DHAKA UNIVERSITY OF ENGINEERING AND TECHNOLOGY

CITY UNIVERSITY
DEPARTMENT OF MECHANICAL ENGINEERING
ME 473 ENGINEERING MANAGEMENT
ME 4203 INDUSTRIAL MANAGEMENT
_______________________________________________________________________
PURCHASES AND SALES

REFERENCE

R. D. Agarwal (1997) Organization and Management, Tata McGraw-Hill Publishing

Company

O. P. Khanna (1995) Industrial Engineering and Management, Dhanpat Rai & Sons

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 1

Purchasing

The production process converts materials into finished products desired by customers. The
efficiency of production function significantly depends on the timely availability of the right
kind of materials, component parts, supplies, tools, etc. Purchasing is concerned with the
procurement of the right kind of materials, in right quantities, at the right price, at the right
time; and the right place. Demand for major raw materials and components, and their timing
are estimated on the basis of production programs and schedules. For all other materials and
supplies, demand for procurement is originated through requisitions from stores department,
production control department, and other user departments. Purchasing is responsible for
procuring all these materials and supplies for the organization. In doing so, it acts as an
interface between the company and its numerous vendors. The purchaser represents his
company as a customer, and as such is susceptible to the marketing strategies of its suppliers.
He acts as an agent of his company, and contacts, bargains and enters into legal contracts
with suppliers for the purchase of specified materials and supplies at the mutually agreed
price and time.

Objectives of Purchasing

The basic objective of purchasing is to make its optimum contribution to corporate profits.
Specifically, it aims at providing materials, components and supplies to production so as
enable it to meet delivery commitments. It achieves these objectives through:

(i) Procurement of materials needed for production of specified quality and in the
required quantity

(ii) Transportation and delivery of these materials at various production points as and
when needed

(iii) Purchase of materials at he most economical price consistent with the desired
quality and delivery schedules; and

(iv) Development of dependable sources of supply

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 2

Responsibilities of Purchasing

Major responsibilities of purchasing are the development of dependable sources of supplies

and determine the sources from which to buy from time to time. It is also responsible for
negotiating and finalizing price and other terms and conditions of purchasing. In some
companies, the scope of purchasing responsibilities has been extended by assigning it the
responsibility of “out manufacture”. In such cases, vendor companies are regarded as
extension of company’s manufacturing function. The purchasing officer takes interest in the
suppliers’ production capabilities, cost of production and quality control. He may even
provide expert engineering advice to vendor companies in order to help them manufacture
according to the specifications and quality standards of his company. However, this extension
of purchasing function also has the same basic objective of ensuring timely supply of
materials in the right quantity and of right quality. In order to perform this function, it
undertakes a number of activities, such as:

1. Studying the market and keeping itself abreast of conditions of supplies, prices, price
trends and deliveries.

2. Maintaining a complete record of sources of supply of materials, supplies,

components, equipments, parts, tools, etc., which he buys from time to time. This also
involves a periodical review of the reliability of its existing suppliers, and
development of new sources of supplies.

3. Advising management on the effectiveness of purchasing policies, and development

of new policies.

4. Developing and maintaining an effective buying service. It discharges this

responsibility by undertaking the following activities:

(a) Interviewing sales representatives of vendors.

(b) Advising production, product engineering and quality control departments on the
availability of new materials and components which can be economically
substituted for the existing ones.

(c) Advising the concerned departments about changes in the availability of materials,
delivery schedules, etc., which are likely to affect production schedules and costs.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 3

 (d) Translating production programs and requisitions into materials and supplies, and
schedule procurement so as to minimize cost of ordering and carrying the
inventories and at the same time making them available as and when needed.

(e) Calling quotations from potential suppliers, collecting and analyzing quotations to
find out the most favorable cost and terms and conditions of purchasing, and
negotiating with suppliers.

(f) Placing order with the supplier or suppliers who offer the lowest prices and best
terms and conditions.

(g) Following up orders to ensure that supplies are received in time.

