Lemery Colleges, Inc.

A. Bonifacio St., Brgy. Bagong Sikat, Lemery, Batangas

Lesson 2
TOPIC: PURCHASING AND VENDOR MANAGEMENT
DURATION: 1 WEEK
PREFERRED DELIVERY: Video/ Recorded Lecture/Printed Module

LEARNING OBJECTIVES
By the end of this module, students will have completed the following objectives:
1. Define purchasing management
2. Understand centralized and decentralized purchasing
3. Describe purchasing policies
4. Explain vendor rating evaluation
5. Describe management of stores
TO DO LIST

: Study
Powerpoint Presentation
Reading
Course Content and Lecture in Module 2 (page 24)

Take Activity #2
Take Quiz

COURSE CONTENT
3.1 INTRODUCTION
Purchase Management is a function of materials management in a company. Their basic function is procuring the
inputs for production function. This function encompasses suppliers in the market external to the organization and several
internal to the organization.
Purchase management is considered to be very important function of materials management in a company. Its
importance is felt even outside the formal scope of materials management. As the purchase decisions commit a very large
portion of financial resource of the company purchase function 15 said to be highly important. Purchase personnel deal with
large number of external agencies while performing their functions. Hence they represent company's reputation in the
outside world. As they negotiate and finalize deals worth lot of money for the company their integrity is of utmost importance
for the organization.
Executives and outsourcing vendors alike are constantly evaluating what vendor management is? Vendor
management is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third
party companies to consistently meet these goals.
Vendor management is not the same as operations management, although it is remarkably similar. In an
outsourcing relationship, vendor managers must understand the drivers of the relationship in order to ensure the vendor is
successful. Vendor managers are not empowered to perform all aspects of the outsourced operation. Rather, they must
influence the vendor to perform. This level of influence is different from managing employees because of the economies
differences in the relationship: a company typically represents 100% of an employee's income, but rarely represents even
5% of a company's revenues. More to the point, most outsourcing contracts are priced by vendors in a way that even
if the vendor paid the maximum nonperformance penalties they are likely to still is profitable.
3.2 PURCHASING MANAGEMENT
Purchase is the procurement of goods or services from some external sources. Acquisition of some kind in lieu of
accepted price on consideration in return.
“Purchasing is the procurement of materials, supplies, machines, tools and operation of a manufacturing plant.”
Till recently, the purchasing process simply involved placing order with the supplier who offered the lowest price.
Nowadays, increase in competition and market demand and scarcity of resources have forced organizations to reexamine
their purchasing activities. The purchasing department functions have expanded considerably and include activities such as
verifying the credentials of supplier, inspecting the quality of the material to be purchased, ensuring the timely delivery of the
material, etc.
While the value of purchased items varies from industry to industry, it adds up to more than fifty percent of sales in
all industries. Purchase management is regarded as a significant activity in many organizations because of high cost
involved in carrying out purchasing activities, increasing quality benchmarks and increasing global competition. Purchase

