Chapter 4

INDENTING AND PURCHASING OF MATERIALS

Introduction :
 Health care institutions require supplies of materials to run day to day activities in a
hospital.

 Therefore, purchasing and procurement are common functions in almost all

organizations.

 Purchasing generally refers to the actual buying of materials and those activities associated
with the buying process.

 Procurement is broader in scope and includes purchasing, traffic, warehousing, storage

and all activities related to receiving inbound materials.
 Indenting and purchasing in a Government Department are governed
by the General Financial Rules (GFR) and Delegation of Financial
Power Rules (DFPR) applicable to each department .

 The delegation of financial power differs from a department to

department ,such as budgetary allocation for orthopedic department
will be different from budgetary allocation to the ophthalmology .

 All the indenting officers are required to be thoroughly acquainted

with these rules and procedures .
Purchase Activities:
 Purchasing activity starts with the recognition of a need for a
particular hospital item or items.

 The next step is the selection of the right source of supply.

 Often, the purchase department has to develop alternative source

selection, timely delivery, quality assurance, reliability, credit
availability etc.

 Maintenance of records and files and food vendor-vendee relations

are also important phases of purchasing activities .
 Objectives of hospital purchasing
 To ensure uninterrupted flow of materials.

 To buy economically in a competitive market; (i.e. to avail the materials,

medicines and equipments at minimum possible cost, ).

 To keep inventory investment low and increase the asset turn over.

 To develop good buyer-supplier relations; (i.e. to establish good relationship

with suppliers, leading to favorable image in business circles)

 To develop alternative and reliable source of supply.

 To act as logistics formation centre with regard to specifications,
processes, price, quality.

 To train and develop the personnel involved with material management

department.
 Efficient record – keeping and management reporting .

 so that the volume and the value of purchases, analysis of work

performed in the purchase department, information about the cash
discount and quantity discount, the trend about the price changes in near
future, new sources of supply etc can be made aware of.
 Purchase Principles, used in hospital set-up
 The basic objective of purchasing is to ensure continuous supply of
materials, components, medicines etc.
 So that the service is carried out without any interruption.
 At the same time it is also to be seen that the items purchased is kept
minimum.
 Right Quantity:
 It implies right specification and dimensions of the material, which a
supplier has to meet.

 It is the duty of purchase department to make the right quality

material available in the hands of the service units to reduce wastages
and rejections.

 So anticipation and prediction by end user department must be

correct and according to needs for particular category of the patients.
 Right Quantity:
The hospital has to ascertain EOQ and place order of EOQ, unless
otherwise warranted.

 The inventory models have to constructed to determine the level of stock,

the organization could hold and to determine the right quantity to order .

 Right Price:
While selecting the supplier, the lowest bidder, is selected.
 The lowest responsible bidder is the one, who has to be selected and
orders, will be placed.

 The hospital has to apply the principle of learning curve in case of

materials with high amount content.

 Further the hospital has to negotiate with the supplier without comprising
on the quality of stock and conditions of purchase.
 Right Time:
 The purchase department has to ascertain the lead time for all materials procured
from outside.

 This helps it in fixing reorder point (Lead time consumption + Minimum Stock)
which in the right time at which the order placed with the supplier.

 Right Transportation:
 The buying firm has to make a comparative analysis of the cost of transportation
by taking into consideration the cost of owning fleet of vehicles and availing the
services of transport agencies.

 A decision has to be then made to ascertain the right mode of transportation,

which provides efficient service at reduced cost.

 For example procurement and purchase cardiac ambulances to shift the patient
from one place to another.
 Right Contracts:
 While entering into contract with the supplier, the hospital must take into account
the various legal enactments that affect the performance of contracts.
 For example: Indian Contract Act, Sale of goods Act, ISI Act, Essential commodities
acts etc.
 It is similar sale deed contracts in the reality sectors.

