Purchasing Function &

Procedure
DR. MRIDULA SAHAY
• is an important function of materials management.
• In any industry purchase means buying of equipments, materials, tools,
parts etc. required for industry.
• The importance of the purchase function varies with nature and size of
industry.
• In small industry, this function is performed by works manager and in
large manufacturing concern; this function is done by a separate
department.
• The moment a buyer places an order he commits a substantial portion of
the finance of the corporation which affects the working capital and cash
flow position.
• He is a highly responsible person who meets various salesmen and thus
can be considered to have been contributing to the public relations efforts
of the company. Thus, the buyer can make or mar the company’s image by
his excellent or poor relations with the vendors.
 Objectives of Purchasing
The basic objective of the purchasing function is to ensure continuity of supply of raw materials,
sub-contracted items and spare parts and to reduce the ultimate cost of the finished goods.
In other words, the objective is not only to procure the raw materials at the lowest price but
to reduce the cost of the final product. The objectives of the purchasing department can be
outlined as under:
• To avail the materials, suppliers and equipments at the minimum possible costs:
These are the inputs in the manufacturing operations. The minimization of the input cost
increases the productivity and resultantly the profitability of the operations.
• To ensure the continuous flow of production: through continuous supply of raw materials,
components, tools etc. with repair and maintenance service.
• To increase the asset turnover: The investment in the inventories should be kept minimum in
relation to the volume of sales. This will increase the turnover of the assets and thus the
profitability of the company.
• To develop an alternative source of supply: Exploration of alternative sources of supply of
materials increases the bargaining ability of the buyer, minimization of cost of materials and
increases the ability to meet the emergencies.
• To establish and maintain the good relations with the suppliers: Maintenance of good
relations with the supplier helps in evolving a favorable image in the business circles. Such
relations are beneficial to the buyer in terms of changing the reasonable price, preferential
allocation of material in case of material shortages, etc.
• To achieve maximum integration with other department of the company:
The purchase function is related with production department for
specifications and flow of material, engineering department for the
purchase of tools, equipments and machines, marketing department for
the forecasts of sales and its impact on procurement of materials,
financial department for the purpose of maintaining levels of materials
and estimating the working capital required, personnel department for
the purpose of manning and developing the personnel of purchase
department and maintaining good vendor relationship.
• To train and develop the personnel: Purchasing department is manned
with varied types of personnel. The company should try to build the
imaginative employee force through training and development.
• Efficient record keeping and management reporting: Paper processing is
inherent in the purchase function. Such paper processing should be
standardized so that record keeping can be facilitated. Periodic reporting
to the management about the purchase activities justifies the
independent existence of the department.
 Parameters of Purchasing
The success of any manufacturing activity is largely
dependent on the procurement of raw materials
of right quality, in the right quantities, from right
source, at the right time and at right price
popularly known as ten ‘R’s’ of the art of efficient
purchasing. They are described as the basic
principles of purchasing. There are other well
known parameters such as right contractual
terms, right material, right place, right mode of
transportation and right attitude are also
considered for purchasing.
Purchase parameters
• RIGHT PRICE
It is the primary concern of any manufacturing organization to get an item at the right price. But right price need
not be the lowest price. It is very difficult to determine the right price; general guidance can be had from the cost
structure of the product. The ‘tender system’ of buying is normally used in public sector organizations but the
objective should be to identify the lowest ‘responsible’ bidder and not the lowest bidder. The technique of
‘learning curve’ also helps the purchase agent to determine the price of items with high labor content. The price
can be kept low by proper planning and not by rush buying. Price negotiation also helps to determine the right
prices.
• RIGHT QUALITY
Right quality implies that quality should be available, measurable and understandable as far as practicable. In
order to determine the quality of a product sampling schemes will be useful. The right quality is determined by
the cost of materials and the technical characteristics as suited to the specific requirements. The quality
particulars are normally obtained from the indents. Since the objective of purchasing is to ensure continuity of
supply to the user departments, the time at which the material is provided to the user department assumes great
importance.
