Purchase Management

 Purchase management defines the acquisition of various goods and services from the outside
network. {Purchase}
 It is a routine function of any organization that also serves as one of the business’s strategic
avenues.[ways] [work]
 A business requires that various materials, parts, stores, equipment, and machinery be available
at all times and at a reasonable price.
 This will assist management in achieving scale economies and being in a better position to
compete. [Help]
 Purchase management brings [laana] efficiency and effectiveness to the system of purchases.
 It is followed by the management and thereby [jiske chaltey] assisting in carrying out the process
of manufacturing.
 Purchase management is nothing but procuring the required material from the right vendor at a minimum
price in the requisite quantity and that too at the right time.

Objectives of Purchasing
1. Availability Materials, Supplies, and Equipment at the Minimum Possible Costs:
 Procurement [achievement] of raw materials, supplies, and equipment, which together constitute
[make, build] inputs for a manufacturing unit, at minimum possible rates. It facilitates bringing down
the overall input cost and cost of production. Reduce the cost of production leads to better
profitability for the organization.

2. Enable Regular Flow of Production:

Incessant [countinuously] supply of various constituents [component] of inputs ensures [confirm]
as and continuous production process. In turn, keeps the production cost in check, and thereby
maintains the profitability level of the organization.

3. Increase Asset Turnover [income]:

 As a result of the purchase department’s ongoing hard work, not only investments are maintained
at an appropriate [suitable] level, but fixed assets are also created. However, as a prude measure,
the investment in inventories/fixed assets needs to be kept at the minimum level with reference to
the sales volume. This is achieved through efficient inventory management. With the augmentation
[increase] of the turnover of assets, the organization’s profitability is also improved.

4. Develop Alternate Sources of Supply:

With a view to improving its negotiating [karobaar krna] power, it is desirable [attractive]to the part
of the purchasing department to explore the possibility of finding alternate suppliers of various
inputs especially the basic raw material, and the cost of material is likely to come down.

5. Establish Cordial [friendly] Relations with Suppliers:

Maintaining a cordial relationship with the suppliers goes a long way in creating an affirmative
reputation for the organization in the market.
Such reputation may yield dividends in various forms like
(I) acquisition of supplies at the most competitive rates,
(ii) getting priority over others in supply of materials during a period of their shortage,
(iii) getting advance signals of an impending shortage of materials,
(iv) timely intimation of any innovation with regard to a substitute of the material currently in use,    
(v) getting the facility of making payments with delay, in case of short-term liquidity constraints,
etc.
6. Achieve Close Co-ordination with Other Departments:
 The purchase department is required to function in close co-ordination with the following
departments of the organization:
o Production Department:
The production department indicates the specifications (quality as well as quantity) of the materials
required, the timeframe within which the supplies have to be received, and any specific items
required, etc.
o Engineering Department:
 The engineering department has to indicate the specifications in respect of various tools,
machines, equipment, etc. to be purchased.
o Marketing Department:
The marketing department is required to give inputs in respect of sales projections, their impact on
the level of production, and purchase of materials, and the impact of quality of inputs on quality of
outputs and sales.
o Finance Department:
The finance department is needed in connection with the maintenance of the desired level of
materials, raising of working capital finance through the hypothecation/pledge of goods, availing
the discount on account of bulk purchase of materials, scheduling of capital as well as current
investments, etc.
o Human Resource Department:
The Human Resource department has to play a crucial role in planning, training, and developing the
Skills of people posted in the purchasing department. It is also responsible for maintaining a cordial
relationship with vendors.

7. Train and Develop the Personnel:

The purchase department has to deal with persons showing varied human traits. The company
needs to create a workforce of personnel with an innovative and imaginative mindset. This can be
achieved through appropriate training and skill development of personnel on various subjects like:
a. Continual Improvement Process or   KAIZEN
b. Supplier Upgradation or Development
c. Quality Management System
d. Process Audit
e. Production Part Approval Process (PPAP)
f. 5S – Work Place Management System

8. Efficient Record Maintenance and Management Reporting:

Maintenance of records, which involves a lot of paperwork, is an important function of the
purchasing department. Record keeping should be standardized with a view to maintaining
uniformity in the system. As the purchasing department operates as an independent entity, there is
also a need to have a system of reporting their major activities to the company’s management at
regular intervals.

