supply arrangements for
detoxers which were up for renewal shortly. He was also thinking about his
garden. There was a touch of frost in the air; death to the dahlias; but it
would do the sprouts a bit of good.
One of the things that bothered him about detoxer supply was that the
arrangements he had made nearly a year ago had not complied with
company policy. The policy guideline in question called for 'single tier
pricing'. lt laid down that any item which UVC was buying both as original
equipment (i.e. to fit into production vehicles) and as spares should be
bought at the same price for both applications. John had received a
technical specification for the item, a request from marketing to put 2000
detoxers into stock (which were to be packed individually in cartons
complete with fitting instructions), and a note that the production divisions
had sourced with Thornrose Ltd at !:250 per 100. But when John contacted
Thornrose they quoted him a price of :3.70 each. By way of explanation
they said that production bought by the million in bulk pallet Ioads while
spares bought by the thousand in individual cartons, so naturally the price
had to be higher. John had replied, in effect, okay, but not that much
higher; and Thornrose had then said that the production division buyer
had persuaded them to supply detoxers at cost price on the grounds that
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301
they would make good profits in the replacement market. Almost a spark
plug situation, they said; as with spark plugs, a low OE price was posible
only if a hrgh price was charged in the after-market.
Marketing were bombarding the purchasing manager with memos and
phone calls; they wanted to get detoxers onto the shelves so as not to lose
sales stimulated by their advertising campaign; and John had agreed to the
price quoted by Thornrose. He didn't have much choice at the time. Also
he feit confident that he could justify his action on a profit basis.
For production items, any reduction in the price of components such as
detoxers would increase the profit margin on the vehicle. But for spares,
any increase in the price of parts would increase the profit margin, in the
absence of competition. Spares Division normally calculated its selling
prices on the basis of: purchase cost plus overhead plus profit percentage
less appropriate trade discount. Both overheads and profit were normally
calculated as percentage additions to the basic purchase cost. Consequently, if purchase cost went up, as it did when John agreed to a price of
f3. 70 rather than f2. 50, both overhead recovery and pro fit also went up.
Arrived in his office, John Mitchell dealt with his mail, and then got out
the technical specification for detoxers. They comprised a metal fabrication with an estimated life of three to five years - but, he thought, by the
time this year's vehicles are due for detoxer replacement it is quite likely
that some technological development will have superceded them. Incorporated in the fabrication was a chemical capsule which needed to be
replaced every 18 months or 18 000 miles; six months from now this years's
vehicles are going to need those replacements, so that will be a !arge
quantity requirement. Just then the phone rang and John was called to
the purchasing manager's office.
Two men were already there, apart from the purchasing manager: a
rather flashy individual John recognized as a marketing representative,
and someone who was introduced as an accountant from finance department. John was given a cigarette and settled into the 'negotiating chair', a
low-slung armchair with defective springs which looked comfortable but
put its occupant at a considerable disadvantage.
'Let me put you in the picture, John' said the marketing man. 'Until two
months ago our detoxers were selling like hot cakes in the after market.
Nobody eise had anything like it. Then a spurious manufacturer called
Redrox - have you heard of them? No? Weil, they've been quite
successful in selling cheap imitations of spare parts for vehicles made by all
the major manufacturers including us; and now they've come up with a
cheap imitation of the detoxer. It's really cutting into our sales. Quality
Control and Engineering have just completed tests on their product. They
can't find anything wrong with it.'
'Cheap it certainly is,' said the accountant. 'It retails at three quarters of
our price. I don't need to remind you that our policy is to meet or beat the
competition on price, and of course quality.'
302
'That puts the ball in your court, John' said the purchasing manager. 'If
Redrox can supply equal quality, we have to beat them on price.'
Back in his office, John Mitchell phoned Purchasing Services.. This was
a new section which had recently been set up to provide research and other
back-up services to the buyers. He asked for as much information on
Redrox as they could produce by the following morning. He had already
arranged for Marketing to give him sales forecasts for detoxers by the
following morning.
Next, he put in a call to the Midlands, to the production buyer who
handled the OE detoxer contract, Keith Smith. He had met the man a year
or two ago at UVC's training centre on a purchasing training course run by
outside consultants, where he had in fact played croquet with Keith. Keith
played croquet ruthlessly, competitively, and with much enjoyment, and
he played to win. He would probably negotiate in the same style.
One discussion on that training course had been about centralized
purchasing. At that time UVC had a purchasing director and was slowly
moving towards centralized purchasing for the company as a whole.
Progress was slow because senior buyers objected to being moved around
the country and losing certain prerogatives, although junior buyers said it
was the logical thing to do, having nothing to lose and seeing possibilities
of promotion. Keith Smith had remarked that everyone who worked for a
!arge corporation could expect to see the pendulum swing from centralization to decentralization and back again at least twice during his working
life.
Everyone thought that was a cynical thing to say. Butten months later
the purchasing director had resigned, and the company had been reorganized into four divisions each of which was a profit centre, each with its
purchasing manager responsible not to a central purchasing director but to
the general manager of the division. The four purchasing managers met as
a committee to decide company purchasing policy. But the committee had
no power of enforcement. If a particular purchasing manager did not like
some policy decided by the committee, he just didn't enforce it.
Keith came on the line. He was glad to hear from John, freely revealed
that his tomato crop had been poor that year, and offered to take John on
at croquet any time. About detoxers he was somewhat cagy.
'Sorry, but I can't play cards with someone looking over my shoulder,'
he said. 'Especially someone who has a hand in the game.'
'Aren't we partners, though, in terms of cards?'
'Weil, it isn't really the same game, I suppose, even if we work for the
same company,' said Keith. 'I don't score any points for pleasing your
purchasing manager, it's my manager I've got to satisfy.'
John Mitchell was a persuasive man, like most successful buyers. He
soon found out, (a), that Keith was due to meet Thornrose in four days
time to negotiate the contract for the ensuing year; (b) that Keith had
stated his opening position, which was that increases in volume and the
Cantrot
303
learning curve effect entitled him to a price reduction, and (c), that
Thornrose had also stated an opening position, that because of inflation
they were making heavy Iosses at the current price and wanted at least a
500Jo increase. He was not successful in persuading Keith to negotiate
jointly with him so that they could arrive at a 'single-tier pricing' for the
OE contract and the spares contract.
That evening J ohn Mitchell spent a long time pottering round his gar den.
Garderring usually took his mind off work, but this time it seemed to have
lost its magic. Thornrose had told Keith they wanted a 50% increase; that
would put the OE price above the spares price, he thought. Thornrose had
taken quite a different line with him; they had not mentioned any increase
in the basic price, but they had said they were out of pocket on packaging
the detoxers in individual cartons and printing instructions.
When he played croquet with Keith a year or two ago, Keith had lost.
In the morning John studied a long complicated memo from marketing,
full of statistics and ifs and buts. He summarized the key points as follows:
Detoxers: this year to 31 Dec we should sell 5000.

