Professional Documents
Culture Documents
IM module-II
IM module-II
Personnel management
Personnel management can be defined as obtaining, using and maintaining a satisfied
workforce. It is a significant part of management concerned with employees at work and with
their relationship within the organization.
According to Brech, “Personnel Management is that part which is primarily concerned with
human resource of organization.”
Personnel manager is the head of personnel department. He/She performs both managerial
and operative functions of management. His role can be summarized as:
1. Personnel manager provides assistance to top management- The top management are
the people who decide and frame the primary policies of the concern. All kinds of
policies related to personnel or workforce can be framed out effectively by the
personnel manager.
2. He/She advices the line manager as a staff specialist- Personnel manager acts like a
staff advisor and assists the line managers in dealing with various personnel matters.
3. As a counsellor, As a counsellor, personnel manager attends problems and grievances
of employees and guides them. He/She tries to solve them in best of his capacity.
4. Personnel manager acts as a mediator- He is a linking pin between management and
workers.
1. Manpower Planning
2. Recruitment
3. Selection
4. Training and Development
The different types of people which are generally required in a concern are:
Recruitment Definition:
Recruitment is defined as a process of discovering reliable sources of contacting desirable
employees which meets the staffing requirements of the organization. Through recruitment
process the organization can attract the adequate number of manpower to facilitate the
effective selection process and joining of efficient work force.
To define the actual meaning of word ‘recruit’ is to make a person join a group or a
corporation. For example: to recruit members for painting group or to recruit people for army.
Recruitment is the process of finding and hiring candidates for a specific job role. The
recruitment definition includes the entire hiring process, from the first stage to the recruit's
integration into the business, is covered by the term recruitment. Recruitment is a positive
process of searching for employees and stimulating them to apply for the jobs in the
organization. There will be opportunity to hire better candidates when more people apply for
employment.
Types of Recruitment
There are majorly two types of recruitment adopted and often used by the organizations in
their recruitment process i.e., internal and external recruitment.
Internal recruitment
This type of recruitment refers to hiring the employees within the organization internally.
Various internal sources of recruitment are:
o Promotion
o Transfer
o Recruiting former employees
o Job posting / job advertisement
o Employee referrals
o Previous applicants
External recruitment
External recruitment refers to hiring employees outside the organization. Various types of
external recruitment are:
o Direct recruitment
o Employment exchange
o Employment agencies
o Advertisements
o Professional association
o Campus hiring
o Advertisement through word of mouth
Steps of Recruitment
The process of recruitment consists of three Major Steps or phases -
a. Before posting job advertisement
b. Selection process
c. Formalities after selection of the candidate.
The common steps of recruiting followed by the Human Resource department of various
organizations:
1) Preparation- It is step in which the HRM department prepare a frame of ideal candidate
for the vacant position. The skills and competencies required to perform the job are
identified, also a qualification and level of experience required execute the job responsibilities
is determined. Once the framework is ready, the HR identifies the proper communication
channel through which the information about job vacancy can be conveyed to the suitable
candidates.
2) Receive applications- Once the advertisement about the job vacancy is posted through
internal and external source of recruitment, the HR department starts receiving the
applications for the job opening. Most of the time the HR department confirms the candidate
that their application is received by the organization and the further sorting process is going
on. Many companies used application tracking system (ATS) which helps to automatically
communicate with the applicant that their job application is received and is in process.
3) Selection stage 1: Cancel out unqualified applicants
Here the selection process begins- In this stage the application which are not suitable for the
job are cancel out by the HRM department. The application can be weed out based on the
un-matching qualification or experience of the candidate.
Importance of Recruitment
1. The process is important to encourage and attract candidates and get ample amount
of application for the job vacancies.
2. It is an effective way to create information pool about the prospective candidates who
are suitable for the talent needs of the organization.
3. It is very important step of planning and analysis about the present and future
manpower requirement of the organization.
4. It bridges the gap between employers and their future employee.
5. It is a less expensive way of gathering information about the talented manpower in
the industry.
6. It helps to improve the selection process by proper sorting of suitable candidate for
the job.
7. It reduces the turnover of employees due to correct matching of candidate
expectations and the rewards offered by the organization.
8. It also helps the organization to meet the social and legal obligation of maintaining the
manpower composition.
9. It determines the appropriate candidates through the different channels of
recruitment.
10. It helps the organization to create different sources of attracting the right candidate
for the job profile.
Selection
The process of recruitment begins with The process of selection ends with the
1. the creation of an applicant pool from selection of the number of candidates for
different sources. the job.
Selection Process:
The selection process of the organisation depends on the various jobs and their nature and
requirements. A good selection process should be able to distinguish applicants who are most
suitable from those who are not suitable. The following are the steps in a selection process:
It may also collect information about work experience and previous positions held by the
candidate, the nature and benefits of the job and the reason for leaving it. Through the
application form, the organisation may also collect details about participation in
extracurricular activities. Further, names and addresses of a few references that have
knowledge about the candidate can also be collected.
