Purchasing: Meaning and Principles of Purchasing

Q. What do you mean by Purchasing ? Explain the principles of purchasing.

Ans: MEANING OF PURCHASING: Purchasing is the process of buying material, parts and components, etc., in the right quantity at right time and place for the production of goods. The term purchasing is used in two senses– narrow sense and broader sense. In narrow sense, it means to buy an item and in broader sense it means a manerial activity including planning and policy formulation.

According to Prof. K. Shridhara Bhat & Sowmya R. Rao, “Purchasing refers to the functions of procuring of materials, supplies, machines, requirements, tools, spare parts and services required for meeting the needs of production department and maintenance department.”

As per Prakash Jai, “Purchasing is defined as the activity of acquiring goods and services at optimum cost from a competent and reliable source.”

Purchasing should not be confused with procurement. Purchasing is a narrow term and is included in procurement. Procurement is a broader term and includes the total responsibility of acquiring goods and services. Procurement include additional activities such as supervision, inspection, inventory control, etc. in addition to purchasing.

PRINCIPLES OF PURCHASING: Purchasing is the most important function in all types of firms whether it is small or large doing manufacturing or trading etc. Therefore it is essential that certain principles should be followed at the time of purchasing. These are:

1. Right Quality: Right quality means the suitability of item for the purpose (for which) it is required. It may either be of low quality, medium quality or best quality as per the product to be manufactured. Quality of the final product will depend upon the quality of the input. The quality of the item is expressed in terms of grades. The quality of the materials may be measurable or attributable. The quality can be measured by physical tests or checking, chemical analysis, etc. Use of brand name, standardising specification like height, weight, etc., can be helpful in maintaining quality of materials. The quality needed are specified by the concerned departments.

Factors Affecting Quality: The cost is the major factor which can affect the quality. The parum has to price the product keeping in view the competitors. Therefore, the purchase department cannot purchase the high priced quality items. The second factor is the suitability. A high quality item may not be suitable for production.

2. Right Quantity: The second principle is, purchasing the material in the right quantity. Right quantity refers to the quantity that may be purchased at a time with minimum total cost. When a purchase is made then two types of costs are to beard – one is carrying cost and the another is ordering cost. The purchase manager should maintain a balance between the two to keep the cost of material at minimum. Simulultaneously the material should be made continuously available so that stock short costs could be avoided. Therefore , the purchase manager should use his knowledge, experience and common sense to determine the right quantity.

Classification of Quantity: The order quantity can be classified into three classes:
(a) Economic Order Quantity (EOQ): It helps in determining the right quantity of material. The following formula is used to determine the EOQ.



(b) Bulk Order Quantity: Bulk order quantity means the large quantities. This quantity will be more than the EOQ. It gives the advantage of discount or low prices but increases the carrying and storage cost. 

(c) Arbitrary Order Quantity: the future is uncertain and there may be varying market conditions, uncertain availability of material and funds, uncertain lead time, uncertain consumption. Thus in those cases, the purchase manager has to apply its own discretion and order the material in varying quantities from time to time.

Factors Affecting Quantity: There are different factors like cost of mederial, nature of material, manufacturing process, storage capacity, market conditions, availability of funds, etc., affect to the purchasing quantity.

3. Right Price: The right price doesn't mean the lowest price rather, it is the price which provides value for money. The cost structure of the product can guide to arrive at right price. The right price is that lowest possible price where the item is available as per standardised quality. The right price may differ from person to person, item to item, etc. Although the right price is an individual opinion yet it depends not only on market conditions but also on knowledge of price movements. 

Factors Affecting Pricing: There are certain factors like quantity, quality, delivery time, life of the material, demand and supply curve, competition, discounts, terms of purchase, business relations, after-sales service, etc. which affect the pricing of the product. While making purchase, these factors should be kept in mind to determine the right price.

The organisations generally follow the tender system for making purchase. For obtaining the right price, the following documents can be referred.

(i) Catalogue price

(ii) Quotations

(iii) Previous purchased records

(iv) Letter of offer from supplier

(v) Prevalent market price.

4. Right Time: The time at which the purchase should be made is very important. The right time means the time at which the item should be made available. The right time of making order depends upon the lead time. Lead Time is the time between record recognition of the need and the item available for use. The right time will be the time when the stock reaches the minimum level. The inventory cost involves carrying cost and it goes on increasing in case of holding more stock than required. It will also block the capital of the firm. The chance of waste and obsolcence will also increase. Therefore the concept of right time is very important. 