 Right Source:
 The buying hospital to make an objective evaluation of the suppliers (vendor rating)
based on various criteria like financial strength, continuity in supply, uniformly in
quantity etc, before selecting a supplier.

 For purchase of hospital drug supply, they must directly contact and sign an
agreement with drug manufacturing company, in order to get maximum discount on
purchase.
 Right place of delivery:
 The hospital has to communicate clearly the place at which the
materials are to be delivered.
 Usually all received hospital drugs and inventories are stored in the
central drug stores.

 Right material:
 The material to be purchased has to be evaluated based on the functions
performed by it:
 Value = Function / Cost

 The procurement is to be made only for standardized material and

components to minimize rejections and ensure uniformity in quality.
 Right Attitude:
 the hospital has to make a SWOT analysis (Strength, Weakness,
Opportunity, and Threat)
 in order to make the right kind of materials available at the right
time, at the right price and in the right quantities.
 It has to be constantly in touch with the market, so that the
innovations and inventions can brought to the notice of the
organization.
 Different types of purchase system:
Basically purchasing is primarily a buying activity. It is divided into
two types:
a) Purpose of buying
b) Method of buying

a) Based on the purpose of buying , it is divided into four types

1. Industrial buyers
2. Buyers of wholesalers
3. Buyers of merchandise for retail stores
4. Ultimate consumers buying from the retail stores.
 Industrial purchasing:
 Defined by D. Watte .

 In most of the organization, normally the consumption of materials

ranges between 60 % to 70 % of the cost of services.

 In the health care industry, this practiced by suppliers of

 different drugs or pharmaceuticals,
 operation theatre materials suppliers,
 suppliers of hospital furniture’s,
 hospital laboratory reagents, hospital linen,
 hospital surgical instruments and implants.
b) Based on methods of purchasing , it is of following types :
a. Rate / Running contracts: This system is prevalent in government
buying- such as government run hospitals or district civil hospital, or,
public sector enterprises
b. The rate of the item is fixed usually by the tender system.
c. In rate minimum quantity specified but quantity not indicated.
d. In running contract, the minimum quantity is also specified.
e. Rate contract reduce delay due to internal administration & lead-time
drastically.
f. Systems contracting: This is form of stockless purchasing, under
which authorized employees may directly obtain requisition of
material from the supplier’s storeroom.
g. usually practiced for category C items such as antacids and analgesics
used in bulk in day to day running of the hospital .
c. Blanket order:
 The blanket orders are the most popular alternative to the single
item, fixed price order.

 A blanket order may be an agreement to provide a designated

quantity of specified items for a period of time at an agreed price.

 A typical example is an annual order for stationery items.

 This is usually done for procurement of hospital items which very

commonly used, such as dressing materials, disposables syringes &
needles, I.V. fluids, injection tetanus toxoid, tablet crocin etc.
d. Reciprocity: It involves a policy of buying from one party, who in
turn buys from another.

e. This decision of reciprocal buying and selling is a matter of top-

management policy.

f. Bazaar purchase: Also known as ‘cash purchase’ or ‘Imprest

purchase’ and is confined to urgently needed small items.

g. For example spot quotation is raised and medicines are purchased at

institutional discount rate.
f. Forward buying:
 It simply means buying in excess of the normal requirement.

 The forward buying is restored to when the purchase section

anticipates any scarcity in supply of materials in the near future or the
price may increase very soon.

 Forward buying however results in increased storage cost as huge

amount of money is locked up in inventories.

 In modern scenario, it is know as kalabazaari and is discouraged by

government, as sudden stocking of essentials drugs will lead to scarcity
of essential.
g. Stockless Purchasing: (also known as system contract)
 Under this system the hospital has no financial responsibility for
inventory of the good being Purchased.

 The inventory is owned by the supplier.

 The goods may be located either at the Supplier’s or buyer’s

location.

h. Tender stock purchasing:

In big organization, while making bulk purchase may resort to
tender system of buying. This may be classified into:
i. Open tender :
 Under this system buying organization gives a tender notice indicating the type of
materials required.

