CHAPTER THREE

PURCHASING

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 Contents of the Chapter
 Definitions of Purchasing
 Objectives of good Purchasing
 Policies Purchasing
 Purchasing Procedures
 Make-or-buy Decisions
 Value Analysis
 Global sourcing

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 Definitions of Purchasing
Purchasing is procurement of goods and
services from some external sources.

 Purchasing is the process acquiring of

materials, supplies, machine tools, and

services required for equipment,
maintenance and operation of a
manufacturing plant.

 Purchasing is a managerial activity that

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goes beyond the simple act of buying.
 Continued
 Purchasing function means the procurement by purchase of the proper

materials, machinery, equipment and supplies for stores used in the

manufacture of a product adapted to marketing in the proper quality and
quantity at the proper time and at the lowest price consistence with quality
desired.

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 Continued

 Purchasing department acquires material

resources like raw material, components, tools,
equipment and machineries, supplies etc from the
external suppliers.
 As purchasing department buys items needed in

a given company from external environment, we

can therefore view purchasing department as a
bridge between the company and its suppliers.

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 Specific activities of purchasing department includes;

Working with user departments to

identify purchase needs
Identification of potential suppliers
Conducting market for materials
Negotiating with suppliers
Issuance of purchase order
Selection of the best suppliers

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 Objectives of good Purchasing
The basic objective of purchasing
function is to insure continuity of
supply of materials and at the same
time reduce the ultimate cost of the
finished goods.
To ensure this, there are a large
number of well known parameters
such as right price, right quality, right
time, right source or supplier, right
quantity, right attitude etc.

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Right price
 It is the primary concern of any manufacturing organisation to get an item at
the right price.
 Right price which brings the best ultimate value is usually determined with
other factors such as quality, quantity, availability of the product, shelf life of
the product, delivery, demand and supply of the product etc.
 While it is difficult to determine the right price, the following can be used as
the general guidelines
 Undertaking the cost analysis of the product

 Buying through tender system


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Right quality
 In purchasing, quality is defined as the suitability and conformity of a
product to its intended purpose.
 It is defined in terms of relationship to a need or a function.
 The important thing, here, is not absolute quality of an item, but the
suitability of the item in satisfying the particular need at hand at the lowest
cost.
 The best quality product may not necessarily be the right quality if it does not
conform to the purpose intended for.
 It can be defined by several means through specification i.e. dimensions,
chemical properties, physical properties, hardness, colour, conductivity,
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performance, characteristics, design parameters, etc.
Right times
 It is a time at which the materials are actually needed.
 Determination of right time for materials requires lead time considerations.
 There is a finite time lag between the identification of the need for an item
till it is approved for use after placing an order, manufacturing, transport,
shipping, and inspection.
 Thus, the right time to purchase an item is when the item reaches its
minimum level.
 The store will inform the purchasing to acquire the required item when that
item reaches its minimum level.

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Right quantity
 A right quantity material refers to the level of materials which can satisfy the
current needs and be sufficient to meet some future needs.
 Concepts such as EOQ, fixed period and fixed quantity system will serve as
broad guidelines to determine the right quantity.
 But the buyer has to use his knowledge, experience and common sense to
determine the quantity after considering factors such as price structure,
discounts, availability of the item, favourable reciprocal relations and make or
buy consideration.

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 Policies defining purchasing responsibilities
 Purchasing policy is one of these several policies and it largely defines where
purchasing responsibilities and authorities lie in an organization.
 Based on organization’s purchasing policy, purchasing responsibility can either be
centralized or decentralized purchasing.
 Purchasing is said to be centralized if all the purchasing functions or activities are
made the responsibility of a single purchasing department.
 Or Centralization of purchasing exists when the entire purchasing functions is
made the responsibility of a single department.

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 Continued
 Where as decentralized purchasing occurs
when personnel from different function units
or departments bear the responsibility for
purchasing activities.
 Or decentralization of purchasing occurs
when personnel from other functional areas-
production, engineering, marketing, finance,
and so on-decide unilaterally on sources of
supply or negotiate with suppliers directly for
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 Continued
Conditions favouring centralized purchasing
 If the size of the organization is small

 If the company’s operation is confined to specific geographic area

 If the company produces few product lines

 If the company can get all the materials it need from few suppliers

Conditions favouring to decentralized purchasing

 If the size of the organization is large

 If the company’s operation is scattered to different geographic area

 If the company produces large product lines

14If the company get all the materials in need from large suppliers 9/5/2023
 Purchasing procedures
 Purchasing procedures refers to a series of steps that should be followed
during purchasing.

