PURCHASING PRINCIPLES

PURCHASE MANAGEMENT

One of the most important activities of Materials

Management is Purchasing.
Purchasing ensures the following:
• RIGHT MATERIALS are purchased, at
• RIGHT PRICE, from
• RIGHT SUPPLIERS, at
• RIGHT TIME, & delivered to the
• RIGHT PLACE.
Purchasing Department –
The Purchasing Department is the interface between the
Supplier of Materials and the Production Function.

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Materials comprise one of the largest components of
expenditure in any manufacturing firm, hence their
procurement requires careful management.

The Responsibilities of Purchasing Department include

the following:
• Learning the material needs of the organization.
• Selecting suppliers and negotiating the price.
• Ensuring delivery.
• Monitoring the cost.
• Monitoring the quality and delivery performance.

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 Objectives
• To buy competitively
• To buy wisely
• To keep inventory investment and inventory losses at a
practical minimum
• To develop effective and reliable sources of supply
• To develop good relationships with the supplier community
and good continuing relationships with active suppliers
• To achieve maximum integration with other departments of
the firm
• To handle the purchasing and supply management function in
professional, cost-effective manner

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Functions of Purchasing Management
1. Receive Purchase Requisition
- Starting point of procurement activity.
- It is the Statement of Requirement of Production.
-Also called ‘Indent’
2. Review and evaluate Requisitions
Purchase Department reviews the following:-
 Item description
 Quantity
 Estimated purchase price or last purchased price
 Consumption pattern in the last 3 years
 When the material is required
 Provisions etc..
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3. Supplier selection

- Deciding on the mode of procurement

-Invitation to tender is issued to prospective suppliers.
4. Scrutiny of Offers
- Reply of a supplier to the invitation to tender is called an
Offer.
- An offer is scrutinized for its specifications, price and
other terms and conditions.
5. Order placement
- Purchasing Department selects
the supplier & places order.

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7. Market research and Information

- Discussions & meetings between supplier representatives

& company officials.
- Keeps in check, the latest developments with respect to
the company and its product .
- Studies the market and keeps in track of new suppliers.
- Studies new developments in production materials &
processes.
8. Payment Authorization
- Ensuring all goods are delivered before payment is made.

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9. Cost Reduction

- Import substitution
- Value analysis
-Engineering
10. Record Keeping

- Thousands of products and materials, hundreds of

suppliers
-Accurate information system is essential.
11. Miscellaneous activities

Such as - applying for import licenses, liaising

government agencies, disposal of secondary items such
as scrap, defectives, surplus etc…

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 IMPORTANCE OF PURCHASING
• Purchasing function provides materials to the factory

• A one percent saving in materials cost is equivalent to a 10 percent

increase in turnover.

• Purchasing manager is the custodian of firm's purse as they spends

more than 50% of company's earnings on purchases.

• Purchasing can contribute to import substitution and save foreign

exchange.

• Purchasing is the main factor in timely execution of industrial projects.

• Material management organizations that exist now have evolved out of

purchasing departments
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 Purchase Organization

Definition

The Purchase organization is an organizational unit within logistics.

Almost all business transactions related to procurement are carried

out in a purchasing organization.

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Structure of Materials Organization

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Role of Purchasing Manager

• Make or buy decision is normally taken by

a committee comprising representatives
from different departments

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 Speculative buying
Speculative buying is conducted with the hope
of making profit out of price changes.

Vendor rating
It’s the process of rating a supplier based on
some rating techniques

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 Rating techniques
• Categorical plan

• The weighted point plan

• Critical incidents method

• Check list system

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 Categorical plan
• Under this plan, the performance from various
divisions maintain informal evaluation records.

Weighted point plan

The performance factors to be evaluated by

giving weighted

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 Critical incidents method
• It is based on buyer -vendor relationship.

Check list system

Use simple check list for evaluate vendors.

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 PURCHASING POLICIES

Ancillary Development: When a company decides to buy a part from outside suppliers, it is
usually sub-contracted in most cases , the sub-contactor is an ancillary unit.

Policy circular
• Production process/method , equipment selection and
layout
• Manpower planning
• Organisation and procedure for production planning,
progressing and control
• Sources of financing and procedure for obtaining them.
• Process quality control equipment and training facilities for
the development of supervisory and artisan skills

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 Ancilllarisation Advantages

• It results in spread of entrepreneurial

base.
• It promotes industrial development
• Regular supply of right quality items is
assured.

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PURCHASING CYCLE

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2. Description of Requirement

The purchase requisition described the required

item.

In order to assure complete and accurate

information for ordering, the requisition must
include all necessary information.

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3. Selection of Source
A regular list of approved suppliers, called register of
suppliers, is maintained by the purchasing
department.

A right supplier is one who delivers materials of the

correct specifications on the stipulated delivery dates

•Single supplier helps develop long-term relationship

and reduce the risk and interruption in the supply.
•Multiple suppliers may not help in maintaining
quality and helps get material at competitive prices.

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4. Determination of Price and Availability

Methods :

1. Vendor’s catalogues and price list are

available for standard items
2. Negotiation : bargaining between buyer and
seller
3. Inviting tenders or quotations

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 5. Placing the order
Purchase order
The legal order is placed with the
supplier on a form is known as
purchase order

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6. Order Acknowledgement

Order acknowledgement is to get a

definite commitment from the
supplier about the supply of items
on time.

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7. Follow Up

Follow up is done to ensure that the items ordered

are delivered by the supplier on time.

Though a general policy should be established for the

entire purchasing department, the immediate
responsibility for expediting is likely to rest on the
buyer who placed the order

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8. Checking The Invoice and Approval

Check the invoice and approve it for payment

Blanket Order
Buyer issues an order covering the requirement of a
small item for one year

Stockless buying
In stockless buying stock of items is kept in buyers
plant, ownership of the stock being with the supplier

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