Selection Test
As there are differences in the abilities, aptitudes, interests and traits of candidates, it is
important that these differences are measured for selecting the most suitable candidate. For
this, various types of selection tests are used. According to Cronbach, “A test is a systematic
procedure for comparing the behaviour of two or more persons.” One of the most common
methods to test the candidate is by using the psychological test.
Psychological tests help the Human Resource Managers to select and place employees and
determine the most suitable career plan for them. They also help them to assess their job
performance as well as act as an aid in counselling employees in conflicting situations.
1. Ability Test
2. Intelligence Test
3. Aptitude Test
4. Achievement Test
5. Personality Tests
6. Interest Test
7. Honesty and Integrity Test
Selection Interview
A selection interview is conducted to collect information that has not been collected during
the other stages of the selection process. Depending upon the nature of the job, one or more
interviews may be conducted. In simple terms, an interview is an activity where thorough face
to face conversation and information are collected to determine whether the candidate is
suitable for the job or not.
The following are the main objectives of the interview:
1. It is a way in which gaps in information are filled that are left during the previous stages
of the selection process.
2. It establishes direct and personal contact with the applicant so that information
obtained could be verified.
3. It creates two-way communication as there is a mutual exchange of information
between the candidate and the organisation.
4. It provides a platform for the organisation to create goodwill in the labour market by
offering good hospitality, courtesy and personal care to applicants.
Types of Interviews
1. Structured Interview
2. Unstructured Interview or Open-ended interview
3. In-depth Interview
4. Stress Interview
5. Panel Interview
Reference Checks
When the candidates fill out the application forms, the candidates are requested to fill in the
names of at least two references who can be contacted by the organisation to cross-check
the information provided by the candidate. Normally, these names are of the people who
know the candidate.
They may be friends, relatives, previous employees, faculty of the institute where the
candidate has studied or any other prominent persons who are familiar with the candidate.
Physical Examination
Physical examination is undertaken with the aim of ensuring that the selected candidates
meet the physical requirements of the job. It also safeguards the organisation from hiring
people with pre-existing ailments. But this step depends on the general organisation practices
as some organisations in India insist on comprehensive medical tests while others do not insist
on such tests.
Job Offer
It is the last step in the process of selection. Here the candidate is informed about their
provisional selection. A job offer that specifies the terms and conditions of employment is
issued to the candidates who have successfully cleared the interview and the physical
examination.
Once a positive response is received from the candidate, the process of integrating the
candidate into the organisation is initiated and his conversion from a possible candidate to an
employee begins. The acceptance or rejection of a job offer is influenced by the following
factors:
Training
Training implies enhancing the skills and knowledge of the employees for performing a
specific job. Training tries to improve employees’ performance in current job and prepares
them for future job. The crucial consequence of training is learning.
Objectives of Employee Training Programmes
1. To prepare employees to meet the varying and challenging needs of the job and
organization.
2. To provide knowledge and skills to new entrants and to help them to perform their
role and job well.
3. To coach employees for more complex and higher level jobs.
4. To educate employees new and innovative ways and techniques of performing job
step should be done for him once. When the trainee demonstrates that he can do the
job in right manner, he is left to himself. Through repetitive practices, the trainee
acquires more skill.
5. Follow up and feedback- The trainee should be given feedback on how well he
performed the job. He should be asked to give a feedback on the effectiveness of
training programme
Training Methods
Induction Training - Induction training is often given to new employees to make them feel a
part of the organization. How do you think an individual can perform if he/she is not familiar
with the policies and rules and regulations of the organization? You can’t expect an individual
to deliver results on the first day itself. You need to welcome your employees well for them
to feel motivated and comfortable. Induction programs need to be designed sensibly. Too
much of information on the day of joining will frighten the new employee and believe me,
he/she will not come from the next day onwards. Induction programs help new employees to
get acquainted with the work culture and fellow workers. Induction programs need to be
short, crisp but informative.
Refresher Training - Refresher trainings are designed for existing employees to refresh them
and also help them acquire new skills and technologies to keep pace with the changing times.
Such training programs prepare employees for more responsible positions.
On the Job Trainings - On the job trainings are given to employees at the workplace itself by
their superiors and Bosses. Managers ought to sit with their team members on a regular basis,
train them on new technologies, skill sets to help them cope with the changes. On the job
trainings are given to employees along with their jobs itself and make them capable to handle
bigger responsibilities.
On the Job trainings are imparted by any of the following methods:
a. Coaching - Coaching is also defined as learning by doing and handling various ongoing
projects. In this method of training, team manager assigns certain job responsibilities
to team members, monitors their performance, points out their mistakes, provides
them feedbacks and also suggestions for improvement.
b. Job Rotation - In this type of training, employees move from one position to another,
thus acquiring new skills and learnings. Job rotation acquaints individuals with newer
roles and challenges and makes them capable of performing any type of task.
Employees need to be encouraged to go through various online learning sites which would
help them in their current job responsibilities. One needs to be aware of the latest
developments in his/her domain. Reading helps a lot.