• RIGHT TIME
For determining the right time, the purchase manager should have lead time information for all products and
analyze its components for reducing the same. Lead time is the total time elapsed between the recognition of the
need of an item till the item arrives and is provided for use. This covers the entire duration of the materials cycle
and consists of pre-contractual administrative lead time, manufacturing and transporting lead time and inspection
lead time. Since the inventory increases with higher lead time, it is desirable to analyze each component of the
lead time so as to reduce the first and third components which are controllable. While determining the purchases,
the buyer has to consider emergency situations like floods, strikes, etc. He should have ‘contingency plans’ when
force major clauses become operative, for instance, the material is not available due to strike, lock-out, floods,
and earthquakes.
• RIGHT SOURCE
The source from which the material is procured should be dependable and capable of supplying items of uniform
quality. The buyer has to decide which item should be directly obtained from the manufacturer. Source selection,
source development and vendor rating play an important role in buyer-seller relationships. In emergencies, open
market purchases and bazaar purchases are restored to.
• RIGHT QUANTITY
The right quantity is the most important parameter in buying. Concepts, such as, economic order quantity,
economic purchase quantity, fixed period and fixed quantity systems, will serve as broad guidelines. But the buyer
has to use his knowledge, experience and common sense to determine the quantity after considering factors such
as price structure, discounts, availability of the item, favorable reciprocal relations, and make or buy consideration.
• RIGHT ATTITUDE
Developing the right attitude, too, is necessary as one often comes across such statement:
‘Purchasing knows the price of everything and value of nothing’; ‘We buy price and not cost’;
‘When will our order placers become purchase managers?’; ‘Purchasing acts like a post box’.
Therefore, purchasing should keep ‘progress’ as its key activity and should be future-oriented. The
purchase manager should be innovative and his long-term objective should be to minimize the cost
of the ultimate product. He will be able to achieve this if he aims himself with techniques, such as,
value analysis, materials intelligence, purchases research, SWOT analysis, purchase budget lead
time analysis, etc.
• RIGHT CONTRACTS
The buyer has to adopt separate policies and procedures for capital and consumer items. He should
be able to distinguish between indigenous and international purchasing procedures. He should be
aware of the legal and contractual aspects in international practices.
• RIGHT MATERIAL
Right type of material required for the production is an important parameter in purchasing.
Techniques, such as, value analysis will enable the buyer to locate the right material.
• RIGHT TRANSPORTATION
Right mode of transportation has to be identified as this forms a critical segment in the cost profile
of an item. It is an established fact that the cost of the shipping of ore, gravel, sand, etc., is normally
more than the cost of the item itself.
• RIGHT PLACE OF DELIVERY
Specifying the right place of delivery, like head office or works, would often minimize the handling
and transportation cost.
 Purchasing Procedure
describes the sequence of steps leading to the
completion of an identified specific task. The
purchasing procedure comprises the following
steps.
• RECOGNITION OF THE NEED
The initiation of procedure starts with the recognition of the need
by the needy section. The demand is lodged with the purchase
department in the prescribed Purchase Requisition Form forwarded
by the authorized person either directly or through the Stores
Department. The purchase requisition clearly specifies the details,
such as, specification of materials, quality and quantity, suggested
supplier, etc. Generally, the low value sundries and items of
common use are purchased for stock while costlier and special
items are purchased according the production programmes.
Generally, the corporate level executives are authorized signatories
to such demands. Such purchases are approved by the Board of
Directors. The reference of the approval is made on requisition and
a copy of the requisition is sent to the secretary for the purpose of
overall planning and budgeting.
• THE SELECTION OF THE SUPPLIER
The process of selection of supplier involves two basic aspects: searching
for all possible sources and short listing out of the identified sources. The
complete information about the supplier is available from various sources,
such as, trade directories, advertisement in trade journals, direct mailing
by the suppliers, interview with suppliers, salesmen, suggestions from
business associates, visit to trade fair, participation in industries
convention, etc. Identification of more and more sources helps in selecting
better and economical supplier. It should be noted that the low bidder is
not always the best bidder. When everything except price is equal, the low
bidder will be selected. The important considerations in the selection are
the price, ability to supply the required quantity, maintenance of quality
standards, financial standing etc. It should be noted that it is not
necessary to go for this process for all types of purchases. For the
repetitive orders and for the purchases of low-value, small lot items,
generally the previous suppliers with good records are preferred.