(h) Scrutinizing and verifying the invoices received from vendors.

(i) Disposing of scrap, obsolete and surplus materials and equipment.

(j) Coordinating the purchasing function with production, product engineering,

production control, quality control and accounting.

(k) Maintaining records of suppliers, orders, purchased materials and requisitions.

Purchasing policies

Purchasing policies differ form company to company. Some companies coordinate buying
closely with production schedules and buy in small lots so as to minimize their cost of
inventories. Other companies buy much greater quantity at one time of the year than another
so as to take advantage of low market prices and quantity discounts. These buying policies
may be classified as:

(i) hand-to-mouth buying

(ii) market purchasing

(iii) long-range contracts

(iv) hedging

(v) speculative buying, and

(vi) upstream buying.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 4

(i) Hand-to-Mouth Buying

A company may adopt the policy of hand-to mouth buying if its materials requirements can
be fulfilled promptly from local or nearly markets, prices are steady and quantity discounts
are not available. It may also follow this policy in case it is short of working capital or
storage space, or its staff specialists have forecasted a decline in the prices of its materials.
Finally, this policy is also suitable when a company’s products are in the process of
redesigning with the result that its materials needs may change. However, a company which
pursues the policy of hand-to-mouth buying runs the risk of interruptions in production
schedules due to stock out of materials resulting from late deliveries, or shortage of materials.

(ii) Market purchasing

Market purchasing is buying raw materials at a time when market prices are lowest for them,
and there is a high probability of an upward swing in prices in the future. This policy is
particularly pursued for commodities of a seasonal nature such as jute, cotton, etc. Thus a
company may buy all or a major part of its requirement of cotton in January-February in
anticipation of a price rise during later part of the year.

(iii) Purchasing on Long-range Contract

Policy of purchasing on long-range contract is pursued in case of materials which are needed
in substantial quantities and on a continuous basis. For example, a steel mill buys iron ore and
coal in huge quantities which it needs daily for its production, and a publishing firm buys
printing paper. In such cases, the company gives a long-term contract, generally extending
over a period of one year or so, to a supplier to deliver materials, periodically at an agreed
price. The company notifies the supplier regarding quantity requirements and delivery
schedules from time to time. Such blanket purchasing has several advantages. It eliminates
the need of frequent searching for suppliers, negotiation and ordering. It also minimizes the
need of storing inventories, and as such results in reduction of ordering and carrying costs.
Furthermore, it ensures continuing and reliable sources of supply. On the other hand, it
benefits the supplier also as firm contracts enable him to forecast his demand more accurately
and schedule his production accordingly. It also saves him costs of marketing.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 5

(iv) Hedging

Hedging is buying now for delivery at a future date. Thus, a firm, anticipating a price rise,
may buy a given quantity of material of a specified quality and at contracted price for
delivery in a future month. Contracted price is generally the market price plus carrying
charges. If the company needs the material before the stipulated future date, it buys this
material from the market for immediate delivery. Simultaneously, it sells for delivery in the
future month. If price of the material has risen at the time of market buying, it is reflected in
the price of sale for future delivery. Thus, if the company has paid higher price in making
market purchases, it is compensated by higher price in the contract for future delivery. For
example, a company enters into a “future contract” in October to buy groundnuts for future
delivery in May at the rate of $300 a quintal. After some time, in February, price of
groundnut has risen to $325 per quintal. It buys from the market for ready delivery at this
rate, and sells the same quantity for future delivery in May at the rate of $325 per quintal. It
pays more now but makes up this loss in May when it receives its supplies at $300 and
delivers at $325 per quintal. Thus it gets its supplies of groundnut at $300 a quintal and does
not have to suffer loss due to a future price rise.

