NITIE,

Mumbai
Chap 7 : Purchasing

Dipak Ramchandra Sutar

Chapter 7 Purchasing
Introduction

Purchasing is the process of buying. Obtaining the right material, in the right quantities, with the
right delivery (time and place), from the right source, and at the right price are all purchasing
functions.

Manufacturing planning and control (MPC) must decide when to order which raw materials so that
marketplace demands can be satisfied. Purchasing is then responsible for placing the orders and for
ensuring that the goods arrive on time. Purchasing has the majority responsibility for locating
suitable sources of supply and for negotiating prices.

On the average, manufacturing firms spend about 50% of each sales dollar in the purchase of raw
materials, components, and supplies. This gives the purchasing function tremendous potential to
increase profits through the negotiation of better pricing or services from suppliers.

The objectives of purchasing can be divided into four categories: (1) Obtaining goods and services of
the required quantity and quality. (2) Obtaining goods and services at the lowest total cost, not price.
(3) Ensuring the best possible service and prompt delivery by the supplier. (4) Developing and
maintaining good supplier relations and developing potential suppliers.

To satisfy these objectives, certain basic functions must be performed: (1) Determining purchasing
specifications; right quality, quantity, and delivery (time and place). (2) Selecting supplier (right
source). (3) Negotiating terms and conditions of purchase (right total cost). (4) Issuing and
administration of purchase orders.

The purchasing cycle consists of the following steps: (1) Receiving and analyzing purchase
requisitions. (2) Finding potential suppliers and selecting the right supplier. (3) Determining the right
price. (4) Issuing the purchase orders. (5) Following-up to assure delivery dates are met. (6)
Receiving and accepting goods. (7) Approving suppliers invoice for payment.

Establishing Specifications
National Institute of Industrial Engineering |Chap 7 : Purchasing

Three broad categories must be considered when specifications are being developed: (1) Quantity
requirements Market demand first determines the quantities needed, but the challenge is to satisfy
the functional needs at a better price. (2) Price requirements The price specification represents the
economic value that the buyer puts on the item (i.e. the amount the individual is willing to pay). (3)
Functional requirements Are concerned with the end application of the item and what the item is
expected to do. Functional specifications are intimately tied to the quality of a product or service.

An item has the required quality if it satisfies the needs of the user. There are four phases to
providing user satisfaction: (1) Quality and product planning. (2) Quality and product design. (3)
Quality and manufacturing. (4) Quality and use.

Functional specifications ultimately are the ones that drive the others. If the product does not
perform adequately for the price, it will not sell.

Functional Specification Description

Functional specification can be described in the following ways or by a combination of them: (1) By
brand. (2) By specification of physical and chemical characteristics, material and method of
manufacture, and performance. (3) By engineering drawings. (4) Miscellaneous.

Two major sources of specifications: (1) Buyer specifications are usually expensive and time
consuming to develop. Use only when there is not suitable specification available or unless the
volume of work makes it economical to do so. (2) Standard specifications have been developed by
governmental and nongovernmental agencies.

Selecting Suppliers

A good supplier is one that has the technology to make the product to the required quality, has the
capacity to make the quantities needed, and can run the business well enough to make a profit and
still sell a product competitively.

Three types of sourcing: sole, multiple, and single. Sole sourcing implies that only one supplier is
available. Multiple sourcing is the use of more than one supplier for an item. Single sourcing is a
planned decision by the organization to select one supplier for an item when several sources are
available. It is intended to produce a long-term partnership.
National Institute of Industrial Engineering |Chap 7 : Purchasing

Factors in selecting suppliers: technical ability, manufacturing capability, reliability, after-sales

service, supplier location, other soft considerations and price.

Some factors in evaluating potential suppliers are quantitative and other factors are qualitative.

Price Determination

Prices have an upper limit, determined by the market place, and what buyers are willing to pay is
based on their perception of demand, supply, and their needs. The lower limit is set by the seller and
is determined by the costs of manufacturing and selling the product and profit expectation.

Fixed costs are costs incurred no matter the volume of sales. Variable costs are those directly
associated with the amount produced or sold. Break-even point is when the revenue equals total cost
and profit is zero. When the volume is less than the break-even point, a loss in incurred; when the
volume is greater, a profit is realized (see figure 7.2).

Through negotiation, the buyer and seller try to resolve conditions of purchase to the mutual benefit
of both parties. One important factor in the approach to negotiation is the type of product:
commodities, standard products, items of small value and made-to-order items.

Impact of Material Requirements Planning on Purchasing

Purchasing can be separated into two types of activities: procurement, and supplier scheduling and
follow-up. Procurement includes the functions of establishing specifications, selecting suppliers,
price determination, and negotiation. Supplier scheduling and follow-up is concerned with the
release of orders to suppliers, working with suppliers to schedule delivery, and follow-up. The goals
of supplier scheduling are the same as those of production and activity control: to execute the master
production schedule and the material requirements plan, ensure good use of resources, minimize
work-in-process inventory, and to maintain the desired level of customer service.

Planner/Buyer concept : Role of production planning and buying are combined . there is smoother
flow of information and material between supplier and factory.

Usually a MRP system generates frequent orders for relatively small quantities. It is costly and
inefficient to issue a new purchase order for every weekly requirement. The alternative is to develop
a long-term contract with a supplier and to authorize releases against the contract. Often the supplier
National Institute of Industrial Engineering |Chap 7 : Purchasing

is given a copy of the MRP so they are aware of future demands. The buyer then issues a release
against the schedule. Contract buying assures the suppliers a given amount of business and commits
them to allocating that amount of their capacity to the customer.

Electronic data interchange (EDI) enables customers and suppliers to electronically exchange
transaction information such as purchase orders, invoices, and MRP information.

Internet, intranet and extranet: Internet technology most commonly used and open to the general
public . Intranet is internal net normally used within boundary of company. Extranet is an intranet
shared by two or more companies.

Reference

1. Introduction to Material management: Fifth Edition J. R. Tony Arnold, Stephen N.

Chapman, R.V. Ramakrishnan

National Institute of Industrial Engineering |Chap 7 : Purchasing