Purchasing of materials

What do you mean by Purchasing of materials?

Procurement of materials for a price is ‘purchasing’. It is usually handled by a separate department, if the size of the concern is large enough, under a purchase manager. A purchasing department can function effectively if:

(i) It is organized on centralized basis.
(ii) Full co-operation between purchasing department and other departments is assured.
(iii) There is close liaison between the purchasing department and accounts department.
(iv) Purchase manager is technically qualified and experienced enough.
(v) A proper procedure is clearly spelled and strictly adhered to.

purchasing is a specialized activity of utmost importance in a manufacturing concern. Materials represent a considerable portion of the total cost of production. As such, the Purchase Manager of a business concern is responsible for spending more of its money than anyone else. An error on his part can be very expensive. Further, the purchase of sub-standard material would result in low quality of the final product, extra wastage of material and expensive machine break-downs.

Hence, it is important to see that the function of purchase of materials is performed effectively, efficiently and economically. According to Alford and Beatty — “Purchasing is the procuring of materials, supplies, machines, tools, and services required for the equipment, maintenance and operation of a manufacturing plant.” Purchasing function is performed by a separate Purchase Department set up under an expert ‘Buyer’ (or Purchase Manager). Purchasing function implies the determination of the following:

  • What to purchase?
  • When to purchase?
  • Where to purchase?
  • How much to purchase?
  • At what price to purchase?

What to Purchase?

Normally some of the spare parts and components which a manufacturing concern requires, may be manufactured in the concern itself rather than being purchased from outside. The various items of stores which the Purchase Department should arrange to procure are:

(i) All the items of materials, stores spares and components which the manufacturing concern cannot make.

(ii) Other items which it can make but does not want to make.

Decision-making in respect of the items falling under category (ii) is an important function of the Purchase Department. The decision in this respect (i.e., whether to buy or make) would depend on various factors like annual requirements of the item, frequency with which it is to be purchased, availability of the spare capacity in the manufacturing concern to produce it, the price advantage arising out of the comparative cost of making and buying, the secrecy of the product etc. The decision to give preference to buying is of utmost importance and is taken by the Purchase Department under the guidance of the Planning Department and Cost Department.

When to Purchase?

Materials are generally purchased as and when requisitions are received from Stores Department. In case of items available only during a particular season, purchases shall be made during the season. In case of items of material restricted by Government control, the time of purchase will be decided with reference to the date of license, quota or permit, as the case may be.

Where to Purchase?

The Purchase Department generally maintains a list of approved suppliers for various items of materials. Whenever materials are required, purchases are made from these suppliers after inviting quotations from them. In case long-term has to be made for the purchase of materials in bulk, the materials are purchased from some specific supplier/suppliers only. In case of controlled items of materials, purchases are made from the specific supplier/suppliers only.

How Much to Purchase?

The quantity of materials to be purchased is another important decision-making area. The purchase department is guided, in this respect, by the Purchase Requisition received through the Stores Department. However, in case of an organization using the budgetary control technique, the Purchase Budget prepared and approved in advance, indicates the timings and quantity of purchases.

Thus, in such a case, the approved budget is the guiding factor. Some manufacturing concerns adopt control technique of Economic Order Quantity which indicates the quantity and frequency of purchases. Economic Order Quantity ensures the minimization of costs involved in purchasing materials and carrying inventory.

At What Price to Purchase?

The ‘price’ to be paid is one of the main factors affecting the cost of material. In case tenders or quotations have been invited and received, it is the responsibility of the Purchase Department to select the price at which the materials should be purchased. Normally, in this case, the tender or quotation offering lowest price is selected.

But the terms of delivery, credit period allowed, rate of discount and the reliability and the capacity of the supplier to execute orders, should also be taken into consideration. In case the material is supplied through Controlling Authority, the Purchase Manager has no option but to procure the supply at the price fixed by the concerned authority.

Types of Purchasing

Purchasing of materials can be done on centralized basis or decentralized basis, keeping in view the nature, size and the requirements of a business concern.

Centralized Purchasing

Under centralized purchasing, the authority to purchase materials for all the departments of an organization is placed in one individual or one department (Purchase Department headed by Purchase Manager).

Advantages of Centralised Purchasing

The main advantages of centralized purchasing may be given as follows:

  • A uniform and firm policy can be pursued with regard to conditions of purchasing, e.g., terms of payment.
  • Purchasing of materials is the sole responsibility of Purchase Department and the operating departmental heads can concentrate on production.
  • Since the materials are purchased in larger quantities, more advantageous rates can be obtained from suppliers.
  • A ready standardization of different items of material can be affected.
  • The buying staff, by concentrating on purchasing alone, develops specialized knowledge and skill leading to expert and economical buying.
  • Centralized purchasing facilitates the maintenance of one complete set of records for purchase transactions which enables the management to exercise better control over purchases.
  • Centralized purchasing helps to co-ordinate the entire purchasing activity and by placing authority for purchasing in one person, it avoids duplication and over-lapping.
  • Centralized purchasing helps in keeping inventories in control and avoiding excessive investment in materials.