 The suppliers, who could meet the terms and conditions, send their quotations to the
buyers.

 The buyers in turn make evaluation of the terms of each supplier .

 The one, who quoted the optimum price, is selected and order for materials is placed
with him.
ii. Limited tender:
 Under this system the buyer has a list of suppliers, usually 5 or 6
 to whom the tender notice is sent
 among the suppliers, the supplier who quotes the lowest price is selected and purchase
order is placed.
iii. Single tender:
 The buying organization follows single tender of buying in case of proprietary items.
 There is no possibility of making systematic vendor rating.
 Purchasing procedure (main steps in brief) :
a. Selection of suppliers
b. Analyzing of bids
c. Price negotiations
d. Issuance of purchase orders
e. Follow-up actions
f. Cost analysis and market study
g. Maintenance of price catalogues, information library, etc.
 Selection of Supplier
i. Selection of a potential supplier should be based on:
ii. Financial capacity,
iii. Manufacturing capacity,
iv. Total value of business,
v. Service facilities,
vi. Business reputations and other customers,
vii. Quality of materials

 In addition, a periodic rating of the supplier’s performances item-wise should be

carried out.
 It must also have the full and detailed descriptions, specifications, drawings
(wherever necessary) as well as estimated cost and expected delivery time.
 On having all these particulars, the buyer must float tenders or enquiry.
 Vendor Ratings:
 The objective assessment of vendors demands a systematic analysis of
their past performance.

 The systematic assessment of supplier’s ability to meet the quality,

delivery schedules, product price and service

 giving an appropriate weightage to each factor can help us in designing

vendor rating system.

 the three methods normally used for rating vendors are :-

i. The categorical method
ii. The weighted point method
iii. The cost ratio method
The categorical method:
 This is a functional method giving emphasis on the cost of value
analysis.
 We can device a system with three levels based on the value viz High
value, Middle value, and Low value.
 Usually category A- ITEMS of the hospital stocks, such as anti-cancer
drugs, are usually selected from renowned supplier.

 The weighted point method:- it includes

 the objectives of the organization,
 its products and
 economic conditions of the organization are included.
  Cost Ratio Method:
 The objective of this method is to evaluate the suppliers on the basis of
proceeding considerations which may not be practical considerations.

SN Factor Average Points

a Quality 35
b Price 30
c Delivery 20
d Service 15
Percentage of price performance = Lowest Price Bid / Actual Price
Percentage of lead time performance = Shortest Lead time (any vendor on comparable
item) / Actual time
 Purchasing procedure: (in details and step by step) :

 Purchasing procedure refers to the way in which a purchase

transaction is carried through from its inception to conclusion.

 Purchasing policies outline the broad objectives to be accomplished

and guidelines within which the procedures must accomplish the
desired results.
 Basic steps of purchasing procedures recognition of the
need:
 Any purchase transaction starts with the recognition of the need for an
item .

 The need may often be satisfied by a transfer of materials from another

department or store room.

 For many items anticipating advance needs is one of the consideration

that determines the size of the order for an item.

 In such cases purchase officer buys a quantity sufficient to reduce the

likely hood of such orders in case of sudden increase in the rate of
consumption of item.

 A purchase officer has to develop alternate source of supply and

potential alternative materials.
 Description of the need:
 Once the need has been recognized it must be accurately described
that all parties .

 The needs for one department in a hospital premises will be different

from the needs & requirements of the department.
 Selection of the source:

 The next is the selection of source for requisitioned items.

 The process consists of selecting the desired number of suppliers, in

accordance with established guidelines from whom quotations will be
requested.

 For non routine purchases, the procedure involves a careful survey of

potential sources of supply.
 Ascertaining the price:

1. Purchase department must ascertain price information on the item being

purchased.