Functions and responsibility of purchase department 

1. Availability of Materials
 The basic role of purchasing department is to make available the materials to carry out the production
process.
 In the case of manufacturing, establishment material includes basic raw materials like steel, iron,
plastic, and aluminum and also includes machinery, tools, equipment, etc.
 Purchasing also involves that suitable quantity is procured from the suitable vendors only.
2. Evaluating Price
 Another routine function of the purchasing department is continuous evaluation of the price.
 Whenever the price touches the bottom mark, the order is placed to get the maximum advantage.
 Higher quantities are preferred to get the maximum discount.
 However, the same may not be possible where the volume of the business is small.
3. Paperwork and Accounting
 Handling the paperwork related to the receipt, delivery and other peripheral activities related to the
purchases is also one of the functions of the purchasing department.
 It ensures that the material order is received from the respective vendors on time and any delay
arising can be tracked.
 In the case of small business enterprises, the purchasing department is usually related to the
accounting department to ensure the availability of sufficient funds for the execution of the purchase
order.

4. Policy Compliance
 Apart from the various functions that are discussed above, the purchasing department is also
responsible for compliance with the company policies and procedures, a formal procedure is adopted
for making a requisition to the purchasing department which further follows certain norms while
placing the order.

5. Supplier Development
 Supplier development is also very much an important function of purchasing department.
 Most organizations rely on procuring material from external sources and a good reliable supplier is
very much important for a consistent supply of quality materials without any interruptions.
 Hence, purchasing department must plan for the development of all its suppliers in a phase-wise
manner for their development activity.

Importance of purchasing department

1. Efficient Administration
 The importance of purchasing function is the same for all organizations, irrespective of the fact
whether it is a manufacturing unit, trading company, Government, or a charitable body. It has a
strong bearing on production cost, level of production, timely delivery, and product quality.
 An effective purchasing function leads to the procurement of materials of superior quality at
competitive rates.
 As a result, the efficiency of the management is enhanced, and the bottom-line of the company is
improved.

2. Quality of the Final Product

 The quality of the end product produced by any unit is of paramount importance.
 Manufacturers are, therefore, very cautious about maintaining the quality of their products.
 They don’t like any compromise in this regard, as any shortcoming in their product would destroy
their image in the market, and their market share may decline.
 They are also likely to lose their loyal customers, who are very particular about the quality of the
brand they are using it.
 This aspect gains additional significance in a market, in which cut-throat competition is rampant.

3. Timely Delivery
 Timeliness is the essence of business ethics and industrial activities, which needs to be paid proper
attention to by business entities.
 Any casual approach in this regard may lead to disastrous results in the form of loss of existing
business and business opportunities.
  From the manufacturer’s point of view, the flow of raw materials in a regular and unbroken manner is
absolutely necessary in order to ensure that the manufacturing process is not interrupted at any
stage.
 The purchase department is, therefore, required to monitor the level of raw material inventory on an
ongoing basis, and place the order for fresh raw materials in a timely manner.

4. Increase in Profitability
 The efficiency level of the functioning of the purchasing department has a direct bearing on the revel
of the company’s profitability.
 They have to decide from which supplier the raw materials should be purchased when to purchase,
and how much to purchase (whether in bulk or in small quantity).
 Such decisions are taken on the basis of a number of factors prevailing in the company, and the
market; the latter being volatile in nature.

5. Full Utilization of Capital

 Placing an order for an appropriate quantity of raw materials at an appropriate time by the
purchasing department obviates the need for unwarranted investment of the capital.
 The capital so saved may be used for some other productive purposes.

Methods Of Purchasing Materials

1. Purchasing by Requirements
“Hand-to-mouth buying” is the alternative name of this method. This is the method of buying in
which purchases are done whenever there is a need for materials.

The different cases when this method can be used are:

i. Purchasing of those materials which are not commonly used.
ii. To facilitate the ad-hoc requirements of the production.
iii. When the prices are not stable or keep on changing or the requirements of the organisations
are not constant, it is advantageous to buy the material in lesser quantities often.

Advantages of Purchasing by Requirements

i. There will be a lesser amount of inventory carrying cost.
ii. Need of limited storage space.
iii. The requirement of lesser working capital.
iv. In case of job-order type production system where a number of products are made
according to the customer’s orders, this type of purchasing is more appropriate.

Disadvantages of Purchasing by Requirements

i. There will have a greater cost of distribution
ii. It is not able to fulfil the unexpected demand.
iii. The benefits of negotiations cannot be taken due to a lesser number of units.

2. Purchasing for Specified Period

This is the method in which sufficient quantities of different materials, e.g., coolants, stationery, oil,
and different other types of materials which are needed for the operation and maintenance of the
offices, plants, and different organizations divisions are purchased which can fulfill the
requirements of a certain time period. The time period is estimated on the basis of the production
schedule.

