CHAPTER THREE

3. PURCHASING
3.1 Definitions of purchasing:-
 Purchasing is one of the material management functions
which are involved in acquisition of materials to be used in
the operation of an organization from the external suppliers.
 The basic objectives of purchasing function are to insure
continuity of supply of materials and the same time reduce
the ultimate cost of the finished goods.
 Purchasing department acquires material resources like raw
material, components, tools, equipment and machineries,
supplies etc from the external suppliers.
 These materials are used to produce the final output.
 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.
 Specific Activities of Purchasing Department

 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
 Selection of the best suppliers
 Issuance of purchase order
 Administration of contract with suppliers etc
 3.2 The relationship between Purchasing Department and Other functional Units

By its very nature purchasing has continuing relationships with

all other departments in the firm as well as with the firm’s
suppliers. Specifically, the relation that it has with production,
marketing and finance departments of a company is very strong.
A. Purchasing versus production department
Purchasing department is responsible for acquiring necessary
materials such as raw materials, components, supplies,
accessories and so on. And production department uses these and
other resources to produce final outputs. Therefore, the degree to
which the purchasing department discharges its responsibility
properly will determine production department’s performance.
 Cont’ed
B. Purchasing versus marketing department
Purchasing department buys items which will be used by the production
department to produce the output. Marketing department on the other
hand sell these company’s output to ultimate customers. If purchasing
department fails to buy items properly, production department can not
produce the finished goods which the marketing department sell to its
customers.
The purchasing -----Production -----sales cycle has its origin in a sales
forecast.

C. Purchasing versus finance department

To obtain necessary materials from the external suppliers, purchasing
personnel needs money which is under the immediate control of finance
department.
 3.3 Objectives of good Purchasing

Right times
It is a time at which the materials are actually needed.
Determination of right time for materials requires lead time
considerations.

Right source or suppliers

These are those who can be dependable and capable of
supplying items of uniform quality for a relatively longer period
of time. Or Right source is the vendor who is responsive,
responsible, fair, and quick to respond to the needs of the
purchasing organization. :
 Cont’ed

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. If
the buyer order an item with large quantity, the inventory carrying cost
will goes up and if the company order an item with small quantity the
unit cost will be high and there may happens to be interruption of
operation.

Right place
A geographical location of the supply affects the cost of transportation
and lead time which certainly occupies a prominent place while
evaluating a supplier. Accident, strikes, flood, transport inadequacy,
supplier’s own negligence are a few problems, which may cause delivery
delays and stock outs, if supplier are located in far-off places.
3.4 Policies defining purchasing responsibilities
 A policy is a general statement that describes in very
general terms an intended (planned) course of action
which guides organizational employees in making
decisions.
 An organization can have different types of policies

related to its various operational areas.

 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.
 Cont’ed
 Purchasing is said to be centralized if all the purchasing
functions or activities are made the responsibility of a single
purchasing department. This department is held accountable by
top management for proper performance of purchasing activities.
 In centralized purchasing policy only a single purchasing
department bear (take) the responsibility for purchasing
activities.
 Whereas decentralized purchasing occurs when personnel from
different function units or departments bear (take) the
responsibility for purchasing activities.
 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 major purchases.
 Cont’ed
Conditions favouring centralized purchasing policies
 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 that need almost similar
materials
 If the company can get all the materials it need from few suppliers
Conditions favouring to decentralized purchasing policies
 If the size of the organization is large
 If the company’s operation is scattered (disseminated) to different
geographic area
 If the company produces large product lines that need different materials
 If the company get all the materials in need from large suppliers
 3.5. Purchasing procedures
Purchasing procedures refers to a series of steps that
should be followed during purchasing.
The purchasing/material management area requires
a wide range of standard operating procedures to deal
with the normal daily tasks.
The number of steps involved in purchasing process
may vary depending on the type of purchase and the
following steps constitute the typical purchasing cycle.
 Cont’ed
Step 1: Recognition of purchase needs
Any purchase originates with the recognition of a definite need by some
units or persons in the organization. In other words, purchase needs can
be recognized when purchase requisition is filled and sent to the
purchasing unit.
Purchase requisition (demanded): - is a letter which request or asks
the purchase of materials from the external suppliers.
It consists of the following information:-
 The name and code of the materials to be purchased
 The name of requisitioned
 The date of requisition
 Time when the materials are needed
 The quality and quantity of the materials needed
 Detailed specification of materials needed.
 Cont’ed
 Step 2: Verification (Proof) 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. The purchasing department should review/examine
the descriptions (specifications) on the Purchase requisition for the
completeness, accuracy and clarity of information on the Purchase
requisition.
 Step 3: selection of source of supply
 Supply selection constitutes an important part of the purchasing
functions that involves searching for qualified sources of supply
and analyzes the capability of suppliers to supply the right
materials on time.
 This can be done through price analysis sheet. The suppliers that
proposed the least price and fulfilled all the conditions will be
selected and an order is placed to the selected supplier/s.
 Cont’ed

