PURCHASING MANAGEMENT

ASSIGNMENT NO. 1

Q.1 Discuss in detail the activities involved in the purchase department from the receipt
of a purchase requisition till placement of purchase order.

Answers :

purchase order process

The following are the steps in the purchase order process. Note that the purchase order
process is one part of a broader procurement process that includes everything from
identifying the need for a good or service to payment. Read our blog post on the entire
procurement process here.

• Step 1: Purchaser creates purchase requisition – The purchase order process

starts with a purchase requisition, a document that is created by the purchaser
and submitted to the department that controls finances. Consider this the part of
the process where you get the thumbs up to purchase the goods and services
 you want. You’re not actually ordering anything, you’re getting the approval to do
so.

Approvers can choose to approve, reject, or flag your request for further
discussion. The key difference between purchase requisitions and purchase orders
is that a purchase requisition is about permission and purchase orders are about
purchasing. Read our blog post on purchase requisitions vs. purchase orders for a
detailed description of these two documents.

• Step 2: Purchaser issues purchase order –

• Activities involved in the purchase department from the receipt of a purchase

requisition till placement of purchase order:

• A source of supply of materials must be selected after the receipt of the purchase
requisition. The purchase department usually maintains for every group of materials a list
of the suppliers’ names and addresses. Quotations may be invited from these suppliers by
issuing tenders to them. On receipt of the quotations from the suppliers, a comparative
statement of various quotations received should be prepared and the desirable suppliers
should be selected.

• While selecting the supplier to whom order is to be given for the purchase of
materials, the purchase department should keep in mind:

• (i) Manufacturing capacities,

• ADVERTISEMENTS:

• (ii) Reliability of the supplier,

• (iii) Financial condition of the supplier,

• (iv) The management of the Supplying firm,

• (v) Price quoted,

• ADVERTISEMENTS:
 •

• (vi) Quantity for which price quoted is applicable,

• (vii) Terms of payment,

• (viii) Terms of delivery, and

• (ix) Specifications to which the products are manufactured.

• All other factor; being the same, the purchase price should be the lowest price at
which a particular material is to be purchased. Thus, the supplier from whom material is
purchased should be dependable and capable of supplying materials of uniform quality at
right time at reasonable prices.

• The purchase officer should keep in mind all the criteria given above in making a
choice of a supplier; however, he must not become penny-wise and pound-foolish. He
must not be afraid to spend, at times more of the firm’s money to meet required delivery
schedules, quality standards and terms of payment.

• The Purchase Manager will obtain the necessary information from schedule of quotations,
past records, catalogues, buyers’ guides and other books. In short, he should maintain all
the necessary records keeping in mind the most important objective of the Purchase
Department i.e., purchasing right quantity and quality of materials at the cheapest rate at
proper time to help smooth running of the production function.

• Step 3:

• After choosing the supplier, the purchase department prepares a purchase order for
the supply of stores. The order is the written authorization to the supplier to supply the
particular material or materials. It is the evidence of the contract between the buyer and the
supplier that binds both the buyer and the supplier to the terms under which the order is
placed.

• The supplier is bound to supply materials according to the terms and conditions of
the purchase order and the purchaser is required to accept delivery of, and make payment
for, materials as agreed upon. Moreover, it is the document which gives the authority to the
receiving department to receive the materials ordered for and to the accounts department
to accept the bill from the supplier for payment.
 •

• The number of copies of the purchase order to be prepared varies from organisation
to organisation. Three to five copies are prepared depending upon the size of the
organisation.

• If five copies are prepared, the possible use may be as follows:

• (i) The original copy is sent to the supplier.

• (ii) One copy is sent to the receiving department.

• (iii) One copy is sent to the person who initiated the purchase requisition.

• (iv) One copy is sent to the accounting department.

• (v) The last copy is retained by the purchase department for future reference.