Advantages of Purchasing for Specified Period

i. Once the order is obtained, production can be initiated.
 ii. It requires lesser working capital and storage space.
iii. It is easy to evaluate the cost which is not greatly influenced by the market variations.

The disadvantage of Purchasing for Specified Period

The reliance on a single source will be increased if the buying is done for a certain period.

3. Market Purchasing
This method enjoys the complete benefit of the current market situation and price variations. The
calculation about the requirements of the analysis of market patterns for placing an order for the
purchases. In order to fulfill the upcoming requirements, the buying is done well in advance when
the prices are at a lower level and are expected to increase in the future.

Advantages of Market Purchasing

i. Lower production cost and greater profits can be enjoyed by acquiring the materials when
the prices are low.
ii. The overhead expenses are also limited to the lower level due to the buying of the
quantities in a single order.

Disadvantages of Market Purchasing

i. It incurs in greater inventory carrying cost.
ii. There will be the need for having large storage.
iii. Seizing of the organisation funds.
iv. There is a probability of huge losses in case of any judgmental mistakes.

4. Speculative Purchasing
For having the greater profits purchasing the materials in additional units during the lower prices, is
done in speculative purchasing as opposed to market buying. The main focus while buying remains
on the price patterns rather than the stringent material requirements of the firm.

Advantages speculative Purchasing

i. There are chances of earning greater profits
ii. It results in lower overhead expenses.

Disadvantages of Speculative Purchasing

i. There is a possibility of huge losses.
ii. It can result in outdated material.
iii. There will be a huge investment in inventories and excess carrying charges. iv) Possibilities
of spoilage and wear and tear of the materials.

Contract Purchasing
This is the method in which a supplier is given a contract to facilitate the material on the contract
prices for a definite period of time (such as 3-4 years). By providing•a suitable notice period, the
review of the contract can be done. Contracts are preferred by majorities of the firms which provide
the supply of basic products, e.g., steel, pig iron, coke, coal, and so on in huge numbers for a
specific time period.

Advantages of Contract Purchasing

i. The requirements of having huge stocks are avoided.
ii. There will be no effect of market variation on buying.
iii. A lot of time can be saved which may be required to invite the quotations.
iv. It provides security of delivery of materials.
The disadvantage of Contract Purchasing
There may be irregular supply resulting in delayed production.

Group Purchasing
This is the buying method in which products are bought in groups or lots in the form of a single
order rather than placing different orders for every individual product.

Advantages of Group Purchasing

i. There is a reduction in clerical works.
ii. Minimization of charges related to delivery, packing, and other overheads.
iii. As each order is of high value, some discounted rates or rebates on the total order value
can be provided by the suppliers.

Disadvantages of Group Purchasing

i. Group Purchasing is a long-term commitment, so entry or exit is not possible for the group
members at their own will.
ii. This is a kind of compromise and thus lesser flexibilities can be faced by the different
members in the benefit plan, In order to sustain and strengthen the group buying, there will
be a need for time and energy to be invested.

Types of Purchasing System

1. Centralized Purchasing: –
In this case, there is only one department that is responsible for purchasing. The requests from all
the departments are forwarded to this department for various raw materials, tools, and equipment’s
and based upon the requisition, the purchase orders are placed.

Advantages of the Centralisation System

1. Concentrated Volume: Since the power to purchase is in few hands-only, all the orders
accrue with the purchasing department Now, the purchasing department have a cumulated
total of the purchase requisition of various departments and they procure in bulk quantity.
They are now in a better position to bargain with the vendors and avail various quantity-
related discounts. This is, however, not possible in the decentralized system.
2. Avoid Duplication: Since all the orders are placed from one centralized location, duplicate
orders is avoided. This saves the related ordering and the carrying cost and the inventory is
also managed properly.
3. Specialisation: The formation of a centralized purchase department is made such that
different personnel handle different types of purchase requirements. The buyers
concentrate only on the particular type of product they are associated with. This ensures
that they have all the required knowledge of the product and they can avail better bargains
for the company.
4. Lower Transportation Costs: The bulk order are dispatched by way of large consignment
order in large carrying truck capacity. If the capacity of the truck is not utilised to the full
extent, then that denotes extra cost.
 5. No Competition within Units: In case of decentralization system, different departments
purchase different quantum of the material for themselves. Thus, many a time, they
approach the same vendor independently and bargain on their own. Thus, there arises a
situation when they are unknowingly competing among themselves. Centralization provides
a solution to this problem.