Off the job Training - Off the job trainings are given outside the workplace. Off the job
trainings can be provided by any of the following methods:
Performance Appraisal
Performance Appraisal is the systematic evaluation of the performance of employees and to
understand the abilities of a person for further growth and development. Performance
appraisal is generally done in systematic ways which are as follows:
1. The supervisors measure the pay of employees and compare it with targets and plans.
2. The supervisor analyses the factors behind work performances of employees.
3. The employers are in position to guide the employees for a better performance.
1. Ranking Method
The ranking system requires the rater to rank his subordinates on overall performance. This
consists in simply putting a man in a rank order.
Under this method, the ranking of an employee in a work group is done against that of
another employee. The relative position of each employee is tested in terms of his numerical
rank. It may also be done by ranking a person on his job performance against another member
of the competitive group.
Advantages of Ranking Method
i. Employees are ranked according to their performance levels.
ii. It is easier to rank the best and the worst employee.
Employees who feel that they are productive, but find themselves in lower grade(than
expected) feel frustrated and exhibit over a period of time reluctance to work.
3. Critical Incident techniques
Under this method, the manager prepares lists of statements of very effective and ineffective
behaviour of an employee. These critical incidents or events represent the outstanding or
poor behaviour of employees or the job.
The manager maintains logs of each employee, whereby he periodically records critical
incidents of the workers behaviour. At the end of the rating period, these recorded critical
incidents are used in the evaluation of the worker’s performance.
Example of a good critical incident of a Customer Relations Officer is: March 12 - The Officer
patiently attended to a customer’s complaint. He was very polite and prompt in attending the
customer problem.
Advantages of Critical Incident techniques
i. This method provides an objective basis for conducting a thorough discussion
of an employee performance.
ii. This method avoids recency bias (most recent incidents are too much
emphasized)
Limitations of Critical Incident techniques
JOB EVALUATION
Definition:-
Job evaluation is the process of comparing jobs with other jobs in terms of wages a worker
should be paid for performing the task. Thus, it is a rating of job. It can also be defined as “the
procedure to determine the relative values of the job in a plant and to determine the basic
wages for the job”.
Objectives:-
1. Its main object is to estimate the correct wages for the work performed.
2. It is means to reduce wage imbalance in the factories.
3. It can be used to resolve wage disputes.
4. It helps in standardization.
5. It helps to establish a method for future promotion of workers
MERIT RATING
Definition:-
Merit Rating is a systematic and orderly approach to assess the relative worth of an employee
working in an organization in terms of his job performance, integrity, leadership, intelligence,
behaviour, etc. Merit Rating is commonly referred to as Employee Rating, Employee Appraisal
or Staff Reporting.
Objectives:-
1. It is commonly used to justify wage increases.
2. This is one of the method for deciding whether employees engaged on production are to
be confirmed or not.
3. It helps the supervisor in deciding, which person is to be given which task.
4. It helps in deciding that which employee deserves promotion.
5. It can be used as a scale by the selection office to judge whether their selection are
successful.
Advantages:
i. Motivates the workers to increase their output.
ii. Simple and easy to understand.
iii. Improve productivity.
Disadvantages:
i. No guaranteed minimum wage. This makes workers insecure.
ii. Great disparity of earning between slow and fast workers.
iii. Wastage might increase.
iv. Quality of production may suffer as the workers concentrate on quantity.
v. Interpersonal relationship suffers due to jealousy and competition to earn more.
vi. Enforced idleness like electricity failure or machine breakdown, adversely affect
earning of workers
Here the minimum guaranteed wage is fixed on hourly basis. A worker gets the minimum
fixed wage/day plus the incentive for the number of pieces produced. To illustrate this,
assume that there is 8 hour’s shift the piece rate is Rs 4 and a minimum fixed wage of Rs 16/
hours (Rs 16 x 8 hours = Rs. 128 per day). The standard time/piece is 15 min.
Now, there are two workers A and B. (If worker A produces 25 prices/day then he earns: Rs.
128 (min. guaranteed wage) + Rs. 100 (Rs. 4 x 25 pcs) = Rs. 228/ day
If worker B produces 40 pieces / day then he earns Rs. 128 (min. guaranteed wage) + Rs. 160
(40 pieces x Rs. 4) = Rs. 228/ day)
Advantages:
i. Min. guarantee improves sense of security.
ii. Disparity between slow and faster workers is reduced.
Disadvantages:
i. Demotivate faster worker.
ii. Slow workers get higher piece rate viz Rs. 5.12 (128/ 25).
Differential Piece Rates:
The shortcoming of the above mentioned incentive plans have given way Differential piece
rates. The differential piece rates are classified under two heads viz. Individual incentive plans
and Group incentive plans.
Wage and Salary Administration 147 complete the job in less than the “standard time”. Bonus
is a certain proportion to the time saved. This proportion is fixed at 50% in this plan.
T x R + 50% (S – J) x R
Where J – time taken, R – Rate of wage, S – Standard time, 50% – The bonus percentage.
