15.

1 INTRODUCTION
0!cbasing is the vital func ·on of materials mana ement a art from stores kee ing, inventory
con ro , tra fi a_nd waste control. After the approval of the material plan and preparation
""of the material budget, it is the responsibility of the purchasing department to follow strictly
the scheduled production plan and procure the material of good quality, in desired quantity
aiicI on ume. Purchasmg 1s not an end in itself. Matenal and supplies are purchased or
"procured for use in other departments and the purchasing department's role is to meet their
needs. Purchasing is deeply involved in the management of material flow from the outside
13
sources down to production through the inventory pipeline. S.N. Charir J calls purchasing
m~er external production manager.
(Material costs form the major part of the production cQsts. Therefore, production costs
can be brought down by exercising control _g~er the !11-~erial costs which, ultimately,
depends upon the purchase of material at a proper price~aterial should be purchased in
such a ~ay~at there is neither any overspending i~ nor any shortage~ causing stoppage in
product~oil) ·ght quantity and quality purchasing will not only lead to reduction in the

m
~ ·
Productt_on' c t\~~ the quality o_f production will also improve. Thus a purchasing manager
has a pivotal

15·2 DEFINITION OF PURCHASING

~ford ~d Banks in his book 'Production Handbook' describe purchasing as the <P!ocurement
~enal, machines and tools on payment') It is the act of exchange of goods and service~
~ney · It. 1s
qualit · procurement of material at competitive · · pnces.
· I t al so inc
· Iudes getting the
matenal to facilitate the standardization and competitive marketability of the product.
213
 . . . I d
It 1s the process which me u es a
II the functions froffi the time the Deed
• s urchased. In a wa
is felt till the receipt and approval of the material .
r0 e Illa .
y' _Purchasin lcriij
anagerial activity and re mres &
become a very important m S O
ther definitions of purchasin 1
. 8!1d planning on the part of managers. ome . • g are: · 0n
' Buying comprises all those activities involved in finding a suitable source of s14
. . I' e an size an o an Pp/
selecting t e desired quantity, qua i - d h nditions "-Pyle a ree... ,
- de1·ivery
wit re erence to the price, · date an ot . er co • _ . ••,e~,
"Scie.;;fic p:..chasing is the procurement by purchasing of '.he pr?er material, ,..,,;,,
equipments and supplies of stores used in the manufactu~mg odal product, adopted'),
• an d qua fI'ty at the proper time an owest price consist ro
marketing in the proper quantity
with the quality desired."-Dr. Walterz enr

"Purchasing is the business activity directed to secure th e mater~al suppliers and equi me
.
required . the operations
m . oif an organiza· ti'on• _ ine an Westmg nil
Thus, purchasing is concerned not only with the _Procurement of material but also a -
the economic issues which affect the cost of product10n. _.