Once these steps in the purchase order process are complete, the goods or services are
delivered and inspected. Thereafter, the vendor issues an invoice to the purchaser,
payment is made, and the transaction is complete.
Q.2 . What is negotiation ? Explain the various phases of negotiation.

A negotiation is a strategic discussion that resolves an issue in a way that both

parties find acceptable. In a negotiation, each party tries to persuade the other to
agree with his or her point of view. By negotiating, all involved parties try to avoid
arguing but agree to reach some form of compromise.

Negotiations involve some give and take, which means one party will always come
out on top of the negotiation. The other, though, must concede—even if that
concession is nominal.

Parties involved in negotiations can vary. They can include talks between buyers and
sellers, an employer and prospective employee, or between the governments of two
or more countries.

KEY TAKEAWAYS

• A negotiation is a strategic discussion that resolves an issue in a way that

both parties find acceptable.

• Negotiations can take place between buyers and sellers, an employer and
prospective employee, or governments of two or more countries.

• Negotiating is used to reduce debts, lower the sale price of a house, improve
the conditions of a contract, or get a better deal on a car.

• When negotiating, be sure to justify your position, put yourself in the other
party's shoes, keep your emotions in check, and know when to walk away.

How Negotiations Work

Negotiations involve two or more parties who come together to reach some end
goal through compromise or resolution that is agreeable to all those involved. One
party will put its position forward, while the other will either accept the conditions
presented or counter with its own position. The process continues until both parties
agree to a resolution.

Participants learn as much as possible about the other party's position before a
negotiation begins including what the strengths and weaknesses of that position are,
how to prepare to defend their positions, and any counter-arguments the other
party will likely make.

The length of time it takes for negotiations to take place depends on the
circumstances. A negotiation can take as little as a few minutes, or, in more complex
cases, much longer. For example, a buyer and seller may negotiate for minutes or
hours for the sale of a car. But the governments of two or more countries may take
months or years to negotiate the terms of a trade deal.

The 4 Phases Of The Negotiation Process

1. Pre-negotiation

Everything we do, if we are to perform the activity properly, requires a certain

degree of preparation. No doubt, there are many occasions we have admonished
ourselves when things didn’t turn out as well as we thought they would. Preparation
is the key to any successful activity or endeavor.

The first thing to determine is whether there is actually any reason to negotiate at
all. Secondly, it’s essential to be clear on the specifics. We have to get “our ducks in
a row” before we even make contact with the other side. Then, we need to establish
some form of negotiation agenda before beginning our talks. We should identify the
correct people who will be involved in the talks. It’s important to know their levels
of responsibility and authority.

Where possible, we should attempt to obtain as much information about these

people and their company. Intelligence gathering is crucial in obtaining a picture of
the other side. That way, we can assess the other side’s needs, motivations, and
goals with respect to our own.

Next, we need to set up a venue where we are going to meet and have adequate
time to conduct the talks. It is a good idea to begin this process by establishing
direct contact with the other person. We can begin by building some kind of
rapport and set out the agenda. This is achievable through a variety of means:
phone calls, faxes, e-mails, and even an informal personal get-together beforehand.

2. Conceptualization

This phase is where we develop the foundation of the agreement by framing the
issues, without becoming bogged down in the small details. We need to put the
building blocks together to understand the basic concept of the agreement we are
seeking. It’s like two sides coming together to consider the blueprint design, or
structure of the deal. We are attempting to formulate principles upon which we can
both agree. For example: who will provide financing or the licensing aspects?

This is the phase where we define each other’s goals and objectives through
factfinding and by establishing some measure of compatibility. It’s not unlike an
awkward first date. We begin to consider creative options and discuss negotiation
concessions. We advance proposals and counter-proposals, back and forth, until
both sides some manner of tentative agreement.

The terms of the partnership are re-framed until they reach the level where both
parties are as satisfied as they can be, within the various parameters of what they
bring to the table. This is how we arrive at the basic concept of our agreement.