Illustration:
Advantages:
i. Guaranteed min. wage exists.
ii. Simple and easy.
iii. Dispensed with time consuming and costly process of work study.
iv. Management share a part of bonus on time saved.
Disadvantages:
i. Workers get only half of the benefit of their efficiency.
ii. If the worker’s rush through the job to save time, the quality may suffer.
iii. Workers object management in sharing bonus on time saved.
iv. Sufficient incentive is not provided to fast workers.
This is a modified form of Hasley Plan, developed by James Rowen of England. The Rowan
Plan pays more than the Halsey Plan. This is possible if a worker completes the task in half the
standard time of the task. If more than 50% time is saved then the bonus he earns decreases.
Illustration:
S = 10 hours; J = 8 hours; R = Rs. 5 / hrs.
Φ =8 x 5 + [8 x 5+ (2/10)]
Φ = Rs. 48
Advantages:
i. Minimum guaranteed wage exists.
ii. Both the employees and the workers share the benefits of time saved.
iii. The efficient workers get bonus at diminishing rate if they save more than 50% of
the standard time. This checks over-speeding.
Disadvantages:
This plan was developed by Henry L. Gantt. Here standard time for every task is fixed through
time and motion study. Minimum time wage is guaranteed to all workers.
A worker who fails to complete the task within the standard time receives wages for actual
time spent at the specified rate. Workers who achieve or exceed the standard get extra bonus
varying between 20% to 50% of the hourly rate for the time allowed for the task.
Illustration:
(S) Suppose the standard time fixed for the job is 8 hours and (T) time rate is Rs. 10 hours and
the rate of bonus is 25%, then a worker who completes the job in 10 hours will be paid Rs. 10
x 8 = Rs. 80. On the other hand the worker who completes the job in 6 hours will be paid Rs
100 (Rs. 80 + 25% of Rs. 80).
Advantages:
Disadvantages:
This plan is developed by Charles E. Bedeaux in 1911. Here the minimum time wage is
guaranteed to all workers. The workers who complete the job within or more than the
standard time are paid at the normal time rate.
Workers who complete the job in less than the standard time are paid bonus, generally 75%
of the wage for the time saved and 25% to the foreman.
Φ = Rs. 57.50
Advantages:
Disadvantages:
This plan was developed by Harrington Emerson. Here minimum wage is guaranteed. Workers
are paid different bonus rates as per their efficiency level. Bonus is given at an increasing
percentage beyond the prescribed level of efficiency (usually 66.67%). Efficiency is measured
by comparing the actual time taken with the standard time.
Illustration:
Φ = (T x R) + (percentage of bonus x T x R)
In this case, the efficiency level in (10/8) x 100 = 125% and, Bonus at 30% is payable.
Advantages:
iii. Bonus begins at 66.67% efficiency which is within the reach of many workers.
Disadvantages:
In some cases like an assembly line production it is not possible to determine the performance
of an individual worker as several workers jointly perform a single operation. In such cases it
is desirable to introduce a group incentive scheme. Here the bonus is calculated for a group
of workers and the total amount is distributed among the group members in proportion to
the wage earned by each.
This is a group plan where the productivity of the entire work force is taken into account. In
this plan bonus is paid at the rate of 1 % for every 1% rise in productivity. Workers are not
paid the full amount of bonus earned by them in the same month.
A certain percentage is set aside as a “Resource Fund” to take care of fluctuation. At the end
of the year, the balance remaining in the “Reserve Fund” is also distributed.
Here a committee of workers and management set the standard of performance. A minimum
wage is guaranteed to each worker. The group gets bonus when actual output exceeds the
standard. The group supervisor also gets a share on the group bonus. This plan promotes
team spirit among employees.
Apart from the above mentioned incentive plans; there are also other forms of incentives,
especially for the white collared workers. They are briefly discussed below.
This is popularly known as ESOP. This is a form of incentive where the employees are allotted
the company share at a price below the market price. When the company achieve better
results, the market price of its shares and the value of the employees’ shareholding rise.
This form of incentive plan is relatively new in India and is becoming popular of late. IT is
motivating to the employee, as (it enhances a sense of belongingness to the organisation)
shareholders are the owners of the organisation.
Profit Sharing:
Prof. Seager defines profit sharing as “an arrangement by which employees receive a share,
fixed in advance of the profits”. Profit sharing usually involves the determination of an
organisation profits at the end of the fiscal, year and the distribution of a percentage of the
profits to the workers qualified to share in the earnings. The main objectives of profits sharing
are to create unity of interest and the spirit of co-operation.
The theory behind profit sharing is that management should feel its workers will fulfill their
responsibilities more diligently if they realize that their efforts may result in higher profits
which will be returned to the workers through profit sharing.
In India this incentive scheme is not well received by both the management and the workers.
Committee appointed by the Govt. of India suggested profit sharing as a method of ensuring
industrial peace and a step towards workers’ participation in management and also suggested
that 50% of the profit be shared among the workers.