15.3 OBJECTIVES OF PURCHASING

The ob· ectives of urchasin , according to the classical definition, are to buy materials d
services of the right quality, in the right quantity, .at the ri ht rice, from the right sour~/
ng t ttm~ n genera management terms, there are eight basic objectives f
purchasing:
ensure smooth operations with an uninterrupted flow of materials.,,.!lld servic
buy competitively and prudt;ntly, this includes two distinct considerations. T ,
buy competitively involves keeping abreast of the forces of supply and demand
that regulate prices and availability of materials. To buy prudently involves a·\
constant search for better alternatives that give the best mix of price, quality, and
service. A buyer who pays more for a cheaper material than a competitor is not
buying competitively. A buyer who purchases costly material when a cheaper material
could perform the function equally well is not buying prudently at all. It is ilie
combination of competitive buying and prudent buying that contributes moSI to
maximizing a company's profits.
I..Y'fo keep
. . inventory investment losses due to deterioration ' obsolescence and tbeft to
a. rrummum. . ·
fio0 develop reliable alternative sources of supply in consultation with other dep~en~•
• develop good vendor and su lier relationships. Good supplier relationships
mvaluable.
th Under such relationships, the pro ems that arise between the buyer ~.
• e sell~r are re~dily s?lved. Suppliers also provide useful information 10. bu~:~
'f!o achieve maximum mtegration with other de artments
un erstan mg ·
. fh1s niJ!tO
the[ll
0 er departments so as to translate
----- ~,
mate~als su~port actions. The most common areas of support are in developing
effe_cttve des1~~ and standar~ization programs, forecast of future prices and general
business cond1t10ns, ~conomic make-or-buy decision, and a repository of information
and_kn~':ledge from suppliers regarding new materials, processes, prices, and materials
availab1hty.
_• l,o train and develop highly competent personnel who are motivated to make the
finn as well as their department suc,ceed. Such ersohnel in addition to fulfilling
the respons1 1 1t1es o t e pure asmg department a reserve talent from
which future execu 1ves o the 1rm can be selec ed.
• o develop policies and procedures which ermit ent of the preceding
seven o 1ectives at the lowest reasonable operatin cost.
These objectives in principle apply to all categories of industrial buying activities,
-manufacturing concerns, governmental units, uQiversities, hospitals, and all other types of
activities that do not buy for resale.

UTIES AND RESPONSIBILITIE OF PURCHASE

' ~
- Pul hase department has to perform several duties and shoulder responsibilities. They are
as follows:
j/ lJleceiving purchase requisitions~ , Purchase. department does not start any activity

of k urchase of material on its own. Tne department in need of a matenal usuall presents
a oinplete pure ase requ1S1t1on orm. urc ase reqmsition is a written list of material for
r coupment, sent to the purchase department. It is submitted to the head of purchase
partment and is generally prepared in triplicate. In other words, it is a formal request to
e purchase department for the purchase of materials. Purchase department, after receiving
the purchase requisition related to will decide about the material to be purchased. It is also
the responsibility of the purchase department to get, information about the .required material
and its use. 1Jie purchase department should not make alterations the purchase requisition

2. S.eledioll..Qf sourc.es of
without consulting the department concerned.
suppjy: . After receiving the purchase requisition, it is the
~uty of the purchase department to select the source of su ly. This invo~ves prep~ng a
list o sup liers and then decidmg w1 · w om to o business. In repanng t e hst, the
J.?llowing steps s ou ·
c.,!...,Past experience with the supplier
C!,--lnterview with the salesmen
l'.,!.--lechnical and descriptive catalogue
~rade directories and trade journals
(Yisits to trade fairs
.!,,Consulting trade agencies
.....!__Open and limited tenders for quotations
l,.Jeriodical advertisements in the press
Uf the roa;erial is to be purcha ed from the e istin su lier, material order - 1 ~
according ta the previous terms and conditions. But, if the supplier is new Wt be Pia
be placed only after decidin u on th;;-t;ms and cond1tioni:U-fs ~ ~c~
· t e purchase department to invite quotations f;..om e new s ~ biliry ~: ,
cpmpared with the price lists of the existing supphers. ·
. 3. Placing the order: After selectin the source of ed
prepares the purchase order. e u chase order is, in a way, an agreement b e il!!nicn1
purchaser and the su l ier in which the latter is ordered to su 1 o o ~ n !ht
conditions. Six copies of the purchase order are prepared. The followin er cen ·
mcluded in
~ c e and terms of paymeQt
~rchase ord~r numbe.r _
1
'--9 Quantity of the material ,to be puichased
. ....4 Description of the material
~Delivery conditions
Special remarks .
4 Delivery at right time: It is the duty of the____purchase department to ensure the
d~ry o e matena a · ng t time for the purchase of an !tern is said
to be the point of rmrumum stock, the point at which the material is expected to arrive in
the storehouse. The purchase department should take immediate steps to replenish the stock
as soon as thematerial touches the reorder 1 1. • ._
5. ·Inspection an assi f bill : <fLis also the duty of the purchase department to
verify ·· e mvo1ces with quotations, inspect the materials received and e~ure that the
material is received as per the conditions laid down in the purchase ore@-. It should also
get the bill passed by the accounts department within a reasonable tim,. he accounts
department should be instructed to make the payment at the earliest.
0· Preservation of purchase records:C..eurci,se order is a legal docum~- ~eref~re,
it is to be preserved by the purchase d'ej(artm~(.,___Besides, the list of sources of supphes,
the vendor's record, contract file and record of printed forms are also to be kept safely by
the purchase departmeqt. These documents help immensely in framing the purchase policies
and taking the purchc<se decisions. .
( 7. .,.Good relations: The purchase department has a responsibility to establish cor~~
re~n~ wi~h supplie~s. If suppliers _are good, their performance in supplying
quahty m nght quantity and at the nght time is outstanding. The relations betwee
the:~:
buyer and the seller are seldom spoiled if they maintain business like relations. . 3
. Moral and ethical standar : The buyer keeps the purse of his organization asof
custodian. The management expects him to follow an ethical approach to the proble!Il\g
· A n ff'•~ia· 1 f avounng_
· ·
pur:h asmg. ° a suppher, a friend or a relative of the buyer accepU
ur 10 a
a gift, the buyer himself acceptmg money or gift in exchange of granting favo. aJIY:
Pai:ticular suppl~~r are a few of the u?ethical practices which one may come across occasion .
00
It 1s the duty or the _l>~hase officer to maintain high ethical standards. 1· ti
0

