UNIT 1

CONCEPT OF PURCHASING

1.0 PURCHASING

Purchasing is the act of buying the goods and services that a company needs to operate and/or

manufacture products.

Many people are ignorant of what purchasing is all about. “Purchasing” is the term used in

industries, commerce, public corporations to denote the act of and the financial responsibility for

procuring material, supplies and services. It simply describes the process of buying. However in a

broader sense, the term involves determining the needs, selecting the supplier, arriving at a proper

price, terms and conditions, issuing the contract or order, and following up to ensure proper

delivery. It focus is to purchase or obtain materials in the right quantity, in the right quality, at the

right price, at the right time, and from the right supplier and delivering to the right place.

1.1 SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is a process used by companies to ensure that their supply chain

is efficient and cost-effective. A supply chain is the collection of steps that a company takes to

transform raw components into the final product. Typically, supply chain management is comprised

of five stages: plan, develop, make, deliver, and return.

The first stage in supply chain management is known as Plan.

A plan or strategy must be developed to address how a given good or service will meet the needs of

the customers. A significant portion of the strategy should focus on planning a profitable supply

chain.
Develop is the next stage in supply chain management.

It involves building a strong relationship with suppliers of the raw materials needed in making the

product the company delivers. This phase involves not only identifying reliable suppliers but also

planning methods for shipping, delivery, and payment.

At the third stage, Make, the product is manufactured, tested, packaged, and scheduled for delivery.

Then, at the logistics phase, customer orders are received and delivery of the goods is planned. This

fourth stage of supply chain management stage is aptly named Deliver.

The final stage of supply chain management is called Return.

As the name suggests, during this stage, customers may return defective products. The company

will also address customer questions in this stage.

1.2 What Is Supply Chain Management (SCM)?

Supply chain management is the management of the flow of goods and services and includes all

processes that transform raw materials into final products. It involves the active streamlining of a

business's supply-side activities to maximize customer value and gain a competitive advantage in

the marketplace.

SCM represents an effort by suppliers to develop and implement supply chains that are as efficient

and economical as possible. Supply chains cover everything from production to product

development to the information systems needed to direct these undertakings.

1.3 How Supply Chain Management Works

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a

product. By managing the supply chain, companies are able to cut excess costs and deliver products
 to the consumer faster. This is done by keeping tighter control of internal inventories, internal

production, distribution, sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market results from the efforts of

various organizations that make up a supply chain. Although supply chains have existed for ages,

most companies have only recently paid attention to them as a value-add to their operations.

In SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain which

consists of five parts:

 The plan or strategy

 The source (of raw materials or services)

 Manufacturing (focused on productivity and efficiency)

 Delivery and logistics

 The return system (for defective or unwanted products)

The supply chain manager tries to minimize shortages and keep costs down. The job is not only

about logistics and purchasing inventory. According to Salary.com, supply chain managers, “make

recommendations to improve productivity, quality, and efficiency of operations.”

Improvements in productivity and efficiency go straight to the bottom line of a company and have a

real and lasting impact. Good supply chain management keeps companies out of the headlines and

away from expensive recalls and lawsuits.

Supply Chains

A supply chain is the connected network of individuals, organizations, resources, activities, and

technologies involved in the manufacture and sale of a product or service. A supply chain starts
 with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of

the finished product or service to the end consumer.

SCM oversees each touchpoint of a company's product or service, from initial creation to the final

sale. With so many places along the supply chain that can add value through efficiencies or lose

value through increased expenses, proper SCM can increase revenues, decrease costs, and impact a

company's bottom line.

1.4 Importance of Supply Chain Management

It is well known that supply chain management is an integral part of most businesses and is essential

to company success and customer satisfaction. The main importance of Supply Chain Management

are:-

A. REDUCE OPERATING COSTS

 Decreases Purchasing Cost – Organizations generally prefer quick distributions of costly products

and raw materials to avoid expensive inventory

 Decrease Production Cost – A reliable supply chain delivers materials to assembly plants and avoid

any costs that may occur due to delays.

B. IMPROVE CUSTOMER SERVICES

 Right quantity and quality – Customer expects delivery of right quantity and quality of products.

 On-time delivery – Customers expect to receive the correct product mix and quantity to be delivered

on time. A reliable supply chain can help in avoiding any bottlenecks and ensure customers get their

products in the promised time frame

 Services – After sales services is one of the important aspects in any business. If any kind of problem

occur in the product, customer expects it to be fixed quickly. A right supply chain ensures that

customers get the service they want.

C. FORWARD MOMENTUM

 Supply chain management streamlines everything from product flow to unexpected natural disasters.

 With an effective SCM, organizations can diagnose problems and disruptions correctly.

 SCM plays an important role in moving items quickly and efficiently to destination.

 With the emergence of competition in current market scenario, an efficient supply chain can give a

business the edge that it needs.

1.5 PURCHASING CYCLE

The purchasing cycle are the steps taken to order and pay for products that a business requires. The

purchasing cycle determines the frequency that products are purchased.

Steps in a Standard Procurement Cycle

1. The Need

You need to identify that there is a need to update the inventory or stock. You may also need a

business service or ad hoc product.

2. Specify

Now you need to decide how much and when you want the products or services delivered.

3. Requisition or Order

This is when you write the purchase order or requisition order.

4. Financial Authority

Before the order can be placed, it usually requires some kind of authority for its purchase. With
 some purchase orders, this is reasonably automatic. With a large order that will be put out to tender

it could be multi staged.

5. Research Suppliers

Repetitive orders usually have set suppliers, although it does no harm to review the options

sometimes. Other orders will either need to go out to tender or there will be a choice of suppliers.

6. Choose Supplier

The supplier is now chosen.

7. Establish Price and Terms

In a large company, many suppliers will be contracted with a Master Agreement where prices and

terms are set for a defined period. For other orders, now is the time to negotiate terms and prices.

8. Place Order

At this stage in the purchasing cycle, the order is placed and this becomes a contract between the

business and the supplier.

9. Order Received and Inspected

The goods are delivered, checked in the warehouse and entered into the inventory. Shortages and

breakages are reported to the supplier for the appropriate credits to be supplied.

10. Approval And Payment

Usually within 30 days, the invoices are received and paid.

11. Update Of Records

The purchasing ledger and stock records are updated. This is automatically done by many

purchasing computer systems.

Steps for Purchasing Cycle with Tenders

1. The Need

In this case, the need usually goes through a business case and is then tightly defined and specified.
2. Financial Authority

This usually happens at a higher level and includes the management of the department that requires

the goods.

3. RFP

A Request For Proposal (RFP) is written, in which the need is highly specified.

4. Invite Tenders

This is always done formally, usually by posting the request in trade magazines and appropriate

web sites. Government projects are posted on government web sites.

5. PQQ

A Pre Qualification Questionnaire (PQQ) is sent out to likely suppliers in order to select a short list

of appropriate potential suppliers.

6. Tenders

The tenders are sent in from the qualified suppliers.

7. Qualifying

A number of meetings are held to clarify any questions that suppliers may have.

8. Evaluation

This is the most exciting part of the purchasing cycle and can take many weeks for a big tender. All

the tenders are evaluated and the requirement awarded to the winning bidder.

9. Negotiation

The fine print of the terms and conditions are negotiated with the chosen supplier. The price is fixed

at the bid price.

10. Contract Award

In a very short time, the contract is awarded to the chosen bidder.

11. Manage Contract

This is the period in the purchasing cycle when the goods are delivered.
12. Approval And Payment

If the contract is carried out completely then full payment is made. If there are problems, there may

be a damage request.

13. Sign Off

At the end of the contract work and deliveries, the contract is signed off and all relationships with

the supplier are finished.

14. Update Of Records

The purchasing ledger and stock records are updated. This is automatically done by many

purchasing computer systems.