Factors Affecting Right-Time: The following factors affect right time.

(i) Lead time

(ii) Re-Order Level

(iii) Production cycle

(iv) Market Conditions 

(v) Contingencies 

Today many options such as integrated supply, vendor-held inventory, just in time and other practices are available which require more up-to-the minute supplier flexibility than just meeting a date on purchase order as was in classic delivery model.

5. Right terms or Right Contract: The purchase order, issued by a firm for making purchases, is a legal contract. This contract binds the seller and the buyer with the terms and conditions mentioned on it. Actually the terms and conditions should be mentioned on the quotation letters and tenders. These terms and conditions may be regarding insurance, sales tax, octroi, freight, excise duty, custom duty, etc. Sometimes the terms and conditions mentioned in the contract may too hard to complete. In that case, the suppliers may not send their quotations, etc. 

It decreases the number of suppliers and ultimately the bargaining power of the buyer decreases. It is desirable that separate policies should be followed for making contracts of capital goods and raw materials. The terms and conditions of the contract should not be one-sided and unreasonable.

6. Principle of Right Place: It will be appropriate for the buyer to have the products at the right place. The right place means the place which is most convenient to him from the view point of location of store houses or the place of production or place of plant location. It will help in reducing the cost of internal freight and time. It will also save the items from deterioration due to repeated handling. 

7. Principle of Right Mode of Transportation: Right mode of transportation needs to be identified as this includes the critical cost profile of an item. 

Factors Affecting Right Mode of Transportation: There are three main factors which affect the transportation. These are:

(i) Cost

(ii) Time

(iii) Availability of Alternating Modes. 

Sometimes the material needed to be transported urgently or the nature of material is perishable. Then the week for cost effective mode cannot be opted and has to be sent immediately. Otherwise the least cost mode of transport can be chosen. The availability of alternative modes of transportition is also important and the buyer should have the knowledge of alternatives available. He should make a comparison of costs, schedules, merits and demerits. The transportation affects the quality of service to customers also. If the delivery is made on time to customers, then it will help in improving the image of the concern also.

8. Principle of Right Source: Source means from where the material can be procured. Thus, source is the other meaning of supplier. Selecting the right source or supplier is an important consideration in the materials purchase procedure. Therefore, the purchase manager must investigate and evaluate its possible external suppliers for the specific materials. It is necessary to assess their legitimacy, evaluate their performances, technical abilities and costs. Thus, purchasing department tries to select a responsible and responsive supplier who can provide the best combination of quality, quantity and price at the same time. In addition to that, the delivery time and ability to provide material on time should also be carefully evaluated.

For routine purchases, the purchase department maintains a list of suppliers from whom the purchase may be made. If the purchase is made for the first time for an item, then the suppliers are to be evaluated.

Types of Source: The types of sources are as follows:

(i) Sole Sourcing: It means only one supplier is available. It may be due to several reasons such as technical specification, raw material, location and so on.

(ii) Single Sourcing: It means the selection of one supplier for an item from the several sources available.

(iii) Multiple Sourcing: It means to purchase an item from more than one supplier. It helps in continuity of supply and the lowering of prices due to competition. 

Factors Affecting Selection of Source: The factors like (i) Technical ability (ii) Manufacturing capability (iii) Reliability (iv) After sales service (v) Supplier location (vi) JIT capability (vii) Price and (viii) Other considerations affect the selection of source.

Types of suppliers: The suppliers may be of following types:

(i) Manufacturers 

(ii) Distributors or Commission Agents

(iii) Stockist or wholesalers

(iv) Retailers

Purchasing: Meaning and Principles of Purchasing

What is Materials Management? Need and importance

 Q. Define Materials Management. Why is materials management important for an organisation ? Explain.

OR

What is materials Management ? What is the need of materials management in the present scenario ?

Ans. Meaning of Materials Management: Materials Management is a combination of two words – material and management. The term material refers to such commodities which are supplied to the manufacturing industry in the crude or original form which need to be processed further. Management is the process of dealing with or controlling things or people. Management is the organisation and coordination of the activities of a business in order to achieve objectives. Thus, materials management is a technique which is concerned with planning, organising and control of flow of materials from purchase of raw material to consumers. 

Materials management is a branch of logistics which deals with the tangible components of supply chain. The materials management is useful for manufacturing Industries. Materials Management is concerned with the planning, procuring, storing and providing the appropriate quality material at right time in right quantity and at right place.