Both the employers and the trade unions rejected this. The trade unions prefer bonus to
profits sharing as bonus is payable irrespective of profit or loss under the Bonus Act 1965.
Fringe Benefits:
ILO describes fringe benefits as wages are often augmented by special cash benefits, by the
provision of medical and other services or by payment in kind that form part of the cost for
expenditure on the goods in services.
In addition workers commonly receive such benefits as holidays with pay low cost meals, low
rent housing etc. such additions to the wage proper are sometimes referred to as fringe
benefits.
Fringe benefits involve a labour cost for the employer and are not meant directly to improve
efficiency. These add to the workers standard of living. Hence benefits may be statutory or
voluntary.
They improve motivation and morale of workers by satisfying their needs and develops a
sense of belonging and loyalty among workers. They also improve the public image of the
organisation.
Group Dynamics
The social process by which people interact and behave in a group environment is called
group dynamics. Group dynamics involves the influence of personality, power, and behaviour
on the group process. Is the relationship between individuals conducive to achieving the
group goals? Is the structure and size of the group an asset in pursuing both the task and
maintenance functions of the group? How is formal and informal power used to build
consensus or reach decisions? Does the combination of individuals produce the right culture?
How these individuals, cultures, and internal forces interact allows us to analyse and better
understand group effectiveness.
There are two types of groups: 1) formal groups who are structured to pursue a specific task,
and 2) informal groups who emerge naturally in response to organizational or member
interests. These interests may include anything from a research group charged with the
responsibility to develop a new product to a group of workers who spontaneously come
together to improve social or member activities. While we can learn a lot from informal
groups in terms of leadership and motivation, we will concentrate mostly on formal groups,
characterized by member appointment and delegated authority and responsibility.
through a number of stages before they achieve maximum performance. Each stage presents
the members with different challenges that must be overcome before they can move on to
the next stage. These stages have been identified as forming, storming, norming, performing,
and adjourning.
Group Functions
Three functions that influence the effectiveness and productivity of groups are task functions,
maintenance functions, and self-interest functions.
Task Functions
This is the primary reason for the establishment of a group. To achieve the task, they must
have members that fulfill some or all of the following roles:
a) Initiating: by proposing tasks or goals, defining problems and suggesting procedures
for a solution;
b) Information seeking: by requesting facts, seeking relevant information, and asking for
suggestions or ideas;
c) Information giving: by offering facts, providing information, stating beliefs, and giving
suggestions or ideas;
d) Clarifying ideas: by interpreting and clarifying input, indicating alternatives and giving
examples;
e) Bringing closure: by summarizing, restating, and offering solutions;
f) Consensus testing: by checking for agreements and sending up ‘trial balloons’.
Maintenance Behaviour
Each group needs social-emotional support to be effective. Some members of the group will
take the lead in providing this support which consists of the following:
a) Encouraging: by showing regard for other members and providing positive response
to their contributions;
b) Improving group by expressing group feelings, sensing moods and relationships,
atmosphere: and sharing feelings;
c) Harmonizing: by reconciling differences and reducing group tension;
d) Compromising: by admitting errors and looking for alternatives;
e) Gate-keeping: by attempting to keep communications flowing, facilitating the
participation of others, and suggesting procedures for sharing discussion;
f) Standard setting: by reminding members of group norms, rules, and roles.
Self-interest Behaviour
This third function displayed by some individuals, members generally takes away from group
performance and affects task achievement at the expense of the group. Activities that identify
self-interest behaviour are as follows:
a) Dominating and controlling: by displaying lack of respect for others, cutting them off,
not listening, and restating other members’ suggestions with a different meaning;
a) Blocking: by stifling a line of thought, and changing the topic either away from the
point of view or back to his or her own interest;
b) Manipulating: by providing self-serving information, or a single point of view designed
to achieve a decision that is consistent with their position;
c) Belittling: through put-downs, sneering at other’s point of view, or making jokes about
another member’s contribution;
d) Splitting hairs: by nit-picking, searching for insignificant details that delay a solution,
or undermining another person’s point of view.
Group Norms
Norms – Generally agreed on informal rules that guide group member’s behaviour.
These are set of beliefs, feelings & attitudes commonly shared by group members
ETHNOCENTRISM: A bias toward one’s own subgroup and against other sub groups.
SNOWBALL EFFECT: The tendency for people to share informal information with others
with whom they come into contact.
FRAMING: The tendency for people to make different decisions based on how the
problem is presented to them
PIPE DREAMS: Types of rumor that expresses people’s wishes
GATE KEEPERS: People responsible for controlling the flow of information to others to
keep them from becoming overloaded
BROWN BAG MEETINGS: Informal get-togethers over meals in which people discuss
what’s going on the company
HYPER VIGILANCE: The state in which an individual frantically searches for quick solutions
to problems & goes from one idea to another out of a sense of desperation
SOCIAL LOAFING (Ringlemann Effect): People may not tend to work as hard in groups as
they would individually do because their contribution is less noticeable in groups hence
they like to see others carry their workload.