1.6 IMPORTANCE OF PURCHASING:

1. Purchasing function provides materials to the factory without which wheels of machines cannot

move.

2. A one percent saving in materials cost is equivalent to a 10 percent increase in turnover. Efficient

buying can achieve this.

3. Purchasing manager is the custodian of his firm’s is purse as he spends more than 50 per cent of

his company’s earnings on purchases.

4. Increasing proportion of one’s requirements are now bought instead of being made as was the

practice in the earlier days. Buying, therefore, assumes significance.

5. Purchasing can contribute to import substitution and save foreign exchange.

6. Purchasing is the main factor in timely execution of industrial projects.

7. Materials management organisations that exist now have evolved out or purchasing departments.
8. Other factors like:

(i) Post-war shortages,

(ii) Cyclical swings of surpluses and shortages and the fast rising materials costs,

(iii) Heavy competition, and

(iv) Growing worldwide markets have contributed to the importance of purchasing.

1.7 OBJECTIVES OF PURCHASING:

The purchasing objective is sometimes understood as buying materials of the right quality, in the

right quantity, at the right time, at the right price, and from the right source. This is a broad

generalisation, indicating the scope of purchasing function, which involves policy decisions and

analysis of various alternative possibilities prior to their act of purchase.

The specific objectives of purchasing are:

1. To pay reasonably low prices for the best values obtainable, negotiating and executing all

company commitments.

2. To keep inventories as low as is consistent with maintaining production.

3. To develop satisfactory sources of supply and maintain good relations with them.

4. To secure good vendor performance including prompt deliveries and acceptable quality.

5. To locate new materials or products as required.

6. To develop good procedures, together with adequate controls and purchasing policy.
7. To implement such programmes as value analysis, cost analysis, and make-or-buy to reduce cost

of purchases.

8. To secure high caliber personnel and allow each to develop to his maximum ability.

9. To maintain as economical a department as is possible, commensurate with good performance.

10. To keep top management informed of material development which could affect company profit

or performance.

11. To achieve a high degree of co-operation and co-ordination with other departments in the

organisation.

1.8 PRINCIPLES OF PURCHASING MANAGEMENT OR (10R'S)

Buying Material at Right QUALITY.

In the Right QUANTITY.

From the Right SOURCE.

At the Right PRICE.

Right SERVICE

Delivered at the Right PLACE in.

At the Right TIME.

With Right mode of TRANSPORT.

With Right CONTRACT.

With Right PAYMENT TERMS

 UNIT 2

SPECIFYING REQUIREMETS

2.0 INTRODUCTION

The overall purpose of a specification is to provide a basis for obtaining a good or service that will

satisfy a particular need at an economical cost and to invite maximum reasonable competition. To

this end, specifications may not be unduly restrictive.

2.1 DEFINITIONS OF SPECIFICATIONS

A detailed description of the measurable characteristics desired in an item to be purchased, such as

quality, size, weight, performance parameters, safety requirements, etc

By definition, a specification sets limits and thereby eliminates, or potentially eliminates, items that

are outside the boundaries drawn.

However, a specification should be written to encourage, not discourage, competition consistent

with seeking overall economy for the purpose intended. A good specification should do four things:

(1) Identify minimum requirements,

(2) Allow for a competitive bid,

(3) List reproducible test methods to be used in testing for compliance with specifications, and (4)

provide for an equitable award at the lowest possible cost.

2.2 DEVELOPING SPECIFICATIONS

Although Procurement has final responsibility for the competitiveness and suitability of

specifications, Procurement cannot initiate or prepare all specifications. The size of staff necessary

to do this would be prohibitive. Procurement serves as the primary activity involved in developing

specifications for items purchased under indefinite quantity term contracts and definite quantity

scheduled purchases. The duty of Procurement to promote both product and price competition
requires that specifications be as non-restrictive as practicable, consistent with satisfying legitimate

needs. Procurement is responsible for final editing of specifications, and ensuring clarity of

language with jargon or in-house terminology. Purchasing will assist and advise you in developing

your specifications, however, Procurement does not have expertise in every sphere. Hence the need

to rely on others with the needed expertise to assist when needed.

2.3 TYPES OF SPECIFICATION

Specifications can be prepared in a number of ways. Speaking generally, one is the specification

that requires something unique, to be custom made or custom built, as is characteristic of

construction or personal services contracts. The other group call for ready-made, off-the-shelf

commercial items regularly available in the market place, as is characteristic of equipment,

materials and supplies. Within these broad groupings are more particular types, including: brand-

name specifications; brand-name-or-equal specifications; design specifications; performance

specifications; and the Qualified Product List (QPL).

1. BRAND-NAME SPECIFICATIONS

The brand-name specifications has the effect of limiting the bidding to a single product and is the

most restrictive kind of specification. Its use will not be permitted unless only one product will meet

an intended need, there are at least ten competitors that can supply the product, the department head

has submitted written justification to this effect and the Director of Procurement has approved the

use.

2. BRAND-NAME-OR-EQUAL SPECIFICATIONS

A brand-name-or-equal specification cites one or more brand-names, model numbers, or other

designations that identify the specific products of a particular manufacturer as having the
characteristics of the item desired. Any other brands or models substantially equivalent to those

named are considered for award, with the Procurement Officer reserving the final right to determine

equivalency. Brand-name-or-equal specifications have a legitimate but limited place in public

purchasing.

A. Although there may be situations when the use of this specification is our only means of

attempting to satisfy the requirement, its use should be limited and justified before solicitation. If

this specification is used, tangible performance, quality or other required characteristics should be

clearly defined in the bid invitation. Bidders offering an equal should be put on notice that the

criteria used to define performance, quality or essential characteristics must be met to be considered

responsive.

B. The best position is to list at least two brand names that will satisfy the requirements.

Another alternative is the requirement that bidders offering products other than specified obtain

approval for the product offered before bid opening. There must be sufficient basis to determine that

these products are equal and this basis must be predicated upon sound evaluation criteria. Vendors

should be provided the criteria for the purpose of qualifying the bid document.

3. QUALIFIED PRODUCT LIST (QPL)

A qualified product list (QPL) is a specification based on manufacturers' names, brand names and

model numbers, but it is arrived at by a systematic and formal process. A QPL is predicated on a

written specification which includes certain tests or other criteria for comparing, examining and

approving products before soliciting competitive bids. These criteria and the methods for

establishing and maintaining a QPL varies widely for different products. Some may require that
committees test the products, others may simply require that brands be tested under controlled

conditions and assessments made of their performance and others may require laboratory tests.

Departments wishing to establish a QPL must list the products that have been tested and are

considered equal, state testing methods used to establish the QPL and indicate steps to be taken by

vendors to add products to the QPL.

4. DESIGN SPECIFICATIONS

Design specifications customarily employ dimensional and other physical requirements of the item

being purchased. "Design" in this sense means that the specification concentrates on how the

product is to be put together. It is the most traditional kind of specification, having been used

historically in public contracting for buildings, highways, and other public works, and represents the

kind of thinking in which architects and engineers have been trained. Its use is called for where a

structure or product has to be specially made to meet the purchaser's unique need.

Departments using design specifications must submit complete specifications with all necessary

drawings, dimensions, terms, and definitions of non-standard terms. Materials used must be

described fully to include thickness, size, color, etc.

5. PERFORMANCE SPECIFICATIONS

The terms "functional" and "performance" are used interchangeably to designate an approach to

specifications that is less interested in dimensions and materials and configurations and more

interested in what a product does. The performance specification is less interested in how a product

is made, and more interested in how it performs, how well it performs, and at what cost.

Performance purchasing is results orientated in terms of function and cost. In contrast to the design

approach, performance specifications afford the manufacturer or bidder sizable latitude in how to

accomplish the end purpose. Performance requirements describe the characteristics and capabilities

that are pertinent to the intended use of the article.