2. Decentralized Purchasing: –
There may be several branches, departments, or sections in the case of large firms. If these
branches, departments, or sections place their own purchase orders based upon their own
requirements, then that is referred to as decentralized purchasing. It is applicable in case:
o There is a large organization having varied plants and they have a different requirement
altogether.
o Heavy and bulky material is required by the branch plants like paint, fuel, and oil products.
o Purchases are required to be made locally to ensure better regional communal relations.
Advantages of the Decentralisation System
1. Full Knowledge of the Requirement: Placing or referring purchase orders to the purchasing
department may arise inappropriate product purchasing. But, when the product is procured
by the department itself, then the connect product is procured.
2. Local Sourcing: In case the company is willing to promote the local business then it is more
likely to procure locally in, a decentralized form. This enables easier and faster availability
of the material. More shipments of small portions are made rather than one big shipment.
3. Less Bureaucracy: Time is saved as the order gets placed much faster. There is better
coordination and communication between the buyer and the seller.

Purchasing Policies
1. Conservative buying policy
Under this policy, purchases are made strictly on the basis of current needs of Industrial concerns.
Small lot purchases are made through small and frequent orders, of course, the buyer has to sacrifice
quantity discount.
But he incurs minimum risk of loss, when he adopts this policy of hand-to-mouth purchases.
A conservative buying policy is obviously suitable and always preferable when there are plenty of
materials available in the market or when prices are falling i.e., in a buyer’s market.
When the stock position in the near future is expected to be quite satisfactory, the manufacturer can
follow this hand-to-mouth policy of buying with advantage.

2. Concentrated buying policy

The number of sources on which a manufacturer may depend for has supplies may be very few or
limited. It is called concentrated buying policy. Such policy offers the following benefits:
i. Patronage given to a limited number of suppliers will enable the buyer to secure the status of a
privileged customer even in a rising market and to get better services, special treatment,
prompt delivery, reasonable prices etc.
ii. Reduction in the cost of contractual function — efforts in searching sources of suppliers and
maintaining contacts with them — is possible.
iii. Large orders on a few suppliers yields the benefit of lower prices and quantity discounts.
iv. Bulk purchases reduce cost of handling and transport per unit of purchases.

3. Diversified Buying policy

Under this policy, instead of depending on one source of supply, purchases are made from a large
number of sources. This policy is also known as scattered buying policy. This policy offers the following
benefits:
i. Buying plan is flexible.
ii. Possible to extract better terms of sales and lower prices when there is healthy competition
among many suppliers.
iii. Diversification helps reduction of risk arising out of extreme concentration. All sources cannot
fail simultaneously to supply materials to the firm.
 iv. Diversification makes selection easy and gives a wider choice to the buyer. Extreme scattering
may create a few disadvantages e.g., sacrifice of quantity discounts, incidence of higher
transport and handling costs, absence of special privileges and lack of better services, etc.

4. Reciprocal buying policy

It is a good policy to place an order with the seller who is the customer of the firm. For example, a
sugar factory agrees to buy sugarcane from a farmers’ cooperative society, provided the society also
agrees to buy sugar from the sugar factory.

Reciprocity is industry’s version of “you scratch my back and I will scratch yours“. Reciprocal buying, “If
you buy from me, I buy from you” provides a return consideration wherever possible and it helps to build
connections and goodwill. A careful buyer can get better quality at a reasonable price. It may increase
sales and simplify purchasing.
Supply Chain Integration
Supply chain integration is a close alignment and coordination within a supply chain, often with the use of
shared management information systems. A supply chain is made up of all parties involved in fulfilling a
purchase, including raw materials, manufacturing the product, transporting completed items and
supporting services.

Supply chain refers to all inputs required to produce a product and fulfill a purchase.

There are several different levels of supply chain integration. Generally, the first step in integration would
be to select specific vendors to provide specific inputs, and develop an agreement for them to provide a set
amount of inputs during the year at a set cost. This ensures the company has the materials it needs to
produce its expected output of computers during the year.

A higher level would be to integrate the companies more closely. The circuit board provider might build a
plant close to our assembly plant, and we might share production software so the circuit board company
can see how many boards we'll need in the upcoming week and can build them as we need them to meet
sales demand.

An even higher level is called vertical integration, which is when the supply chain of a company is actually
owned by the company.

1. E2E Visibility
Supply chain integration is the process of creating cohesion and increasing connectivity throughout
the entire value chain, from procurement to production planning to logistics. Rather than letting each
individual function exist in its own silo, supply chain integration brings these disparate functions
together in such a way as to promote collaboration and decrease disconnect. This can be done through
IT solutions that help to centralize cross-operational data or via other means, but regardless of how it’s
achieved, the result should be a significant increase in cross-operational visibility.