"'r----'o " €oord"mati OI!!.,.

·/ Coord'matlon
· is z~
· the essence of good management for an organurcbase
nd
to be successful. All the departments must act as cogs of well-oiled machine. A P
,,,----- .
ent is no except~on to i
·Q ·
ts one of the druies af the purchase department to
deP~ coordination with other de artments in o ro erl assess the purchasing
Jl!aintain
~P.•rchase Jiwigd.: Since purchasing activity accounts
10,~ r P it ll
for
a substantial portion of
rate fmance, it assumes a great importance among various budgets such as sales •
'

the c;t:v;ersonnel ~~dg~t ~d revenue budg~t. The purchas·e budget indicates ·the purchases
buds made for achievmg the~ omplete budget _plan. This represents the requirements of
10 be d indirect material purchased and services as set op in the production cost and
,~p . .
di ·'tal ex.penditure budget, T~e pu~chase bu~get enables the purchase department to plan its
caP1h es and place long-term contracts after considering all relevant factors.
pure as .- -..

1s.s~IPLES OF PURCHASING .

stated earlier purchasing is one of the most important functions of materials mana eme
5
AI . ·mpossible t ·eve t e desired results for which the business exists without successful
tIS 1 __...-- . . . d
nnrchasi.ng,. Pqrcfiasmg practices may vary accordmg to the pohcy of management, size ~n
~ndustf):'.. However, there are five well-recognized p,pncjples of scientific purchasmg
~(Fig.
pe 15.1) agreed upon- unanimously by most authors and research workers. They are as

follows:
,- ,(1) Right quality ~
(2) Right quantit~
·(3) Right time
~4) Right price ._,,,,,<
·(5) Right place

Right time

Right price

Right quantity

Right place
Right quality
I
!; FIGURE 15.1 Five principles of purchasing.