(v) Speculative Buying

Speculative buying involves purchasing in excess of normal requirements with objective of

earning profit resulting from an anticipated price rise in future. This is called pure speculation
as the purpose of purchasing is subsequent resale at a higher price, and to earn a profit. As
manufacturing companies do not have speculating as one of their basic objectives, they do
not generally engage in this kind of purchasing. Many companies, particularly those which
use agricultural raw materials, buy their long-period requirements in bulk so as to protect
themselves against a future price rise. This is called operational speculation. Although,
operational speculation helps a company in purchasing its requirement when prices are
relatively low, it has its costs in term of reduced liquidity, interest on capital tied up in
inventories and carrying expenses. It also increases the risk of deterioration and obsolescence
of materials.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 6

(vi) Upstream Buying

Upstream buying involves research in the price of raw materials, components and supplies for
products which are still in the planning stage. The purchasing department makes investigation
and forecast costs of materials when the product will actually go in production. This price
investigation helps in estimation the cost of production and forecasting of profit per unit.
Product and process engineers use these cost forecasts of purchased materials and
components in product designing and process planning so as to plan the product on the basis
of production cost and selling price relationship.

Purchasing Procedures

Purchasing cycle begins with the decision to procure materials and ends with the approval of
the vendor’s invoice for payment. It involves the following steps:

(i) receipt of purchase requisition in the purchasing department

(ii) selection of sources of supply

(iii) issue of letters inviting quotations

(iv) receipt and analysis of quotations

(v) selection of vendor

(vi) issue of purchase order

(vii) follow-up to ensure timely deliveries

(viii) analysis of receiving reports; and

(ix) scrutiny and approval of vendor’s invoice for payment.

(i) Receipt of Purchase Requisition

Purchasing cycle begins with the receipt of the purchase requisition in the purchasing
department. It provides the purchasing department authorization to initiate action for
procuring the required materials, components and supplies. The purchase requisition may be
issued by the production control department or stores, or any of the various user departments.
It contains details as to the materials to be purchased, quality specifications, quantities, and
time and place of delivery. At traveling requisition is often used for items that are used

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 7

regularly. It contains all the information as the regular requisition with space for repeat
requisitions. This is used again and again without refilling columns relating to name of the
item, quality and place of delivery. Quantity of materials required and delivery dates are
specified every time the traveling requisition is issued. Purchase requisitions often contain a
column to indicate the quantity on hand so as to force the requisitioned to think that the
requisitioned items are really needed.

(ii) Potential Sources of Supply

When the purchase requisition is received in the purchasing department, the purchasing
executive looks for the potential sources of supply. Generally speaking, the purchasing
department maintains a list of approved suppliers for every item purchased by the company.
This list is prepared on the basis of information gathered from various sources including
advertisements in newspapers, trade journals, buyer’s guides, purchase agents and salesmen
contract, etc. It is reviewed periodically to add the names of new suppliers and delete the
names of those who have ceased business, or whose supplies or services have proved to be
unsatisfactory.

(iii) Issue of Letters Inviting Quotations

The purchasing department issues letters to approved suppliers requesting them to send
quotations. These letters contain full information pertaining to the materials required,
quantities, quality specification, delivery schedule and place of delivery. In order to enable
the purchaser to decide intelligently and to avoid future complications, the potential suppliers
are often requested to provide details about additional charges, if any, in respect of
packaging, handling, freight, sales tax, etc. In case of purchase of machines, plant and
equipment, the quotation letter also asks the vendors if they would provide technical
assistance, training programs, and after-sales services.

(iv) Receipt and Analysis of Quotations

Quotations received from potential suppliers are opened and signed by a responsible officer.
A comparative statement of quotations is made indicating price, terms and conditions of

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 8

payment, discount rate, etc. It is analyzed to identify the supplier who offers the lowest price
and most favorable terms and conditions.

(v) Selection of Vendor

It is always not necessary to select the vendor who offers the lowest price and most favorable
terms and conditions. The purchasing executive has to consider various other factors before
selecting the vendor. These factors include reliability of the vendor on the basis of past
experience, his capability and resources to supply the required materials, his willingness to
accept the rejected materials without arguments, accommodation relating to cancellation of
orders under conditions beyond control and so forth. As mentioned earlier, the objective in
purchasing is not to reduce the initial unit cost of materials but the total cost of purchasing.

