Logistics and International Trade

MB 502

18 January, 2020

UNIVERSITY OF MINES AND TECHNOLOGY, TARKWA UMaT

 PURCHASING
AND
MATERIALS MANAGMENT

UNIVERSITY OF MINES AND TECHNOLOGY, TARKWA UMaT

INTRODUCTION TO PURCHASING

 Purchasing describes the process of buying. It is the

learning of the requirement, identifying and selecting a
supplier, negotiation price.
 Purchasing is an element of the wider function of
procurement and it includes many activities such as
ordering, expediting, receipt and payment.
 Purchasing is responsible for obtaining the materials,
parts, supplies and services needed to produce a
product or provide a service.
INTRODUCTION TO PURCHASING

 Purchasing can be divided into two broad categories,

large and small purchases, based on seven
characteristics of purchased product – volume,
specificity, technological complexity, essentiality,
fragility, variability, and economic value (Parikh, 2005).
BULK PURCHASE

 Is ideal for high volume items, large amount, and

more frequent utilization with more specific use.

 Bulk purchases are handled in large organizations

and multinational organizations with the
standardized purchasing process, where as some
other organizations use separate purchasing
process.
BULK PURCHASE

 Issues Associated to Bulk Purchases

 There are frequent misuse and lack of control in purchasing
process in those organizations in which same standardized
process is used for both bulk and small purchasing.

 Large purchases are typically non-urgent in nature.

 Large-volume, continuous-usage items can be covered by

blanket purchase orders, which often involve annual
negotiation of prices.
SMALL PURCHASE
 Small purchase are low volume items, small amount, less
frequency of utilization, high variety and low technical
complexity.
 Mainly small purchases include machine parts, auto parts,
machine repairs, in frequent sullies of offices and miscellaneous
goods.

 Small purchases are urgent in nature. There are two basic types of
purchasing in the business world: purchasing for resale or
purchasing for consumption or conversion.

 Purchasing for resale or resale purchasing is mainly performed by

retailers and wholesalers (called merchants). Purchasing for
internal consumption or conversion is called industrial buying.
SMALL PURCHASE Cont…

 The industrial buyers generally face different

and complex problems with comparisons of
merchandise buyers or resellers.

 For instance, the industrial buyers have to spend

time to anticipate in determining what products
should be produced or manufactured and what
product should be purchased from outside or
suppliers.
 Important Terms
Purchasing:
Purchasing describes the process of buying. It covers
the knowledge of the requirements, identifying and
selecting a supplier and negotiating price.
 Cont…
Procurement
It is a broader term. It includes purchasing products
required for production, stores, traffic, receiving,
inspection and salvage.
 Cont…
Materials Management
It includes planning, organizing, communicating, directing
and controlling of all those activities mainly concerned with
the flow of materials into an organization. Material
management views material flows as a system.
 Cont…
Logistics Management
It is the planning and controlling of the flow of raw material
in a cost effective manner from the suppliers or point of
origin to the manufacturing and then flow of finished goods
for consumption in the customers’ hands.
 Purchasing Management
Purchasing management is concerned with the
planning and controlling of the acquisition of
suppliers' goods and resources, to fulfill the
administrative and strategic objectives of the
organization.
Importance of Purchase
Management
 For Cost Effective Production
 Purchasing is responsible for learning of the
internal requirements, locating and selecting
suppliers, obtaining the materials, parts,
supplies and services needed to produce a
product or provide a service.
 A purchase manager is responsible for
negotiation of price with suppliers too.
For Strategic Purpose
 Purchasing is a strategic issue.
 The manufacturers have to procure capital items like
plant and machinery for manufacturing facilities.

 It requires heavy investment.

 So, purchasing is an important function. But in some

organizations, especially small scale, purchasing is
considered as a clerical activity. They assign this job to
the persons simply who are loyal to the organization.
For Strategic Purpose
 But it is a wrong way.

 In purchasing, the executives must be dynamic,

innovative, creative and must have analytical decision
makings skills to negotiate with the suppliers.
 For Strategic Purpose

 The emergence of the supply chain management

concept has enlightened managers about the
strategic role played by purchasing.

