PURCHASING

Management
 MAKE OR BUY DECISION
Make or Buy is a strategic decision of a manufacturing organization.
The decision of Buying a material or component instead of
making it, is preferred when,
1. Cost of manufacturing is more than the Cost of bought
out item
2. Return on Investment to organize manufacturing the item
is not attractive
3. The requisite skilled manpower for such manufacturing is
not available in the organization
4. The demand of the item is of less quantity or
seasonal or irregular or occasional.
5. The item of requisite quality is abundantly and
conveniently available in the market, having no difficulty
in transport
6. The (manufacturing) process is patented and is difficult
to be available.
7. Additional managerial manpower to take up such
manufacturing is not available in the organization
 RISK INVOLVED IN OUT-SOURCING
1. Lack of Control on :
i) Cost of Product : due to lack of control on rise of price and
procurement cost ,even in negotiation stage.
ii) Committed Delivery-Time of Product : due to the uncertainty or
non-commitment of suppliers on delivery
iii) On Quality of Product : due to the non-compliance to the
required quality (ie quality failure) of supplied materials / services
iv) Reliability of Product : probability of performance-failure of the
product due to the failure of any purchased item or material
v) After-Sales Services : due to lack of expertise, knowledge,
technical assistance, spare-parts etc in the supplier side for
the purchased items.
3. Loss of Confidentiality : Out-sourcing often leads to off-loading of
confidential data, design, sensitive part of know-how, etc.
4. Lack of Flexibility to any required modifications as per the customer-
need.
5. Ineffective Customer Service Management : External material / service
provider may not be so sensitive up to the need of the end-users of the
product.
 Functions of Purchasing Department
I. Pre-purchasing Functions
1. Review and Assess the demand (place, time, type, quantity and quality of
material requirement)
2. Make-or-Buy decision considering the risks of out-sourcing
3. Standardization of Material & components.
4. Finalizing the detail quality-specifications of each item to be procured
5. Assess the most suitable time and most economic and suitable Order-
quantity, for order placement
6. Determination of Inventory Levels (including Ordering level)
7. Market Analysis (availability of materials)
8. Price Forecasting
9. Making Material-Sourcing strategy
10. Vendor Development and Vendor Rating / Evaluation

II. Functions During Purchasing

11. Preparation of the Tender Document
12. Floatation of Tender Enquiry (Open Tender or Closed Tender)
 Functions of Purchasing Dept (contd).
Functions During Purchasing
13. Bid Evaluation
14. Vendor-Negotiation and Finalizing the vendor
15. Placement of Order (along with technical & commercial contract /
Agreement) on the selected vendor with agreed Price, Quality, Delivery-
terms and other terms of supply
16. Progress Monitoring (Follow-up) the supplier on quality, progress-status
of supply and Expediting for supply.
17. Stage Inspections (if any) and Pre-shipment (Final) Inspection & Testings
before issuing Clearance Certificate for Delivery-order (shipment order).
18. Arrangement of Transportation (may be 3PL SERVICE including
Transport, suitable packaging for transport, Transit Risk Insurance, all
(initial, final and intermediate) Loadings & Unloadings as well as
Material Handling, from the source ie Supplier to destination site, if
contractually needed to be done by the Buyer.
19. Finally Clearance of the bill (invoice) of the vendor (ie certifying) for
payment, after receipt of material at site in ok condition.
III. Special Function
20. Value Analysis to revise or finalize the list & Specifications of the
materials/ items with recommended alternatives.
 FORWARD BUYING :
Forward Buying is the committed purchasing of any particular item/s (under a
valid CONTRACT), (i) at future dates, (ii) during a specified duration (iii) at contracted
quantity, (iv) at the contracted price (unit price) and (v) with the contracted terms &
conditions of purchase.
In Forward Buying, the purchase will be binding on both parties buyer & seller & is
independent of :
(i) market price (ii) the market conditions (Demand & competition), (iii)
Buyers actual requirement (iv) Buyers availability of Fund
(v) Suppliers constraint , prevalent at the time of all purchases in future
during contract period.
Both the buyer and seller make such contract with a speculative interest regarding fluctuation of
(i) market price, (ii) market demand and (iii) market competition.
It is to assure the future business transaction at the estimated order quantity, price and
other terms, and thereby minimizing the future uncertainties in the market.
Applicability : When (i) anticipated price rise, (ii) anticipated scarcity, (iii) repeated purchases
for large value purchase (iv) purchasing without price rise during extended future period
Factors to be considered before the decision of Forward Buying :
(i) Anticipated Availability / Scarcity of the item in the market in future
(ii) Availability of fund (Fund-inflow) in future
(iii) Anticipated Fluctuations in market price
(iv) Anticipated demand fluctuation from EOQ in future
(v) Assurance for discount in future purchases
 HEDGING :
Hedging is different from Forward Buying.
Unlike Forward Buying, in Hedging the buyer enters into
two different contracts
contract for FORWARD BUYING and
contract for FORWARD SELLING, separately in the
market, whose prices moves up or down together
(along with the buyer market).
This gives a protection to the buyer against any probable risk of
loss due to market fluctuation.

The profit or loss sustained in buying transaction is compensated

in Hedging by the loss or profit in the selling transaction, if
the two markets behave similarly (price moving up or down).
 FOREIGN PURCHASE (IMPORT)

Procedural STEPS of IMPORT :

1. Review and/or Assess the place, time, type, quantity and quality of material
requirement which are to be imported.
2. Foreign Vendor (Exporters) Development, for materials / items to be
imported.
3. Asses the probable Time of Delivery.
4. Assess the most suitable Time and most suitable Order-quantity, for import
order placement.
5. Finalizing the detail quality specifications and Terms & Conditions of Purchase
for the materials / items to be imported.
6. Preparation of the Global Tender-documents (consist of Condition
of Tendering, General Condition of Contract, detail Specifications, Bid-
Exhibits of Format).
7. Floatation of Tender Enquiry (Open Tender or Closed Tender)
 Procedural Steps of Foreign Purchase (contd)

8. International Bid receiving, Bid Opening & Bid Evaluation.

9. Negotiation, if required & Finalizing the vendor.
10. Opening LC (Letter of Credit) Account at a suitable Bank of
International status and acceptable to vendor, for the particular import.
11. Placement of Order through opening LC on that foreign
purchase with all details of technical & commercial Terms of Contract and
Validity of that LC, corresponding to the Committed Shipment Time) on the
selected foreign vendor.
12. Monitoring /Follow-up the supplier, if needed, on quality (approval of
design & planning), progress status from Third-Party Inspection and
Expediting the shipment.
13. THIRD-PARTY INSPECTION including stage & Pre-shipment
Inspection on both quality and quantity of order and consignment.
13. Receiving of complete Shipping Documents, immediately after
shipment, required for Clearing the imported items at the destination port.
14. Port-Clearance (with the Customs and Port authority) of the imported
items, at the destination port.
15. Arrangement of Transportation from the destination port to site.
16. Automatic Clearance of the Invoice (bill) of the foreign vendor,
through Banking network, as per LC.