 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
required.
 Purchase order contains the following detail information:
 • identification number
 • purchase requisition number
 • name of the buying organization
 • complete description of the item required
 • the name of the supplier
 • quantity, price per unit and total price
 • delivery date and conditions
 • signature of authorized persons and
 • other pertinent terms that are believed necessary by the buyer
 In most cases, the purchase order becomes a contract document. For this
reason, the buyer should take great care in preparing and wording the order.
 Cont’ed
 Step 5: Follow-up
 Follow-up is a routine tracking of an order to ensure that the vendor
will be able to meet delivery promises. Follow-up, which requires
frequent inquiries of the vendor on progress and possibly visit to the
vendors’ facilities, will be done when large purchase (dollar) or long
lead time buys. It can be done through phone, to get immediate
feedback or through a simple form to request information.
 Step 6: Receiving and inspection (checkup) of goods
 The next step in the purchasing cycle is receipt and inspection of
goods. When a supplier ships a material, it includes in the shipping
container a packing slip which itemizes the contents of the shipment.
 Step 7: Clearing the invoice and payment
 To insure that the purchases makes proper payment for the materials
actually received, sound accounting practice dictates that some type
of review procedures precedes payment to the supplier.
 Cont’ed
 Step 8: Maintaining Records
 Purchasing is responsible to maintain records that are believed important, as per
the policy of the organization, to be kept.
 Those, which are of no value, are discarded quickly to release space.
 It is advised that the records related to a specific order be placed together so that
they can be found easily and referred to get a complete picture of the order.
 The basic records that are essential for the effective operations of the
purchasing department are:
 Purchase requisitions
 Record of open order (outstanding order)
 Record of closed orders
 Commodity records (list of all materials and services that are bought repetitively)
 • Supplier record (both good and black ones)
 • Correspondences
 • Bid documents
 • Price analysis sheet
 • Tender committee minutes and
 • Policy guidelines
 3.6. 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 decisions usually arise when a firm that
has developed a product or part is having trouble with
current suppliers, or has diminishing capacity, or
changing demand.
 Cont’ed
 Considerations Which Favour Making Decision
1. Cost consideration (less expensive to make the part)
2. Desire to integrate plant operations
3. Productive use of excess plant capacity to help absorb fixed
overhead (using existing idle capacity)
4. Need to exert direct control over production and quality
5. Design secrecy required (to protect proprietary technology)
6. Unreliable suppliers
7. Desire to maintain a stable workforce (in periods of declining sales)
8. Provision of a second source, and etc.
 Cont’ed
 Considerations Which Favour Buying Decision
1. Limited production facilities (insufficient capacity)
2. Cost considerations (less expensive to buy the part)
3. Small volume requirements
4. Suppliers’ research and specialized know-how exceeds that of the buyer
5. Desire to maintain a stable workforce (in periods of rising sales)
6. Desire to maintain a multiple-source policy
7. Indirect managerial control considerations
8. Procurement and inventory considerations
9. Brand preference
10. Item not essential to the firm’s strategy
 3.7. Value Analysis
What Is 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.
What Are the Benefits of Value Analysis?
 Eliminating Costs
 Modernizing
 Design Flaws
 Customer Service
Thank
you!!!!
!