• PLACING THE ORDER
Once the supplier is selected the next step is to
place the purchase order. Purchase order is a
letter sent to the supplier asking to supply the
said material. At least six copies of purchase
order are prepared by the purchase section and
each copy is separately signed by the purchase
officer. Out these copies, one copy each is sent to
store-keeper, supplier, accounts section,
inspection department and to the department
placing the requisition and one copy is retained
by the purchase department for record
• FOLLOW UP OF THE ORDER
Follow-up procedure should be employed wherever the
costs and risks resulting from the delayed deliveries of
materials are greater than the cost of follow-up procedure,
the follow-up procedure tries to see that the purchase
order is confirmed by the supplier and the delivery is
promised. It is also necessary to review the outstanding
orders at regular intervals and to communicate with the
supplier in case of need. Generally, a routine urge is made
to the supplier by sending a printed post card or a circular
letter asking him to confirm that the delivery is on the way
or will be made as per agreement. In absence of any reply
or unsatisfactory reply, the supplier may be contact through
personal letter, phone, telegram and/or even personal visit.
• RCEIVING AND INSPECTION OF THE MATERIALS
The receiving department receives the materials
supplied by the vendor. The quantity are verified and
tallied with the purchase order. The receipt of the
materials is recorded on the specially designed
receiving slips or forms which also specify the name of
the vendor and the purchase order number. It also
records any discrepancy, damaged condition of the
consignment or inferiority of the materials. The
purchase department is informed immediately about
the receipt of the materials. Usually a copy of the
receiving slip is sent to the purchase department.
• PAYMENT OF THE INVOICE
When the goods are received in satisfactory
condition, the invoice is checked before it is
approved for the payment. The invoice is
checked to see that the goods were duly
authorized to purchase, they were properly
ordered, they are priced as per the agreed
terms, the quantity and quality confirm to the
order, the calculations are arithmetically
correct etc
• MINTENANCE OF THE RECORDS
Maintenance of the records is an important
part and parcel of the efficient purchase
function. In the industrial firms, most of the
purchases are repeat orders and hence the
past records serve as a good guide for the
future action. They are very useful for
deciding the timings of the purchases and in
selecting the best source of the supply.
• MAINTENANCE OF VENDO RELATIONS
The quantum and frequency of the transactions
with the same key suppliers provide a platform
for the purchase department to establish and
maintain good relations with them. Good
relations develop mutual trust and confidence in
the course of the time which is beneficial to both
the parties. The efficiency of the purchase
department can be measured by the amount of
the goodwill it has with its suppliers.
 Selection of Suppliers
•
is the responsibility of the purchase
department. It can contribute substantially to
the fundamental objectives of the business
enterprise. Different strategies are required
for acquiring different types of materials. The
selection of supplier for standardized products
will differ from non-standardized products.
Following factors are considered for the
selection of suppliers:
 SOURCES OF SUPPLIER
The best buying is possible only when the decision maker is familiar
with all possible sources of supply and their respective terms and
conditions. The purchase department should try to locate the
appropriate sources of the supplier of various types of materials.
This is known as ‘survey stage’. A survey of the following will help in
developing the possible sources of supply:
1. Specialized trade directories.
2. Assistance of professional bodies or consultants.
3. The buyer’s guide or purchase handbook.
4. The manufacturer’s or distributor’s catalogue.
5. Advertisements in dailies.
6. Advertisement in specialized trade journals.
7. Trade fair exhibitions.
DEVELOPMENT OF APPROVED LIST OF
SUPPLIERS
•
The survey stage highlights the existence of the
source. A business inquiry is made with the
appropriate supplier. It is known as ‘Inquiry
Stage’. Here a short listing is made out of the
given sources of suppliers in terms of production
facilities and capacity, financial standing, product
quality, possibility of timely supply, technical
competence, manufacturing efficiency, general
business policies followed, standing in the
industry, competitive attitude, and interest in
buying orders etc.
 EVALUATION AND SELECTION OF THE
SUPPLIER
The purchase policy and procedure differ according to the type of items to be
purchased. Hence, evolution and selection of the supplier differ accordingly. In the
‘purchasing handbook’ edited by Aljian, it has been described that the following
variables to be considered while evaluating the quotations of the suppliers:
• Cost Factors
Price, transportation cost, installation cost if any, tooling and other operations
cost, incidence of sales tax and excise duty, terms of payment and cash discount
are considered in cost factor.