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departments buy raw materials, parts, machinery and services used by production systems. The objective of purchase
management is to procure the right equipment, materials, supplies and services in the right quantity, of the right quality,
from right suppliers, at the right time, at the lowest price.
3.2.1 Objectives of Purchasing
1. To acquire the goods or services at minimum cost.
2. To ensure the continuous flow of production.
3. To develop the main and attenuate sources of supply.
4. To ensure timely delivery.
5. To make optimum utilization of capital.
6. To acquire quality product so that quality output is served to the consumer
3.2.2 Types of Purchasing
1. Purchase Made as Per Requirement: No purchase is made in advance. Purchase is done as need arises.
Method usually applied for emergency requirement or infrequent goods.
2. Contract Purchasing: Contract of material is given to an agency. It has an advantage that low price of those
materials whose cost fluctuates highly
3. Market Purchase: Purchase is made from the market to take advantage of price fluctuations.
4. Schedule Purchasing: It is a cyclic purchase model. A schedule of purchase is made and it used for those
commodities whose price does not fluctuate.
3.2.3 Purchasing Procedure
1. Purchase Requisition: All the departments of the organization are asked to make a requisition for purchase.
2. Decision of Purchase: Collecting requisition from various departments and handed it to Purchase
department/committee head. Purchase head decide what to purchase and in what quantity.
3. Study of Market Conditions: Market trends are analyzed to generate an idea of price and availability of product.
4. Selection of Vendors.
5. Placing of Purchase order.
6. Receiving of order.
3.2.4 Functions of Purchase Department
The function of the purchasing department is to provide assistance in securing qualified vendors, soliciting
and obtaining proper equipment, supplies, and services at the right price, in the right quantity, at the right time.
Functions/responsibilities of purchase department are:
1. Obtaining prices
2. Selecting vendors
3. Placing Purchase order
4. Settlement of complaints
5. Making and maintaining harmonious relations with vendors.
3.3 ORGANIZING PURCHASING
The effectiveness of purchasing activities can be enhanced by proper organization and coordination of the
activities. There are two types of purchasing system:
 Centralized purchasing system
 Decentralized purchasing system
3.3.1 Centralized Purchasing
Centralized purchasing means buying and managing purchases from one location for all locations within an
organization. This can also be run by a central location buying in to a distribution warehouse that feeds smaller warehouses.
This is called a hub and spoke system.
The responsibility and authority to purchase, lease, or rent materials, supplies goods, equipment, or services are
placed with the division of finance and operations purchasing and stores department.
Purchasing is centralized to:
 realize economy, efficiency, and effectiveness in the procurement function
 pursue quality assurance and standardization;
 maintain the highest standards of ethics;
The control by a central department of all the purchasing undertaken within an organization. In a large organization
centralized purchasing is often located in the headquarters. Centralization has the advantages of reducing duplication of
effort pooling volume purchases for discounts, enabling more effective inventory control consolidating transport loads to
achieve lower costs, increasing skills development purchasing personnel, and enhancing relationships with suppliers.
3.3.2. Advantages of Centralized Purchasing
 Volume Purchasing: When the district is able to purchase a single item in mass, vendors are often willing to
provide a discount. Purchasing in mass advantage of discounts is called volume purchasing.

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 Warehouse: In order to take advantage of volume pricing, the district purchases items in bulk. Vendors
typically require that the district take delivery of the items in mass. These bulk purchases are stored in the
warehouse until the items are requested by the sites.
 Save time in Researching Products: Individuals spend hours to research the products and to find best
price. The purchasing department has resources to help reduce the time to research products.
3.3.3 Disadvantages of Centralized Purchasing
The main disadvantages of centralized purchasing are as under:
1. Delay: Centralized planning causes delay as plants may be situated in different places. It is really very
difficult to consolidate the requirements of all items different factories and then place orders with suppliers.
2. High Initial Cost: It leads to high initial cost because a specialized purchase department for purchase of
material has to be established.
3. Local Purchase: The benefits arising out of local purchase cannot be availed of where there is centralized
purchase in operation.
4. Emergency Purchase: In case of centralized purchasing, emergency purchase cannot be made.
5. Communication Difficulty: This system of purchase leads to communication difficulty between centralized
purchase office and the plants.
6. Less Flexible: The purchasing procedure under centralized purchasing is flexible.
3.3.4 Decentralized Purchasing
Decentralized purchasing is the opposite where each plant or office buys what it needs. This operation allows any
employee to buy what he needs. We can also run this operation with a designated buyer assigned to the site to do the
buying. The more decentralized an operation is, the less control the home office has. We have a duplication of effort in
buying and less buyer specialization. We lose discounts on quantity buys. We lose freight options based on dollars or
weight. Also some support is lost from the supplier as there is no single contact for the supplier to deal with.
3.3.5 Advantages of Decentralized Purchasing.
 Materials can be purchased by each department locally as and when required.
 Materials are purchased in right quantity of right quality for each department easily.
 No heavy investment is required initially.
 Purchase orders can be placed quickly
 The replacement of defective materials takes little time.
3.3.6 Disadvantages of Decentralized Purchasing
 Organization losses the benefit of a bulk purchases.
 Specialized knowledge may be lacking in purchasing staff.
 There is a chance of over and under-purchasing of materials
 Fewer chances of effective control of materials.
 Lack of proper cooperation and coordination among various departments.
3.4 PURCHASE POLICIES
The major principles on which purchasing policies should be based are a sound orientation, reflect a cross
functional approach and be directed at improving the company's bottom line.
3.4.1 Business Orientation
Developing a purchasing and supply strategy requires a thorough understanding of the company's business
policies. The following questions are important to determine how purchasing and supply strategies will need to support the
company in meeting its goals and objectives:
 What end-user market is the company targeting and what are the major developments going on in those
markets?
 What competition is the company suffering from and what leeway does the company has in setting its own
pricing policies?
 To what extent can material's price increases can be passed onto the last customer or is it impossible?
 What changes are happening in the company's product, production and information technologies?
 What investments will be made by the company in terms of new products and technology?
 What products will be taken out of the market for the years to come?
3.4.2 Integrated, Cross-Functional Approach
Purchasing decisions cannot be made in isolation, and should not be aimed at optimization of purchasing
performance only. Purchasing decisions should be made taking into account the effects of these decisions on other primary
activities like:
 Production planning
 Materials management