 Departments using performance specifications must explain in detail the results required, testing

methods, and characteristics that the goods or service must perform.

2.4 PURPOSE OF SPECIFICATIONS

 The cost of an unit quantity of work is governed by its specifications.

 Specification of a work is required to describe the quality and quantity of different materials

required for a construction work and is one of the essential contract documents.

 This also specifies the workmanship and the method of doing the work. Thus specification of a

work serves as a guide to a supervising staff of a contractor as well as to the owner to execute the

work to their satisfaction.

 A work is carried out according to its specification and the contractor is paid for the same. Any

change in specification changes the tendered rate.

 As the rate of work is based on the specification, a contractor can calculate the rates of various

items of works in tender with his procurement rates of materials and labour. Thus tender rate

without specification of works is baseless, incomplete and invalid.

 Specification is necessary to specify the equipment tools and plants to be engaged for a work and

thus enables to procure them beforehand.

 The necessity of specification is to verify and check the strength of materials for a work involved in

a project.

2.5 PRINCIPLES OF SPECIFICATIONS

Description of materials: The quality and size of materials required to do an item of work shall be

fully described for checking up at site according to the bindings provided in the specification.
 Workmanship: Complete description of workmanship, the method of mixing to the proportion, the

method of laying, preparation of base or surface, compaction, finishing and curing etc. specifically

applicable to the item of work shall be clearly stated in different clauses.

Tools and plants: The tools and plants to be engaged to carry out a work shall be described. The

method of operation and by whom to be supplied shall be stated.

Protection of new work: The method of protection of new works against damage or the method of

curing if required, the test of completed work if necessary shall be described in separate clauses

Expression: While writing a specification endeavour shall be made to express the requirements of

the specification clearly and in concise form avoiding repetition and unusual words. The style of

tense shall remain same throughout.

Clauses of specifications: As far as possible, the clauses shall be arranged in the order in which

work shall be carried out. This does not mean to follow the works according to the order of

arrangements but it facilitates reference. While framing clauses for quality of materials,

workmanship, tools and plants etc. practical possibilities shall be realized.

2.6 FEATURES GOOD SPECIFICATION

1. Simple, consistent and exact, but not so specific that a loophole will allow a bidder to evade any of

the provisions and thereby take advantage of his competitors or the buyer.

2. Identified, when possible, with some brand specification already on the market. (Custom goods are

expensive).

3. Capable of being checked. It should describe the method of checking which will govern acceptance

or rejection. A specification which cannot be checked is of little value and only confusion will

result.

4. Reasonable in its tolerance. Unnecessary precision is expensive.

5. As fair to the seller as possible.

6. Capable of being met by several bidders for the sake of competition.

7. Clear and Up-to-Date. Misunderstanding can be expensive.

8. Flexible, inflexible specifications defeat progress. Invite vendors to suggest cost saving alternatives

or substitutes.

2.7 ADVANTAGES OF STANDARD PURCHASE SPECIFICATIONS

1. Forces managers to determine exact requirements in advance for any product

2. Useful in menu preparation

3. Eliminates misunderstandings between buyers and suppliers

4. Circulation of specifications for one product to several suppliers makes competitive bidding

possible

5. Eliminates the need for detailed, verbal descriptions of a product each time it is ordered

6. Facilitates checking food as it is received

 UNIT 3

SOURCING PROCESS

3.0 Definition of Sourcing

Sourcing is the "location, acquisition and management of all the vital inputs required for an

organisation to operate. This includes raw materials, component parts, products, labour in all its

forms, location and services" (Hinkelman, 2008:578).

Sourcing seeks to find, evaluate and engage suppliers to achieve cost savings and best value for

goods and services which can be done through a tender process. Factors such as reliability, quality,

flexibility and capacity are considered in the tendering process alongside price.

STRATEGIC SOURCING

Strategic sourcing is a procurement process that continuously improves and re-evaluates the

purchasing activities of an organization.

A supply strategy based upon joint opportunities, mutual trust, respect and open & honest

communication between the supplier and the customer.

3.1 WHY STRATEGIC SUPPLIER RELATIONSHIPS ARE IMPORTANT

A new supplier commences operations every minute

A supplier files bankruptcy every 8 minutes

A supplier ceases operations every 3 minutes

A judgment is filed against a supplier every 14 seconds

 A supplier name change happens every 2 minutes

A supplier ownership change happens every 4 hours

A supplier’s risk profile changes every minute

3.2 STRATEGIC SOURCING PRIMARY OBJECTIVES

– Reduce the costs of goods and services

– Capture resulting savings.

– Create contractual alliances with suppliers to support the long-term goals of the Organization.

– Maintain and improve product quality.

– Improve business functions.

– Optimize the total purchasing process.

3.3 SEVEN STEPS OF STRATEGIC SOURCING

Analysis

Develop Commodity Team

Sourcing Strategy

Identify & Prequalify Suppliers

Supplier Selection & Contracting

Integrate Suppliers
 Monitor & Follow-Up

3.4 THE NATURE OF THE SOURCING DECISION

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services

to your business. Procurement is the process of actually purchasing those goods and services.

Sourcing and procurement have become a bigger part of a supply manager’s job in recent years, in

part because businesses keep becoming more specialized.

3.5 ATTRIBUTES OF A GOOD SUPPLIER

A definition of a good supplier which would be acceptable to everybody would be difficult to write,

there are a number of attributes which might be regarded as desirable for a typical relationship.

The following list is given by way of suggestion only:

Delivers on time

Provides consistent quality

Gives a good price

Has stable background

Provides good services back-up

Keeps promises

Provides technical support

Is responsive to our needs

Keeps the buyer informed on progress

3.6 DIFFERENT TYPES OF SOURCING

Different types of sourcing:

Consumable supplies

Production materials and components

Capital purchases ( e.g. machinery )

Intellectual property ( e.g. software)

Subcontracts

Service

3.7 SOURCING DECISIONS

A procurement strategy enables decision makers to understand longer-term goals, such as realizing

value for money and encouraging supplier improvement, and to consider these goals when making

procurement decisions.

The traditional approach to source decision making involves the buying organisation in:

Establishing which suppliers make or supply the product or service

Selecting a shortlist (say three) from those available.

Sending an enquiry to each of those three setting out the requirements.

Selecting the best supplier from those who quoted by comparing the offers.

Placing the purchase order with them, specifying such matters as volume, schedule, place of

delivery, price and quality required.

3.8 STRATEGIC SOURCING PROCESS

Why use a formal strategic sourcing process?

Experience has shown that the 7 step strategic sourcing process developed in 2001 has stood the test

of time and with variations, has become best practice. The main objective of strategic sourcing is to

save money but other reasons include improving the acquisition process, supplier performance and

minimizing risk.

Step 1 Profile the category

Understand everything about the spend category as the first step in the strategic sourcing process.

This means defining the category and commodities in it. What is the current quantity used, types

and sizes. Who are the users, where are they located, what are the processes used and who else is

involved in the supply chain. Data must be documented in as much detail as possible as changes

may be needed.

Step 2 Supply market analysis

Identify potential new global and local suppliers. Study the cost components of the product or

service, and analyze the suppliers’ marketplace for risks and opportunities. Key raw material prices

and other variables such as labour and transportation must be priced and calculations done of the

suppliers’ cost elements.

Step 3 Develop the strategy

Deciding where to buy while minimizing risk and costs is how you develop the strategic sourcing

strategy. Using a cross functional project team is a must. The strategy will depend on what real

alternatives there are to the current suppliers, how competitive the supplier marketplace is and

importantly, how open the users are to new suppliers.

Step 4 Select the sourcing process

The most common method of sourcing is to use a Request for Proposal process for soliciting bids. It
includes product or service specifications, delivery and service requirements, pricing breakdown

and legal and financial terms and conditions. Often the evaluation criteria are also stated.