(vi) Purchase Order

Once the purchasing executive has decided on the source of procuring materials, he issues a
purchase order to the vendor. It contains details of items to be supplied, quantities, quality,
price, time and place of delivery. Purchase order, when accepted by the vendor, becomes a
contract for the supply of materials according to the terms and conditions stipulated in it or in
a separate purchase agreement. In case of high-volume, steady-use items, a blanket purchase
order is issued, as mentioned earlier. It contains all the above details except the quantities to
be delivered and delivery schedules. Actual supplies are delivered by the vendor against the
release orders issued by the purchase department as and when materials are required.

(vii) Follow-up and Delivery

The purchaser’s job does no end with the issuance of purchase order. He follows it up to
ensure that deliveries are received according to schedules. In cases where timely deliveries
are crucial for the operation of the buyer company’s manufacturing processes, the purchase
agreement often contains a penalty clause against late deliveries. Even in such cases, follows-
up is crucial as penalties imposed on suppliers for late deliveries do not compensate for losses
resulting from interruptions in production operations.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 9

(viii) Analysis of Receiving Reports

When materials are received, they are inspected by quality control and verified by the stores
department with reference to the purchase order. Shortages and damages, if any, are reported.
In case quality of materials is not in conformity with specifications contained in the purchase
order, or with accompanying engineering designs and blue prints, the purchasing department
gets in touch with the supplier for taking back the reject materials, and supplying a fresh
consignment.

(ix) Scrutiny and Approval of Invoices

This is the last step in the purchasing cycle. The invoices received from suppliers are sent to
the purchasing department for verification with reference to the purchase order, inspection
report and the receding departments reports. If it finds that materials have been received in
the ordered quantity and specified quality, it approves the invoices and forwards them to the
accounting department for payment. In case of shortages, damages or sub-standard quality, it
notifies the vendor immediately and asks him to take remedial action.

It may be mentioned that these steps are not necessarily followed in case of all purchases. In
case of repeat purchases of materials, it is not necessary to invited quotations and go through
the whole process of selection of vendors every time a fresh order is placed. In case the
purchasing department is satisfied with the performance of the previous vendor, it may place
repeat orders with him. However, it should keep in touch with price fluctuations in the market
and continually look for cheaper sources of supplies. In case of purchaser of standard items of
a particular brand name, steps relating to calling the quotations and selection of vendors are
omitted. Negotiations and bargaining for price and delivery schedule, however, continue to
be important purchasing procedures as in order cases.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 10

Sales

- Business functions can be broadly divided into three areas, namely

(i) Finance,

(ii) Production, and

(iii) Sales

- Sales function is a very vital phase of the business.

- Actually, the major problem of today’s business is not that of production but it is that
of sale. With the immense competition at every step of marketing, the problem of
sales has outstripped the problem of production.

Sales Management

- Sales Management is the term applied to the process of distributing goods from the
producer to the ultimate user. It consists of advertising and selling, storing, transporting
and handling and financing or risk-taking.

- The three biggest problems which seem to be attached with Sales Management are,

(a) Managing sales force and making them understand the definition of their jobs, i.e., the
sales force must know who is selling what, where and to whom.

(b) Compensation of salesmen, i.e., rewarding sales force suitably.

(c) Training of sales force.

Sales (Marketing) Organization

- The actual organization of the sales force or sales department is largely determined

1. by function

2. by area

3. by product group

4. by customer category and end-user category

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 11

1. Functional Organization

- The functional organization (Figure 1) is usual for the small or medium sized company
with a limited range of related products.

- Functional organization has various functional (marketing) departments or specialists

reporting to a sales or a marketing director.

- Functional organization has the advantage of administrative simplicity.

- Functional organization suffers from certain disadvantages such as

(a) Inadequate detailed planning for specific products and markets, since no body is
assigned full responsibility for any product or market.

(b) Products that are not favorites with various functional specialists tend to get neglected.