Right quality
~
. . asr · 'fiicat10n
eci ·
of qua1ity
, shou ld be made in the terms of, contract The acceptable
sh u ~ l and method of testmg
q • should be made discrete in the contract
. ocum . re
__ ouJd not be a . h ali'ty of the material at the time of purchase u&1ause
ny compromise on t e qu
 , it will reduce the quality level of the product if it is below the s p e c i f ~
quality of an item may be the n ht uaht for a 1ven purpose but
right for another purpose. Quality should easurable an un erstandable not be
normally that qua ty w 1c is ec1 e keeping in . far as
.possible. The right quality is '----..-- 1i h' h . d 'd d as
' buyer's pref~nces
" °
and cost factors. l'~ere 1s a tren d t speci'fY th e Cp value Whic th_e
explained in Fig. 15.2. It should be venfied that the Cp value of the products shouidh 1&
such that it falls between 1.50 to 1.70.
. .
. . be

Lower Upper
process limit process limit

, Lower Upper
l+-1-- p - - -~ /
specification specification
limit limit

'
FIGURE 15.2 . Process limit and specification li.mit.

T
Cp = -
p
where
T = Tolerance provided
P = Supplier process capability

(Right quantity__!
<the main objective of the purchase de artment is to · '
production department without any interruption. This is
.... baying. The dec1S1on of ngh fo the peri
and a so to the minimum t prevent shortages.
in _overstockin . Capital _is unnecessan y oc ed and inventory carr ing c
~oncepts such as econonnc order quantity, fixe period and fi 'ty system, tic ,
· mes. But t e buyer has to use his knowle ·ence a
·ne the quantity after considering factors sue s
ity of the item, favourable reciprocal relations and make-or-bu
Jt~o1g1~ow~~gth~e~~b~ea~t~e~n; ~a~t~ht·Jh~e: ~sh~o~u~l~dE;bei~c~rie~at[iv~e~~an¥,~ _ ----.,;,,,"
term o ective shou e to minimize the cost of ultimate pro has to adopt s riiilJCal
pohc1es and procedures for ca mer items. He should riate matheJJla .
-modes an selective control (ABC VED, etc.) wisel .
 ~me
aterial should be purchased at ro time so that production costs can be kept under
control. For determining the ri ht time, the pure ase manager esttma es e lead time
!iifoiination for all compone9!~. Lead time is_the.total-time that elapses between the recog n
'(5f"the need of_an item tHl the item · ·s rovided J or use. While deciding upon
thepurcnases, the buyer has to ~onsider emergency situations like stn es, ock-outs, etc.
w@ch llllght add up to the lead time in exceptional case.s. The right time for ordering of
material is termed reorder level of materials. which is decided ao the basis of demand
'auring lead time plus safet stock. The respon~bility for purchasing the material lies with
e pure ase epartment. The store department sends the requisition to the purchase department
as soon as the material touches the reorder level. The purchase department takes immediate
steps to replenish the stock in order to procure the material by the time the material reaches
the minimum level.

Right price
It is ve difficult to determine the right price. Right price is that price which brings the
best ultimate value invested in purchasing the materials. • . · , f
•varying factors which determme the right price of an item to be ur . 'f.he quantJty;-
·~ · · , eman an supply curve, competitive trend, business relationship,
distance, government restrictions, after sales servic...es, discount, terms of purchase are the
important factors which ovem the determination ~f right price of an item. The questicm
o pn e ermination demands not only market knowledge but also a c ear understanding
of the pricing process.
rices are determined by preparing a comparative statement and analysis of the price
lists, catalogues, quotation, tenders, etc. of the various su p 1ers. e preva ing mar et
pnces may a so e t e aSIS of price determination. There. may be negotiations between the
purchase department and suppliers for the determinat~on of price. The buyer should make
use of learning curve effect to negotiate for a lower price in labour-intensive products.

-----
Right place
Right._place___means that place of supply which is appropriate, keeping in view the place/
iocation of the store. 1The selec · · cts the trans ortation and material
handlin costs. at lace where these costs are the lowest.
If a local supplier agre_~§._.10 supply--on the same conditions as an outside su lier, he should
be 1ve · · . · - ·
The purchase parameters can be depicted elaborately with .the help of Fig. 15.3.

