Purchasing

Meaning
Purchasing

refers to a business or
organization attempting to acquire
goods or services to accomplish the
goals of the enterprise
Requires input from:

Marketing
Engineering
Manufacturing
Manufacturing Planning and Control
what materials to order
when to order them

Objectives of Purchasing
Obtain

goods and services:

of the required quantity and quality

at the lowest possible cost
at the best possible service and
delivery
while maintaining and developing
suppliers

Purchasing Functions
Determining

purchasing
specifications

right
right
right
right

quality
quantity
time (delivery)
place (delivery)

Selecting

supplier

right source

Purchasing Functions
(continued)
Negotiating

terms and conditions

right price
Issuing

and administering
purchase orders

Purchasing Cycle
1. Receive and analyse purchase
requisitions
2. Select suppliers, issue quotations
3. Determine the right price
4. Issue purchase orders
5. Followup to assure correct delivery
6. Receive and accept the goods
7. Approve invoice for payment

Receiving and Analyzing

Requisitions
From

planners (MRP system) and

all other users
Purchasing will:
Identify originator, account number,
approvals
Check material specifications
Verify quantity and unit of measure
Verify delivery date and place
Ensure all supplemental information

Selecting Suppliers
Often

from a list of approved

suppliers
For small items:
internet
catalogues
trade journals
For

large items, issue a request

for quotation

Requesting Quotations
Written

inquiries sent to enough

suppliers
to ensure competitive and reliable
quotes are received

Quotes

are analyzed

price
compliance to specification
technical suitability
often with the involvement of the
originator

Determining the Right

Price
Usually

the lowest
May involve negotiations
Responsibility

Department

of the Purchasing

Issuing a Purchase Order

Legal

document
Forms a contract with the
supplier upon acceptance
Copies to:

Supplier
Originator
Accounting
Receiving
Purchasing file

Follow-up and Delivery

Ensure

on-time delivery
Negotiate any changes
Take corrective action:
expedite as required
find alternative sources of supply
work with suppliers to resolve
problems
reschedule production?

Receiving and Accepting

Goods
Receiving

inspects goods for

correct quantity and any damage
Accepts goods and generates a
receiving report
send to quality for further inspection
hold goods damaged in transit
Copies

to Accounting, Purchasing

Approving Invoice for

Payment
Agreement

with:

Original Purchase Order

Receiving Report
Invoice

price including discounts

quantity
Send

approval to Accounts
Payable

CHOOSING
SUPPLIERS

Selecting Suppliers
The

right supplier:

can supply the quality needed

has the capacity to deliver the
quantity need and on time (JIT
deliveries?)
makes a profit, but at a good price
contributes to the improvement of
your product

Factors in Selecting
Suppliers
Technical

ability
Manufacturing capability
Reliability
After-sales service
Location
Other considerations
Price

Technical Ability
Do

they have the technical

capability?
Is there a program of product
development and improvement?
Can they assist in improving your
product?
Their

products become part of

your product

Manufacturing Capability
Can

they consistently meet the

specifications and quality
desired?
quality control programs
competent personnel

Do

they have good

manufacturing planning and
control systems?
to supply information on delivery

Reliability
Reputable
Stable
Financially

strong

Were in
this
together

After-Sales Service
Service

organization
Supply of spare parts
Technical support

Supplier Location
Location

may effect delivery time

Local inventories
May be required for after-sales
service
will your customers require service?

Other Considerations
Credit

terms
Willingness to hold inventory
JIT
Information technology
Reciprocal business

Price
Not

always the lowest

May include other services

Supplier Selection
On-going

relationship
Mutual benefit
Supplier can depend on future
business
Buyer can be:
assured supply of quality products
technical support
product improvements / problem
solving

Supplier Selection: Weighted-Point

Plan
Factors:

Things that must be

considered
as part of what we will be buying
Weights: The relative importance
of each of the factors
Rating: How well each supplier
compares on each factor
Ranking: The weight times the
rating

Weighted-Point Plan
1.Select the factors
2.Assign a weight to each factor
3. Rate the suppliers for each
factor
4. Rank each supplier
(multiply the weight by the rate for
each factor)

Weighted-Point Plan

Figure 7.1 Supplier rating

Price Negotiation
Buyer

needs knowledge of
sellers costs
Buyer must have sufficient clout
Should benefit both supplier and
buyer
Savings must justify the time and
effort required

Negotiations - Type of
Product
Commodities

price is determined by the market

concern for future contracts
Standard

products

price set by catalogue listings

little room for negotiation
Small

value items

try to reduce ordering costs or increase volume

Made-to-order

items (negotiation possible)

quotations from a number of sources

Supplier Responsiveness and

Reliability
Material

requirements often

change
Suppliers must be able to react
to change
Flexibility
in volume
in products needed
Reliable

in delivery promises

INVENTORY CONTROL
(STOCK CONTROL)

Inventory- meaning
Inventory

is actually money,
which is available in the shape of
materials (raw materials, inprocess and finished products),
equipment, storage space, worktime etc.

Inventory control
Inventory control is concerned
with
achieving
an
optimum
balance between two competing
objectives.
1) Minimizing
the investment in
inventory.
2) Maximizing the service levels to
customers and its operating
departments.

OBJECTIVES
1.
2.
3.
4.
5.
6.

7.

