PEM M C07

Project Materials Management

Dr. Deepak Sundrani

Session 6
 Reminder
• On Friday 25 March 2022, there will be a MCQ
Test of 20 marks from 4.45 pm to 5.05 pm.

• Portion : Session 1 to Session 6

• At the end of today’s session, Link will be

given in the chat-box , however it will not
open till Friday 25 March 4.45 pm
 For today’s session
Please keep ready with you, the following:
•Calculator
•graph paper,
•scale,
•pencil,
•Eraser / rubber,
•sharpener,
•coloured pens (red, blue, black etc.)
Recap
PURCHASE MANAGEMENT
 Purchasing inputs
1) Purchase requisition
( from Production Manager , specifying quality,
quantity, type, etc. in the form of Bill of Materials ) , if
it is standard item in store, give directly.

If special material :
Buyer (person who actually buys) obtains quotations
and, in many cases according to the importance of
the item, invites tenders or special tenders by
advertisement in the newspapers for the supply of
the materials required.
• No purchases should be permitted without duly
authorized purchase requisitions.
• In case of materials which are regularly needed in large
quantities, generally forward contracts are made in
consultation with and approval of higher management.
When such contracts are made, a record of orders
issued against them and deliveries made has to be
kept. These are called open-end purchase orders or
blanket purchase orders. Repetitive orders go directly
to the supplier without being processed by the
purchase department. The contracts are negotiated for
a fixed period, however the delivery dates , quantities
and prices are kept open.
• In other cases , when material is not regularly
required, necessary formalities are to be carried out
and processed, such as invitation of quotations,
tenders, etc.
• A good plan is to prepare a schedule of quotations to
facilitate comparison and then to decide on a supplier
to place the order.
• Apart from price, due weightage has to be given to
such factors as quality and specifications, conditions of
delivery (time, place etc. ) and other conditions
including terms of payment and trade-discounts.
• A purchase order form is then written (in
triplicate) . In many cases, details of the general
terms such as shortages, breakages, spoilages,
including supplier’s warranties needed, damages
in case of supply failures are printed on the back
side of the purchase order.
• The original is sent to the supplier, a duplicate
copy is sent to the receiving storekeeper and the
third one is retained by the purchase department
for reference.
A) PURCHASE REQUISITION FORM
(for stock items)