15.6 SPECIAL METHODS OF PURCHASING

v·

is to purchase the r · · in right

e size and nature of uantum
pure ase varies i,tnywhere between a few thousand of rupees and ores of
 1
rupees~uyer is gener,lly interested in obtaini~~ the best price cons_istent with quality ana
delivery requirement~ ~hen the market cond1t1ons are stable, this does not pose an)
problem to him, but when it is u:ifs-le, it becomes critically important for him to decide
when purchases are to be made. Different types of purchasing are discussed here.
Figure 15 .4 illustrates some of t ese methods in approximate relation to time. ·
1. Hand-to-mouth purchasing: (fu__this ,!}:_Qe
of purchasing oaly items ·of imme! ate
uirements are urc ase . e purchase manager does not keep a buffer which rotec
..........LLl...-l!,rom such event1nttffies-mr-S1~tSS-OJUlt=atllSflOIT ottlenecks. He procures ilie
aterial in the mos-:- t _e_c_o-no-ffil
---;-.c- -;--~:----;:;::;;:-:----- te~ is fraught w
0- p_:u:_r_c~h-as--.1-n-g- sy-s-:-- if
dangerous cor sequences and hence is the worst system. 1s 1s ollowed only whe 1'
purchase manager is sure that the supply will never b~erru d. ven in such circumstan~'~'
- · · mstan\ ·
: s~ag~ i~n_o~r~d~e~r~to~~u~a~r~d~ a~~a1~·n~s~t~u~n~f~o~r~es~e::e:::n7.c:r1r;;
cn, e~r=ta~1~n'.:--:r=e~rv:ie~ s~u~p;:p:y~ 1:_s_n:_e::c:;:e:.:s~ rc~
. u hk
. r1
1.
Hand-to-mouth pure as1ng 1s beneficial to the organization if the prices ar~ falhng_ 0~J),~~
to a • s sys em may prove ns y if t e · creases or ten s to mcrea~ (
. ~----
~Uirements' takes care of futurp_need~s . - - - - - -- - - - - v~ ·. tlli'
(2. J?orward_ purchasi~ard buyi~ refers to ~rchasing for futu~ ;J
type of . . er makes a ommitment to buy at a . ~ lf~l'1
~.?ntracted gua~!!!_y ~t a .co~cted price. The prevailing market price a~ --
~~ons1derallon. It 1s ~ing in excess of the minimum requiremen ·
 It is · in a way· a deal
· made in the present for the future ,. Forward
-, p_!Ire h asmg
• is
• a guard
1
ag ainst mterruption m I supp y due
, to one or the other reasons · t a s e ps m economy
~ s m g trecau_se ~r e uantlt orders earn discount and teduce the purchasing costs.
forward . urcha . . . · 0 urchase ahead of needs . ence it ensures a ams t
@ssible i~terruptrnns_ i~ operati~n~ there_by helping the organization not only to maintain·
iti, goodwi~l a~d ful~il its co~mit~ent to t~e market but also to beat its competitors 10 a
market which is subjected to i~flationary nee trends, scarcit conditions and profiteerin . •
Market ms a i ity motivates this type of buying .
.- 3. ~peculati~,e p~~chasing:. Speculat~e pu~chasing is generally followed in order to
ake so~e _rof _s ansmg out o~ !n ~ntici ated rice rise. In this purchasing, large orders
oL matenal are gr: en. :-furchase is not made for business reqmrements but to earn pro its
in future. Speculation m urchasin activities b urchase de..,.,.,,..,.~, ~t ·s seldom appreciated.
0