The
specific
objectives
of
inventory
management are as follow:
Utilizing of scare resources (capital) and
investment judiciously.
Keeping the production on as on-going basis.
Preventing idleness of men, machine and
morale.
Avoiding risk of loss of life (moral & social).
Reducing administrative workload.
Giving satisfaction to customers in terms of
quality-care, competitive price and prompt
delivery.
Inducing confidence in customers and to
create trust and faith.

INVENTORY - TYPES
Raw

materials & purchased parts

Partially completed goods called
work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)

Replacement

parts, tools, & supplies

Goods-in-transit to warehouses or
customers

FUNCTIONS OF INVENTORY
To

meet anticipated demand.

To

smoothen production requirements.

To

decouple operations.

To

protect against stock-outs.

To

take advantage of order cycles.

To

help hedge against price increases.

To

permit operations.

To

take advantage of quantity discounts.

FACTORS INFLUENCING
INVENTORY
Manufacture

requires relatively long

process cycle-time.
Procurement of materials has a long
lead-time.
Demand
for
finished
products
is
sometimes
seasonal
and
prone
fluctuation.
Material
costs
are
affected
by
fluctuations in demand and subsequently
by fluctuations in manufacturing.

Inventory Costs
Costs

associated with ordering too much

(represented by carrying costs).
Costs
associated with ordering too little
(represented by ordering costs).
These costs are opposing costs, i.e., as one
increases the other decreases.
The sum of the two costs is the total stocking
cost (TSC).
When plotted against order quantity, the
TSC decreases to a minimum cost and then
increases.
This cost behavior is the basis for answering the
first fundamental question: how much to order.

Balancing Carrying against

Ordering Costs

COSTS IN INVENTORY
Inventory costs may vary from 28 to
32% of the total cost. Apart from
material costs, several other costs
are also involved in inventory. These
are given as below:
Ordering Costs
Holding Costs/ Carrying Costs
Stock Out Costs

Ordering Costs

Stationary
Clerical and processing,
salaries/rentals
Postage
Processing of bills
Staff work in expedition
/receiving/ inspection and
documentation

Holding/Carrying Costs
Storage

space (rent/depreciation)
Property tax on warehousing
Insurance
Deterioration/Obsolescence
Material handling and maintenance,
equipment
Stock taking, security and
documentation
Capital blocked (interest/opportunity
cost)
Quality control

Stock out Costs

Loss

of business/ profit/ market/

advise
Additional expenditure due to
urgency of purchases
a) telegraph / telephone charges
b) purchase at premium
c) air transport charges
Loss of labor hours

SELECTIVE INVENTORY
CONTROL
Selective

Inventory Control is
defined
as
a
process
of
classifying items into different
categories,
thereby
directing
appropriate attention to the
materials in the context of
companys viability.

Classification of Materials for

Inventory Control
Classification

Criteria

A-B-C

Annual value of consumption of the

items

V-E-D

Critical nature of the components with

respect to products.

H-M-L

Unit price of material

F-S-N

Issue from stores

S-D-E

Purchasing problems in regard to

availability

S-O-S

Seasonality

G-O-L-F
X-Y-Z

Channel for procuring the material

Inventory value of items stored

ABC Classification System

Classifying

inventory according to annual

value of consumption of the items.
A - very important
B - mod. important
C - least important

When

a large number of items are involved,

relatively few items account for a major
part of activity, based on annual value of
consumption of items.

It

is based on the principles of vital few

and trivial many.

ABC Classification System

(Contd)
A-items

: 15% of the items are of the

highest value and their inventory
accounts for 70% of the total.
B-items : 20% of the items are of the
intermediate value and their inventory
accounts for 20% of the total.
C-items : 65%(remaining) of the items
are lowest value High
and their inventory
A small balance,
accounts for the relatively
Annual
i.e., 10%.
$ value
B
of items

Low
Few

Many

Number of Items

V-E-D Classification
Based

on the critical nature of items.

Applicable
to
spare
parts
of
equipment, as they do not follow a
predictable demand pattern.
V-Vital :Items without which the
activities will come to a halt.
E-Essential :Items which are likely to
cause disruption of the normal
activity.
D-Desirable : In the absence of which
the work does not get hampered.

H-M-L Classification
Based

on the unit value (in

rupees) of items.
Similar to A-B-C analysis
H-High
M-Medium
L -Low

F-S-N Classification
Takes

into
account
the
distribution and handling patterns
of items from stores.
Important when obsolescence is
to be controlled.
F Fast moving
S Slow moving
N Non moving

S-D-E Classification
Based

on the lead-time analysis

and availability.
S Scarce : longer lead time
D Difficult : long lead time
E Easy : reasonable lead
time

S-O-S Classification
S-O-S

:Seasonal-

Off-

Seasonal
Some items are seasonal in
nature and hence require special
purchasing
and
stocking
strategies.
EOQ formula cannot be applied in
these cases.
Inventories
at the time of
procurement will be extremely

G-O-L-F Classification
G-O-L-F

stands for:

G Government
O Ordinary
L Local
F Foreign

X-Y-Z Classification
Based

on the value of inventory stored.

X class items which are critically important and
require close monitoring and tight control
while this may account for large value these will
typically comprise a small percentage of the
overall inventory count.
Y class are of lower criticality requiring standard
controls and periodic reviews of usage.
Z class require the least controls, are sometimes
issues as free stock or forward holding.
If the values are high, special efforts should be
made to reduce them.
This exercise can be done once a year.