• Delivery
Routing and F.O.B. terms are important in determining the point at which the title
to the goods passes from vendor to the buyer and the responsibility for the
payment of the payment charges.
• Design and Specification Factors
Specification compliance, specification deviations, specification advantages,
important dimensions and weights are considered in line with the demonstration
of sample, experience of other users, after sale services etc.
• Legal Factors
Legal factors include warranty, cancellation provision, patent protection, public
liability, federal laws and reputation compliance.
• Vendor Rating
The evaluation of supplier or vendor rating provides valuable
information which help in improving the quality of the decision. In
the vendor rating three basic aspects are considered namely
quality, service and price. How much weight should be given to
each of these factors is a matter of judgment and is decided
according to the specific need of the organization. Quality would be
the main consideration in the manufacturing of the electrical
equipments while price would be the prime consideration in the
product having a tense competitive market and for a company
procuring its requirements under the blanket contract with agreed
price, the supplier rating would be done on the basis of two
variables namely quality and delivery.
The Development Project Committee of the National Association
of Purchasing Agents (U.S.A.) has suggested following methods
for evaluating the performance of past suppliers.
• The categorical plan:
Under this method the members of the buying staff related with the supplier like
receiving section, quality control department, manufacturing department etc., are
required to assess the performance of each supplier. The rating sheets are
provided with the record of the supplier, their product and the list of factors for
the evaluation purposes. The members of the buying staff are required to assign
the plus or minus notations against each factor. The periodic meetings, usually at
the interval of one month, are held by senior man of the buying staff to consider
the individual rating of each section. The consolidation of the individual rating is
done on the basis of the net plus value and accordingly, the suppliers are assigned
the categories such as ‘preferred’, ‘neutral’ or ‘unsatisfactory’. Such ratings are
used for the future guidance.
• This is a very simple and inexpensive method. However, it is not precise. Its quality
heavily depends on the experience and ability of the buyer to judge the situation.
As compared to other methods, the degree of subjective judgment is very high as
rating is based on personal whim and the vague impressions of the buyer. As the
quantitative data supported by the profits do not exist, it is not possible to
institute any corrective action with the vendor. The rating is done on the basis of
memory, and thus it becomes only a routine exercise without any critical analysis.
• The weighted-point method:
The weighted-point method provides the quantitative data for each
factor of evaluation. The weights are assigned to each factor of
evaluation according to the need of the organization, e.g., a
company decides the three factors to be considered quality, price
and timely delivery. It assigns the relative weight to each of these
factors as under:

• The evaluation of each supplier is made in accordance with the

aforesaid factors and weights and the composite weighted-points
are ascertained for each suppliers A, B and C are rated under this
method. First of all the specific rating under each factor will be
made and then the consolidation of all the factors will be made for
the purpose of judgment.
• Quality rating:
Percentage of quantity accepted among the total
quantity is called quality rating. In other words, the
quality of the materials is judged on the basis of the
degree of acceptance and rejections. For the purpose
of comparison, the percentage degree of acceptance
will be calculated in relation to the total lots received.
• Price rating is done on the basis of net price charged
by the supplier.
Timely delivery rating will be done comparing with the
average delivery schedule of the supplier.
• The cost-ratio plan:
Under this method, the vendor rating is done on the basis of
various costs incurred for procuring the materials from various
suppliers. The cost-ratios are ascertained delivery etc. The cost-
ratios are ascertained for the different rating variables such as
quality, price, timely delivery etc. The cost-ratio is calculated in
percentage on the basis of total individual cost and total value of
purchases. At the end, all such cost-ratios will be adjusted with the
quoted price per unit. The plus cost-ratio will increase the unit price
while the minus cost-ratio will decrease the unit price. The net
adjusted unit price will indicate the vendor rating. The vendor with
the lowest net adjusted unit price will be the best supplier and so
on. Certain quality costs can be inspection cost, cost of defectives,
reworking costs and manufacturing losses on rejected items etc.
Certain delivery costs can be postage and telegrams, telephones
and extra cost for quick delivery etc.
 Profit impact of materials
management
• Purchase Multiplier = 1/ Profit Margin