Step 5 Negotiate and select suppliers

The first round of the negotiation process, after reducing the bids to the valid ones, is conducted

with many suppliers asking for clarifications and more detail where needed. A good strategic

sourcing strategy is to conduct multiple rounds of negotiations to get to a short list. The final

selection is usually done by the team and signed off as per the approval process.

Step 6 Implement and integrate

Notify the successful suppliers and ensure that they are involved in the implementation process.

Implementation plans vary depending on the degree of changes. The communication plan in the

strategic sourcing strategy will include any improvement to specifications or process, changes in

delivery or service requirements or pricing.

Step 7 Benchmarking and tracking results

This is a key element of the sourcing management process. It is the start of a continuous cycle,

starting with benchmarking the current status of the commodity or category, monitoring the results

and ensuring that full value is being achieved. Back to Step 1 to review the supply market again and

restart the process in a constantly evolving marketplace

3.9 SOURCES OF POTENTIAL SUPPLIERS

Every organisation maintains a list of vendors, trade group-wise whom they approach for their need

of materials. This list is under constant review. Unsatisfactory suppliers are eliminated and new

suppliers are added to enhance competition.

Also new suppliers have to be found for newer materials required on ever expanding business. An

important function of the purchase research section will be to obtain this information from the

following sources and keep a classified record for reference when necessary.

1. Newspaper advertisements

Newspapers columns are full of advertisements from various firms indicating the items of stores

which they manufacture, import, and stock or specialise in.

2. Trade directories

Indian and foreign directories are available which give classified information of suppliers industry

wise. Very detailed information is available there in regarding names and addresses of

manufacturers, their regional and branch offices, their authorised agents and their range of products.

3. Catalogue, price lists etc.

Prices obtainable from catalogues and price lists are generally not final and are subject to

confirmation at the time of placing the order. Catalogues and price lists should be properly

classified and arranged to enable easy reference. Either they could be kept according to commodity

groups as such as pipes and fittings, tools, alloy steel, abrasives, etc., or numbered serially and

covered with index cards or lists prepared according to commodity groups.

If necessary, a supplier wise card index or list may also be maintained to facilitate locating

catalogues of various firms. The card or list will be arranged alphabetically and will show supplier’s

name, particulars of their catalogues and the serial number.

4. Trade journals

Most leading companies advertise in trade journals like the Indian Trade Journal. Sometimes

excellent articles appear in them regarding specific industries. Valuable information can be obtained

from such journals.

5. Salesmen

Salesmen are excellent sources for supply and material information. Not only are they usually well

informed about the capabilities and features of their own products, but they are also familiar with

similar and competitive products as well.

By the very nature of their specialised knowledge, sales people can often suggest new applications

for their products which will eliminate its search for new suppliers. From their contacts with many

companies, sales men and sales women learn much about many products and services and all of this

information is available to the alert, receptive buyer.

This is a key reason why sales personnel should always treated courteously and given ample time to

make their sales presentations. To deny them this opportunity is to risk the loss of valuable

information, including information concerning new and reliable sources of supply.

6. Advertised tender

Tender is the process of ascertaining availability and price of materials in sealed covers which are

opened and scrutinized, at a predetermined time by a tender committee. It is implied that the

materials covered by the tender should give scope for competition.

The tender system induces the bidders to quote the lowest Price, safeguards the interests of both the

buyer as well as that of bidder, ensures impartially and fairness, inspires confidence in the suppliers

and leaves no room for malpractice such as favouring a particular bidder or tampering with prices in

the purchase section.

7. Telephone directories

Telephone directories of large cities contain classified advertisements from suppliers.

8. Exchange of information between similar companies

If satisfactory trade relations are maintained, even one’s own competitors will part with the

information he has.

9. Trade exhibitions and fairs

Visits to exhibitions and fairs should give valuable information regarding potential suppliers. Such

exhibitions and fairs are held industry wise and also for specific purposes, e.g., import substitution.

Some such exhibitions are held regularly at specific intervals when available information can be

updated.

10. Personnel from other departments of the company

Personnel from other departments of a firm can often provide purchasing with helpful information

about prospective suppliers. Through their associations in professional organisations, civic

associations, and social groups, these employees often learn about outstanding suppliers.

Scientific, technical and research personnel who use sophisticated materials or services always have

many valuable suggestions to make regarding possible sources of supply. From their attendance at

conventions and trade exhibits, and from their discussions with associates, these personnel are

particularly well informed regarding new products, new methods and new manufacturers.

11. Enquiry

This is a simple method of ascertaining availability and price of materials through open offers. It is

adopted when there is no room for competition on account of (a) the value being very small, (b) the

materials being of a proprietary nature, (c) the policy being to buy only from one particular firm, (d)

the source of supply being limited or not established as in the case of machined components and

fabricated parts. The buyer may, however endeavour to obtain price reduction by negotiation. The
enquiry form (form7) is simpler then the tender form (form 8) but both call for price, terms of

payment, delivery time, etc.

12. Yellow pages

Another commonly known directory is the classified yellow pages section of telephone directories.

This source of information is frequently of limited value to industrial buyers because local

telephone books list only local companies.

However, buyers can readily obtain telephone books for all major cities from the telephone

company. The size and capability of companies are also difficult to determine, as management and

financial data are normally not included in the advertisements.

The yellow pages do, however, have the virtue of being well indexed. Also, they can serve as a

useful starting point if other sources have proved fruitless, and if local sources are desired.

3.10 THE SOURCING LOCATION

The location of potentially useful sources of supply is a major responsibility of the procurement

and supply executive.

Three principal reasons why the location of suppliers might be difficult are:

Technical advances – the buyer’s needs are becoming more complex and difficult to meet, and

fewer suppliers are willing or able to do so.

Increasing ‘concentration’ in supply markets - the continuing process of mergers and takeovers is

leading in many industries, to a situation where there are few, very large suppliers who have less

need actively to pursue business which will inevitably come their way.

Increased specialisation – specialisation among manufacturing concerns tends to lead to more

‘buy’ rather than ‘make’ decisions

3.11 SUPPLIER EVALUATION

The organisation (buyer) is in a much better position to evaluate an existing supplier, based on his

past performance than is the case with a new supplier

Task variables which determine the choice of supplier are traditionally stated as: quality, quantity,

timing, service, and price the supplier is evaluated for named products or processes as fully

approved, approved, conditionally approved, or unapproved.

Variations of the checklist approach are legion, and changes and improvements are incorporated as

the needs of the organisation change

Typical checklist questions are:

Do they trade with our competitors

Are confidential documents properly controlled?

Does the buyer have technical support?

How do they search the market and how often?

How long have they been established?

What are their investment plans?

3.12 OTHER ASPECTS OF SOURCING

Some of the considerations which need to be evaluated are:

Effect on price

Effect on security of supply

Effect on supplier motivation, willingness to oblige, design innovation

Effect on market structure

The captive supplier

Captive supply is a term for that part of the supply that is not owned by a company but is

used by the company to maximize its own profits often at the unknowing expense of those who

actually own those supplies.

Reciprocity in Buying

In certain business situations a buyer may give preference to a supplier who also happens to be his

customer. This relationship is known as reciprocity. It is something like "I buy from you if you buy

from me"

A supplier association

A supplier association is a business term which refers to a customer company bringing together a

group of its suppliers on a formal and regular basis in order to achieve strategic and operational

alignment.

Market structure

There are three types of market structure

Monopsony: where there is a single dominant buyer or (market situation in which there is only

one buyer for a product)

Monopoly: where there is a single powerful seller

Oligopoly: is the present where several sellers co-operate to dominate the market.