ecu ative purchasing affects both the working capital position and the net income o the
organization. Both of these may e a verse y affecte i t e pnce does not ris ording
to-expectations._This type of purchasing shou e avoided as it is risky and can harm the
organization's reputation.
o;:: 4. Hedging: A buyer can resort to hedging to neutralize the effect of fluctuations of
1f
prices the market. Hedging refers to two simultaneous contracts. One contract is entered
into for _a purchase an'clanother for a sale. 'OJese contracts are ei:tered into in two markets.
It is esspntihl that these two markets should· be such that the . rice in o e should sfi6w a
distinct pw d movement and the price in the other should show a downward movement
simultaneous y. Such mov e two mar ets should approximate y e the
same. 1s 1s necessary because hedging is used as a too to protect t e org _ m
~ssible losses. In .such a situation, the losses of one market would be com ensated by the
ains o e o er, 1vm t e or anization a net zero loss. Cancellation of gains and losses
ff.Q!Jl price changes is the sole aim of hedging, which is done by pure asing one comrno
today and selling the other at a future date. Hed i sactions are meant for future
~elivery. Therefore, t e uyer s ou e able to forecast well even to make a profit.
5. ~eciprocal purchasing: Recipro~ying means purchasing from one's customers
in prefurence to other. However, a purchasing executive should not indul e in reci rocity
on his own initiative w en the terms and conditions are not e ual with other su liers. It
is o ten oun a ess e 1c1ent manufac ibutors gain by reci rocit what
they are unable to gain by price and quality The well-known abrasive wheel manufac~rers
~orundum and GriQdwel Norton exchange silicon carbide and alumina mutually.
6. Concentrated purchasing: Under this system of purchasing, purchases are made
from very limited soarces or even · a
'sure' cus o r. e ets etter services and material at t e proper time and at a pro er nee
a~a1 s more credit facilities. He has to create less business-re at10ns which result in
saving in cost and time. But there are certain shortcomings of this method also. The buyer
~ri's to bank on some suppliers or even a single supp~ The choice of items is also limit~d.
may also take undue advantages of the buyer's trust.
·'-'I. QJversitied purcbasing· The buyer purchases goods from a large number of sellers.
~t J_s a flexible and commonly us6d method of purchasmg. !_!I this method, ben~ ~ a
pe~ect competition among the suppliers are derived. Better service and goods at nght pnce
 . ---.........._
are made available under this method of purchasin . ' ut the bu er has to establish I
WI
'th a number of ~=---=c=c-~~~-:;i~:::r;;--
su 1ers, w 1cli 1s difficult. ,,,-- re atj0ns
8. Tender buyin : Pu · u asin s ould be done without an favouritism "'
b . . I . •en
• uymg ensures proper competition among vendor~ . The steps mvo ved are as.J@ows: .r·
--Bt-Formulate the requirements clearly
(i.i.YEstablish the bidder's list ·
~nvite the bids through advertisement (in case of the so-c~lled open tender)
fa-)~pen the tenders on a notified date before the. representat1:es
, Jtf'f ~repare a comparative statement on quality, pnce, and dehvery conditions
( ~rivaluate the bid
~ -Award the contract to the lowest }e~onsibk ~bidder
f:j)ir. The quotation should be low price and consistent with the quality requirements.
As the advertisement of bids is costly and eats up time, bids are solicite? from limited
parties with a good reputation. This method is termed close tender or,, limited tender.
So~ e · es a single t~nder is also res~~d to. . .
· . Rate or runnmg contract \This method ..,...,,,u.a , ls m governmental bu in and
procurement by direct _ emanding officers. Organizations Ii e Railways use · runniqg_
contract where the rate and quantity is specified. - - - ·
0. stems ~ontracting: T s is a form o stockless purchasing in which authorized
employees may direct y o ain the required material from the supplier's storeroom: The
co tr is simple, covering only delivery period, price and invoicing procedure:
11. anket order: · This is an incomplete contract in which usually low value items
ar"e involved and supply is made when the vendor receives a bona fide shipping requisition.
Blanket orders usually cover one year perioa. A typical example is an ·order for stationery
items.
12. Bazaar purchase: Also termed cash purchase or impress purchase, it is confined
to urgently needed, low-priced items. It is a good idea to collect several such orders from
various departments and buy all the needed items in one visit by the buyer.