 Purchasing helps to determine a firm's cost

structure through negotiation
Organization major benefits with effective
and efficient purchasing management.
There are five rights that every management
expects from their purchasing executives:
Right Quantity
Right Quality
Right Time
Right Supplier
Right Cost
From Functional Perspective:
Uninterrupted flow of materials and services
Buying at competitive prices
Avoiding under-inventory and over-inventory
To have good relationship with other
departments
In nutshell, purchase management has
the following benefits:
Cost reduction or improvement (required
utmost to be competitive in market)
Improved material delivery (required for
smooth flow of production)
Shorter cycle time, including product
development cycle times (helpful in fast
production)

Quality improvement (required to satisfy or win

the hearts of the customers ultimately)
Cont…

 Manufactures spend an average of 55 cents out of

every dollar of revenues on goods and services,
hence purchasing is clearly a major area for
potential cost savings.
 This fact was recognized first by many Japanese
companies in the 1980s when superior
management of relationships with supplies gave
Japanese automobile companies a $300 to $600
per car cost advantage.
Cont… Different industries require
different types of materials
WHAT CAR/AUTOMOBILE COMPANIES BUY: Tires, Brakes leathers,
Clutches, Wires, Steel plates, Glasses, Paint, Fabric, Aluminum
sheets, Electronic components, Carpets etc.

WHAT SOFT-DRINK PRODUCERS BUY: Bottles, Sweetener,

Carbonation, Flavouring substances, Caps, Cardboards, Plastic
Containers, etc.

WHAT SOFTWARE COMPANIES BUY: Computers, Hardware, Chairs,

Tables, Wires, Data Cables, etc.
WHAT HOTELS/RESTAURANTS BUY: Vegetables, Utensils, Air
conditioners, Gas Stoves, Carpets, etc.

So, we see that different industries require different types of materials

according to their requirements.
Cont…

WHAT CAR/AUTOMOBILE COMPANIES BUY: Tires, Brakes leathers,

Clutches, Wires, Steel plates, Glasses, Paint, Fabric, Aluminum sheets,
Electronic components, Carpets etc.

WHAT SOFT-DRINK PRODUCERS BUY: Bottles, Sweetener, Carbonation,

Flavouring substances, Caps, Cardboards, Plastic Containers, etc.
WHAT SOFTWARE COMPANIES BUY: Computers, Hardware, Chairs,
Tables, Wires, Data Cables, etc.
WHAT HOTELS/RESTAURANTS BUY: Vegetables, Utensils, Air
conditioners, Gas Stoves, Carpets, etc.

So, we see that different industries require different types of materials according
to their requirements.
 Purchasing Activities
There are two major forms of purchasing activities that take place in an
organization:
i. Tactical purchasing
ii. Strategic sourcing
 (i) Tactical Purchasing
 The organizations require some materials for the smooth
flow of production.
 The day to day management of materials flow is called
tactical purchasing.
 These activities generally ensure that products and
services are delivered to the right internal people at the
right time but are often not carried out using a long term
horizon.
 (ii) Strategic Sourcing
 The purchasing which affects the long-term profitability is called
strategic purchasing.
 Strategic sourcing is a part of purchasing activities but in a
broader sense, in the strategic sourcing process there may
includes members from other department than purchasing
department like from engineering, quality, design, manufacturing,
marketing and accounting department for managing, developing
and integrating with supplier capabilities to achieve competitive
advantages like cost reduction, technology development, quality
improvement and cycle time reduction.
Types of Purchase
There are mainly two types of purchases; the individual purchase
and the organizational purchase.