Partnership source

This is a commitment by customer / suppliers, regardless of size, to a long-term relationship based

on clear mutually agreed objectives to strive for would class capability and

competitiveness. Mission of partnership sourcing initiative is summarized in the

statement: ‘to bring about a fundamental change in companies’

 UNIT 4

CONTRACT FOR PURCHASING AND SUPPLY

4.0 DEFINITIONS

A contract is basically an agreement between two parties creating a legal obligation for both of

them to perform specific acts. Each party is legally bound to perform the specified duties such as

rendering a payment or delivering goods.

In order for the contract to be enforceable, each party must exchange something of value (called

“consideration”).

A contract may be used for various transactions, including the sale of land or goods, or the

provision of services. They may be either oral or written, though courts prefer that agreements be

put in writing.

Supply contract

An agreement by which a seller promises to supply all of the specified goods or services that a

buyer needs over a certain time and at a fixed price, and the buyer agrees to purchase such goods or

services exclusively from the seller during that time.

4.1 What are the Requirements for a Valid Contract?

In order for an agreement to be binding in a court of law, a contract must contain the following

elements:
 Mutual Assent: Each party must have a shared understanding regarding what the subject matter of

the contract is. For example, for a delivery contract, both parties must understand that the word

“ship” does not refer to a sea vessel, but rather means “to deliver”.

 Offer and Acceptance: One party must make an offer by clearly communicating their intent to be

bound in a contract. Likewise, the other party must render their acceptance in unambiguous terms.

 Consideration: This where both parties mutually exchange something of value in order to make the

agreement binding. The consideration may simply be a formality, such as giving $1. Sometimes

contracts can be enforced in a one-sided promise where only one party renders consideration.

4.2 HOW CONTRACTS ARE BREACHED

Contract claims are best thought of in a timeline. The entire formation of the contract begins with

negotiations and may undergo several modifications before a final agreement is reached. This

means that there are several points in time when the contract may be breached. A breach of contract

means that one or both parties has failed to perform their duty.

Some common types of breach include: non-performance of duties, impossibility (one party makes

the other party’s duties impossible to perform), breach of an implied duty, and anticipatory breach.

A breach may either be total or partial, and each will yield different legal consequences.

4.3 CONTRACT BASICS

Contracts are legal agreements between two parties or more. Legally binding contracts must have

essential elements in order to be enforced in court. Some contracts that are missing one or two of

these essentials will still hold up in a court, but it's best to have them all covered.

A contract is made basically any time one entity offers something to another and the offer is

accepted. Think of the last time you accepted a job offer. The company offered you a job and you
 accepted, therefore a contract was formed. Employment contracts are one of the most common

types of legal agreements.

4.4 CLASSIFICATION OF CONTRACTS

Usually, the types of contracts you'll come across in the business world are classified as simple

contracts. These can be made:

 In writing

 Verbally

 With action

Bilateral contracts are one of the basics where both parties act to uphold the agreement. If one

person promises something to someone else and that person agrees to give something in return,

they've entered into a bilateral contract. When a product or service is sold and the customer

provides payment, the company selling the item and the customer entered into a bilateral contract.

Unilateral contracts are agreements where one party promises something in return for the action of

the other. If you've even returned a lost dog for a reward, you've entered into a unilateral contract.

The dog owner paid you a reward for the action of finding their pet.

Deeds are required to be handwritten and sealed with the signatures of both involved parties under

the witness of a third party. These include agreements like:

 Transferring land

 Mortgages

 Conveyances
 Offer

First, an offer must be extended in order to begin a contract. This should include details of the

agreement and its terms and conditions. Simply put, the offer is the offeror's attempt at entering into

a contract with another.

Sometimes businesses will look for contractors through an invitation to treat by letting people know

that they are interested in entering into a contract.

Acceptance

Once the offer is extended, it's in the hands of the offeree to either accept or reject the proposal and

its terms and conditions. Offerees can accept offers via mail, email, or verbally.

Most states use the mailbox rule meaning that, if an offer is accepted via mail or email, the moment

the acceptance is placed in a mailbox to be mailed or sent via email, it has officially been accepted.

This holds true even if the offerer never receives the acceptance. Within this acceptance, there

needs to be a clear statement that the terms of the agreement are all accepted.

Meeting of the Minds

The meeting of the minds in contract law refers to the moment when both parties have recognized

the contract and both agreed to enter into its obligations. This is also called:

 Genuine agreement

 Mutual agreement

 Mutual assent

 Consensus ad idem
Even after the parties have entered into the contract, it can be voided a few different ways including

duress, undue influence, fraud, or misrepresentation.

Consideration

Something of value must be exchanged in order to have a valid legal agreement. Usually, things like

products, property, protection, or services are offered for the exchange of money.

If not trading in money at all, the parties should be sure that the court would view whatever they are

trading, also called their consideration, as valuable.

Capacity

Each party must be fully able or have the legal capacity to enter into the contract in order for it to be

considered valid. For instance, you cannot enter into a legal contract with a three-year-old. Both

parties must be of their right mind in order to form a contract, so a valid agreement could not take

place if one of the parties is under the influence of any mind-altering substance.

This also includes the desire of both parties to enter into the agreement free from coercion.

Legality

Contracts cannot be created to govern the trade of illegal products or services. A drug dealer cannot

enforce a contract with their buyer if their buyer doesn't pay them.

Each party must show legal intent, meaning that they intend for the results of their agreement to be

completely legal.

4.5 DIFFERENCE BETWEEN IMPLIED AND EXPRESS CONTRACT

The difference between implied and express contract is essentially as follows:

 An express contract is one in which the terms and conditions are spelled out in the contract, either

verbally or in writing. Once an express contract has been established and agreed upon, an identical

implied contract cannot exist.

 An implied contract is one in which the terms and conditions are inferred by the actions of the

parties involved.

In an express contract, words, either written or verbal, are used to bring the contract to fruition,

whereas an implied contract comes into existence as the result of actions. Sometimes, the age-old

expression, “actions speak louder than words” has a lot of weight.

Either type of contract is viewed as legally binding insofar as the courts are concerned, as any

contract is one that has been entered into willingly, by the involved parties via an offer and

acceptance. With that said, it is obviously much easier to define and then enforce an express

contract, particularly one that is in writing, as opposed to an implied contract.

4.6 THE LAW OF CONTRACT AND THE SALE OF GOODS ACT

The contract for the sale of goods is a particular type of contract which is different from other types

of contract.

A transfer of property in goods is a necessary element in the contract for the sale of goods.

The transfer of property means that ownership in goods must pass from the seller to the buyer to

complete a contract for the sale of goods. If property, or ownership in the goods has not passed the

sale is not complete.

Section 1 (1) of the Sale of Goods Act, 1962, Act 137 posits that a contract for the sale of goods is a

“contract whereby the seller agrees to transfer the property in the goods to the buyer for a

consideration called the price, consisting wholly or partly of money.

On achieving independence, Ghana had to enact its own law on the sale of goods. The Sale of

Goods Act 1962, Act 137 was enacted and before this enactment, the British Sale of Goods Act

govern transactions on the sale of goods.

Section 80 of the Act postulates that “the rules of the common law and of customary law, save in so

far as they are in consistent with the provisions with this Act, shall continue to apply to contracts for

the sale of goods”.

4.7 NATURE OF GOODS AND THE CONTRACT FOR THE SALE OF GOODS

WHAT ARE GOODS?

The Sale of Goods Act posits that ‘goods means movable property of every description, and

includes growing crops or plants and other things attached to or forming part of the land which are

agreed to be severed before sale by or under the contract of sale’.

Goods are things that can be moved from one place or position to another.

It includes all chattels personal other than in action and money.

Chattel real are things attached to or forming part of land.

Chattel personal are subdivided into things in possession and things in action.

A thing in action is intangible and cannot be possessed.

A thing in possession or a chose in possession is something capable of being possessed.

Excluded from the definition of ‘goods’ is land and anything forming part or attached to land. Land

(building) is classified as immovable property.

