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One of the most important activities of Materials
Management is Purchasing.
Purchasing ensures the following:
• RIGHT MATERIALS are purchased, at
• RIGHT PRICE, from
• RIGHT SUPPLIERS, at
• RIGHT TIME, & delivered to the
• RIGHT PLACE.
Purchasing Department –
The Purchasing Department is the interface between the
Supplier of Materials and the Production Function.
Materials comprise one of the largest components of
expenditure in any manufacturing firm, hence their
procurement requires careful management.
The Responsibilities of Purchasing Department include
• Learning the material needs of the organization.
• Selecting suppliers and negotiating the price.
• Ensuring delivery.
• Monitoring the cost.
• Monitoring the quality and delivery performance.
To buy competitively
To buy wisely
To keep inventory investment and inventory losses at
a practical minimum
To develop effective and reliable sources of supply
To develop good relationships with the supplier
community and good continuing relationships with
To achieve maximum integration with other
departments of the firm
To handle the purchasing and supply management
function in professional, cost-effective manner
Functions of Purchasing Management
1. Receive Purchase Requisition
- Starting point of procurement activity.
- It is the Statement of Requirement of Production.
- Also called ‘Indent’
2. Review and evaluate Requisitions
Purchase Department reviews the following:-
Estimated purchase price or last purchased price
Consumption pattern in the last 3 years
When the material is required
3. Supplier selection
- Deciding on the mode of procurement
- Invitation to tender is issued to prospective suppliers.
4. Scrutiny of Offers
- Reply of a supplier to the invitation to tender is called an
- An offer is scrutinized for its specifications, price and
other terms and conditions.
5. Order placement
- Purchasing Department selects
the supplier & places order.
7. Market research and Information
- Discussions & meetings between supplier representatives
& company officials.
- Keeps in check, the latest developments with respect to
the company and its product .
- Studies the market and keeps in track of new suppliers.
- Studies new developments in production materials &
8. Payment Authorization
- Ensuring all goods are delivered before payment is made.
9. Cost Reduction
- Import substitution
- Value analysis
10. Record Keeping
- Thousands of products and materials, hundreds of
- Accurate information system is essential.
11. Miscellaneous activities
Such as - applying for import licenses, liaisoning
government agencies, disposal of secondary items such
as scrap, defectives, surplus etc…
IMPORTANCE OF PURCHASING
Purchasing function provides materials to the factory
A one percent saving in materials cost is equivalent to a
10 percent increase in turnover.
Purchasing manager is the custodian of firm's purse as
they spends more than 50% of company's earnings on
Purchasing can contribute to import substitution and
save foreign exchange.
Purchasing is the main factor in timely execution of
Material management organizations that exist now have
evolved out of purchasing departments
The Purchase organization is an organizational
unit within logistics.
Almost all business transactions related to
procurement are carried out in a purchasing
Make or buy decision is normally taken by
a committee comprising representatives
from different departments
Role of Purchasing Manager
Speculative buying is conducted with the
hope of making profit out of price
It’s the process of rating a supplier based
on some rating techniques
The weighted point plan
Critical incidents method
Check list system
Under this plan, the performance from
various divisions maintain informal
Weighted point plan
The performance factors to be evaluated by
Critical incidents method
It is based on buyer -vendor relationship.
Check list system
Use simple check list for evaluate vendors.
Ancillary Development: When a company decides
to buy a part from outside suppliers, it is usually sub-
contracted in most cases , the sub-contactor is an
Production process/method , equipment selection and
Organisation and procedure for production planning,
progressing and control
Sources of financing and procedure for obtaining
Process quality control equipment and training
facilities for the development of supervisory and
It results in spread of entrepreneurial
It promotes industrial development
Regular supply of right quality items is
The purchase requisition described the required
In order to assure complete and accurate
information for ordering, the requisition must
include all necessary information.
A regular list of approved suppliers, called register of
suppliers, is maintained by the purchasing
A right supplier is one who delivers materials of the
correct specifications on the stipulated delivery
•Single supplier helps develop long-term relationship
and reduce the risk and interruption in the supply.
•Multiple suppliers may not help in maintaining
quality and helps get material at competitive prices.
1. Vendor’s catalogues and price list are
available for standard items
2. Negotiation : bargaining between buyer and
3. Inviting tenders or quotations
The legal order is placed with the
supplier on a form is known as
Order acknowledgement is to get a
definite commitment from the
supplier about the supply of items
Follow up is done to ensure that the items ordered
are delivered by the supplier on time.
Though a general policy should be established for the
entire purchasing department, the immediate
responsibility for expediting is likely to rest on the
buyer who placed the order
Check the invoice and approve it for payment
Buyer issues an order covering the requirement of a
small item for one year
In stockless buying stock of items is kept in buyers
plant, ownership of the stock being with the supplier
Also called as ‘Value Engineering’
It is a combination of Purchasing and Methods Engineering.
This activity is aimed at modifying the specification of
materials, parts & products to reduce their cost.
Value analysis has wide acceptance as it offers increased value
of a product without increasing the cost and it reduces the
cost without reducing the usefulness of the product.
It is widely used by many companies and governmental
• A value analysis team or committee takes a product, which
has been designed or produced.
• Then they attempt to define what function, product should
• Next, the analysis committee tries to perform that function at
the lowest possible cost.
Another approach is to do comparative analysis.
Value analysis may investigate all identical parts purchased by
the company and this investigation can reveal opportunities to
cut costs of some of these parts.
Supplier contacts is yet another approach to value analysis. Smart
purchasing personnel maintain close contact with suppliers who
suggest improvement and cost-reduction ideas.