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 Transportation
Therefore, purchasing decisions need to be based on balancing total cost of ownership. When buying for instance,
a new packaging line it is important to consider not only the initial investment, but also the costs which will be incurred in the
future for buying accessories, spare parts and services. This example itself illustrates the complexity of its type of purchases
and the different kind of decisions that need to be made.
Careful decision making in those circumstances, therefore requires a cross functional and team based approach
among all the business disciplines affected by it. This can only be done when top managers are involved. The purchasing
and supply manager will lead the developing of such views and visions.
3.4.3 Bottom-line Orientation
The purchasing should provide a healthy commercial opposition vis-à-vis its internal customers. Through their
activities the buyers should make their company more and more cost aware. They should consistently look for improving the
price/value ratio of the goods and services bought by the company. To accomplish this, purchasing should be able to
suggest alternatives to existing product designs, materials or components to be used and alternative suppliers. Experience
with companies which purchasing is recognized as a bottom-line driven activity shows this function contributes to a
permanent reduction in cost price of the end product, whilst stimulating innovation from the suppliers at the same time.
3.4.4 Implementation of Purchase Policy
Important areas to consider when implementing supply and purchase policy are supply, product and supplier
quality, materials costs and prices, supplier policy a communication policy.
Supply. Supply is aimed at the optimization of both the ordering process and the incoming materials flow.
Purchasing order processing entails handling of:
 Purchasing Requisitions-Order processing and expediting
 Development of efficient, computer
 supported order routines
Materials and supply planning relates to:
 Issuing materials delivery schedules to suppliers
 Reducing supplier lead times
 Troubleshooting in case of delivery problems
 Reducing (pipeline) inventories
 Monitoring supplier delivery performance
Product and Supplier Quality. Central to this aspect are the materials specifications. Two important subjects of concern here
are purchasing early involvement in design and product development and improving product and supply quality
performance. Activities which may contribute to both areas are:
 Standardization of materials-by striving for standardization or simplification of product- specifications, the buyer may
reduce product variety resulting in both cost reduction and supplier dependence at the same time;
 A purchasing policy focused on the life cycle of the end products - there is not much point in investigating material
quality improvements used in products which will be eliminated shortly;
 Specific quality improvements- negotiating targets on improving reject rates, reducing incoming inspection, and
negotiating quality agreements
 Agreeing on and gradually extending permanent warranty conditions that are to be provided by the supplier;
 Initiating special program in the field of value analysis to simplify product design and/or reduce product costs;
Materials Cost Policy The objective of cost policy is twofold:
 First to obtain control of material cost and prices in such a way that suppliers are unable to pass on unjustified price
increases to the company.
 Second, to systematically reduce the supplier's materials cost through joint, well prepared action plans.
In order to be successful in both aspects a thorough knowledge of the supplier’s, pricing policies and cost structure is
required. Understanding and knowledge of the market structures and of their susceptibility of the price paid to market and
cost factors is necessary. It should be decided for what products to build detailed cost models, for what models to monitor
underlying cost factors, and for what product to develop detailed materials budget estimates.
Supplier Policy. The supplier policy is focused on the systematic management of the company's supplier base.
Decisions need to be made for what commodities to pursue a multiple sourcing strategy or to go for single sourcing
or a partnership relationship.
 Suppliers who perform best should be rewarded with more business in the future.
 Targets and possible projects for future co-operation should be determined carefully.
 Relationships with suppliers who consistently fail to meet the company's expectations should be
terminated.
However, such decisions need to be made based on detailed data on how the supplier performed in the past and
be implemented carefully.