3. Settling the Details

Simply put, this phase sees the completion of the agreement. Here, we use our
external specialists to complete the details of the venture on which we are about to
mutually embark. This phase discusses the problems of implementing the
partnership realistically so that it is both viable and workable. We also hammer out
the details as they relate to production, scheduling, handling delays, task
responsibility, and authority. We will use our own technical and management people
to streamline the process, so it works smoothly, and meets both our standards and
requirements.

The final portion of this process is then left to the wordsmiths, usually our respective
legal experts, to put our agreement into written form, and to describe the
contractual obligations to which both sides have agreed.
This is not the “walk in the park” like it sounds. Settling the details correctly and
meticulously is extremely important. Many talks have collapsed because the
participants failed to devote the necessary time and work to address the details
efficiently. Until these are properly ironed out, we can’t celebrate our success.

4. Follow-up

Just because we’ve signed on the dotted line doesn’t mean that it ends there. We
cannot toss the contract into our files and forget about it. It seldom ends there as
problems always arise. Any aspect of any contract may need to be re-negotiated, or
the details altered to counter a wide variety of changing circumstances. Expensive
and embittered legal battles can be circumvented simply by keeping the lines of
communication open with our counterparts. We should be experienced enough by
now to understand that things may not be as simple as they first seem.

Conclusion

If we properly apply the phases of negotiation effectively and efficiently, positive

results will manifest themselves following our efforts. Anything worth doing is worth
doing well, and as negotiation is something we can’t hide or run away from, we
might as well do it right.
ASSIGNMENT NO. 2

Q.1 A) EXPLAIN METHODS OF E TENDERING

Types of e-Tendering

The process of tendering involved some kind of complicated procedures and processes
unlike with the help of an eProcurement software. Before any tendering process can be
done, a professional team must be ready with all the tendering documents checked and
approved. The source of funding must also be available and the project financing should
be put in place. The processes in the subsequent stages should be established with the
express consent of the employer to ensure the online tendering process will go
smoothly. The type of tendering an employer must go with depends purely on the
nature of the contract, the complexity in the construction, the expertise needed and
various other reasons. The government projects are usually made open tenders in order
to ensure that the procurement and works to be done in a fair manner without prejudice.
The various types of tenders generally used are: open tender, selective tender, negotiated
tender, serial tender and term tendering.

— Open Tendering

Open tendering is the main tendering procedure employed by both the private sector
and the government. The client advertises the tender offers in the local newspaper along
with the key information of the proposed works and inviting interested contractors. The
tender notification includes an invitation to treat, a mere request by the employer for a
suitable contract to submit their bids or offers.

— Selective Tendering
Selective tendering is the one alternative developed to address the limitation of the open
tendering procedure. Here a short list of contractors is drawn up and they are invited to
submit tenders. The purpose of this tender is to improve the quality of bids received to
ensure that the contractors with necessary experience are given a chance to submit the
necessary bids for the specific reason of the employer. This makes the e-tendering
process in India more manageable and less burden for the parties involved.

— Negotiation Tendering

This type of tendering is widely used in the engineering and construction industry
commencing from tendering until the resolutions of the disputes, which comes under the
pre-contract negotiations and the post-contract negotiations. Usually, a single contractor
is included but can be scaled into 3 contractors.

— Term Tender

Term tendering is normally used on projects that need huge maintenance. The contractor
will be asked to cover a range of different buildings in different locations. It is often
limited to a fixed time scale although the needs of the client may require this to be
extended. This is generally a standing offer to undertake a loosely defined extends of
work usually within a fixed amount of time.

e-Tendering Process
The seven main steps in the e-tendering process include:

1. The Tender Process is Determined

How to register for e tendering? The organization which requires the tender will
determine the type of tender that will be used, and what will be involved in the
online tendering process. There are various types of tenders as already discussed
and these tenders can be issued through:
• Expressions of Interest(EOI)- used to shortlist potential suppliers before seeking
detailed offers
• Request for information (RFI)- used in the planning stage to help in defining the
project however not used to select suppliers.
• Request for proposal (RFP)-used where the project requirements have been

defined, but an innovative and flexible solution is required.