Marketing Director

Advertising and Sales Marketing Export

Sales Promotion Manager Research Manager
Manager Manager

Figure1. Functional Organization

2. Area Based Organization

The area based organization (Figure 2) is one of the more common ones in use for concerns
with a relatively limited range of products requiring selling and distribution to be on a more
or less nationwide scale through many outlets.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 12

 Marketing Director

Marketing Services Sales Sales Sales Sales

Manager Manager Manager Manager Manager
(North) (South) (East) (West)

Sales Office Manager

Advertising and Information, Market
Sales Promotion etc. Research Distribution Manager
Manager
Field Sales Manager

Depot Manager

Figure 2. Area Based Organization

3. Product Group Organization

- This type of sales organization (Figure 3) is employed when there is a wide range of
relatively unrelated product groups which require different selling methods and the
company sales forces require their own particular market and technical knowledge.

Marketing Director

Marketing Services Sales Manager Sales Manager Sales Manager

Manager Product -X Product -Y Product -Z

Agents Salesmen Sales

Representatives

Figure 3. A product Group Organization

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 13

4. End Use and Customer Class Sales Organization
- If an enterprise is selling a substantial range of products to dissimilar types of customers
or for different uses, the selling operations are split up by type of customer or end use.
- Separate sales forces are necessary.
- However, marketing services may either be kept centralized or again split up as per the
particular division of the selling operations.
- Figure 4 shows the end use sales organization and Figure 5 the customer class sales
organization.
Marketing Director

Marketing Services Manager General Sales Manager

Sales Manager Sales Manager

(Mechanical) Engineering (Civil) Engineering

Sales Manager Sales Manager

(Electrical) Engineering (Chemical) Engineering

Figure 4. End Use sales organization

Marketing Director

Marketing Services Manager General Sales Manager

Sales Manager Sales Manager Sales Manager

(Oil Companies) (Chemical companies) (Metal Working Companies)

Figure 5. Customer class sales organization

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 14

 - Figure 6 shows a general organization of the sales department of an engineering
company.

Sales (or Marketing)

Department

Marketing Research Sales Service Packing Warehouse

Intelligence
Forecasting
Statistics Home Sales Foreign Sales
Sales Correspondence
Contracts
Representatives Servicing Consultancy Spare parts

Advertising
Contracts Representatives
Exhibition

Press
Radio & T.V.
House Publications

Figure 6. Sales Organization of a Company.

Functions of Sales Department (duties of Sales Manager)

(i) Analyzing markets thoroughly
(ii) Studying consumer’s psychology and demand.
(iii) Studying the conditions existing in competitive firms
(iv) Studying the market fluctuations.
(v) Preparing market, sales and other relevant business forecasts.
(vi) Assisting in the preparation of marketing plan
(vii) Preparing the sales budgets from the marketing plan.
(viii) Deciding on the distribution policy, methods and network.
(ix) Planning of the advertising campaign
(x) Ensuring suitable packing of the products.
(xi) Creating communications network for the department.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 15

 (xii) Developing technical advisory and other services to the customers.
(xiii) Determining sales staff requirements and handling the recruitment, training and
compensation of sales staff.
(xiv) Providing technical advisory and other services to the customers.
(xv) To explore newer markets for selling the company products.
(xvi) Ensuring effective coordination with production and financial departments.
(xvii) Striving continuously to lower selling costs, to expand sales and to improve the
product for its wider acceptability.

Duties of Salesman (Sales Engineer)

- The distinction between a salesman and a manager of a market area is important; it is the
difference between viewing salesmen as employees or as members of management.
- A salesman’s job may be seen as that of managing a market area or the salesman may be
looked upon as an order taker.
- In general, a salesman may perform as many as five different activities such as:

1. Prospecting, i.e., a salesman is expected to search for additional (business) prospects.

2. Communication information pertaining to company’s products and services to
existing and potential customers.
3. Selling company products
4. Service, i.e., providing service to different customers. Service includes providing
technical help, expediting delivery, etc.
5. Collecting Information, i.e., conducting market research and supplying regular reports
on his findings to the company.