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Communication Policy. The company's purchasing policies need to be communicated both internally and to suppliers.
Companies use the Intranet for the former and many employ their own Purchasing Websites in order to communicate their
future materials requirements and ways of working to their suppliers.
The next step is that preferred suppliers have access to the customer's Intranet through which internal users can
order directly from them through their electronic catalogues.
3.5 PURCHASE SYSTEMS
In an organization all activities are carried out according to systems and procedures for reducing variations and
errors arising out of individuality. This makes performing the function simple and less prone to errors. Purchase organization
also consists of such systems established for smooth running of purchasing function. These systems are pre purchase
system, ordering system, post purchase system.
3.5.1 Pre Purchase System
This system lays down how purchase activity is initiated. Various activities controlled by this system are
requisitioning, selection of suppliers and obtaining and evaluating quotations
Requisitions. Requisition for an item may be made by anyone in the organization. Pre purchase system prescribes separate
requisition form for capital equipment as this purchase activity is controlled by a separate system. Requisition for an item
shall be made a standard format. This format ensures that indenting person furnishes all relevant information like quantity,
specifications, etc. and gets the purchase authorized by competent authority in the organization. Thereby making purchase
activity easier and less time consuming. This system shall identify the hierarchical level competent to authorize the
purchase depending on the nature and value of the item.
Traveling Requisitions. In an inventory system where an item is made a stock item to be perpetually maintained at a
minimum level, purchase activity is triggered by stores function based on ROL. The requisition is a permanent document
with specification, authorization and quantity required permanently marked on it. The traveling requisition returns to
indenting department after purchase is initiated.
Inquiries. Pre-purchasing system prescribes standard formats for making inquiries in the market for supply of a particular
product. These are standard forms boldly declaring that they are not explicit or implicit purchase orders.
3.5.2 Ordering System
Purchase order is the most important element in ordering system. Purchase manager releases the purchase order
after selecting the supplier and finalizing the price and other conditions of sale. Once the purchase order is raised and
accepted it becomes a legal document.
Contents of the purchase order are:
 Purchase order reference number
 Description of materials and specifications
 Quantity required and delivery schedule
 Price and discounts
 Shipping instructions
 Location where the material is to be shipped
 Signature of the authorized officer
Detailed terms and conditions:
 Several numbers of copies made to be forwarded to various recipients. Many companies color code the
copies making the color destination specific.
 Original and a copy are sent to the supplier for acknowledgment of the original order. This acknowledgment
is acceptance of terms and conditions of purchase order.
 One copy is sent to the receiving department for making necessary receiving arrangement.
 One copy is sent to the indenting department for information
 One copy is sent to finance department for organizing payment to the supplier.
3.5.3 Post Purchase System
This system includes follow up procedures, receipt and checking invoices
Follow Up Procedures. Follow up is an expensive activity for an organization. Hence this should be minimized and made
more effective. A sound procedure for follow up is required to eliminate duplication and ineffectiveness. After conducting
FSN analysis follow up does not become wasteful. Follow up responsibility 1s assigned to buyers responsible for areas in
which suppliers situated.
Receipt. Receipt system should ensure that detects in receipt process are eliminated proactively. A systematic record of all
receipts, carrier details and descriptions is maintained. This record is in chronological sequence of arrival of supplies. The
system ensures that inspection of consignments received is arranged in time and payment to suppliers for accepted
consignments is organized. In many organizations a receipt section handles this activity centrally.
Invoice Checking. Supplier sends his invoice to customer’s finance department for payment for the goods supplied. Invoice
checking system ensures that the invoice is checked against the PO terms, receipt details, quantity received, inspection