• Request for Quotation(RFQ)-invites businesses to provide a quote for the provision
of specific good or services
• Request for tender-an invitation to tender by public advertisement open to all
suppliers.

2. Request for Tender is Prepared

The tender request includes what is required, the requirements of the contract and
how you should respond. These are an invitation to the suppliers to provide a
competitive offer to win a contract for the supply of their products or services.
Although the documents may vary from one organization to another, the common
elements for tender request documents include:

• Description of the good and services to be procured: this includes what the
work will involve, any technical specifications and anything related to the
requirement, deliverables or outcomes of the project.
• Conditions of tender: These consist of the terms and conditions that must be
met in order to be considered for the project.
• Evaluation criteria: This outlines how your tender submission will be assessed
and evaluated. This is then used as a guide when preparing your tender submission.
• Submission content and format: includes the details on how you should
present your submission which may be relating to the length of the submission, its
format, presentation etc. Templates or response forms may also be provided.
• Process rules and information: the deadline for submission, the place and time
for its submission, what the submission must include etc are what this consist of.
• Conditions of contract: this includes the standard terms and conditions of the
contract with additions and alterations made while a winning tender is announced.

3. Tenders are Invited

The tenders are invited as a part of the online tender submission procedure
depending on the value, complexity and business category. Your ability to identify
opportunities in the competitive tender market Is a crucial part of achieving success.
The initial step to online tender submission procedure is to find out the
organizations or Govt agencies that are likely to need your product or services.
Registering with tender information service providing website can be another great
way to keep track of what opportunities are available in the tender market. Tender
advisory services and online information systems are a great place to begin your
research.

4. Suppliers Respond

This is followed by the response:

You should get all relevant documentation and then,

• Attend any pretender briefing sessions being conducted
• Clarify the uncertainties
• Plan and prepare your response
• Submit the prepared response in the right format on time and at the right place.

5. Evaluation and Selection

Each tender will be checked for compliance and then evaluated across the criteria
specified in the tender documentation. The tender, which offers the best value for
money, will win the business.

Each tender will be initially assessed to find out if it complies with all requirements
of the tender document, i.e.

• Complies with any conditions of participation

• The tender has been lodged on time

• The documents are signed as required

• Tender meets all mandatory requirements.

If any tender does not meet this initial check they will be excluded.
Hence, it is important to ensure that you adhere to requirements and meet all
criteria in order to increase the chances of winning the tender. Once the evaluation
process is complete, a tenderer will be selected and notified of their successful
tender and others, of the unsuccessful submissions.

6. Notification and Debriefing

When a contract has been awarded, the successful tenderer will be advised in writing
of the outcome and the unsuccessful tenderer’s are advised a debriefing interview.

7. Contracts Established and Managed

Generally, a formal agreement will be required between the successful tenderer and
the relevant agency. Once you are notified of the success of your tender and have
awarded the contract, it is important to meet all requirements and manage the
contract effectively.

It is important to maintain ongoing and open communication with the contracting

organization so that you can build a strong and sustainable relationship. Companies
are usually more willing to work and the contract will other organization that they
have trust and are familiar with. If they are confident using the services of your
business, then there are more chances for them to choose you over the other
competitors.

B) EXPLAIN ANY FIVE MAIN TERMS AND CONDITIONS OF A PURCHASE ORDER

Representation of Terms and conditions in a Purchase Order:

Every purchase order represents a legal contract between your company and the
vendors you rely on for goods and services. And as such, they can only protect your
interests if they leverage the law’s power.

