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Presented to :- Presented by :-

Asstt. Pro. M. L. Meena Padamdhar garg (2011PME5258)

Vikrant chandrakar(2011PME5263)
Umardaraj (2011PMM5266)
M. Tech MNIT Jiapur

Vendor means a person (or company) who sells and supplies
his (or its) products.

An intelligent purchasing involves the rational selection of

sources from which materials can be obtained. Considerable
efforts are needed in identifying, developing and evaluating
the prospective suppliers. It is also essential to continuously
appraise the performance of the current suppliers

A few questions are tobe answered before
attempting to develop vendors

How much quantity is required to be purchased?

How much time is available for making such purchases?
Will the material be required repeatedly or occasionally?
What is the volume of purchase of the required materials?
Which is the industry producing the required materials?
What is commercial viability of the materials?

Based on the answers, a list of potential supplier is drawn.
For the purchase of items that are of repetitive nature, a
detailed evaluation procedure of suppliers is adopted. For a
one-time purchase, elaborate inquiries and evaluation
procedures may not be necessary.

Unless the item is costly and has a high technological

content, such as biological products. Effective negotiations
can avoid many difficulties in regard to supplies


First Stage survey stage

Second Stage enquiry stage

Third Stage negotiation & selectionstage

Fourth Stage experience & evaluation stage

Survey stage-source of information on
potential vendors
Survey stage-source of information on potential vendors
Survey involves collecting information on different suppliers
of the desired materials. The following sources may be

Trade directories: These give information regarding dealers

addresses, regional offices, names, types and range of
products including spares. Electronic digital interchange, for
example :- computer based trade directories, is useful source.

Trade journals:- These contain advertisements of the
materials related to specific industries, namely chemicals,
plastic , steel etc. these journals can be subscribed, relevant
information can be classified, indexed, updated and
maintained in proper files by the buyer.

Telephone directories :- These contain classified

advertisement arranged alphabetically, item-wise or group-
wise. Examples are, abrasives, air-conditioners, castings,
diamonds and so on. It is an easy and fast means of collecting
the sources.

Suppliers catalogues :- many manufacturers periodically
publish catalogues and pamphlets giving details of the
products they manufacture. These catalogues contain
considerable technical information, specifications, prices etc.

Salesmen :- they trained person who continuously visit

customers for the possible business and orders. Through
their sales presentations, it is possible to collect the
information and clarify doubts. They help in expanding the
knowledge to a great extent.

Inquiry stage- selection of potential
suppliers :
After a list of possible suppliers is complied, the next step is
to inquire a few of them further. It involves a detailed analysis
of supplier’s activities furnished by vendors or collected by
the company.

Accreditation, FDA approval and certifications namely ISO

9000, 9002 etc, facilitate the selection. A comparison may be
made in regard to four aspects of competition

Technological competition

Service competition

Price competition

Time based competition (TBC) i. e, response time for


Internal facilities of vendors:- Adequate facilities are
essential for the manufacture and quality control of items.

These must be done under the supervision of qualified and

experienced staff. Additional facilities are to be explored for
the supply of items in time. Modern equipment, quality of
inputs, maintenance, size and capacity, layout ,
housekeeping and cleanliness are inspected

• Financial adequacy and stability:- the financial status of
the vendor company and relations with his bankers should be
explored, so that items can be produced and supplied
without any financial difficulties at any stage. For this
purpose, previous years balance sheets of the company are

Reputation of the vendor: Methods of selling and
distribution network are important. The supplier ‘s
reputation in the market in regard to prices and promises of
delivery dates should be considered.

Location of the vendor’s factory:- It should be nearer to

the buyers factory. If it is located at a very distant town.
Vendors representative should be available in the locality.
after sales service :- In case of equipment, after sales service is
essential. The availability of maintenance engineers in the
locality or town should be advantageous
Industrial relations: Industrial conflicts, frequent strikes, layoffs
etc, seriously affect the supplies. The industrial climate, work
culture, employer- employee relationship should be given
consideration. Hence, one has to very careful in dealing with such
companies. In addition, several other factors should be
a) Is the supplier a direct manufacturer or only a agent?
b) Is the buyer looking for one or more suppliers?
c) Whether the supplier is small or big?

Hence, full enquiry into all factors should be made in order to

arrive at a decision regarding the selection of sources.
Thus short listed suppliers are considered for the third stage.
Negotiation and selection stage-
finalization of vendors:
The vendors who are successful in the enquiry stage
may be called for negotiations in order to discuss
business possibilities.
During this stage, various terms namely credit,
quantity discount, quality specifications etc, can be
Finally, a list of approved vendor’s drawn.
Accordingly, purchase orders are placed with the
approved vendors.
Several aspects of buying techniques are used at third
Experience and evaluation stage:

At this stage, the buyer evaluates and appraises the

performance of the vendor. The objective is to improve the
performance of vendors in which they are deficient.

The evaluation is done especially on two counts, namely

quality (judged by rejection of lot- size ) and delivery (
judged by delays on delivery).