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reports (accepted quantity and rejected quantity), losses, damages etc. this system helps materials management to
coordinate with finance department for payment to suppliers.
3.6 VENDOR MANAGEMENT
Vendor Management is the management and control, by an entity, of those third parties that supply goods and/ or
services to that entity. It is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and
managing third party companies to consistently meet these goals:
Establishing Goals. Just as employees need clearly established goals, operations need clearly defined performance
parameters. When selecting or managing vendors, vendor managers must optimize their opportunity to achieve these goals
by using third parties’ companies.
Selecting Vendors. The fine art of vendor management is essential to optimizing operational results. Different vendors have
different strengths and weaknesses, and it is the vendor manager's responsibility to match the right company with the
desired performance characteristics. Failure to consider this comprehensively could lead to complete failure
Managing Vendors. On a daily basis, vendor managers must monitor performance, provide feedback, champion new
projects, define or approve/disapprove change control processes, and develop vendors.
Consistently Meet Goals. Operations must perform within statistically acceptable upper and lower control bounds.
Everything the vendor manager does should focus on meeting goals, from providing forecasts to defining requirements,
from ensuring vendors have adequate staff ensuring the staff have completed all required training.
3.6.1 Vendor Relations
An important objective in purchase management is that of maintaining good relations with vendors. A good vendor
is an asset of the company; and, therefore, just as customer goodwill is considered important, a good relationship with the
vendor should be treated likewise. A vendor who supplies the proper quality material in proper amounts in proper time is not
very easy to find. Moreover, there are many situations where materials are required in hurry. There are situations where
materials are in shortage in the supply market. In all such situations, good relationships with the vendors pay dividends.
This may entail: personal relationship, professional relationship:
 By helping the vendor in times of stress and strain with financial aid, by providing management skills if
necessary, and
 Maintaining a healthy professional relationship by fair negotiation, fair evaluation and fair compensation.
The modern management theory and world class manufacturing call for a long-term, almost a lifetime, association
with the vendors. This also means that there will be fewer vendors but these will be dedicated vendors- almost a part of
organizational family.
Until the present and even now, the Indian industry has not given/is not giving much importance to vendor relations.
The emphasis, if any, has been on vendor selection and on monitoring the performance of the vendor through a vendor
rating system. Vendor is the entity that is, generally, taken for granted. This attitude is: All said and done, the vendors for the
company may change over a period of time. They may change to another business; some of them may not give the desired
performance in quality, delivery and price, and therefore, one should always expect a drop-out rate in the vendors list of the
company.
3.6.2 Selection of Vendors
1. The production capabilities of the vendor
(a) Capacity to manufacture the required product in desired quantities.
(b) Possibility of future expansion in capacity.
(c)The understanding or the knowledge of the vendor regarding the buying company and its need.
2. The financial soundness of the company
(a) The vendor company's capital structure
(b) whether it belongs to a larger group of companies; whether it is a Private Limited or a Public Limited
company.
(c) The profitability record of the company in the past.
(d) Expansion plans of the company in the future.
3. Technical Capabilities
(a) whether the available machines are capable of the required quality of materials? What are the future plans
of the vendor?
(b) whether there are enough technical skills available with the vendor?
(c) Whether there is proper research, design and development facility available with the vendor?
(d) What is the record of the vendor in filling the orders of other buying companies in the same business?
(e) What has been the consistency in the quality produced by the vendor?
(f) Whether the vendor has appropriate storage and warehouse facilities to retain the quality of the product
produced?
(g) Whether proper quality control procedures are being followed in the vendor company?