Consider the ways in which formalizing terms and conditions protects our interests:
 1. They explain and confirm essential information to create a framework. Unlike
oral contracts, a purchase order with baked-in terms and conditions that have
been drawn up and reviewed by lawyers clearly establish immutable (or at
least unlikely to change) information you want included in every transaction
you conduct.
This is especially important if your procurement team has little or no legal
training. Their expertise will be sure to cover matters of price, delivery of
goods, and other information relating to vendor performance but may not
make allowances for proprietary information, local laws, liability insurance, or
non-transactional implications such as workers’ compensation, the role of
independent contractors working for either party, affirmative action, or even
attorney’s fees.

2. They reduce the chance of litigation. Clearly written terms and conditions
make obvious the expectations and obligations of all parties. The more detail
and specificity involved, the less appealing it will be for anyone to claim
ignorance—and the less likely it will be they can claim a violation—and take
the matter to court.
Enforcing claims generated by violations will also be much easier, since
everything will be spelled out.

3. They encourage compliance with all applicable laws. Beyond the company’s
risk exposure and financial interests, formal terms and conditions make
complying with labor, eCommerce, and other laws and regulations much
easier for both buyers and vendors alike.

Once they’ve been formalized, the terms and conditions you’ve established for your
purchase orders will be automatically included for every vendor if you use a
comprehensive procurement software solution. Automation will ensure all general
terms and conditions protecting intellectual property rights, trade secrets, and other
proprietary information are included by default. This same automation ensures
specific information relating to payment terms, delivery of goods, purchase price,
and order number is also included for each transaction, and connected to other
related documents, correspondence, and financial audit trails.
Five Main terms Are:
1. PRICE: This is a firm price order. In the absence of indication of price by Buyer, Seller must
not fill this order at a price higher than last quoted or charged to Buyer without Buyer's written
consent.

2. DELIVERY: Time is of the essence in the performance of Seller’s obligations under this
Order. Seller recognizes that Buyer utilizes “Just In Time” scheduling and accepts complete
responsibility to deliver materials meeting all referenced standards on the exact date and time
specified herein. Seller shall furnish sufficient labor and management forces, plant, and
equipment and shall work such hours (including night shift, overtime, weekend and holiday
work without a premium) as may be required to assure timely delivery.

3. TRANSPORTATION: . Seller shall be liable for all excess shipping or demurrage charges
resulting from failure to ship and route as instructed, including shipping prior to date required.
Seller’s obligations under this Agreement are not severable if delivery or performance occurs
in installments. Buyer is not obliged to not accept shipments sent C.O.D. without its consent
and may return them at Seller's risk..

4. PACKAGING, PACKING LISTS AND BILLS OF LADING: Seller shall be responsible for
proper packaging, loading and tie-down to prevent damage during transportation. No
additional charges shall be made for packing, crating or cartage unless stated on the front of
this purchase order.

5. TAXES: If the goods furnished under this order are for resale (as indicated on the front of this
Order), Buyer will pay any sales or use taxes imposed on such goods after delivery. Seller will
pay all other taxes imposed before acceptance or delivery to the destination point, whichever
is later, including property taxes imposed on goods for which title has passed to Buyer.

Q.2 DISCUSS THE VARIOUS METHODS AND ADVANTAGES OF VENDOR VALUATION:

5 Supplier Evaluation Methods

There are number of approaches being used to assist the supplier performance
evaluation. The following five effective evaluation methods are commonly used today in
the oil and gas industry.

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1. Categorical Method

Categorical method is the most uncomplicated method. The lists of relevant

performance variables or factors are defined. The buyers will assign performance
ratings of each evaluating attribute in categorical terms, e.g. “good”, “neutral”, and
“poor”. The ratings are judged by agreement between various representatives from
several functions in the company such as procurement, logistics and production. The
supplier who obtains highest score will then be the best performer.

2. Weighted-Point Method

Weighted-point method is the most frequently used method for evaluation process.
With weighted-pointed method, different attributes which are important to the
customers are weighted as per their importance level. The evaluator assigns the score to
each supplier performance in each attribute and then the score will be multiplied by the
assigned weight of each factor. Finally, the weighted score will be totaled to find out the
final performance rating of each supplier. The supplier who obtains highest score will
then be the best performer.