Individual Purchase
Individual or personal purchase includes those types of items or
products which are purchased for personal or family consumption.
 Factors influencing individual purchase
behavior:

In general mainly there are four types of influence factors:

Cultural Factors
Social Factors
Personal Factors
Psychological Factors
 Organizational Purchase
 A purchase will be considered to be organizational if it is
 made in the name of a company or organization,
regardless of size, from a medium sized company up to a
multinational or state company.
 Cont…
Business and industries purchase materials for
business use or as a raw material to produce other product.
Wholesalers/Retailers/traders buy product for resell
at profit.
Government organizations purchase products for use
in offices or provide services to people.
Non-government organizations purchase products to
provide services to their client.
Cont…
Consumer Purchasing / Industrial Purchasing /
Decision making Decision-making

Less risky More risky

Emotional decision-making Rational / Analytical decision-

making

Personal purchasing is Scientific purchasing as whole

sometimes unplanned or on the organization’s profitability
spot or abrupt buying influenced affects
by promotional activities
 Purchasing Cycle
 The purchasing cycle begins :
 With a request from within the organization to purchase
material, equipment, supplies, or other items from
outside the organization, and
 the cycle ends when the purchasing department is
notified that a shipment has been received in
satisfactory condition, and managerial accounting is
actively involved in each step.
The main steps in the cycle are :
Recognition of need
Description of need
Selection of suppliers
Determination of prices
Preparation of purchase order
Placing the order with a selected supplier
Monitoring and follow up the order
Receiving the ordered materials
Checking and approving for payment to supplier
Characteristics of a Purchasing Manager
The following pre-requisite traits required from a purchase
manager:

 INTERPERSONAL SKILLS
 The purchase manger must have good
communication skills.
 There are many aspects of interpersonal
communication such as handling suppliers, respect of
other opinion and so on
 Analytical Decision Making
 Purchase manager may face many problems in his or her
job
 like placing order,
 selection of best supplier,
 maintaining healthy relationship with supplier, and
 purchase right materials in right quantity at right time
and so on.
 So, a good purchase manager must have analytical
decision making.
 Loyal to the Organization
 The purchasing manager is involved in large
activities of purchasing materials consistently
involving very large financial deals.
 So, the person has to be loyal to the organization
and he has to prove his loyalty from time to time.
COMPUTER LITERACY
 The purchase manager must be well
skilled in computer as he requires use
of computer in many activities.
 If the person is computer literate,
then he can work efficiently.
 Technical skills
 Now-a-days, in production a very highly sophisticated
technology is used.
 Purchase manager must have technical understanding of
the business.
 The purchase manager has enough technical background
to understand the production process, the supplier’s
processes and scheduling system in order to making
improvement.
 Ability to Make Decision
 The purchasing manager has to take quick decisions
in line with procurement strategy of organization
vis-à-vis liaison with other departments.
 The person has to take decisions with quality,
market, economic, social and political environment
and issues taken into account.
 INNOVATIVE
 Innovation is very necessary for survive in the
market in present competitive market condition.
 So, a purchase manager should take innovative
decisions related to purchase techniques,
maintaining quality, inventory stock, inventory
control, re-ordering level and order processing.
BARGAINING POWER
 It must be the prime motive of
the purchase manager that
organization can purchase more
and best materials with less cost.
 For this a purchase manager
should have good bargaining
power.
 Materials Management
 Material management is defined as the planning, acquiring,
storing, moving and controlling of materials as per the
requirement of the organization.

 Materials management is basically related with the smooth flow

of materials.

 The major activities covered under materials management are

the anticipation of the materials required in the organisation
from time-to time.
 It involves ordering and obtaining materials from the suppliers,
introducing the materials to the organisation and monitoring the
status of materials. It helps to optimize the usage of facilities,
personnel and funds and to provide service to the user in the line
 Materials Management
 It involves
 ordering and obtaining materials from the suppliers,
 introducing the materials to the organization and
 monitoring the status of materials.

 It helps to optimize the usage of facilities, personnel

and funds and to provide service to the user in the line
with the organizational aims.
Materials management
Is the coordination and control of the various materials.
The Key Material Activities Are:
 Purchasing Activities: It involves mainly identification of
materials needs, market research, maintaining materials records
etc.
 Procurement Activities: It involves material specifications,
materials studies, receiving materials etc.
 Inventory Management: It involves planning and controlling
of materials handling, storing materials and managing material
supplies etc.
 Supply Management: It involves monitoring in-plant material
handling, strategic planning of materials etc.
Classification of Manufacturing
Materials
The manufacturing materials can be classified into following categories:
Raw Materials:
 It is the materials that the company is required to transform
into finished goods. It is very important.
 The shortage or halts can stop the production and can cause
high losses.
 It is different for different industries.
 As for example, for textile industry the cotton is main
input.
 For automobile industry, the spare parts are very
important.
 Cont…
Manufactured Parts:
These parts are the output of the organizations. These are the
finished materials built by the company.