 Placing order:

2. All orders should be in writing and should be on the buyers purchase order to
avoid the possibility level of difficulties.

 Follow up of the order:

3. the responsibilities for following up orders that it places

4. as the delay in the delivery of the hospital essential items, may affect the life of
needy & critically ill patients.
 Checking Invoices-

Invoices checking are a part of purchase function since receipt of

invoices constitutes the usual notification that the suppliers have made
shipment.

 Maintenance of records and files:

Purchase orders are legal contract and as such should be preserved

for as long as they have legal significance.

 Maintenance of vendor relations:

Good relations are based on mutual trust and confidence.

The purchasing department effectiveness is measured by the amount of

goodwill it has with its suppliers.
 Selection of source of supply:
 the final authority of for the selection of the source of supply is with
the purchasing department.

 In some hospitals improper selection causing inferior goods and

services .

 For example if the inferior quality of laboratory reagents is supplied

by suppliers and its ill effect on the health care sector.
 Procedure:
 The procedure of source selection involves the preparation of an
extensive list of prospective suppliers.

 The procedure is therefore one of the searching for all likely suppliers
and then sorting for one or ones with whom to do business.

 factors responsible for selection of the prospective suppliers are:

Experience; Catalogue; Trade directories; trade journals; Associates;
Trade shows and conventions.
 Request for quotations:
 When a new item is under consideration, a buyer should therefore,
first of all inquire whether any of his present or past suppliers items
prospects matches with the specification of needed items.

 Most purchasing departments maintain vendor files which contain the

name and addresses of vendors with whom the company has dealt.

 Frequently the files are set up to include additional data on such things
as the reliability of the supplier in meeting commitment dates,
willingness to handle emergency and rush hours and defect or reject
ratio on shipment received in past.
 Catalogues:
All buyers make some use of their catalogues and a substantial percentage of
buyers use them extensively.

 Trade directories:
The trade directory is a publication that list and classifies suppliers according to
the services they provided. It gives a minimum amount of information on such matters
as the financial status of the companies, their method of distribution and location of
their offices.

 Trade Journals:
Trade journals or business magazines are other very fruitful sources of supplier
names.
 Trade shows and conventions:

 Another source of information about suppliers is the trade show .

 build up their wares in an attempt to attract buyers, built up their interest and if
possible make sales.

 Request and quotations:

 Finally information on prospective suppliers can be secured through a request for

quotation form.
 Such request contains blue print or written specifications including quality
requirements and estimated usage.
 Bids are solicited from three potential suppliers, thereby providing an
opportunity for equitable comparisons amount competitors.
 Sources of Procurement of Medical and Non-medical Stores
(related to day to day practices in health care & hospital
supply in a government set up)

 We have to approach different sources of procurement depending

upon the type of materials, quantity to be procured, cost of the items,
lead time permissible (urgency of the item), various rules under GFR
and Government orders etc.
 The various sources of procurements are as shown in the following
figure:
 Sources of Procurement

D. G. S. & D

Private Company Central and State

Medical Stores
organization Government MSD

Govt. Agencies &

Companies
 Directorate General of Supply and Disposal (DGS&D)
 This is a centralized agency established by Government of India
 It has offices in Delhi, Bombay, Madras, Kolkata and Kanpur for the supply. It
includes :-
 Ministers, attached and subordinate offices of the Government of India
 State Governments and their departments
 Local bodies and district boards
 Quasi public bodies, public sector undertakings and statutory bodies, if
required.

 DGS&D also undertakes purchases from foreign countries through its

subsidiaries like Indian Supply Mission situated at London and Washington.
DGS&D has a full Inspection Directorate in Japan.
 Medical Stores Depot (M.S.D. Government of India) :
 Ministry of Health and Family Welfare has established 9 depots in the
country to provide facility for procurements of medical stores.

 The location of various depots is at Delhi, Karnal, Bombay, Guwahati,

Madras, Kolkata and Hyderabad.