Employee morale
Employee morale is a description of the emotions, attitudes and feelings of employees
within their workplace environment. Employees that are happy and show a positive
attitude at work are known to have high morale, but employees who don’t favor their
work environment have low morale.
A few aspects of a workplace that can influence an employee’s morale include working
conditions, support from management and job security. For example, If Jane sits down
with her manager and she is communicated that she is on task with her work, then she’ll
have a higher likelihood of feeling emotionally at ease and feel less pressure because of
receiving a vote of confidence from management.
MATERIALS MANAGEMENT
f). Just-In-Time
PURCHASING MANAGEMENT
Purchasing is an important function of materials management. In any industry purchase
means buying of equipment, materials, tools, parts etc. required for industry. The importance
of the purchase function varies with nature and size of industry. In small industry, this function
is performed by works manager and in large manufacturing concern; this function is done by
a separate department. The moment a buyer places an order he commits a substantial
portion of the finance of the corporation which affects the working capital and cash flow
position. He is a highly responsible person who meets various salesmen and thus can be
considered to have been contributing to the public relations efforts of the company. Thus,
the buyer can make or mar the company‘s image by his excellent or poor relations with the
vendors.
DEFINITION:
The purchasing can be defined as the process of buying and procuring the materials, parts,
components, equipment, spare parts, tools and supporting items required by industries or
any organization to deliver its products as per customer requirements at the competitive
rates and of good quality.
OBJECTIVES OF PURCHASING
The basic objective of the purchasing function is to ensure continuity of supply of raw
materials, sub- contracted items and spare parts and to reduce the ultimate cost of the
finished goods. In other words, the objective is not only to procure the raw materials at the
lowest price but to reduce the cost of the final product. The objectives of the purchasing
department can be outlined as under:
To avail the materials, suppliers and equipments at the minimum possible costs:
These are the inputs in the manufacturing operations. The minimization of the input cost
increases the productivity and resultantly the profitability of the operations.
To ensure the continuous flow of production through continuous supply of raw
materials, components, tools etc. with repair and maintenance service.
To increase the asset turnover: The investment in the inventories should be kept
minimum in relation to the volume of sales. This will increase the turnover of the
assets and thus the profitability of the company.
To develop an alternative source of supply: Exploration of alternative sources of
supply of materials increases the bargaining ability of the buyer, minimization of
cost of materials and increases the ability to meet the emergencies.
To establish and maintain the good relations with the suppliers: Maintenance of
good relations with the supplier helps in evolving a favorable image in the business
circles. Such relations are beneficial to the buyer in terms of changing the
reasonable price, preferential allocation of material in case of material shortages,
etc.
Advantages
Disadvantages
In large size organization it is difficult to communicate the policy and
PROCEDURES OF PURCHASING :
The policy statements are guidelines and they should be difficult to understand.
Lengthy and too many policies have to be avoided. The purchasing policy provides
the guidelines and direction in the following categories. It defines:
(a) Rules of purchasing
(b) Conduct of purchasing personnel
(c) Social and minority business objectives
(d) Operational issues
PURCHASING PROCEDURE
The procedure describes the sequence of steps leading to the completion of an identified
specific task. The purchasing procedure comprises the following steps as indicated in Fig.
1. Recognition of the need: The initiation of procedure starts with the recognition of the need
by the needy section. The demand is lodged with the purchase department in the
prescribed Purchase Requisition Form forwarded by the authorized person either directly
or through the Stores Department. The purchase requisition clearly specifies the details,
such as, specification of materials, quality and quantity, suggested supplier, etc. Generally,
the low value sundries and items of common use are purchased for stock while costlier and
special items are purchased according the production programmes. Generally, the
corporate level executives are authorized signatories to such demands. Such purchases are
approved by the Board of Directors. The reference of the approval is made on requisition
and a copy of the requisition is sent to the secretary for the purpose of overall planning
and budgeting.
2. The Selection of the supplier: The process of selection of supplier involves two basic
aspects: searching for all possible sources and short listing out of the identified sources.
The complete information about the supplier is available from various sources, such as,
trade directories, advertisement in trade journals, direct mailing by the suppliers, interview
with suppliers, salesmen, ssuggestions from business associates, visit to trade fair,
participation in industries convention, etc. Identification of more and more sources helps
in selecting better and economical supplier. It should be noted that the low bidder is not
always the best bidder. When everything except price is equal, the low bidder will be
selected. The important considerations in the selection are the price, ability to supply the
required quantity, maintenance of quality standards, financial standing etc. It should be
noted that it is not necessary to go for this process for all types of purchases. For the
repetitive orders and for the purchases of low-value, small lot items, generally the previous
suppliers with good records are preferred.