Disadvantages of Centralized Purchasing

Centralized purchasing has limitations of its own which may be given as follows:

  • The procedure adopted for the purchase of materials is less flexible which may cause undue delays in obtaining supplies.
  • Setting up of a separate Purchase Department leads to high administration cost.

Decentralized Purchasing

Under decentralized purchasing, the authority to purchase materials is decentralized and placed in the hands of more than one individual or department.  Under this system, each departmental head makes purchases for his own department. It is also known as ‘localized purchasing‘.

Advantages of Decentralized Purchasing

Decentralized purchasing is beneficial on account of the following reasons:

  • Decentralized purchasing provides for flexibility in the purchase routine which helps in avoiding all types of delays in purchasing materials.
  • Under decentralized purchasing, the purchasing of materials is made by the departmental heads and no separate buying staff is appointed. Thus, there is saving in administration costs.
  • Decentralized purchasing is more efficient as the departmental head can assess the requirements and problems of his department well.

Disadvantages of Decentralized Purchasing

Decentralized purchasing has the following disadvantages:

  • Decentralized purchasing is not economic since materials are purchased in smaller lots as a result of which quantity discount and favorable terms and conditions for purchase cannot be obtained.
  • A uniform policy regarding purchases of materials cannot be possible.
  • Prices paid for the same materials purchased by different departments may not be uniform.
  • Expert buying staff cannot be engaged for each department of the organization.
  • There is no co-ordination among various departments of the organization in respect of purchases of materials which may lead to duplication and over-lapping of efforts.
  • The heads of various operating departments, being responsible for purchase of materials, cannot concentrate on their routine duties.

Purchasing Procedure Or Purchasing Cycle

1. Initiation of purchase.

This starts with the receipt of purchase requisition by the purchasing department. The purchase requisition is prepared by the storekeeper, which he prepares on the basis of (i) requisitions received from the departments of the enterprise, (ii) replenishment policy being pursued, (iii) special requisitions for specific equipments and materials, and (iv) his own Judgement and experience, if he is permitted to do so in some of the cases.

The requisitions are usually approved by those who are authorized to approve. The storekeeper ensures that he is acting according to policy which is given to him. He prepares the purchase requisitions in triplicate. The first one (original) sent to the purchasing department, the next one is sent to the costing department and the last is retained by the store department.

The copies may be prepared more in quantity according to the requirement of the particular enterprise. The purchase requisition forms the basis of the order to be placed with the suppliers. It is, therefore, that this should be prepared with all care and caution and with every detail. This helps in purchase in right quantity, of right quality, at right place , from right source and at appropriate right.

This helps the enterprise to procure the materials at a competitive price and also helps in smooth and uninterrupted running of the enterprise.

Format/Specimen of Purchase Requisition

Purchasing of materials - Format-Specimen of purchase requisition

2. Inviting Quotations, etc.

After the receipt of the purchase requisition, the purchase department would proceed further and invite quotations, etc. from suppliers. The usual practice is to send an inquiry proforma to the supplier. The specimen of the Enquiry Proforma is given below :

Specimen of the enquiry proforma

3. Receipt of Supplier’s Quotation.

The supplier(s) after receiving the inquiry letter(s) quote his prices and terms and conditions of the supply of materials to the purchase department indicating the quality, quantity, time of delivery, price, discount and other necessary information in his reply to the inquiry. This submission is important from the point of view of both the purchaser as well as the supplier. It is an offer in legal terms. This, therefore, requires careful handling and proper preservation.

4. Preparation of Comparative Statement.

The comparative statement or a comparative schedule of quotations is prepared after the receipt of quotations. This is prepared with a view to compare the prices, terms and conditions, etc. and to select one of the suppliers, whose terms are favorable to the organization.

The comparative statement is an important document which should be carefully kept on record for future reference and guidance. The prepared statement is submitted to the head of the purchasing department for according approval on the supplier selected for making the supply. The purpose of the preparation of comparative statement is to realize the money’s worth. A proforma of a comparative statement is given below.

Proforma of Comparative statement for purchasing of materials

5. Preparation and Placement of Purchase Order.

The last act in purchasing to prepare a purchase order and place the some. This is a legal document which implies the acceptance of offer of the supplier. It should, therefore, be prepared with great care and in all details so as to help the supplier to supply the materials of right quality, in right quantity and at right time.

Purchase Order is an order to the supplier to supply the required materials as per the quotations submitted by him in accordance with the instructions contained therein. The proforma of a purchase order is given below:

Purchase Order Proforma for the purchasing of materials

Generally, the purchase order is prepared in triplicate. The original copy is dispatched to the supplier, the duplicate is sent to the account section and the triplicate is retained for future reference. However, if more copies are required, the required copies might be made. Five copies should conveniently be prepared. The fourth one for the storekeeping and the fifth one to the requisitioning department.

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