Next year if our price is lowest we sell at least 15 000, and
if our price equal to competition we sell 8000 to
10000, but
if our price high we sellless than 5000.
(Production requirement for OE detoxers next year is in excess
of a million.)
Capsules: this year sales are 500 a month at present but falling due to
competition from Redrox.
Next year if our price is lowest we hit 10000 a month by June,
say 100000 for the year, and
if our price equal to competition we sell 50 000 for the
year, but if our price high we sell10000 for the year
maybe.
The following year we should sell over a million if price right.
(Production requirement for capsules nil.)
He also had a short report from Purchasing Services. Redrox Ltd was a
private limited company, not quoted on the stock exchange, which started
up three years ago in the backstreets of Birmingham, making spare parts
for British motor vehicles. Opinion in the trade was that their quality was
excellent, their prices very keen, and their marketing methods both
aggressive and co-operative. They were wellliked by the distributors. They
were considered very sound financially and were shortly to move to a new
factory in a development area. Sales director was James Affleck. ('Thanks
for calling us in, John' said a handwritten note from the section manager.
'Give us the word and forty-eight hours and we can find out a whole lot
more about Redrox. ')
John picked up the phone and asked for James Affleck at Redrox. He
304
was away on a sales trip, but ten minutes later he phoned back and invited
J ohn to lunch with him as he happened to be in the area.
By 2.30, John was back at his desk after a very enjoyable lunch. Affleck
had shown him photographs of the new factory in which they planned to
mass produce detoxers, along with many other motor vehicle parts. lt
looked quite impressive. Affleck had also revealed that a big advertising
campaign was planned for the following year.
John then suggested that Redrox supply UVC SparesDivision instead of
the trade, thus reducing the cost of advertising and distribution. Affleck
had evidently been expecting this. Redrox feit they had a commitment to
go on supplying existing customers, he said, but he was also willing to sell
to Spares Division, either as sole supplier or as a second source. His price
for the detoxer would be f3 each, individually packed, and for the capsule
f50 per 100 (the same price as Thornrose had been charging). Minimum
order for each item would be 1000. Rebates would be payable annually
based on annual volume: 2Yz0Jo for 10000 to 100000, and 5% if over
100000 were taken in a year. The new factory was already in production,
but if a visit by quality control engineers was required it should be deferred
for a month in case of initial running in snags.
Questions
(1) If you were John Mitchell, how would you plan your next meeting
with Thornrose? What prices would you try to get and what arguments
would you use?
(2) How should the situation as regards the production buyer be
handled?
(3) Firstly on the assumption that Thornrose match the Redrox price,
and secondly on the assumption that their price remains higher, explain
whether you would single-source or dual-source (a) the detoxer, and (b) the
capsule. lf you would single-source, would your source be Redrox or
Thornrose? If you would dual-source, how would you share the business?
(4) Shortly before John met Thornrose, he located a contract packer
who was prepared to accept pallet Ioads of detoxers and pack them
individually in cartons for f20 a 100. How would this affect your answer to
questions 1 and 2?
(5) If John decides to order from Redrox, are there any further steps he
should take before placing the order?
Control
305