3. Placing the order: Once the supplier is selected the next step is to place the purchase order.
Purchase order is a letter sent to the supplier asking to supply the said material. At least six
copies of purchase order are prepared by the purchase section and each copy is separately
signed by the purchase officer. Out these copies, one copy each is sent to store-keeper,
supplier, accounts section, inspection department and to the department placing the
requisition and one copy is retained by the purchase department for record
4. Follow-up of the order: Follow-up procedure should be employed wherever the costs and
risks resulting from the delayed deliveries of materials are greater than the cost of follow-
up procedure, the follow-up procedure tries to see that the purchase order is confirmed
by the supplier and the delivery is promised. It is also necessary to review the outstanding
orders at regular intervals and to communicate with the supplier in case of need. Generally,
a routine urge is made to the supplier by sending a printed post card or a circular letter
asking him to confirm that the delivery is on the way or will be made as per agreement. In
absence of any reply or unsatisfactory reply, the supplier may be contact through personal
letter, phone, telegram and/or even personal visit.
5. Receiving and inspection of the materials: The receiving department receives the
materials supplied by the vendor. The quantity are verified and tallied with the purchase
order. The receipt of the materials is recorded on the specially designed receiving slips or
forms which also specify the name of the vendor and the purchase order number. It also
records any discrepancy, damaged condition of the consignment or inferiority of the
materials. The purchase department is informed immediately about the receipt of the
materials. Usually a copy of the receiving slip is sent to the purchase department.
6. Payment of the invoice: When the goods are received in satisfactory condition, the invoice
is checked before it is approved for the payment. The invoice is checked to see that the
goods were duly authorised to purchase, they were properly ordered, they are priced as
per the agreed terms, the quantity and quality confirm to the order, the calculations are
arithmetically correct etc.
7. Maintenance of the records: Maintenance of the records is an important part and parcel
of the efficient purchase function. In the industrial firms, most of the purchases are repeat
orders and hence the past records serve as a good guide for the future action. They are
very useful for deciding the timings of the purchases and in selecting the best source of the
supply.
8. Maintenance of vendor relations: The quantum and frequency of the transactions with
the same key suppliers provide a platform for the purchase department to establish and
maintain good relations with them. Good relations develop mutual trust and confidence in
the course of the time which is beneficial to both the parties. The efficiency of the purchase
department can be measured by the amount of the goodwill it has with its suppliers.
SELECTION OF SUPPLIER
Selection of the right supplier is the responsibility of the purchase department. It can
contribute substantially to the fundamental objectives of the business enterprise. Different
strategies are required for acquiring different types of materials. The selection of supplier for
standardised products will differ from non-standardised products. Following factors are
considered for the selection of suppliers:
SELECTION OF SOURCES OF SUPPLIER AND VENDOR DEVELOPMENT
The best buying is possible only when the decision maker is familiar with all possible sources
of supply and their respective terms and conditions. The purchase department should try to
locate the appropriate sources of the supplier of various types of materials. This is known as
survey stage‘.
The government department, large manufacturing and business companies like public sector
firms keep the records of approved suppliers depending upon their
(i) Manufacturing capabilities
(ii) Financial conditions
(iii) Reputation
(i) Trade Journals and Trade Directories: Trade journals or magazines routinely publish the
information about different companies about their technical or innovative
developments of a material, product, process or service. Advertisements in trade
journals about the products and services also help in selection of suppliers. Almost all
the industries publish the directories of firms and companies which produce their items
and services required to facilitate to refer to the selection of supplier and vendors.
(ii) Industrial Exhibitions and Trade Fairs
These are the best ways of exposure directly for the industrial products to sell and
purchase of items. It is also exhibiting the latest technological developments,
introduction of new products and information about latest prices.
(iii) Internet Searches
Now the internet is providing lot of information and access to the remote suppliers.
Ecommerce and E- Business is helping to make direct purchase from the
manufacturers to get the items worldwide.
(iv) Local or Distant Suppliers
The problems associated with distant supplies is that the cost of transportation,
packing, insurance, sales tax and octroi etc. are high and the repair and maintenance
become difficult by such suppliers. Therefore, it is always preferred to select local
suppliers to purchase the materials provided their performance and prices are
comparable to distance suppliers.
(v) Small or Big Suppliers
There are various types of companies and manufacturers in India for example, large-
scale manufacturers, medium scale, small scale and mini-scale manufacturing concerns.
Each one is having its own advantages and disadvantages for supplying their products.
Large-scale manufacturers find large potential buyers.
They supply goods at cheaper cost. The small-scale manufacturers however render
more attention to their clients and ensure about quality of items and delivery time.
VENDOR DEVELOPMENT:
The survey stage highlights the existence of the source. A business inquiry is made with
the appropriate supplier. It is known as Inquiry Stage‘. Here a short listing is made out
of the given sources of suppliers in terms of production facilities and capacity, financial
standing, product quality, possibility of timely supply, technical competence,
manufacturing efficiency, general business policies followed, standing in the industry,
competitive attitude, and interest in buying orders etc. A survey of the following will
help in developing the possible sources of supply
Specialised trade directories.
Assistance of professional bodies or consultants.
The buyer‘s guide or purchase handbook.
The manufacturer‘s or distributor‘s catalogue.
Advertisements in dailies.
Advertisement in specialised trade journals.
Trade fair exhibitions.
