- Purchasing is the first phase of materials management. Procurement is a function responsible for getting the materials, supplies and equipment of Right Quality, in the Right Quantities from the Right Source, at the Right Prices and at the Right Time.
- A company’s procurement function becomes particularly important when:
- Its purchased items account for a high proportion of the unit cost of the product.
- When the prices fluctuate widely.
- When numerous diverse items are needed.
- When the quality of the material appreciably influences the cost of manufacturing.
- Purchasing in an enterprise has now become a specialized function. Any negligence in the purchase function increases the cost resulting into decrease in profits. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater opportunities in purchasing.
CLASSIFICATION OF PURCHASES:
- RAW MATERIAL:
- These are the materials which are purchased in their natural state which need further processing and fabrication. Generally raw materials are received from the mine, farm, animal, sea and forest. Iron ore, crude oil, rubber leather, timber etc. are certain items of raw material.
- Components are finished products which are sub-assembled to form a finished product. Components are the finished product of the preceding processes and the raw materials for the subsequent operations. e.g. tires in automobiles.
- CONSUMABLE STORES AND SUPPLIES:
- These are the items which are required in the manufacturing operations but which normally do not enter into the finished product. e.g. lubricants, abrasives, paper, cleaning compounds, shipping containers etc.
- OFFICE SUPPLIES:
- These are the indirect materials which are consumed in the office. They include stationery, carbon papers, stencil papers, duplication ink etc.
- SPARES AND TOOLS:
- Certain tools and parts are required for repair and maintenance while some tools are required for replacements. They include bolts, nuts, hammers, pumps, wrenches, bearings and different types of tools which are loose and replaceable parts if the machine and equipment.
- MACHINE AND EQUIPMENTS:
- Various types of machines and equipment are required for the manufacturing process. They include lathes, driller, cutter, furnaces, boilers, trucks, material handling equipment etc. Their useful life is relatively higher and so they are treated as capital expenditure items.
- To provide uninterrupted flow of materials, tools, supplies etc. to ensure continuous production.
- To buy wisely and contribute to the competitiveness of the end product.
- To maintain inventories at the optimum level and thus minimize investment in stock.
- To bring about better coordination with other departments.
- To develop and maintain good relations with suppliers.
- To develop policies and procedures.
- To train and develop purchasing personnel working in the organization.
- To select suitable sources of supply and also develop reliable alternative source of supply.
- Collect information about the new materials, tools, equipment etc. which may reduce the manufacturing costs.
- To achieve economy and efficiency in the activities of the purchase department by analyzing its performance.
PRINCIPLES OF SCIENTIFIC PURCHASING:
- Right quality
- Right quantity
- Right price
- Right time of delivery
- Right place of delivery
- Right source of supply
FUNCTIONS OF PURCHASING DEPARTMENT:
- Maintain records of materials indicating materials that can be used as substitute.
- Maintain records of reliable sources of supply and prices for each type of material required in the organization.
- Review material specifications with a view to simplifying and standardizing them.
- Calling quotations.
- Analyze quotations and making contacts with right sources of supply.
- Placing order and necessary.
- Maintain record of all purchases.
- To make sure through inspection that right quality of right material in right quantity has been purchased.
- Checking and approving invoices.
- Checking requisitions.
- To prepare purchase budget.
- To ensure that the material is purchased at right time and economical rates.
- To prepare up to date list of materials required for different departments/sections.
- To maintain uninterrupted supply of materials to various production sections.
- To act as communicator between the vendors and different departments of the concern such as production, quality control, finance, maintenance etc.
- To ensure prompt payment to vendors. This will help to improve vendor-vendee relations ad increase in reputation of the firm.
- To handle sub-contracts at the time of high business activity.
- Develop mew sources of supply.
- To maintain inventory at optimum level.
- To take decision about disposal of salvage and scrap.
- Single Tender:
Invitation to one firm only.
- Spot Quotation:
Quotation is expressly stated the rate at which you sale a product/services at your terms (for small quantity).
- Open Tender:
Tender is usually for the purchase of a relatively high value and complex item or source.
- Closed Tender/Limited Tender:
Closed tender is when only selected person or organizations are invited to submit a tender of property.
- Recognition of the need.
- Selection of source of supply.
- Inviting quotations.
- Processing the quotations.
- Placing the order and follow up.
- Receipt and inspection.
- Approval of payment.