Materials management is ideal for the industries who track the flow and manage the materials in their enterprises. It involves the purchase of material, inventory management and control. It is the integrated function of purchase. It has a very wide scope including purchase of material, planning of materials, maintenance of material and spare parts, obtaining quality material at right time and place, storing of material and issuing of material. There are 5 M’s which are critical for an organisation and out of these, the material is the most important. Thus, the materials management is very important for each such organisation which uses raw-material.

Definition: As per Bailey and Farmer, “Material management is the management of the flow of materials into an organisation to the point, where, those materials are converted into firm’s end product (s).”

Materials Management is important for an organisation for the following reasons.

1. Helps in reducing cost: Materials management helps in solving problems related to reducing the overall cost of product by purchasing materials at reasonable prices. Simultaneously it reduces costs by reducing wastage of material.

2. Improving material productivity: Productivity means quality of producing something. Materials management also solves problems related to standardisation and reduction methodologies for improving productivity. Improved productivity helps in decreasing the cost per unit and thus helps in increasing profitability.

3. Optimum Utilisation of Physical Resources: Materials Management provides adequate and timely material for production. Thus it helps in optimum utilisation of physical resources, and therefore helps in decreasing the cost.

4. Warehouse Management: Warehouse management is also the function of materials management. Through proper warehouse management, materials management helps in decreasing the wastage of material. Thus, indirectly it helps in improving the profitability.

5. Helps in solving Inventory Problem: It helps in solving problems of shortage or excess of inventory. It projects the demand of the material and accordingly arranges the materials. For exact requirement of materials in the stock, it uses various techniques such as EOQ, re-order level, etc. The overstocking of materials is undesirable as it increases the cost. Thus it helps in keeping the investment in materials to minimum.

So, The materials management is crucial for the success of an organisation because it involves a major part of the total cost of the product.

Material Management: Functions, Challenges.

 Q. Discuss the functions of ‘Materials Management’. Mention the challenges of Materials Management in today’s competitive business. 

Ans. Materials management is ideal for industries who track the flow and manage the materials in their enterprises. The functions of materials management are as follows: 

1) Material Requirement Planning: The material require planning includes production scheduling and inventory control. It is a control system through which adequate inventory levels can be maintained to assure the adequate and required material can be provided as and when needed. This is not suitable for job shops or for continuous processes that are tightly linked with each other. MRP system meets the following three objectives:

i) To ensure that materials are available for production and products are available for delivery to customers.

ii) To maintain lowest possible level of inventory.

iii) To plan manufacturing activities, delivery schedules and purchasing activities.

Or 

The basic function of material management is material requirement planning. This planning can be done with the help of computer and it includes production and inventory control scheduling.

2) Purchasing or Procuring of Materials: The materials department is supposed to provide the right material at right time in right quantity at right price. The department should procure the material from the right source. For this the materials department is to select the best sources of supply from the available alternatives. 

3) Storage of Materials: Once the material is received, its physical control, preservation, minimization of obsolescence, loss or theft or damage should be safeguarded through efficient handling. Proper records should be maintained and stocking is done in stores at proper locations. Storing function also includes inspection of material purchased and issuing of materials. This function also includes coding of items, preparing indexes showing code number and place or room number or godown number or cupboard number or preparation of bin-cards etc. 

Or 

The storage of various types of materials and spare parts as inventory is very important before delivering it to the end users and to different production centres for use by them. Proper records....... same as above.

4) Issue of Materials: Issue of materials mean supply of material from store to those various departments of the organisation who demands it. For this purpose, the department is to submit requisition slip to the store. On the basis of requisition slip, the storekeeper will issue the material to the concerned department.

5) Inventory Control: Inventory control involves the procurement, care and disposition of materials. Inventory includes raw materials, work-in-progress, and finished goods. The reasons for inventory control may be for maintaining the continuity of production and sale, minimising the stock-out cost, controlling the investment of working capital in stock, etc. Therefore, it is necessary to ensure the sufficient goods on one hand to avoid stock-outs and the safeguard the wastage of material on the other to protect the capital. Different techniques like EOQ, minimum and maximum stock levels, reorder level, ABC analyses, stock register, etc., can be followed. The process of inventory control involves the following:

(i) Determination of optimum levels of inventory,

(ii) Determination of level of control required.

(iii) Designing the inventory control system

(iv) Establishing the inventory control organisation.