In Halaby v Wiredu (1973), Koranteng-Addo J. said, “The sale of a business is a sale of more than

the goods that are sold by the business man. It includes for instance the sale of goodwill and the sale
of a whole business organization… what was sold consisted also of an interest in land. The sale of

such things cannot surely be the sale of goods”.

A contract of sale is about the delivery of chattels. It includes a sale and an agreement to sell.

SALE

Where under a contract of sale the property in the goods is transferred from the seller to the buyer

the contract is called a sale.

AGREEMENT TO SELL

Where under the contract of sale the transfer of the property in the goods is to take place at a future

time or subject to some condition later to be fulfilled the contract is said called an agreement to sell.

4.8 NATURE OF CONTRACT FOR THE SALE OF GOODS

Section 1 (1) of the Sale of Goods Act, 1962, Act 137 posits that a contract for the sale of goods is a

“contract whereby the seller agrees to transfer the property in the goods to the buyer for a

consideration called the price, consisting wholly or partly of money.

Section 81 (10) defines property as the general property in the goods and not merely a special

property.

SALE OF GOODS DISTINGUISHED FROM OTHER TYPES OF EXCHANGE

Contract for works and materials

These are contracts in which persons are contracted to do some work and they need to purchase

some materials that are essential for the work to be done. It is the contract of work and materials

because the contract is to do some work. Such contracts are not contracts for the sale of goods.

Robinson v Graves (1935)

A contract of hire

If you hire something you pay money to the owner so that you can use it for a period of time. Since

the thing you requested for and used would have to be returned, property does not pass to you. A

contract of hire is therefore not a contract for the sale of goods.

Beecham foods Ltd. v North Supplies (Edmonton) Ltd. (1959)

Hire-purchase contract

The Sale of Goods Act states that, ‘hire-purchase contract means a contract of sale of goods in

which the price is to be paid for in five or more installments.

A hire-purchase agreement therefore occurs when the buyer obtains possession of the goods, and

pay for the goods in five or more installments.

Barter

Barter is the practice of exchanging goods for goods or services. The goods are not sold for money.

Money consideration is very important for the contract for the sale of goods as stated in section 1

(1) of the Sale of Goods Act, 1962.

Types of contracts involving the sale of goods

Section 1 (3) of Act 137 postulates that there may be a contract of sale between one part owner and

another.

Section 1 (4) of Act 137 provides that a contract of sale may be absolute or conditional.

4.9 FORMATION OF CONTRACT FOR THE SALE OF GOODS

Form of the contract

Section 3 of the Sale of Goods Act, 1962 provides that a contract for the sale of goods can be:
 (i) In writing;

(ii) By word of mouth;

(iii) Partly by writing and partly by word of mouth;

(iv) Implied by the conduct of the parties.

Elements of the contract of sale

 Offer and acceptance

 Capacity of the parties

 Consideration

 Intention to create legal relations

 Reality of consent

 Legality of object

Capacity

Section 2 (1) posits that capacity relates to capacity to contract and to transfer and acquire property.

P 120-121.

Auction sales

Subject to reserve price

4.10 DIFFERENT TYPES OF GOODS UNDER THE SALE OF GOODS ACT

Specific goods

These are goods that are in existence, able to be identified and agreed upon at the time the contract

is made being the goods that are the subject of a contract.

Unascertained goods

These are the goods that are not identified at the date of formation of the contract and may or may

not be future goods. These goods are sold under description that does not identify particular goods

at the time when the contract is made.

20 bags out of a lot of 40 bags of groundnut. Until the 20 bags are identified the they remain

unascertained. The parties have not identify them yet.

Ascertained goods

Section 81 of the Act 137 provides that, ‘ascertained goods are goods identified and agreed upon

after a contract of sale is made.

Property in goods cannot pass if the goods are unascertained. The goods must become ascertained

before property or ownership can pass.

Existing goods

These are goods that are physically in existence and owned by the seller . They are goods that exist

at the time of formation of the contract. Existing goods can either be owned or possessed by the

seller at the time the contract of sale is made.

Future goods

Section 5 (2) posits that future goods are goods to be manufactured or grown or acquired by the

seller after making the contract. The are future goods when they are not yet owned by the seller, or

when they are not yet in existence.

Contingent goods

Section 5 (3) postulates that these are goods the acquisition of which depends upon a contingency
which may or may not happen.
The sale will take place on or after something has happened.
 4.11 PRICE OF GOODS

What constitutes the price?

Section 1 (1) of the Sale of Goods Act, 1962, Act 137 posits that a contract for the sale of goods is a

“contract whereby the seller agrees to transfer the property in the goods to the buyer for a

consideration called the price, consisting wholly or partly of money.

How is the price determined?

Section 6 (1): fixed by the contract or left to be fixed in a manner thereby agreed, or may be

determined by the course of dealing between the parties.

Section 6 (2): by paying a reasonable price.

Four methods of determining the price of goods:

(1) By the parties by stating explicitly the price, by negotiation or bargaining;

(2) By Providing a mechanism for fixing the price;

(3) By a Course of dealing or by custom or trade practices

(4) By paying a reasonable price

Valuation of price

A valuation is a judgment that someone make about how much money something is worth. And it is

done by a third party.

Two parties can agree that a third party should value the goods. If the third party does not make

such a valuation, the agreement is avoided. And where one party prevents the third party from

making the valuation, the other party can maintain an action in damages against the defaulting

party.
4.12 PURPOSE OF TERMS AND CONDITIONS

1. Coverage of Terms

Without terms and conditions, things may be overlooked, especially those that are a little less

obvious. For non-lawyers, they are probably only considering including delivery costs, price and

payment terms; however, they may miss on essential aspects—disclaiming liability for delay,

limiting liability and protecting intellectual property rights. You may also miss on the passing of

risk and title.

But with a well-drafted terms and conditions, you won’t miss any of these and you can protect your

business and your position.

2. Certainty

An oral contract is enforceable, but it is hard to prove with certainty and evidence when a dispute is

filed or a problem arises. In fact, both or either parties may forget the terms you have agreed

beforehand.

But if T&C is written, there is no chance that either of you will forget what are stated in the contract

because it was written. Also, emailing back and forth is hard, especially when locating the specific

part of the terms and conditions you are looking for.

On the other hand, you may have to pay more of legal fees to a lawyer if he has to consume time in

reading emails to find a certain contract provision.

This problem can be prevented if you have drafted it in the written contract, in plain English.
3. Payment Terms

If you have an online business, it is integral that you include payment terms in the written/published

contract. A specific section in the T&C referring to the payment terms can improve trust on the part

of the customer in dealing with you.

They will have more confidence on your business because they can perceive you are a professional

that values credibility, especially on money matters.

Terms of service are extremely for your website, but you may also create them using terms of

service generator online.

4. Court Action

With a written terms and conditions, you can avoid any trouble of being taken to court during a

legal dispute, as everything can be found easily in the written contract.

All the terms covering important aspects of your provisions of goods and services will minimize

legal dispute. The other party’s lawyer will advise his client that there are clear terms on the issue

on hand.

In this case, they will only have a little chance to win if they choose filing a case in court.

5. Agreement Enforcement

Without T&C, it will be hard to enforce your policies and find out if a user or customer has violated

or has breached the contract. You can avoid any of these problems with written contracts, which can

be easily enforced, if you have to take a customer to court due to non-payment or violation of

specific provisions in the terms and conditions.

6. Law Compliance

It’s almost always considered important to have your written contract outlined and published on

your website in reference to existing laws in many jurisdictions and territories.

As businesses are providing or supplying products or services to varying industries, there may be

certain rules and regulations that apply to a specific industry that your business is about and for as

well.

In the ecommerce industry, the law mandates that businesses provide information to the customers

prior to the contract’s conclusion. This is a provision commonly stated in the written contract.