(1) 'Value Analysis should not consist of a group of people sitting round
a table muttering "Let's make it in plastic" ', according to one writer.
What in your view should Value Analysis consist of?
(2) 'In the vehicle manufacturing industry, upwards of 20 labour relations problems can be in the purchasing director's office on any one
day, each causing an interruption to supplies.' What steps can be
taken to minimize the effect on a manufacturer's production of
strikes in the plants of his suppliers?
(3) It has been said that in times of severe shortage, companies need
expediters rather than buyers, and also that companies with keen
buyers who negotiated low prices when there was a buyer's market
have to pay for it when there is a seller's market. Do you agree?
(4) 'Purchasing in this company is analytical. We do not believe in
haggling with vendors; we wanttobe able to negotiate realistically.'
(Quoted in Purchasing Research in American Industry, American
Management Association.) How could full-time purchasing research
staff help purchasing to negotiate realistically rather than haggle?
(5) What supplies are of strategic importance to your organization? Why
are they so important?
(6) It has been said that the chief executive of a large organization is
personally responsible for corporate planning. To what extent can he
delegate this responsibility? To what extent can purchasing and
supply contribute to corporate planning?
(7) Explain the terms physical supply, physical distribution, and materials management.
(8) Discuss the advantages of adopting special systems for small orders,
and describe two or three of the systems which are used.
(9) Describe and distinguish between cost analysis and value analysis.
(10) Compare and contrast the work of the retail distribution buyer with
that of the industrial purchasing officer.
(11) What does the job of a purchasing manager involve?
(12) A manufacturing organization with 5000 employees at two factories
is in the process of adopting a materials management type organization structure, and preliminary studies have shown up considerable
weaknesses in planning and control of stock. As a result of this it
has been decided to appoint a stock control manager. This is an
entirely new post. Write: (a) a description of the job responsibilities
and of the qualifications you consider desirable and/or essential; and
(b) a short advertisement of the post to appear in the 'Sunday Times'
and in suitable professional journals.
(13) What qualifications and personal characteristics do you consider
important for buyers working for large organizations, whether in the
manufacturing, service or distribution industry?
306
(14) (a) Mr Green rents a greengrocers shop. The only asset he has in the
business is his stock-in-trade which he turns over fifty times a year.
What is his return on assets if his profit margin is 50Jo on selling price?
(b) Mr Brown rents a furniture shop. His stock turn rate is five times
a year. What pro fit margin would he require to get the same return
on assets as Mr Green (on the same assumption: no other assets)?
(c) Comment briefly on the advantages and disadvantages of stock
turn rate as a performance measure.
(15) Define purchasing research, explain how it can be organized either on
a full-time or a part-time basis, and Iist some important areas for
investigation.
(16) Write a description of the duties and responsibilities of a stores
manager in a medium size manufacturing organization in which three
production substores and one non-production substores are supplied
from a main stores with 5000 stock items.
(17) What is a profit centre? In what circumstances is it possible for a
supply department to be treated as a profit centre?
(18) In a !arge multi-product multi-division manufacturing organization,
to what extent is it (a), a practical possibility, and (b) of economic
advantage, to centralize purchasing?
(19) In a !arge multi-outlet retail chain, to what extent is it: (a), a practical
possibility, and (b) of economic advantage, to centralize buying?
(20) lt has been suggested (by a politician) that the entire purchasing and
supply Operation for local and central government should be handled
by a single central office. Is this a good idea? Explain your answer.
Index
ABC analysis, 102, 242