 In addition to these the Directorate General of Health Services,

Government of India has established a Medical Stores Organization in
New Delhi to cater to Central Government Health Scheme (CGHS).

 These depots are also responsible for the supply of materials under
various National Programmes like N.M.E.P., N.L.C.P., and
N.F.W.P. etc.
 State Governments Medical Stores Deports :

 has established medical stores depots for the supply of material to various
hospitals, dispensary, PHCs under the control of State governments.
 Indents can be placed to such organizations for procurement of materials.

 Government Cooperative and Undertaking :

 The co-operatives which deal in non-medical stores are
 Super Bazaar,
 Kendriya Bandar,
 Khadi Gramoudyog,
 State Industrial Development Corporation etc. In the Medical Stores Division,
the various Government agencies are I.D.P.L., H.A.L., U.P.D.P.L., Orissa
drugs and Pharmaceuticals Ltd., Bengal Immunity Ltd., Karnataka Antibiotics,
Super Bazaar etc.
 Purchasing procedure in Private Organizations :
In addition, there are numerous agencies either manufactures, distributions,
authorized agents, stockiest or retailers in the private sector, which are also the
sources of procurement.

 Specification of Products :
 While floating tender enquiry or making indents, detailed specification of the
product should be given in order to receive the correct materials

 . Due attention should be paid to the weight, packing, markings, strength of the
materials, etc. Some standard product specification like I.S.I., F.A.D., Agmark, I.P.,
B.P., U.S.P., N.F.I. etc.

 A detailed list of various I.S.I standard products can be had from Bureau of Indian
Standards on payment. Various pharmacopeia standards are available for drug items,
disposable syringes, I.V. sets, sutures etc.
 Proprietary Article Certification (P.A.C.)
 Depending upon the delegation of power, a purchaser a product of a
particular brand or company. The power to issue a P.A.C. depends upon the
delegation of power which differs from organization to organization.

 Purchasing procedure in government organization:

 Purchase through DGS&D

 Departments are required to approach DGS&D for procurement of materials

beyond a limit as laid down in financial rules and generally it is beyond Rs. 1
lakh at a time.

 DGS&D has devised different system for procurement and supply as follows:
 DGS&D’s Running Rate Contract (RS’s)
 Rates of medical and non-medical stores are finalized by DGS&D and rate
contracts are issued.

 These rate contracts can be operated by any Direct Demanding Officers

(DDOs) of Central or State Governments.

 There is no limitation in the purchase of materials against these contracts.

 This inspection note is retained by the Company and is sent to the Directorate
of Supply for the payments.

 The Company gets 95 per cent of payments after inspection and production of
documents of dispatch of goods itself.
 The rest 5 per cent is paid after the receipt of goods by the inventory.
 DGS&D Price Agreements :
 In addition of rate contracts, DGS&D has undertaken various price agreements.

 In these agreements, only prices are fixed and settled for a particular period of time.

 These price agreements are operable by DGS&D only.

 Indent to DGS&D :
 Any item which is not covered under rate contracts can be procured specifically through
DGS&D by making an indent for procurement.

 These indents are to be made in a prescribed proforma available from any DGS&D office.

 The procedure of issuing Inspection note and payments is same as in case or RC’s.
 4.10.2 Purchase through Medical Stores Depots
(Government of India) :

 The Medical Stores Depots have an approved VMS (Vocabulary of

Medical Stores) list which has enumerated various items procured.

 It includes drugs, surgical materials like gauges, cotton bandages,

instruments, glassware, vaccines and materials under National
Programmes.

 Each item has been given a VMS No. and indents need to be made
accordingly mentioning the item, VMS No. quantity to be procured
etc. MSDs generally do not accept an indent of less than Rs. 10,000/-
per item for procurement and supply.
 Purchases through Government Agencies or Cooperatives :
 The policy of purchase through government agencies or cooperatives
may differ from State to State Government.