It specifically refers to the Provision of Services Regulations (*2009), which states that service

suppliers has to provide buyers or customers with specific information. This aspect has to be well in

place in your terms and conditions page.

7. Customer Service

Written contracts improve customer satisfaction. These are not only easily implementable but they

also help you in providing high level of customer service.

One reason is that T&C gives them confidence to do business with you because these written

contracts can give them a sense of your professionalism.

On your part, you will have protection, especially when you seek enforcing a section in the terms.

8. Expectations

Written contracts can avoid any wrong expectations about your business. For example, you have to

import goods from abroad, so it will take about three weeks before the item is delivered. In this

case, you’re customer will not be expecting ordered items to arrive in two days.

If you spelled delivery terms in the contract out, your customers will not have mismatched

expectations about your business. Additionally, this can save time on the part of your customer

support that is less likely to attend to calls from customers who are asking when the product/s will

arrive.
The same goes if you supply or provide a service. The terms and conditions are very important for

this matter. If you’re a writing service provider, then it will help you have all the terms outlined

when it comes to turnaround time of the article, blog or essay.

9. Protection

Terms and conditions can block future disputes or complaints. When everything has been laid out in

the page, your customers may have to think twice first before filing a court action because they have

agreed to the policies and terms stated in the T&C. If ever they still pursue a case against you, they

might not be able to win because a specific area of concern has been clearly stated in the published

or signed written contract.

10. Trust

This may seem obvious, but a written contract improves your credibility.

Customers will find you trustworthy. They’ll feel confident in transacting with you because they are

also protected by a T&C. With it, they learn of their rights that can make them feel at ease. Also, it

clearly defines their responsibilities to your company, and vice versa. Both parties are given greater

peace of mind in doing business together.

4.13 DISPUTES RESOLUTION OF IN CONTRACTS

Dispute resolution or dispute settlement is the process of resolving disputes between parties. The

term dispute resolution is sometimes used interchangeably with conflict resolution, although

conflicts are generally more deep-rooted and lengthy than disputes.[1] Dispute resolution techniques

assist the resolution of antagonisms between parties that can include citizens, corporations, and

governments.

The following are some of the methods of disputes resolution:

 A.NEGOTIATION

Definition: Negotiation is the most basic means of settling differences. It is back-and-forth

communication between the parties of the conflict with the goal of trying to find a solution.

The Process: You may negotiate directly with the other person. You may hire an attorney to

negotiate directly with the other side on your behalf. There are no specific procedures to follow -

you can determine your own - but it works best if all parties agree to remain calm and not talk at the

same time. Depending on your situation, you can negotiate in the board room of a big company, in

an office or even in your own living room.

Negotiation allows you to participate directly in decisions that affect you. In the most successful

negotiations, the needs of both parties are considered. A negotiated agreement can become a

contract and be enforceable.

When and How Negotiation Is Used: Most people negotiate every day. In some circumstances you

may want the help of a lawyer to help you negotiate a fair deal. Negotiation is the first method of

choice for problem-solving and trying to reach a mutually acceptable agreement. If no agreement is

reached, you may pursue any of the other options suggested here. This process can be appropriately

used at any stage of the conflict - before a lawsuit is filed, while a lawsuit is in progress, at the

conclusion of a trial, even before or after an appeal is filed.

Characteristics of Negotiation:

 Voluntary

 Private and confidential

 Quick and inexpensive

 Informal and unstructured

 Parties control the process, make their own decisions and reach their own agreements (no third

party decision maker)

 Negotiated agreements can be enforceable

 Can result in a win-win solution

B.MEDIATION

Definition: Mediation is a voluntary process in which an impartial person (the mediator) helps with

communication and promotes reconciliation between the parties which will allow them to reach a

mutually acceptable agreement. Mediation often is the next step if negotiation proves unsuccessful.

The Process: The mediator manages the process and helps facilitate negotiation between the parties.

A mediator does not make a decision nor force an agreement. The parties directly participate and

are responsible for negotiating their own settlement or agreement.

At the beginning of the mediation session, the mediator will describe the process and the ground

rules. The parties or their attorneys have an opportunity to explain their view of the dispute.

Mediation helps each side better understand the other’s point of view. Sometimes the mediator will

meet separately with each side. Separate “caucusing” can help address emotional and factual issues

as well as allow time for receiving legal advice from your attorney. Mediations are generally held in

the office of the mediator or other agreed location.

Agreements can be creative. You could reach a solution that might not be available from a court of

law. For example, if you owe someone money but don’t have the cash, rather than be sued and get a

judgment against you, settlement options could include trading something you have for something

the other wants. If an agreement is reached, it will generally be reduced to writing. Most people

uphold a mediated agreement because they were a part of making it. It can become a contract and
 be enforceable. If there is no agreement, you have not lost any of your rights and you can pursue

other options such as arbitration or going to trial.

When and How Mediation Is Used: When you and the other person are unable to negotiate a

resolution to your dispute by yourselves, you may seek the assistance of a mediator who will help

you and the other party explore ways of resolving your differences. You may choose to go to

mediation with or without a lawyer depending upon the type of problem you have. You may always

consult with an attorney prior to finalizing an agreement to be sure that you have made fully

informed decisions and that all your rights are protected. Sometimes mediators will suggest that you

do this. Mediation can be used in most conflicts ranging from disputes between consumers and

merchants, landlords and tenants, employers and employees, family members in such areas as

divorce, child custody and visitation rights, eldercare and probate as well as simple or complex

business disputes or personal injury matters. Mediation can also be used at any stage of the conflict

such as facilitating settlements of a pending lawsuit.

Attorneys and other professionals provide private mediation for a fee. If you have an attorney, you

can work together to select a mediator of your choice. You may want a mediator who is

knowledgeable about the subject matter of your dispute. You may wish to use a for-fee mediator in

the first instance or if Early Settlement mediation has not resulted in a resolution of your dispute.

You may also find mediators or mediation services listed in the telephone directory or available on

lists provided by some courts or private professional organizations. When selecting a mediator, you

should always check their credentials and get references.

Characteristics of Mediation:

 Promotes communication and cooperation

 Provides a basis for you to resolve disputes on your own

 Voluntary, informal and flexible

 Private and confidential, avoiding public disclosure of personal or business problems

 Can reduce hostility and preserve ongoing relationships

 Allows you to avoid the uncertainty, time, cost and stress of going to trial

 Allows you to make mutually acceptable agreements tailored to meet your needs

 Can result in a win-win solution

C.ARBITRATION

Definition: Arbitration is the submission of a disputed matter to an impartial person (the arbitrator)

for decision.

The Process: Arbitration is typically an out-of-court method for resolving a dispute. The arbitrator

controls the process, will listen to both sides and make a decision. Like a trial, only one side will

prevail. Unlike a trial, appeal rights are limited.

In a more formal setting, the arbitrator will conduct a hearing where all of the parties present

evidence through documents, exhibits and testimony. The parties may agree to, in some instances,

establish their own procedure; or an administrating organization may provide procedures. There can

be either one arbitrator or a panel of three arbitrators. An arbitration hearing is usually held in

offices or other meeting rooms.

The result can be binding if all parties have previously agreed to be bound by the decision. In that

case, the right to appeal the arbitrator’s decision is very limited. An arbitrator’s award can be

reduced to judgment in a court and thus be enforceable. In nonbinding arbitration, a decision may

become final if all parties agree to accept it or it may serve to help you evaluate the case and be a

starting point for settlement talks.

 How and When Arbitration Is Used: A common use of arbitration is in the area of labour disputes -

between fire fighters and the city in wage disputes, for example. You will usually be represented by

an attorney in arbitration.

Many contracts have clauses which require that disputes arising out of that contract be arbitrated.