Vendor Rating:
A few ways by which a vendor can be evaluated are
listed below:-

1) categorical method
2) weighted point method
3) cost ratio method

Categorical method : The buyer prepares a list of factors,
which are considered necessary for evaluation.

At periodic intervals, say once in three- months , the buyer

prepares a performance report.

The format such a report is given:
Factors Grading

1. Supplies as per Always Usually Seldom Never

quantity specified 9 8 7 6 5 4 3 2 1 0

2.Deliveries are as per


3.Rigorous follow up are

not necessary

4.Solves his raw material

problem on his own

5.Willing to accommodate
when production
schedules are suddenly
Factors Grading

Always Usually Seldom Never

9 8 7 6 5 4 3 2 1 0

6.Helps in
7.Behavior is
courteous and
8. Reasonable in
9. Miscellaneous
Each supplier is evaluated and a number-score is calculated.

Then, it is converted into word rating. The conversion of

scores is as follows:
Point Remark

80-100 Excellent

70-80 Good

60-70 Average

50-60 Very poor

Weighted point method : this type of evaluation involves a
point rating based on the quality of goods received, the
promptness of deliveries made and the quality of the service
rendered by the vendor.

The point may be assigned as follows:-

Performance Points

Quantity 50 points

Delivery 30 points

Price 20 points

Total points 100
The performance of each factor is separately quantified.

For example, consider the quality aspect, Assume that 160

lots were received during a year and 16 lots were rejected on
account of poor quality, the number lots accepted will be 144.

Quality rating = Number of lots accepted× rating points

(i.e., 50 Number of lots received
quality rating = 144 × 50 = 45 160
similarly delivery rating can be obtained using below
Delivery rating = number of lots delivered in time × rating
points total number of lots delivered
The price rating is calculated using equation
Price rating = least offer received × rating points supplier’s

Cost – ratio method : it is an intricate system of determining

the actual costs incurred in purchasing, follow up,
transportation, packing, duties, receiving etc,

Based on these costs, the unit cost incurred by the buyer is

calculated, the higher the cost, the lower the supplier’s
comparative rating .

For example, costs relating to quality works out to be Rs
2,000 and the total worth of material purchased is Rs 2.0
lacks per year Quality cost ratio = 2,000 : 2,00,000, (i.e., 1%)
Similarly, when the cost of delivery is Rs. 1000 then Delivery
cost ratio = 1,000 : 2,00,000 (i.e., 0.5%)

Similarly, all types of costs can be calculated. These ratios

must be maintained as minimum of possible.

U sing the methods mentioned above, a buyer can
better judgment over retaining the vendors.

However, many non- quantifiable factors namely integrity,

behavior, attitudes towards progressiveness etc., should also
be given importance.

Thus, the buyers experience and judgment would ultimately


We can understand vendor rating by this example:
Ex. The following information is available on 3 vendors: A,
B and C. Using the data below, determine the best source of
supply under weighed point method and substantiate your
Vendor A: Delivered 56, lots 3, were rejected 2 were not
according to the schedule.
Vendor B: Supplied 38, lots2 were rejected 3 were late.
Vendor C: Finished 42, lots 4were defective 5 were delayed
Give 40 for quality and 30 weightage for service.

Solution: Quality performance (40% weightage)
= (quality accepted/total quantity
Delivery performance:
X, Adherence to time schedule(30%)
=(no. of delivery on the scheduled date/total
scheduled deliveries)*30
Y,Adherence to quantity schedule(30%)
=(no of correct lot size deliveries/tot no of scheduled
Total Vendor Rating =X+Y

Vendor A= (53/56)*40+(54/56)*30 =66.78

Vendor B=(36/38)*40+(35/38)*30 =65.52

Vendor C =(38/42)*40 +(37/42)*30 =62.62

So Vendor A is selected with best rating.

Purchasing involves procurement of materials, machinery an
services needed for production and maintenance.

The purchasing department procures the right kind of

material (quality ) , in right – quantities, at right time and
makes them available for the production.

It also concentrates on the right source and economic

procurement, while procuring the materials, the company
pays the price.

Price is defined as the amount of money at which a thing is
valued or the value that a seller sets on his goods in the

Price is a greatest variable in purchasing. Very often price is

qualified by terms, best price, lowest price, economic price

In order to determine the right price, the buyer should be

conversant with business trends, trade cycles, supply and
demand, price advances and declines, quantity discounts .

Quotation is an inquiry to know whether the vendor can
supply the desired material and if so, by what price.

Quotation are invited on a prescribed form or format from

the selected sources for the required items.

The quotation also includes the terms and conditions

namely taxes, freight, cartage etc.

At the top of this form, the words ‘THIS IS NOT AN
ORDER’ is printed

A minimum of three quotations each in duplicate is

required from differentsuppliers.

The quotations are valid for at least one month from date of

Quotation is not a purchase order

Generally materials are bought by one of the following

Spot quotations :-The buyer can go to the market and

collect minimum of three quotations from three different
suppliers and takes spot decision.