 In the Central Governments’ instructions, there is no need to call rates

and quotations from government undertakings and order can be placed
directly.

 Also in case of comparison of rates through tender enquiry, price

preference up to 10 per cent is responsible to government
undertakings.

 In many organizations, there are orders to procure some items through

certain government agencies only.
 Purchases through Local Purchase Committee :
 At the organization level, tender enquiry can be floated , after taking
the approval from a duly constituted purchase committee.

 As per GFR, for the anticipated purchases up to Rs. 20,000 limited

tendered enquiry is sufficient and for the amount exceeding this, open
tender enquiry is required.

 Even registration of firms can be done at the organization level and

tender enquiry can be sent to those firms only.

 In case of emergency purchases up to Rs. 500/- per item can be made

through any source without any rate quotation.
 Preparation of a Supply Order or an Indent :
 After getting the approval of purchases, the supply order or indent is prepared.

 The state government levies the octroi charges when the product enters the state.
The octroi charges vary from 3% to 6 % of the product value.

 The octroi charge is payable by the recipient at the time of delivery.

 The courier will collect the octroi amount from the recipient at the time of
delivery.

 A sample supply order is attached as appendix 1. In case of medical stores, the

instruction regarding date of manufacturer ate of expiry, batch No., ‘government
supply, not for sale’ making, should be mentioned.
Floatation of Tenders / Enquires :
 Enquires should contain complete specifications, brand or trade names, and date on
which tenders are to be received. All governmental buying and purchases in public
sector undertakings resort to tender buying.
 Tenders are floated according to the system prevailing in the respective health care
organization and hospitals.
Tender systems may be any one of the following:
 Open tender: By advertising in the requisite media of newspaper, bulletins
magazines, etc.
 Limited tender: Often advertising is costly and increases the lead time, then bids
are solicited only from reputed limited pre-qualified parties.
 Simple tender: In case of only a single source, that firm is asked to submit his
quotation in writing. Simple tender purchases should be avoided, as it leads to
monopoly of proprietary item, which is against the basic objective of purchasing.
 Global tender: When bulk purchase of special articles is involved, global tenders
are invited through advertisements both in India and abroad.
 The steps involved in open tender system are:
a. Formulate the requirements clearly.
b. Establish bidder’s list.
c. Invite competitive bids through advertisement.
d. Open the tender before the representatives on the notified date.
e. Prepare comparative statements on quality, price, and delivery schedules.
f. Evaluate the bid.
g. Award the contract for the lowest responsible bidder by taking a total view of the final
product. Lowest implies being below the average standard. Responsible means
answerable legally and morally.
h. The quotation should be low, consistent with the quality requirement.
i. The lowest bidder need not be the best bidder from the buyer’s view.
j. Discounts such as cash discounts, trade discounts and quantity discount should be
familiar to the buyer to ascertain the final price.
 Capital Equipment purchasing:
 Capital Equipment:

Capital equipment refers to those items of machinery and equipments

which have long life and high value.

 Procedure for purchasing capital equipment:

 Evaluation of need:
 The recognition of the need originates with the using department and the
evaluation of this need requires the study of alternative methods.
 a cost analysis of alternative methods, a search for equipment that will do
the job, and a second cost study to determine the savings made possible by
the use of the proposed equipments.
 Specification:
 Once the need has been established and the type of equipment determined, the next step
is to draw up specifications.
 The manufacturer’s representatives are also consulted in designing the specifications.

 Negotiation:

 The specifications are provided to selected vendors and they are invited either to quote or
to send a representative to survey the job before quoting.

 Ordering:
After deciding the supplier, it is necessary for the purchasing department to work
out with that vendor all details of the purchase order. An experienced buyer knows that,
although he may be reimbursed for any damages incurred he can save himself much
trouble, cost and work by taking precautions before placing the order.
 Follow up:
 The follow up of an order should be performed
by the executive who placed the order.
 Economic Analysis:
Approaches to Capital Equipment:

 The hospital considering the purchase of new equipment makes a careful cost analysis to
compare the operation of the proposed equipment with its present equipment.