3. Cost Ratio Method

With cost ratio approach, the total cost of each purchase including selling price with the
buyer’s internal operating costs, which are connected with the quality, delivery, and
service components of the purchase, is calculated as the total company’s purchasing
price. Each internal operating cost will be converted to a cost ratio which expresses the
percentage of the total value of the purchase. Lastly, the overall cost ratio is applied to
the supplier’s quoted unit price to obtain the net adjusted cost. The supplier with the
lowest net adjusted cost would be the best preferred supplier.

4. Dimensional Analysis Method

Dimensional analysis model is a supplier evaluation technique with the purpose to

resolve some of the drawbacks of the other approaches. The model combines several
criteria of different dimensions and relative importance into a single entity for each
supplier. Then the supplier performance index is calculated based on the supplier
performance against the standard performance for a set of criteria and the relative
importance of the criteria. Each supplier is evaluated according to the performance
index created in this way. Criteria may have either positive of negative weight. For
example, quality represents positive weight criterion while price represents negative
weight criterion. In conclusion, the dimensional analysis model is used to measure each
supplier against a standard set of criteria.

5. Analytical Hierarchy Process (AHP)

AHP can be considered as a problem-solving tool with flexibility and systemization to

signify the elements of a complicate problem. The AHP is designed to break down a
complicate, multiple criteria problem into levels of hierarchy with the top level as the
objective, the intermediate levels as the criteria and sub-criteria, with the lowest level
as alternatives. Figure 1 illustrates the general structure of AHP. The relative
importance of each criterion determining which criterion has the highest priority.
Interviews with the experts will be conducted to obtain pair-wise comparison for paired
of homogenous criteria. With a series of pair-wise comparisons of all criteria, the
weights of the criteria are determined and can be used to construct a supplier
evaluation system.

Benefits of Supplier Evaluation process :

1) Increase performance visibility

When companies have no or little knowledge on how their suppliers are

performing, supplier management tends to be based on the game of
guesswork with the factor of ambiguity. With the simple process of measuring
the performance of the suppliers can help improve the overall performance
of the company. This improvement can be even more dramatic and lucrative
in nature when companies award additional business on the yardstick of
suppliers meeting their performance goals.

2) Remove hidden waste and cost drivers in the sustainable procurement.

The sustainable process of the procurement is full of potential risks that can
originate from suppliers with regards to the aspect of corporate social
responsibility. Some of these risks can be avoided through the way of better
and clear communication channel between customers and suppliers. With
the better understanding of the supplier performance and supplier business
practices, customers can help suppliers drive waste and inefficiency out of
the business processes that result in the higher-quality suppliers and lower
costs of the goods procured.

3) Leverage the supply base

Through the process of Supplier Evaluation, the company is able to set a

threshold for its suppliers that can result in the higher-quality results.
Companies can plan better and new range of products and services based
on a good understanding of its suppliers’ expertise, vital capabilities, and
performance levels.

4) Align customer and supplier business practices

In the ideal case scenario, the suppliers should run their business operations
in alignment with their customer sharing the similar business ethics, expect
similar levels of excellence, show commitment towards the aspect of
corporate social responsibility, and work towards the continuous
improvement of their operations.

5) Diminish risk factors

With the proper insights into the performance of the suppliers and their
overall business practices helps to reduce the business risk, particularly
when the companies increase their dependency on their key suppliers. Risks
can range from financial to operational in nature and increase with
geographic distance.

6) Improve the performance of the suppliers

The main goal of the Supplier Evaluation process should be the improvement
of the performance of the suppliers. While simply measuring their
performance has a positive effect, the supplier Evaluation can be more
effective when it leads to continuous improvement activities and actual
performance improvement of the suppliers. Follow-up activities, such as
supplier training and development, and counteractive actions to address the
evaluation findings are the best ways to attain measurable and positive
results.