 A purchasing department buys many different types of materials and services,

and the procedures used in completing a total transaction normally vary among
the different types of purchases.

Step 1: Recognition of purchase needs

 Any purchase originates with the recognition of a definite need by some units

or persons in the organization

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 Continued

 Purchase needs can be recognized when

purchase requisition is filled and sent to

the purchasing unit.
 Purchase requisitions can originate
from two sources.

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 Continued
Step 2: Verification of purchase needs

 The purchasing unit refine whether the

requisition is appropriate or not.

 They should make judgements on whether

to buy or not and check if the requisitioned is
authorized or legible to do so, if budget is
available etc.

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 Continued
Step 3: Selection of source of supply

 It is an important part of the purchasing

functions that involves searching for qualified

sources of supply and analyses the capability
of suppliers to supply the right materials on
time.

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 Continued
Step 4: Preparation and Issuance of PO

 Once a supplier has been selected, the

purchasing department prepares and
issues a serially numbered purchase
order (PO) to selected supplier/s.
 A purchase order is an external
document generated by the purchasing
unit issued to winner suppliers to provide
the buying firm the item/service that is
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 Continued
Step 5: Follow-up and Expediting
 Follow-up is a routine tracking of an order to ensure that the vendor will be able to
meet delivery promises.
 Expediting, on the other hand, is the application of pressure on vendors to set them
either to meet the original delivery promise or delivery ahead of schedule.
Step 6: Receiving and inspection of goods

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 Continued
Step 7: Clearing the invoice and payment

 The purchaser determines whether the quantity and type of materials ordered was in

fact received. The accounting unit after verifying the documents pays the supplier and
the order is closed.

Step 8: Maintaining Records

 Purchasing is responsible to maintain records that are believed important, as per the

policy of the organization, to be kept.

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 Make-or-buy Decisions
 The make-or-buy decision is the act of making a strategic choice between

producing an item internally (in house) or buying it externally (from an

outside supplier).

 The buy side of the decision also is referred to as outsourcing.

 Make-or-buy analysis is conducted at the strategic and operational level.

 Of course, firms should make items that reinforce or that are inline with

their core competencies.

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 Continued
 The increased existence of firms that utilize the concept of lean
manufacturing has prompted an increase in outsourcing.
 Lean firms are those increasingly buy more and make less.

 Most firms outsource all items that do not fit with one of the following
three categories.
A. The item is critical to the success of the product, including customer
perception of important product attributes.
B. The item requires specialized design manufacturing skills or equipment, and
the number of capable and reliable suppliers is extremely limited.
C. The item fits well within the firm’s core competencies
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 Factors Influencing make-or-Buy decisions
Considerations which favour making
 Cost consideration (less expensive to make the part)

 Desire to integrate plant operations

 Productive use of excess plant capacity

 Need to exert direct control over production and quality

 Design secrecy required

 Unreliable suppliers

 Desire to maintain a stable workforce (when falling sales)

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 Continued
Considerations which favour buying
 Limited production facilities (insufficient capacity)

 Cost considerations (less expensive to buy the part)

 Small volume requirements

 Suppliers’ research and specialized know-how exceeds that of the buyer

 Desire to maintain a stable workforce (when rising sales)

 Brand preference

 Item not essential to the firm’s strategy

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 Value Analysis

 Value analysis (or value engineering)-

is a method for improving the usefulness
of a product without increasing its cost or
reducing the cost without reducing the
usefulness of the product.

 It can result in great cost savings or a

better product for the customer, or both.

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Benefits of value analysis/value engineering

 Reduced complexity of products.

 Improved functional aspects of product.

 Improved maintainability of the product.

 Lower costs

 Less labor required (simpler flows, easier tasks)

 Higher quality:

 Simple, easy-to-make products means fewer opportunities to make

mistakes
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 Global Sourcing
 International sourcing is the process of purchasing from suppliers outside of

the firm’s country of manufacture.

 It is defined as the integration and coordination of requirements across world

wide business units, looking at common items, process, technologies, and

suppliers.

Why purchase international goods and services?

The reasons are for the seek of quality, timeliness, product and process

technologies, broadening the supply base, counter-trade and so on.

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Potential problems of international buying
☹ Cultural and social problems
☹ Source location and evaluation problems
☹ Currency fluctuation
☹ Communication problems
☹ Long lead/delivery time
☹ Payment related problems 2639
☹ Transportation related problems
☹ Legal problems

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 End of the third Chapter

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