6) Material Handling: After receiving the materials, the stores incharge has to check the weight and inspect the quality of them. If it is found right, then he stores them properly so that it can be issued to factory when needed for production. Material handling involves movement, packaging, transfer and delivery of materials starting from receiving of materials to final distribution of finished goods to consumers.

7) Disposal of Scrap: Scrap is the waste that either has no economic value or only the value of its basic material content by selling that. It includes wastage, spoilage, used and repairable tools, oils, equipment, etc. In addition, it also includes the obsolete parts. It is the duty of the materials manager to dispose off or selling of those materials by inviting tenders from scrap dealers or through auction.

8) Vendor Evaluation and Vendor Rating: Under this system, evaluation of a supplier is

done through recording and ranking of performance in terms of a variety of issues including quality of materials and delivery performance. This process is necessary for effective purchasing. Vendor rating is the result of a formal vendor valuation system vendors or suppliers are given standing, status or title according to their attainment of some level of performance such as delivery, lead time, quality, price, etc. The purpose of vendor rating is to improve the quality level of the suppliers performance and to use the results of the evaluation in the qualification system and when awarding contracts.

9) Purchase Analysis and Research: Analysis  and research in the purchase is the systematic investigation of all related aspects. It also includes the investigation of all sources of supply and selection of best and suitable material from the various available materials. This function also includes the analysis and research of the fact that how the prices of materials can be reduced and the quality can be improved. What can be the alternative sources of supply in case of short supply of material, etc.

10) Transport and Traffic Management: Materials manager supervise many aspects of transportation systems including planning, logistics, maintenance and repair. These managers focus on getting materials, people and goods from one place to another while considering safety, efficiency and cost. Transport management helps in enlarging the market for finished goods. Under the transport management, the materials manager has to arrange the safe, rapid and economical transportation for incoming and outgoing materials. It will help in increasing the number of perfect orders, improve the quality of customer service, etc.

CHALLENGES OF MATERIALS MANAGEMENT: The materials management has to face the following challenges: 

1) What to Stock?: The first and the most important challenge faced by materials management is what items need to be stocked? Which items are available on demand and which are not available. Whether the goods can be arranged from alternative vendors or not. 

2) How Much to Stock?: After deciding the goods to be stocked the materials manager has to decide how much stock is to be maintained in the store. For this purpose, they have to calculate minimum and maximum inventory levels, reorder points safety stocks economic order quantity, etc., for each type of raw material separately. 

3) Inventory Turnover: Inventory turnover ratio is very important from the view point

of profitability and liquidity. Higher ratio indicates that the less amount is locked up in inventory and as quickly as the stock is converted into sales, it will result in profits. Therefore materials management has to fix the desired turnover ratio. They also have to develop the techniques for improving the ratio without impacting maintenance and operations.

4) Forecasting of Demand: Materials planning is done on the basis of short-term sales forecast. Hence the materials planners have to always find out how much material will be required because neither the material supply should be in short nor in excess.

5) Government Policies: If the material is to be imported from other countries. Then the materials department may have to depend on the import policy of the government, foreign exchange availability, credit availability, etc.

6) Scarce Financial Resources: Scarce financial resource is the another challenge for materials management as on the one hand money/finance is limited and on the other hand sufficient material should be available for production on right time. Thus the materials manager has to maintain the balance between the two and has to arrange the material within limited resources.

7) Storage Space: Storage space is the another challenge for materials management. As everyone knows the prices of land and building are rising, therefore the management may allocate a little space for storage. The materials manager has to keep the stock of raw-materials and spare parts in the allocated space.

8) Obsolete and Surplus Material: The presence of obsolete and surplus material is a problem for all the companies. Obsolete materials may exist due to change in engineering activities. Whereas surplus material may be due to over procurement, uncontrolled production operations and inefficiency. In both the cases firm has to bear the expenses for space as well as for wastage of material. The materials manager has to plan for reducing such type of costs.

9) Selection of Appropriate Vendors: The another challenge for materials manager is the selection of appropriate vendors. Evaluation of suppliers is a process that leads companies to select their desired suppliers. It has two objectives, to reduce all costs of purchasing and to increase the overall value of engineering. Thus the materials manager has to maintain a balance between the cost and quality.

10) Managing Information: The materials manager has to keep himself updated always regarding new materials, new spare parts, new machinery, new techniques so that they could be implemented in the organisation.

Discuss the functions of ‘Materials Management’. Mention the challenges of Materials Management in today’s competitive business.