Sales Forecasting
Introduction and Importance
- Forecasting is essentially the art of anticipating what buyers are likely to do under a given
set of conditions.
- The market research conducted by a firm plus the analyses of current sales experience and
trends form the basis for the construction of a sales forecast.
- The sales forecast is a commitment on the part of the sales department and each of its
divisions of the expected sales likely to be achieved in a given period at stated prices.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 16

- Sales forecasting is a basis for developing coordinated and goal-directed systems of
marketing action.
- The sales forecast is one of the vital tools of marketing planning since adequate planning
and the effective deployment of marketing resources are based on sales forecasting data.
- Sales forecasting is essential if more accurate sales budgets, production and purchasing
schedules are to be set.
- Accurate forecasts are vital aids to decision making.
- Forecasts provide basis for evaluating the functioning and productivity of various
segments of business activity. They can guide marketing and other business actions
toward the achievement of implicit and explicit objectives.

Sales Forecasting Factors

The factors to be considered when making the sales forecast are:
1. Government action. This is important when most of the purchases are made by
government departments, government controlled bodies, nationalized industries, etc.,
as in U.K.
2. Economic trends. The trends at home which are affected by government action and
the trends in world market are both of interest.
3. Competition-existing competitors and new competitors.
4. Changes in technology and markets.
5. Internal factors such as capacity, available resources product mix and Marketing
mix, etc.

Sales Promotion
- All the activities that go into the development of sales or those that are intended to raise
the demand level for a product very quickly can be grouped under the title Sale
Promotion.
- Sales promotion includes those marketing activities, other than personal selling,
advertising, and publicity, that stimulate consumer purchasing and dealer effectiveness,
such as displays, shows and exhibitions, demonstrations, and various non-recurrent
selling efforts not in the ordinary routine.
- Sales promotion focuses the attention of the customer at the actual point of sales in the
shops with such effectiveness that both the advertiser and the dealer are benefited. The
main purpose is to increase sales.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 17

- Sales promotion plays a critical role in introductory and maturity stages of the product life
cycle and also appears to be especially effective during periods of rapid inflation.
- Sales promotion, intended to educate the consumers better and to bring about an increase
in sales is used more extensively in highly competitive businesses.
- The whole idea behind sales promotion is to bring the name of product and that of the
manufacturer constantly before wholesalers, retailers and the consumers in order to
stimulate their interest in the product.

Sales Promotion Methods

Sales promotion is the catchall for various promo-tools that are not formally classifiable as
advertising, personal selling, or publicity. These tools (methods) may be sub-classified as:

1. Consumer Promotion- persuading consumers to buy; these include samples, money-

refund offers, prices-off, premiums, trading stamps, contests and competitions (i.e.,
the winner customer will have a trip to Europe, etc.)
2. Trade promotion- incentives to distributors and others to hold stocks of company
product; these include special discounts, buying allowance, one or two free units per
bulk container, dealer competitions such as free holidays, push money, etc.
3. Sales force promotions- bonuses, contests, sales rallies etc., for the salesmen.
4. Good public relations, develop good will and increase sales. Every proposed
business policy should first be analyzed in terms of its effect upon the company
image.
5. Good customer relations. Good customer relations are basically the result of their
past transactions with the company. Speedy handling of complaints, assistance in
emergencies, abiding by announced policies etc., all develop good customer relations
and increase future sale of company products.
6. Display. Displays at points of sale, using posters, banners, placards and leaflets, to
attract the customer’s attention to the product.
7. Product exhibitions, demonstrations, and conferences.
8. Holding competition and awarding prizes to winners.
9. Latest product styling and appealing product packaging catch the eye of the
consumer and increase sales volume.

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 18

Functions of sales promotion Department (or Manager)
1. Product package detailing
2. Service to salesmen.
3. Service to dealers.
4. Making displays.
5. Helping the dealer in demonstrations, door-to-door canvassing, etc.
6. Publicity, (through slider, films, and calendars, etc)

ME 4203 Industrial Management Professor Dr. Md. Arefin Kowser 19