Hence these above plays a major role in vendor development.
VENDOR EVALUATION:
The evaluation of supplier is done through the weightage assigned by measuring their
performance by purchase. The criteria are
1. Cost price 2. Quality 3. Delivery
The following variables to be considered while evaluating the quotations of the suppliers:
1. Cost factors: Price, transportation cost, installation cost if any, tooling and other operations
cost, incidence of sales tax and excise duty, terms of payment and cash discount are
considered in cost factor.
2. Delivery: Routing and F.O.B. terms are important in determining the point at which the
title to the goods passes from vendor to the buyer and the responsibility for the payment
of the payment charges.
3. Design and specification factors: Specification compliance, specification deviations,
specification advantages, important dimensions and weights are considered in line with
the demonstration of sample, experience of other users, after sale services etc.
4. Quality performance: The buyer can compare the supplier quality and define supplier
quality performance
5. Legal factors: Legal factors include warranty, cancellation provision, patent protection,
public liability, federal laws and reputation compliance
VENDOR RATING:
Vendor rating: The evaluation of supplier or vendor rating provides valuable information
which help in improving the quality of the decision. In the vendor rating three basic aspects
are considered namely quality, service and price. How much weight should be given to each
of these factors is a matter of judgment and is decided according to the specific need of the
organization. Quality would be the main consideration in the manufacturing of the electrical
equipments while price would be the prime consideration in the product having a tense
competitive market and for a company procuring its requirements under the blanket contract
with agreed price, the supplier rating would be done on the basis of two variables namely
quality and delivery.
In order to compare the performance of various vendors, it is necessary to rate them. The
rating of supplier (vendor) will be done on the following parameters.
(i) Quality performance
(ii) Delivery performance
(iii) Price performance
the lowest bidder is responsible party and is capable of meeting the delivery schedule and
quality requirements. Open tender system or advertisement in newspapers is common in
public sector organizations. As advertising bids is costly and time consuming, most private
sector organizations solicit tenders only from the renowned suppliers capable of supplying
the materials
3. Blanket order system: This system minimizes the administrative expenses and is useful for
C‘ type items. It is an agreement to provide a required quantity of specified items, over a
period of time, usually for one year, at an agreed price the buyer‘s needs. The system
relieves the buyers from routine work, giving him more time for focusing attention on high
value items. It requires fewer purchase orders and thus reduces clerical work. It often
achieves lower prices through quantity discounts by grouping the requirements. The
supplier, under the system maintains adequate inventory to meet the blanket orders.
4. Zero stock: Some firms try to operate on the basis of zero stock and the supplier holds the
stock for these firms. Usually, the firms of the buyer and seller are close to each other so that
the raw materials of one is the finished products of another. Alternatively, the system could
work well if the seller holds the inventory and if the two parties work in close coordination.
However, the price per item in this system will be slightly higher as the supplier will include
the inventory carrying cost Operations Management in the price. In this system, the buyer
need not lock up the capital and so the purchasing routine is reduced. This is also significantly
reduces obsolescence of inventory, lead time and clerical efforts in paper work. Thus, the
seller can devote his marketing efforts to other customers and production scheduling
becomes easy.
5. Rate contract: The system of rate contract is prevalent in public sector organizations and
government departments. It is common for the suppliers to advertise that they are on ‗rate
contract‘ for the specific period. After negotiations, the seller and the buyer agree to the
rates of items. Application of rate contract has helped many organizations to cut down the
internal administrative lead time as individual firms need to go through the central
purchasing departments and can place orders directly with the suppliers. However, suppliers
always demand higher prices for prompt delivery, as rate difficulty has been avoided by
ensuring the delivery of a minimum quantity at the agreed rates. This procedure of fixing a
minimum quantity is called the running contract and is being practised by the railways. The
buyer also has an option of increasing the quantity by 25% more than the agreed quantity
under this procedure.
6. Reciprocity: Reciprocal buying means purchasing from one‘s customers in preference to
others. It is based on the principle ―if you kill my cat, I will kill your dog‖, and ―Do unto your
customers as you would have them do unto you‖. Other things, like soundness from the
ethics and economics point of view being equal, the principles of reciprocity can be practiced.
However, a purchasing executive should not indulge in reciprocity on his initiative when the
terms and conditions are not equal with other suppliers. It is often sound that less efficient
manufacturers and distributors gain by reciprocity what they are unable to gain by price and
quality. Since this tends to discourage competition and might lead to higher process and
fewer suppliers, reciprocity should be practiced on a selective basis.
7. Systems contract: This is a procedure in tender to help the buyer and the sellers to reduce
administrative expenses and at the same time ensure suitable controls. In this system, the
original indent, duly approved by competent authorities, is shipped back with the items and
avoids the usual documents like purchase orders, materials requisitions, expediting letters
and acknowledgements, delivery period price and invoicing procedure, Carborandum company
in the US claims drastic reduction in inventory and elimination of 40000 purchase orders by
adopting the system contracting procedure. It is suitable for low unit price items with high
consumption