This type of practice is not possible in the purchase of

pharmaceutical materials.

This method is suitable for the purchasing of office
stationery and computer peripheries.

The purchasing department selects the suppliers form the

approval list and accordingly does the purchasing.

Floating a limited enquire :- This method is used when the
value of purchases is small. The company sends letters to a
few reliable vendors requesting for prices, analytical reports,
and other details for a particular material.

A purchase enquiry form is usually prepared for this purpose.

The quotations are collected in duplicate at least from three


After getting quotations, these are opened and a comparative

statement is made.
It is analyzed in the light of following points:-

1. Price of the material - Material specifications (quality)

2. Place of delivery - Delivery period –
3. Taxes - Terms of payment –
4. Validity of tender - Guarantee period etc.

The comparative statement helps in studying and comparing

different quotations at a glance.

Thus a quick decision can be taken as with whom to place

order for the purchase of a material. 37
Tenders :-
A tender is a written letter or a published document ( in news
papers) that is aimed at finding the price for procuring
certain materials or for getting a particular job done within
the desired period and under specified conditions.

Tenders are invited from recognized or registered firms. A

few types of tenders are given below;-

- single tender
- open tender
- closed tender or limited tender 38
S ingle tender : Single tender is invited from one
reliable supplier, under certain conditions.

It is applicable to proprietary items, high quality items and

also C- items such as clips, pins, pencils etc., when items are
required urgently.

Open tender : Open tender method is used when the value
of purchases is high. When supply sources are not known or
intended to locate more supply sources, open tender ( or
public tender ) is used. Open tenders are very expensive.

The buyer is not aware of the capability of the supplier.

Therefore, tenders are invited from recognized or registered


Open tender is also called press tender, because it is

published in the news papers, trade journals etc 40
Negotiations :-

• Negotiations may be defined as an art of arriving at a

common understanding through bargaining on the
essentials of contract such as delivery, specifications, prices
and terms.

Negotiations with the concerned vendor(s) are often

necessary before finalizing a purchase contract. The purpose
is for fixing and finalizing prices of materials, terms and
Need for negotiations :-

In most cases, purchase orders are decided on the basis of

quotations. Negotiations are required when a change in the
scope of a contract is warranted. Negotiations are considered
essential in the following conditions:

- prices are related to large volumes or to a large value.

- terms and conditions are required for large volumes.
- contract is desired for a longer period.

Variations in quantity to be purchased are possible.

Changes in drawing and specifications are necessary.

Changes in transportation, packing and delivery points are to

be decided.

When no acceptable quotations are received from the

responding vendors.

Process of negotiations : negotiations take place between two
individuals or two sets of individuals.

Communication is an important ingredient in the art of


Through the communication of ideas, the purchasing

department persuades and convinces the vendors to agree
with their view point,

So that an agreement can be reached. Negotiations should

attempt at a ‘win-win, situation to both parties. It is mutually
satisfactory settlement.
Discounts :-
Discounts are defined as the cash concessions offered by the
vendor in the payment price, on the goods purchased, in
order to enhance the volume of business opportunities.

Reasons for offering discounts :- when large orders are

placed, the seller is able to obtain economies in production,
packaging, billing, selling etc.,

When the bills are cleared immediately after delivery, the
supplier gets finance for his activities.

Similarly transportations costs and other costs provide


The supplier is prepared to give a part of his savings to the


Thus discounts are usually offered by a majority of suppliers.

Types of discounts :
Materials may be purchased in three ways.

1. Volume contract
2. Deals
3. Discounts

Volume contract : this type of contract is employed to cover
total purchase of ampoules, bottles and other accessories.

Because of a large order, the seller is able to obtain

economies in production, packaging, billing, selling etc

Volume contract discount may be defined as a method of

offering discount proportionate to the quantity of goods or
volume of material ordered.

In this system, the manufacturer (buyer) estimates its

annual consumption of a class of products and signs an
agreement with the supplier

Such contracts are executed for a period of one year.

The advantage of this type of purchase is that contract price

is usually protected from an increase (or decrease) of prices.

In some cases, the buyer directly pays to the supplier.

In case of government purchases, payment is made through

Director general of supplies and disposals (DG, S & D ) Cash
discount : The normal credit period is 90 days for the
payment of bill.
Cash discount is a method of offering discounts depending
on the time of payment made on the delivery.

Cumulative discounts: in this case, quantity might not be

fixed in the contract.

Cumulative discounts may be defined as a method of

offering proportionate discount on the basis of actual
purchases and appropriate to the quantity range in an year.

For example, buying is continued during the course of the

year, but the price will be reduced beyond a certain volume.
Consignment terms : This is frequently used in retailing

In consignment terms, the buyer ( usually a trader ) pays the

price after selling the goods.

A pharmaceutical company may agree or consignment terms

of payment with a chemist’s shop

Flow Chart of vendordevelopment process