Work in Progress:
These are semi-finished products found at various stages in
the production process.
Cont…
Packaged Materials: These are materials that are
packaged together to prevent damage during
transportation and deterioration when they are stored.

MRO Supplies: These materials are required for

maintenance, repairing, and operating supplies used in the
manufacturing process regularly for the smooth
manufacturing, i.e. soap, lubricating oil, grease, plastic
and rubber parts, screw driver, nuts etc.

Loose Materials: These are materials that are partially

fabricated and that should be handled individually.
Objectives of Materials Management
Department
We have the primary objectives and the Secondary objectives
The primary objectives of Materials Management department are:
 Low Procurement price
 High inventory turnover
 Low cost of acquisition and possession
 Continuity of supply
 Consistent quality
 Low payroll costs
 Favorable supplier relations
 Maintenance of good records
Cont…

The secondary objectives of Materials Management

are:

 New materials, processes and products

 Economic make or buy decisions
 Standardization
 Product improvement (Khana, 2012)
Relationship between Materials Management
Department and other Departments

Materials Management Department plays a

very important role in an organization and it
must have good relationship with other
departments.
The departments that are mostly involved
are: Production, Engineering design, Quality
control, and Finance Department.
Materials Management Department and
Production Department
 The materials management department must
have good relationship with production
department.
 Materials Management is responsible for the
purchase of all materials required by the
production department.
 If the needed materials are not supplied at right
time then the production process can halt and
generate huge losses. So, for the smooth
functioning of the production department, the
materials department must be vigilant about the
Materials Management Department and
Production Department
 If the needed materials are not supplied at right
time then the production process can halt and
generate huge losses.
 So, for the smooth functioning of the production
department, the materials department must be
vigilant about the latest requirements.
Materials Management and Engineering
Design Department
 If both materials management and engineering design
department work together then the much required
innovative strategies can be formulated and
implemented.
 Both departments can work together for standardization
of materials.
 The suggestions of the materials management are very
important for engineering department.
Materials Management and Quality
Control Department

 The selection and rejection of the materials

purchased depends upon the parameters set
by the quality control department.
 So, if both the departments have
cooperation and cordial relationship then
the delay in the purchasing of raw materials
can be avoided.
Materials Management and Finance
department

 Usually, finance department release fund to

materials department for the materials
purchased.
 It is the responsibility of both departments
to ensure payments are made to the
suppliers, without unnecessarily delay.

Risks to be Considered by Purchase Material
Manager
 The purchase and materials manager must avoid the following
consequences:
 Receiving materials before they are required, causing
more inventory cost and chance of deterioration in
quality;
 Not receiving materials at the time of requirement,
causing loss of productivity;
 Incorrect materials take off from drawing and design
document;
 Subsequent design changes;
 Damage/loss of items;
Risks to be Considered by Purchase Material
Manager
 Failure on installation;
 Selection of type of contract for specific material
procurement;
 Vender evaluation criteria;
 Pilling up of the inventory and controlling of the
same;
 Management of surplus materials.
KEY WORDS

 Purchasing
Purchasing describes the process of buying. It covers the knowledge
of the requirements, identifying and selecting a supplier and
negotiating price.

 Procurement
It is a broader term. It includes purchasing products required for
production, stores, traffic,
receiving, inspection and salvage.
Cont…
 Materials Management
It includes planning, organising, communicating, directing and controlling
of all those activities mainly concerned with the flow of materials into an
organization. Material management views material flows as a system.

 Logistics Management
It is the planning and controlling of the flow of raw material in a cost
effective manner from the suppliers or point of origin to the
manufacturing and then flow of finished goods for consumption in the
customers’ hands.
 Questions

 Thank you.

Dr. EKB. 60