2. Added Flexibility
We saw in the benefit above the ways in which integration might help to smooth out the day-to-day functioning
of a modern supply chain, but what effect does it have on disruption management? Since integration is
fundamentally a process of increasing the knowledge and resources available to each distinct organizational
unit, it stands to reason that those newly accessible resources could be leveraged to mitigate crises.

3. Reduced Waste
Another benefit of keeping your various teams working together, rather than at cross purposes, is that waste is,
on the whole, reduced. Why might be this be the case? Because teams are no longer redoubling one another’s
efforts or implementing redundant processes. In a non-integrated environment, for instance, two teams might
each have their own dedicated LTL (less-than-full truck load) shipments scheduled on a recurring basis.

4. Data Centralization
Speaking of uncovering areas of waste and redundancy. We spoke a little bit above about the increased data
visibility that an integrated environment affords, much of which can come in the form of creating a centralized
cache of highly accessible information. While data centralization is certainly a good thing in its own right, it
also, crucially, helps to pave the way for advanced analytics workflows that can—you guessed it—help you
uncover areas of inefficiency within your existing operations.

5. Improved Margins
We’ve danced around this point, but it’s time to come right out and say it: each of the benefits we’ve outlined
above can and should have a measurable positive impact on profit margins.
Increases in efficiency can help save money through reduced warehouse space and generally lean supply chain
management; flexibility and improved disruption management can help you maintain value in the face of the
unexpected, meaning fewer late shipments, shortages, or overages—any of which could prove extremely costly
in the short or long term.
The Role of IT in Supply Chain Management

1. Integrated and Coordinated Supply Chain 

A supply chain can only work efficiently when it is properly integrated and well-coordinated. IT
performs this crucial task by bringing in multiple technologies and combining them to optimise
the supply chain. These technologies make data collection possible and much easier and more
accurate. In turn, this allows precise and detailed data analysis leading to sound business
decisions.

2. Increased Productivity
Smooth flow of information, new technologies and effective communication increase the
productivity of all entities in the supply chain. It is like a trigger for product movement. Instead of
going back and forth, IT provides the link that passes the needed information continuously.

3. Cost Reduction 
IT permits optimum utilisation of resources and assets. Old data is used to study the trends, and
technology is used to analyse it for improving performance. When resources are used optimally,
they result in cost reduction.
In a supply chain, the role of IT becomes more prominent because it motivates all parties to use
their respective resources in the most cost-efficient manner. When IT is used as it should be,
there is a dramatic fall in overall expenses.

4. Product Improvement 
IT consists of tools and applications which can be used to gain early awareness. In a market
where consumers always want something new, the product will either have to evolve or it will go
out of demand. To stay in business, you must introduce product improvement and innovation
sooner rather than later. The kind and extent of product improvement can be validated with the
help of IT.

5. Supply Chain Visibility 

Information makes the entire supply chain visible to supply chain managers. The manner in
which the information flows from one collaborator to the other and the impact it has on others
is used by the managers in making strategic decisions.
Software for Supply Chain Management
1. Enterprise Resource Planning 
Materials requirement planning, which was earlier used to distribute resources for a
manufacturing operation, resulted in enterprise resource planning (ERP), a system that links
individual IT applications into a single one. This results in the integration of the data and the
processes of the complete business.
When all operations are consolidated, information related to cash flow and material flow starts
making more sense. ERP has now become the backbone of the supply chain and provides an
integrated view of the organisation as a whole. Today, ERP has also led to the automation of
many functions so that there is minimal human intervention.

2. Electronic Data Interchange 

Electronic Data Interchange (EDI) is the exchange of business data from one computer to
another. It is usually done in a standard format so that all concerned parties can use it according
to their need without having to constantly ask for it. EDI allows companies, across the industry,
to communicate with one another.
Everyone who uses EDI follows the same rules and methods. This makes for efficient inventory
management, better business relationships, and improved customer service.

3. Supply Chain Management Systems 

An ideal supply chain management system will help in planning, selecting the vendor,
manufacturing, logistics, and building the customer relationship. To provide the necessary
assistance Supply Chain Planning (SCP) software and Supply Chain Execution (SCE) software are
used.

4. Customer Relationship Management 

CRM or e-CRM uses IT to assist an e-business in managing its customer base. It matches
customer needs with the product plans to increase sales.