Purchase Management and Methods of Buying

Purchasing is a function of procuring goods and services from sources external to the organization. In the words of Alford and Beaty,”Purchasing is the procuring of materials, supplies, machine tools and services required for the equipment, maintenance, and operation of a manufacturing plant.” According to yet another authority,” Purchasing is the procuring of materials, tools, stores and services required for the manufacture of a product, maintenance of the machines, and un-interrupted running of the manufacturing plant in a manner that guarantees the marketing of the company’s products in the quantities desired, at the time promised and at the competitive price consistent with quality desired.” Purchasing in essence is the task of buying goods of right quality, in the right quantities, at the right time and at a right price.

Since raw materials, components and services account for a significant as much as 50 to 70% proportion of the company’s total expenditure, effective purchasing, therefore, can result in a substantial savings to the company. Mere one percent saving can give benefit equivalent to eight to nine percent rise in sales volume.

Traditionally, purchasing was regarded as one o the activities of the production management.

However many progressive managements have already realized that in lieu of changing business conditions, growing competition, continual in the costs of inputs, purchasing must be given status equal to that of other major functions.

Objectives of Scientific Purchasing:

Objectives of scientific purchasing include the following:

1. To procure at a competitive price the needed materials, supplies, tools and services of the right quality, in the right quantity and at the right time.
2. To maintain continuity of supply to ensure production schedule at minimum inventory investment.
3. To ensure the production of goods of better quality the competitive price by procuring materials which best suit the product and the purposes for which they are intended.
4. To suggest better substitutes to materials which are currently being used with a view to lower cost and maintain quality of the products.
5. To render assistance in standardization, variety reduction, value analysis and other cost reduction programmes.
6. To advise on probable prices, deliveries, and performance of items under consideration by the design, development and estimating department.
7. To create goodwill and enhance the company’s reputation for fairness and integrity through dealings with the suppliers.
8. To enable company to maintain competitive position and earn a fair return on its investment.

Methods of Buying:

The buying department of the company is responsible to provide goods and services required by the company at the minimum cost and optimum quantities. The request to procure may be received either from stores department or from one of the functional departments.

Such requests may be received:

1. Either for direct materials or for indirect materials.
2. Either for production items or for non-production items
3. Either for low priced items or for expensive items
4. Either for items sold at premium or for items sold at discount
5. Either to meet immediate needs or satisfy needs at a later date
6. Either for seasonal items or for non-seasonal items.

Different Methods of Buying:

1) Tender Buying:

Government department and public sector undertakings in India follow this method of buying. Private sector organizations to adopt tender buying if the value of the purchase exceeds the prescribed limits, say Rs. 25000 or Rs. 50000 fixed by the management as policy decision. Salient characteristics of the system are:

• The buying department establishes bidders’ list and invites them to submit bids.
• Bids on receipt are evaluated by comparison and the right supplier is selected.

Advantage of the method:

• Tender buying is the purchaser’s most important single tool to select qualified supplier on the basis of competitive prices.
• It eliminates possibility of favoritism, patronage, and personal preferences.

Disadvantage of the method:

Tender buying is costly and time consuming and therefore used by private sector undertaking only when the value of purchase is high.

2) Group purchasing

Group purchasing refers to ‘buying of items of trivital value in a single purchase order.’

Characteristics

• Minimum and maximum levels are fixed for each item within each classified group.
• Stocks on hand are reviewed periodically, say once a month or once in 12 months.
• Quantity equal to the difference between the ‘maximum level’ and stock on hand is procured for each item

3) Hand to mouth buying

Hand to mouth buying also called buying according to the requirements refers to the frequent purchases of an item in small quantities.

Characteristics

• Purchases are made only when demand arises.
• Purchases are made to cover immediate requirements.
• Quantity purchased is generally small though at time at large quantity may be purchased.
• The terms of contract is negotiated.

Advantages

• Lower inventory investment.
• Low carrying charges.
• Reduced deterioration and obsolescence of materials.
• Limitation of losses from price declines.

Disadvantages

• Comparatively higher price due to urgencies and loss of quantity discounts.
• Possible losses occasioned by an upward jump in prices.
• Acceptance of sub standard goods in emergency.

4) Scheduled buying

Scheduled buying is the process of procuring an item in staggered deliveries according to the delivery schedule furnished to the supplier by the buyer.

Characteristics

• A purchase order covering annual requirements is placed with the supplier.
• The supplier is given the estimate of the procurement needs covering a mutually agreed period of time.
• Fresh delivery schedules are given to the supplier prior to completion of the previous schedule.
• Monthly deliveries are usually specified except for perishable material, bulky items and others required in large quantities or where supplier has setup production facilities especially for the buyer.

Advantages

• Both buyer and seller enjoy the savings resulting from regularity of production and small inventories.
• Buyer is assured of supply of goods while supplier is assured of business.
• Supplier can effectively plan his factors of production while buyer can plan his requirements of finance.

5)  Blanket orders

Blanket orders refer to the purchase of variety of items from single sources, usually a middleman.

Characteristics

• A blank order specifies the category of items covered by the order,
• The items covered by the order generally have low unit value.
• More than one middleman may be selected to avoid hold-ups in case of non-availability of an item with one.