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4. Other Considerations
(a) What are the working conditions in the vendor company?
(b) How are the industrial relations in the vendor company?
(c) Whether there is any possibility of disruption of the supply of materials in terms of quantity and/or quality
due to human relations problem in the vendor company?
3.7 VENDOR RATING
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given standing,
status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some
combination of variables. The motivation for the establishment of such a rating system is part of the effort of manufacturers
and service firms to ensure that the desired characteristics of a purchased product or service is built in and not determined
later by some after- the-fact indicator. The vendor rating may take the form of a hierarchical ranking from poor to excellent
and whatever rankings the firm chooses to insert in between the two. For some firms, the vendor rating may come in the
form of some sort of award system or as some variation of certification. Much of this attention to vender rating is a direct
result of the widespread implementation of the just-in-time concept in the United States and its focus.
3.7.1 Criteria for Evaluation
Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service. Each area has
a number of factors that some firms deem critical to successful vendor performance.
Pricing factors include the following:
 Competitive Pricing The prices paid should be comparable to those of vendors providing similar
product and services. Quote requests should compare favorably to other vendors.
 Price Stability: Prices should be reasonably stable over time.
 Price Accuracy: There should be a low number of variances from purchase-order prices on invoiced
received.
 Advance Notice of Price Changes : The vendor should provide adequate advance notice of price
changes.
 Sensitive to Costs: The vendor should demonstrate respect for the customer firm's bottom line and
show an understanding of its needs. Possible cost savings could be suggested. The vendor should
also exhibit knowledge of the market and share this insight with the buying firm.
 Billing. Are vendor invoices being accurate? The average length of time to receive credit memos
should be reasonable. Estimates should not vary significantly from final invoice. Effective vendor bills
are timely and easy to read and understand.
3.7.2 Quality Factors Include.
 Compliance with Purchase Order. The vendor should comply with terms and condition as stated in
the purchase order. Does the vendor show an understanding of the customer firm's expectations?
 Conformity to Specifications: The product or service must conform to the specifications identified in
the request for proposal and purchase order. Does the product perform as expected?
 Reliability: Is the rate of product failure within reasonable limits?
 Reliability of Repairs: Is all repair and rework acceptable?
 Durability Is the time until replacement is necessary reasonable?
 Support: Is quality support available from the vendor? Immediate response toand resolution of the
problem is desirable.
 Warranty: The length and provisions of warranty protection offered should be reasonable. Are
warranty problems resolved in a timely manner?
 State-of-the-art product/service: Does the vendor offer products and services that are consistent with
the industry state-of-the-art? The vendor should consistently refresh product life by adding
enhancements. It should also work with the buying firm in new product development.
3.7.3 Delivery Factors Include the Following
 Time: Does the vendor deliver products and services on time; is the actual receipt date on or close to
the promised date? Does the promised date correspond to the vendor's published lead times? Also,
are requests for information, proposals, and quotes swiftly answered?
 Quantity: Does the vendor deliver the correct items or services in the contracted quantity?
 Lead Time: Is the average time for delivery comparable to that of other vendors for similar products
and services?
 Packaging: Packaging should be sturdy, suitable, properly marked, and undamaged. Pallets should
be the proper size with no overhang.
 Documentation: Does the vendor furnish proper documents (packing slips, invoices, technical
manual, etc.) with correct material codes and proper purchase order numbers?

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 Emerge Delivery: Does the vendor demonstrate extra effort to meet requirements when emergency
delivery is requested?
3.7.4 Finally These are Service Factors to Consider
 Good Vendor Representatives have Sincere Desire to Serve : Vendor reps display courteous and
professional approach, and handle complaints effectively. The vendor should also provide up-to-date
catalogs, price information, and technical information. Does the vendor act as the buying firm’s
advocate within the supplying firm?
 Inside Sales: Inside sales should display knowledge of buying firms reed. It should also be helpful
with customer inquiries involving order confirmation, shipping schedules, shipping discrepancies, and
invoice errors.
 Technical Support: Does the vendor provide technical support for maintenance, repair, and
installation situations? Does it provide technical instructions, documentation, and general
information? Are support personnel courteous, professional, and knowledgeable? The vendor should
provide training on the effective use of its products or services.
 Emergency Support: Does the vendor provide emergency support for repair or replacement of a
failed product.
 Problem Resolution: The vendor should respond in a timely manner to resolve problems. An
excellent vendor provides follow-up on status of problem correction.
A more comprehensive approach is needed for suppliers that are critical to the success of the firm's strategy
or competitive advantage. For firms that fall into the latter category performance may need to be measured by the following
7 C's.
 Competency: Managerial, technical, administrative, and professional competence of the supplying
firm.
 Capacity: Supplier's ability to meet physical, intellectual and financial requirements.
 Commitment: Supplier's willingness to commit physical, intellectual and financial resources.
 Control: Effective management control and information systems.
 Cash Resources: Financial resources and stability of the supplier. Profit, ROL, ROE, asset-turnover
ratio.
 Cost: Total acquisition cost, not just price.
 Consistency: Supplier's ability to exhibit quality and reliability over time
3.7.5 Benefits
Benefits of vendor rating systems include:
 Helping minimize subjectivity in judgment and make it possible to consider all relevant criteria in
assessing suppliers.
 Providing feedback from all areas in one package.
 Facilitating better communication with vendors.
 Providing overall control of the vendor base.
 Requiring specific action to correct identified performance weaknesses
 Establishing continuous review standards for vendors, thus ensuring continuous improvement of
vendor performance.
 Building vendor partnerships, especially with suppliers having strategic links
 Developing a performance-based culture
Vendor ratings systems provide a process for measuring those factors that add value to the buying firm
through value addition or decreased cost. The process will continually evolve and the criteria will change to meet current
issues and concerns
3.8 USE OF MATHEMATICAL MODEL FOR VENDOR RATING
3.8.1 Cost Ratio Plan
Under this method, the vendor rating is one on the basis of various costs incurred for procuring the materials
from various suppliers.
The cost-ratios are ascertained for the different rating variables such as quality, price and timely delivery etc.
For example: The total delivery cost is 5000 and the total purchases are 1,000,000, then delivery cost-ratio
will be: (5000 x 100)+100000 = 5%
All such cost-ratios will be adjusted with the quoted price per unit. The plus cost ratio will increase the unit
price while the minus cost ratio will decrease the unit price.
The net adjusted unit price will indicate the vendor rating. The vendor with the lowest net adjusted unit price
will be the best supplier.