Ammer Dean, 194, 299
Arbitration, 206, 211
Article numbering, 97
Automatie warehouse, 72
AVC0,130
Backwardation, 166
Bain, Joe So, 160
BEAMA,217
Behrman, J 0, 186
BIM, 245
Blanket order, 249
Brand, specification by, 142
Brown, RoGo, 101
Buckner, Ho, 35, 172, 191
Budget, 291
Buffer stock, 114, 126, 244;
for commodities, 164
Breakeven analysis, 38
British Standards Institution, 146, 148
Cancellation, 50
Cartel, 155, 164
Check digit, 96
Coding materials, 75, 90
CODOT,256
Colour code, 91
Commodity markets, 162
Competition, 156
potential, 161
Concentration, 17, 155
Conflict of interest, 196
Conformance, 147, 173
Consignment stock, 102, 128
Container, 65
Contract, 211
Corey, Ro, 61
Corporate planning, 233
Cost
analysis, 22, 161, 295
incentive, 219
plus, 216
Cost, conto,
procurement, 106, 250
stockholding, 105
Countervailing power, 160
CPA, 216
Critical path, 58
Croell, RoCo, 15
Cyert, RoMo and March, loGo, 25
Dewey, Melvil, 93
Discount, 41
Drucker, P 0, 268
Edwards and Townsend, 25
EEC, 157,203, 213
EOQ,103
Ericcson, Dag, 282
Ethical code, 192
Expediting, see Progressing
Exponential smoothing, 100
Farmer, DoHo, 191,275
Fearon, HoEo, 235
FIFO, 130
Forecasting stock demand, 99
Futures contract, 164-7
Goods received note, 78
Grading suppliers, 150, 173
Group contracts, 273
Hedging, 164-7
Hili, Ro and Hillier, To, 190
Imprest stock control, 127
Incentive contract, 219
Index-linking, 217
Information technology, 53
Invoice, 49
IPS, 191
Kotler, Po, 17
Kottishank and South, 263
Index
308
Lauer,S.,280,282
Lead time, 112,244
Leenders, M.R., 162, 187
Lewis, C.D., 98
LIF0,130
Linear programming, 57
Liquidated damages, 218
Location of stock, 78
London Meta! Exchange, 162
Macmillan, K., 191
Make or buy, 19, 161
Manual, purchasing, 15, 280
Marketing, 15, 47, 169, 190
Materials
analysis, 241
coding, 75, 90
handling, 70, 77
management, 287, 298
Max-min, 125
Microform, 55
Miles, L.D., 239
Monopoly, 155, 181, 187
Moving average, 100
Multinational, 194, 203, 274
Negotiation, 160, 197
Network analysis, 14, 58
New, C., 135
Obsolescence, 85
Oligopoly, 22, 158, 160
Order Ievel, 112
Pallet, 65
Pareto, 102, 119,242
Penalty clause, 218
Physical distribution management, 282
Prestel, 56
Price adjustment clause, 216
Price analysis, 161
Procurement Iiaison engineer, 279
Profit centre, 120, 298
Progressing orders, 45
Public sector, 8, 82
Purehase analyst, 259
Purehase order, 39
Purehase record card, 35, 120
Purchasing manual, 15, 280
officer, 257
research, 177, 235
Random location, 80
Reciprocity, 184
Requisition, purchase, 31
stores, 82
Research, 177, 233-5
Retail distribution buyer, 258
Rowe, D. andAlexander,l., 16,169,171
Sample, specification by, 142
Savings report, 286
Scrap, 51
Service Ievel, 297
Simulation, 57, 119
Small firms, 181,266
Small orders, 248
Standardization, 238, 273, 144
Standards organizations, 145
Standing order, 249
Stillage, 65
Stock
controller, 261
location, 78
record, 120
turn rate, 297
valuation, 130
Stocktaking, 84
Stores manager, 260
Strauss, G., 279
Supplier
development, 162, 179, 186
evaluation, 175
Surplus stock, 51, 85
Termsand conditions, 213
Topping-up system, 127
Townsend, R., 277, 281
Transfer price, 24
Travelling requisition, 34
Turner, G., 101
Two-bin system, 128
Unit Ioad, 65
Valuation of stock, 130
Value analysis, 238
Variance, budget, 294
Variety reduction, 86
Vendor rating, 149, 175
Visual control, 83, 128
Quantity discount, 43, 111
Webster, F.E. and Wind, Y., 16, 172

