- Vihang Naik

Elements of Purchasing / Procurement Cycle

Buyer Supplier Relationship

Self Certified Vendors / Suppliers

Method of Buying under certainty ,

under risk ,
under uncertainty

Recognition of the
need

Description of specification and requirements

Purchase Requisition
Specification File

Check specifications /prices /suppliers

Purchase
Records

Determination of price and availability of materials

Enquiry , tender,
import

Select the supplier

Suppliers
Record

Price and terms finalization after negotiation

Preparation and issue of purchase order

Contd..

Follow-up of supplier

Suppliers acceptance of purchase order

( order acknowledgement)
Delivery of material by supplier

Receiving and inspection of materials

Invoice checked with
purchase orders and stores
receipt note

Storage and Record keeping

Checking the invoice and authorizing payment of

bills

Closing the order

Introduction

Three Types of the Buyer Seller Relationship

1.

Traditional or Transactional Relation

2.

Collaborative Relation

3.

Alliance Type Relation

Traditional or Transactional Relation

Features
1. Focus on price
2.

Lack of sharing of data and information

3.

Absence of concern

4.

Market forces fix prices

5.

E-procurement

6.

Absence of basis for collaboration

Merits of Transactional relationships

1.

Inspection of incoming material

2.

Requirement of lower skilled personnel

3.

Market forces of demand and supply

4.

Less purchasing time and effort

Demerits of Transactional relationships

1.

Transactional Relation cannot provide flexibility

2.

Minimum after sales service

3.

Quality with transactional relation will be just acceptable level

4.

More Delivery Problems

5.

High investment in expansion and monitoring

6.

Buyers expect less effective performance

Collaborative and Alliance Relation

Features
1.

Long term agreement allows suppliers an opportunity to show

performance and reduce their costs

2.

Suppliers are more likely to take initiative to reduce costs through

standardization , variety reduction , value engineering , value
analysis

3.

Procurement of non-commodity items and service

4.

Replace market forces with controlled competition ,

benchmarking , and advanced supply management pricing
practices.

Three most important factors in a successful buyer-supplier

relationship

(a)

Two-way communication

(b) The suppliers responsiveness to supply managements needs

(c) Clear product specification

Alliance Type Relation

Features
1. Improved quality - design of experiments and supplier certification
2.

Reduced time to market

3.

Improved technology flows from suppliers

4.

Improved continuity of supply

5.

Lowest total costs

Merits of Alliance Type Relation

1.

Focus Continuous improvements

2.

Controlled through formal and informal connections , information

systems and internal infrastructure

3.

Existence of co-operation

4.

High level of interdependence and commitment

5.

Openness exist in all areas of relationships

6.

Adaptability to changing conditions

Demerits of Alliance Type Relation

1.

Instability

2.

Capability limitation

3.

Dependency

4.

Concentration of benefits

5.

Likelihood of conflicts in purchasing terms of contract

Choice of type of Relationship

Traditional relationship is favoured when:

i)

There is a large no. of supplier who are equally good and the buyer
has a wide range of choices

ii)

Well-off suppliers willing to help a few chosen customers

Collaborative relationship is favoured when:

i)

Both the parties have potential benefits

ii)

Both the parties are flexible

Alliance type relationship is favoured when:

i)

If a potent supplier is willing to join hands with a firm and wishes to

take risks

ii)

If a supplier who makes all semi-finished and finished components is

located adjacent to a firm

iii)

Customers those in the need of fast supply chain

(Institutional)
(Interpersonal)
Trust

(Little)
Transactional

Collaborative

Alliance

Time
Changes in Buyer-seller relations with time

Suppliers Point of view

Globalization

A gradual shift from transactional to collaborative and alliance type

relation

E.g. Hindustan Motors , Pithampur (M.P)

Dr. Kauro Ishikawa one of the pioneers in the Japanese

Quality Movement

Traditional Approach

Two assumptions :-.

(b)

Supplier will supply fallacious goods

In-house resources are capable and available for
the testing and certification

New Approach

(a)

Supplier will receive Self-Certified Vendor Certificate from the

organization

Steps in Supplier Certification

1.

Verify the capability of the supplier in meeting the needs of the

organization in all areas

2.

Motivate supplies to continue to improve their processes

3 levels-Quality Vendor, Certified Vendor, Excellent Vendor.

3.

Improve key supplier processes in the value chain

4.

Assess continuously the suppliers capabilities

Guidelines for the implementation of Supplier Quality

Management Process(SQMP)
1.Assess

organizations needs

2.Assess

internal , stakeholders needs and develop a plan

3.Design

SQM system structure

4.Provide

adequate training

5.Implement

supplier policy deployment

Contd..

6.

Hold supplier symposiums

7.

Perform planning for supplier quality projects

8.

Provide logistics improvement support

9.

Train suppliers in the macro logistics management system

10.

Create a system for continuous monitoring

11.

Perform supplier certifications and review prior certifications

12.

Review and revise the supplier quality management system

Green Channel Suppliers

Elements- TIIA
Benefits:1. Reduces all round liability & long term risk
2.

Improves inventory control

3.

Reduces packaging costs

4.

Improves status with regulatory agencies

5.

Improves supplier relations and productivity

What Do Buyer Gain ?

1.

Multiplier effect of supplier gains

2.

Reduced purchase costs

3.

Reduced liability

4.

Greater assurance of consistent and reliable supply

5.

Improved inventory control

6.

Elimination of unresponsive / non-committal suppliers

What Do Seller Gain ?

1.

Reduced production cost-resource optimization

2.

Assured client commitment / potential for more clients

3.

Reduced liability

4.

Improved relations with regulatory agencies

5.

Competitive advantage over others

6.

Improved management systems at marginal costs

What are the mutual gains ?

1.

Mutual competitiveness

2.

Improved relations-secured ties

3.

Reduction production costs- grater margins

Features of all purchase decision making problems:a.Recognition

b.Prediction

of the existence of several possibilities

of the pay-off of each one of the strategies

c.Assessment

of the orders of preference of the strategies

Classification of Decision problems:I.Decision

Making Under Certainty

II.

Decision Making Under Risk

Pay-off Matrix
Stock
Number

Probability of Requirement

Expected
Total
costs
(Rs.)

0.1

0.5

0.3

0.1

---

1000

2000

3000

1400

300

---

1000

2000

530

600

300

---

1000

310

900

600

300

---

480

III.

Decision Making Under Uncertainty

Type of Cost

Apparatus A

Apparatus B

Capital cost

Rs. 50000

Rs. 75000

Operating cost per

year

Rs. 10000

Rs. 5000

Maintenance
expenses(Rs.)

P1

P2

P3

P4

Year 1

2000

2000

2000

1000

Year 2

2000

2000

1000

1000

Year 3

3000

3000

1500

1500

Year 4

7000

3000

1000

2000

Year 5

2000

7000

1000

1000

Pay-off Table
Life in years

Maintenance
A

P1

P1

P2

P2

P1

P2

P1

P2

Maintenance
B

P3

P3

P4

P4

P3

P3

P4

P4

Average
Cost A

26000 23200

25000

23400

26000

23200

25000

23400

Average
Cost B

27130 22900

27130

22900

25130

23100

25150

23100

Difference
A

300

500

870

100

300

1130

2230

150

Principles used in Decision under uncertainty :1.

Rationality

2.

Minimax Principle

3.

Maximax Principle

4.

Criterion of optimum (Hurwitz Criterion)

5.

Principle of Regret