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 Lemery Colleges, Inc.
A. Bonifacio St., Brgy. Bagong Sikat, Lemery, Batangas

Under this method, the most strategic issue is the identification of various costs and their allocation among
different variables and suppliers. Certain important heads of quality costs and delivery costs can be listed as under:
Quality Delivery Costs
Inspection costs Postage and telegrams.
Cost of defectives Telephones
Reworking costs Extra cost for getting quick delivery for example, costlier means of transportation.
Manufacturing losses
on rejected items.
All the cost ratio is calculated for all the suppliers on individual basis. On the basis of the value of each cost-
ratio, the consolidated rating of each supplier is done.
3.9 MANAGEMENT OF STORES
Stores management is part of the overall function of materials management. In order, therefore, to
understand the function of the former it is desirable to have a clear understanding of what materials management stands for.
Beginning with the term management is important to examine its definition and objectives.
Management is the specific purpose of planning, controlling and implementing. Materials management is one
of the recent additions to the growing glossary on management.
Materials management is the process if planning, implementing and controlling the flow or storage of input,
facilities, service and information efficiently and effectively from the point of supply to the point of consumption in the
conformity of the company’s objective.
Stores organization may be defined as a systematic coordination and combination of efforts in manner, which
would result in optimum efficiency with a minimum of expenditure.
The term Store, Storehouse, or Warehouse refer to a building or room or place where materials are kept.
3.9.1 Objectives and Responsibilities of The Store Function
Store is an organization is primarily intended to assist in the production of goods or services and no industrial
unit of public undertaking of any significant size can be efficiently managed without it. The basic objective is to provide a
service to the operating functions and this aspect must be fully appreciated. All the other activities, although they have their
own importance, are subordinate to the main responsibility.
The service rendered by stores can be categorized into four broad divisions:
 To make available a balance flow of raw materials, components, tools, equipment and any other
materials necessary to meet operational requirements.
 To provide maintenance materials, spare parts and general stores as required.
 To receive and issue finished products
 To accept and store scrap and other discarded material as they arise.
The major responsibilities of stores are:
 Identification of all material stored.
 Receipt of incoming goods.
 Inspection of all receipts.
 Storage and preservation.
 Materials handling.
 Packing
 Issue and dispatch.
 Maintenance of stock records.
 Stores accounting.
 Inventory control.
 Stock-taking.
3.9.2 Organizing Stores
Traditionally, this department has been attached to the production department, even considered part of it.
The finished goods stores were attached to the sales department. Today, it has been recognized that both Production and
Sales has vested interest, which conflict with the basic objectives of inventory control. A such, the modern concept is to
delink stores from production or sales. The best practice is to place stores under the materials manager and make it part of
the materials department.
The materials manager will have the status of other senior departmental heads of production, sales or
finance,
who report to the chief executive.

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