 Payback Period:

 Payback period is calculated by relating the cost of the equipment to the profit it earns

 then estimating the number of years it takes for the equipment to pay for itself.

 The basic objective is to purchase the equipment with fastest payback period.

 Payback period is simply the time it takes to cover the cost of the equipment and is
expressed in the formula P = C/R where P = the payback period; C = Cost and R = the
cash return from the investment, or the present value of the further return.
 Discounted cash flow:

 For example, a lot of companies assume that they must earn a 20 % return after tax on
new investment in hospital and equipment. They then discount the value of future cash
flows will equate their sum to the supply price of the asset. It is given in the formula.
C = Rs/1+r = R1/1+r + R2/ (1+r)n + …..+ Rn/ (1+r)n + S/ (1+r)n
Where r = Discounted rate of return
R1R2 = Cash flow after taxes in year 1, 2………4
N = Life of association
S = Salvage value

 After the discounted rate of return on the investment has been calculated it is compared
with the cost of the capital to be invested.

 If the return is greater than the cost, the purchase is economically sound, because the
discounted return is greater than the return that could be obtained from the invested
capital in alternative use.
 Present Value:
 Any investment calculations involve two things; the expected pay off; or savings, which
extends over many years and the cost of the capital invested.

 Because capital equipment will usually produce savings over a long period of time, it is
necessary to determine the worth of the future savings today.

 If the present value of the investment, V, exceeds the cost of the equipment, the purchase
is economically sound.

 The determination of the present value of estimated future savings is an integral part of
any capital equipment economic analysis.
 Return on Assets:

 The approach relates the cash savings anticipated to result from the
purchase to the amount of money invested.

 Return of Asset = Present value / Savings rupee investment ×100

 This approach is subject to all conceptual difficulties already mentioned

viz estimated if of equipment; estimated future returns etc.

 If it is a new machine, which , has a greatest output or a faster of

operation, one might assume this to be a greater value.

 But this is not necessarily true if there is no need for the faster or
greater output.
 Legal Aspects of Purchasing
 All purchase orders signed by the purchaser on behalf of his health centre /
hospital and commitments made therein binds his institution.
 The purchase order or contract is, therefore, a legal document which a direct
bearing on the company as to the performance of the contract.
 As a primary rule, all purchasing personnel should consult competent counsel on
doubtful or controversial points.
 The purchaser should always be familiar with the basic principles of contract and
be aware of certain legal terminology, so as to minimize the area of
misunderstanding and conflict, and to avoid litigation.
 Law of agency: This states that the acts of the purchaser done within the
apparent scope of his authority binds his institution with respect to third parties
(seller), in respect of any contract concluded.
 Law of contract: A formal contact of purchase duly signed by an authorized
hospital / health centre purchaser binds both the seller and the buyer. An offer
becomes a contract only when it is accepted by the seller. A valid contact has four
basic elements:
a. An agreement resulting from an offer and acceptance, understood in the same
sense by both the buyer and the seller.
b. A consideration or an obligation imposed on both the parties.
c. Parties should be competent to contract.
d. The purpose of the contract should be within the existing laws of the land.
 Legal status of buyer:
 The purchase officer while signing a purchase contract does so on behalf of the district
health center / hospital.
 The buyer must, therefore, know the extent of his scope and delegated authority; either
expresses or implied, to bind his institution with the supplier.

 Summary on guidelines for a good purchase system:

1. Receipt and analysis of requisitions to assess the needs and description of requirements
2. Selection of possible sources of supply
3. Determining the time, price, quality and quantity
4. Placing the order
5. Follow-up and expediting the order
6. Checking the invoice and receiving the order
7. Processing discrepancies and rejections after inspection
8. Closing completed records
END OF CHAPTER 4