Word processing, 56
Work study, 73, 247
Rack, storage, 67
Zoned Iocation, 81

P. J. H. Baily B.sc. (Econ.), A.C.I.S., F. Inst. P.S. (Auth.) - Purchasing and Supply Management-Springer US (1978)

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Purchasing

B.Sc. (Econ.), A.C.l.S., F.Inst.P.S.

Springer-Science+Business Media, B.V.

First published 1963

Part one: Fundamentals of purchasing and supply

Scope and objectives

Part two: Practice and techniques

Purehase specifications and quality control

Part three: The management of purchasing and supply

The adoption by the Institute of Purchasing and Supply of a considerably

Organizational purchasing is the process by which organizations define

Fundamentals ofpurchasing and supply

Scope and objectives

work in the canon of English literature, several of the horseback pilgrims

Fundamentals oj purchasing and supply

The distinguishing characteristic of the distribution industry is that it

Scope and objectives

Fundamentals ofpurchasing and supply

WHAT THE GOVERNMENT BUYS

Other central government services

r~~;:::::::::::\:':-:1 National hea!th Service

Transport and communication services

Other manufactured goods

Ships and marine engines

Electrical engineering products

Chemieals and allied products

Food, drink and tobacco products

Commodity analysis of central government'current expenditure on goods and services in 1969

Fundamentals of purchasing and supply

accountability in the expenditure of public money. Government buying, it

Scope and objectives

Some are parastatal organizations which have never existed except as

Fundamentals of purchasing and supply

Scope and objectives

distrust. Their understandable misgivings were challenged by the Joint

Manufacturing industry is still the largest sector of the economy, despite

Fundamentals ofpurchasing and supp/y

industry, but in aircraft or motor car manufacture they are of less

Scope and objectives

Fundamentals oj purchasing and supply

Scope and objectives

Fundamentals ofpurchasing and supply

Before any purchase order, or production order, can be issued, somebody

Fundamentals ofpurchasing and supply

Routine make-or-buy decisions

Large organizations sometimes set up a make-or-buy committee, with

Make-or-buy questions involving capital investment

Fundamentals of purchasing and supply

Several machine tool firms bought iron foundries as captive suppliers in

Fundamentals ofpurchasing and supply

firms, and firms with a decentralized management style, gave considerably

Fundamentals ojpurchasing and supply

Fundamentals ofpurchasing and supply

be charged of course). By five o'clock he had got the answer, a firm in

In formal organizations making large numbers of purchases it is necessary

Jnitiating the purchase

Purchasing practice and procedure

Drt.ptr.,.tmcnt- .... __________ -----

l>tttc------ ___________ ----

NumM"------ -------------Quantty anti Pucriptiofl

Figure 3.1 Typical purchase requisition. Handwritten, one copy to

Requirements programmes may be thought of as groups of specific needs

Fundamentals ofpurchasing and supply