No. ________________ Date : _________________

Description Quantity Material Balance on Last purchase

Code No. hand Requisition No. and
name of the supplier

Signature

From Storekeeper Approved by

NB. : Sometimes additional information like time, place and date of delivery are also
mentioned
 Seen till here in Session 5
On Wednesday 16 March 2022
 Interdepartmental relations
Good relations of Purchase department with
other departments is absolutely necessary
1) Purchase Department and Production
( Construction Execution ) department
Purchase department has to make available the
required materials on time, sometimes
emergency needs may also arise to avoid
stoppage of work.
Production Department must try to give
adequate lead time for procurement otherwise
unnecessary expenses are incurred
• Sometimes Production Department may not
give sufficient advance notice to Purchase
Department.
• Sometimes Purchase Department may not be
able to procure materials in time, even though
requirements were given well in advance. In
such a situation Purchase Department must
inform the Production Department if there is
expected delay in delivery, so that jobs can be
rescheduled.
• Production Department should assist in
inspecting materials. They should give a fair trial
to new/ substitute materials
• Close co-ordination required between both
departments in case of make-or-buy decision.
• Production department should not
unnecessarily ask for extra quantity.
• Production Department should control
defectives due to poor workmanship.
• Production department should undertake
rework of items on time
2) Purchase Department and Engineering Deptt.
( Architecture / RCC )
(Engineering department prepares technical
specifications for materials and equipment)
Since specifications determine costs , Engineering
Department must specify materials that are
economical. Usually Engineering Department
incorporates materials without regard to cost and
procurement problems.
For economic design, Engineering Department
should hold consultation with Purchase
Department to get acquainted with market
availability of materials.
Engineering Department should prescribe only
those materials which are easily available. They
should not over-specify. They should restrict
variety. Those materials which are already
available should be specified if possible.
Inform Purchase Department in advance if
changing design.
3) Purchase Department and Inspection &
Quality Control Department
QC department should not over-react or
reject materials for minor defects. Repetitive
rejection drives away vendors.
Purchase Department should involve QC
Department in selecting vendors based on
their Qualty Assurance capability.
4) Purchase Department and Sales
Sales Department should give accurate forecasts
of sales. It should give prompt communication in
case of any change in forecast. Also in case of
special orders, inform Purchase Department
well in advance
Purchase Department should provide
information on costs of major items to Sales
Department and increase (if any) so that
products are priced correctly.
5) Purchase Department and Finance Deptt.
Finance should inform Purchase Deptt. About
availability of funds. Timely payments
necessary to vendors for smooth flow of
materials. Purchase should liason with Finance
so that unrealistic commitments are not made.
Sometimes Cash on Delivery / advance
payment
6) Purchase Deptt and Maintenance Deptt.
Maintenance Department should provide list
of consumable spares which are required
regularly . Also inform in advance replacement
spares to be procured based on maintenance
schedules.
Purchase Department should ensure
availability even for emergency requirements
7) Purchase Department and Planning Deptt.
By advance communication , Planning
Department can enable Purchase Department
to provide materials without tying up too much
capital. Purchase Department should inform of
changes in production programme. Check
requirements of non-stock items thoroughly.
Purchase Department should make available as
per commitment.
8) Purchase Department and HR Department
Close liason so that right type of person
selected for Purchase Department
9) Purchase Department and Legal Department
Purchasing is a contract. Purchase Department
should get approval of Legal Department to
avoid litigation later. Many problems can be
avoided by proper drafting of contract terms.
 Qualities of Purchase Personnel
1) Education : Especially knowledge of commercial laws
2) Dependability
3) Initiative
4) Cooperation : Get along with other departments
5) Tactfulness
6) Integrity
7) Good communication ability
8) Habit of going into details
9) Knowledge of products/ materials and their usage.
 Methods of buying
Many factors influence selection of buying
methods :
(i)Nature of item
(ii)Regularity of its demand
(iii)Quantities required
(iv)Susceptibility to price variation
 Different methods of buying
1) Hand to mouth buying (buy only when need arises)
2) Scheduled buying
3) Market purchasing ( in advance, when prices
expected to rise)
4) Speculative buying ( buy in large quantity and sell at
a higher price
5) Contract buying ( eg. Every month for one year)
6) Blanket orders ( variety of low-value items from a
stockist, order usually given on phone )
contd….
 Contd… Different methods of buying
7)Tender buying : especially Government Deptt.
8) Seasonal buying ( mainly agricultural products)
9) Group purchasing ( many small things in one
purchase order)
10) Sub-contracting
11) Central purchase organization : large companies,
example MSRTC
12) DGS & D ( central purchase organization for
Government organisations)
 Purchasing under different
circumstances
1) Buying under certainty
Replenishment
(a) Fixed order quantity, variable duration
and
(b) fixed interval, variable quantity
2) Buying under risk
3) Buying under uncertainty
 a) Fixed order quantity
Procurement costs Carrying costs
(Ordering costs) (Holding costs)
1) Cost of printing and 1) Interest on capital
stationery invested
2) Telephone 2) Storage and handling
3) Postage costs
4) Travelling charges 3) Loss due to
5) Running expense of deterioration
transport
Economic Order Quantity (EOQ)
 Example
• Monthly consumption of an item costing
Rs. 300 per unit is estimated as 100 per
month.
• Inventory carrying cost (holding costs) is
computed at 15 % on average inventory
• Procurement cost (Ordering cost) is computed
at Rs. 3000 per order.
a) Calculate Annual procurement cost
( Ordering cost) assuming different
values of order quantities in steps of 100
b) Calculate annual inventory cost for different
order quantities
c) Determine EOQ
(i) Graphically
(ii) By formula
Order Annual Procurement Annual Inventory carrying Annual total cost
Quantity cost (Ordering cost) cost (Holding cost)
(Rs.) ( Rs.) (Rs.)

100 36000 2250 38250

200
300
400
500
600
700
800
900
1000
1100
1200
Order Annual Procurement Annual Inventory carrying Annual total cost
Quantity cost (Ordering cost) cost (Holding cost)
(Rs.) ( Rs.) (Rs.)

100 36000 2250 38250

200 18000 4500 22500
300 12000 6750 18750
400 9000 9000 18000
500 7200 11250 18450
600 6000 13500 19500
700 5143 15750 20893
800 4500 18000 22500
900 4000 20250 24250
1000 3600 22500 26100
1100 3273 24750 28023
1200 3000 27000 30000
 Formula
2.S.Cp
EOQ = -------------
Cu .i
S = Annual consumption of item (units)
Cu = Unit price ( Rs.)
Cp = Procurement cost per order (Rs.)
i = inventory carrying cost expressed as
percentage of average inventory investment