You may have seen such a provision when you applied for a credit card or opened a retirement

account or other account with a stock broker. You may want to explore using this process if you and

the other side agree that the problem needs to have someone make a decision but you do not want

the expense of going through the court process. If you agree to arbitrate or sign a contract with an

arbitration clause, you should understand that the arbitrator may make the final decision and that

you may be waiving your right to a trial in court.

Who Provides This Service: Many attorneys, other professionals or professional associations offer

their services as arbitrators. Typically your attorney will select the arbitrator based upon the

particular type of the dispute. In complex and highly technical cases, often an arbitrator who is

knowledgeable in that field is chosen. Usually fees are charged.

Some courts offer court-sponsored, nonbinding arbitration and have specific procedural rules to

follow.

Characteristics of Arbitration:

 Can be used voluntarily

 Private (unless the limited court appeal is made)

 Maybe less formal and structured than going to court, depending on applicable arbitration rules

 Usually quicker and less expensive than going to court, depending on applicable arbitration rules

 Each party will have the opportunity to present evidence and make arguments
 May have a right to choose an arbitrator with specialized expertise

 A decision will be made by the arbitrator which may resolve the dispute and be final

 Arbitrator’s award can be enforced in a court

 If nonbinding, you still have the right to a trial

D.LITIGATION (GOING TO COURT)

Definition: Litigation is the use of the courts and civil justice system to resolve legal controversies.

Litigation can be used to compel opposing party to participate in the solution.

The Process: Litigation is begun by filing a lawsuit in a court. Specific rules of procedure,

discovery and presentation of evidence must be followed. The attorney for the other side will want

to take your deposition to learn more about the facts as you see them and your position in the case.

There can be a number of court appearances by you and/or your lawyer. If the parties cannot agree

how to settle the case, either the judge or a jury will decide the dispute for you through a trial.

A trial is a formal judicial proceeding allowing full examination and determination of all the issues

between the parties with each side presenting its case to either a jury or a judge. The decision is

made by applying the facts of the case to the applicable law. That verdict or decision can conclude

the litigation process and be enforceable; however, if appropriate, the loser can appeal the decision

to a higher court. In some cases, the losing party may have to pay the costs of the lawsuit and may

have to pay the other party’s attorney fees.

How and When Litigation Is Used: Our American civil justice system is one of the best in the

world. Our Constitution gives us the right to a fair trial. If you want your day in court with a judge

or jury of your peers deciding the outcome, then the pursuit of litigation and trial of the case is for

you.
 You may be in a municipal court, state district court or a federal court depending on the type of

dispute you have and where your attorney files your case or where you get sued. State court trial

judges are elected on a nonpartisan ballot, though vacancies are filled through an appointment

process from highly qualified applicants. The district courts also appoint special judges, who handle

certain kinds of cases, such as small claims and divorces. These judges are selected by the district

judges from qualified applicants.

In all courts, cases are randomly assigned to the various judges. You have no choice concerning

which judge will hear your case. Juries are randomly selected from a jury wheel. If you cannot

settle your differences through negotiation, mediation, arbitration or some other means, then you

should pursue litigation through the courts with your lawyer.

Characteristics of Litigation:

 Involuntary - a defendant must participate (no choice)

 Formal and structured rules of evidence and procedure

 Each party has the opportunity to present its evidence and argument and cross-examine the other

side - there are procedural safeguards

 Public - court proceedings and records are open

 The decision is based on the law

 The decision can be final and binding

 Right of appeal exists

 Losing party may pay costs

 UNIT 5

BUYING METHODS

5.0 Methods of Purchasing Materials

Some of the methods of purchasing are discussed as follows:

1. Purchasing by Requirement:

This method refers to those goods which are purchased only when needed and in required quantity.

The goods which are not regularly required are purchased in this way. On the other hand it refers to

the purchase of emergency goods. These goods are not kept in store. Purchasing department must

be in knowledge of the suppliers of such goods so that these are purchased without loss of time.

2. Market Purchasing:

Market purchasing refers to buying goods for taking advantages of favourable market situations.

Purchases are not made to meet immediate needs but are acquired as per the future requirements.

This method will be useful if future needs are estimated accurately and purchases are made

whenever favourable market situations arise. The market situation is constantly studied for

forecasting price trends.

The advantages of this method are: lower purchase prices, more margin on finished products due to

lower material cost and saving in purchase expenses. This method suffers from some limitations:

losses in case of wrong judgment, fear of obsolescence, higher storing expenses due to more

purchases.
3. Speculative Purchasing:

Speculative purchasing refers to purchases at lower prices with a view to sell them at higher prices

in future. The attention in this method is to earn profits out of price rises later on. The purchases are

not made as per the production needs of the plant rather these are far in excess of such

requirements. A cloth mill may purchase cotton in the market when prices are low with the attention

of earning profits out of its sales when prices go up.

Speculative purchasing should not be confused with market purchasing. The former is done to earn

profits out of future price rises whereas the latter is concerned with purchasing for own needs when

favourable market situations exist. Though speculative purchasing may result in profits but there are

chances of prices going down in future, fear of obsolescence and incurring higher storage costs.

4. Purchasing for Specific Future Period:

This method is used for the purchase of those goods which are regularly required. These goods are

needed in small quantity and chances of price fluctuations are negligible. The needs for specific

period are assessed and purchases made accordingly. The requirements for such purchases may be

assessed on the basis of past experience, period for which supplies are needed, carrying cost of

inventory etc.

5. Contract Purchasing:

In the words of Spriegel it is “the purchasing under contract, usually formal, of needed materials,

delivery of which is frequently spread over a period of time.” Under this method a specific quantity

of materials is contracted to be purchased and delivery is taken in future. Even though the goods are

procured in future but the price and other terms and conditions are fixed at the time of contract. This
method may be useful when price rises in future may be expected and material requirements for

future may be accurately estimated.

6. Scheduled Purchasing:

Under this method the suppliers are supplied a probable time schedule for material requirements so

that they are in a position to arrange these in time. An accurate production schedule is prepared for

estimating future material needs. The suppliers are informed of probable needs and orders are sent

accordingly. The schedule provided by the purchaser to the vendor is not a contract. This is only a

gentleman’s agreement for terms and conditions of purchases. The main objectives of this method

are: minimum inventory, prompt service. low prices, quality goods etc.

7. Group Purchasing of Small Items:

Sometimes a number of small items are required to be purchased. The prices of these items are so

small that costs of placing orders may be more than prices. In such situations the buyer places order

with a vendor for all these items. The purchase price is agreed to be by adding some percentage of

profit in the dealer’s cost. This method will be used only when dealer’s records are open to

inspection for determining his cost. This type of purchasing reduces the cost of the buyer by

eliminating much clerical work.

8. Co-operative Purchasing:

Small industrial units may join to pool their requirements and then place bulk orders with dealers.

This will help them in availing rebates on large quantity purchases, cash discounts and savings in

transportation costs. After receiving the materials these are divided among the member units. Co-

operative purchasing helps small units in availing the benefits of bulk purchasing
 5.1 WHAT IS TENDERING?

Tendering is a process where are an organisation responds to a request for information or pricing

related to the supply of goods and services from another organisation. Organisations typically solicit

tenders from more than one organisation and will evaluate and accept tenders that meet their needs

and offer the best value for money. The acceptance of a tender results in a contract between the

organisations.

5.2 WHAT IS A TENDER?

A tender is a formal offer to perform work in return for payment. Payment maybe in the form of a

fixed price or via a schedule of rates. Work may include the supply of goods or services or both. To

win a tender you should understand the tendering process and what the buyer expects.

An effective bid management and tender process provides a positive evaluation approach that leads

not only to the appointment of appropriate suppliers but to ensure that the ongoing relationship is a

mutually beneficial. A wholly balanced and highly efficient bid and tender management process

improves the quality of the supply chain while reducing costs and managing risks.

A tender is a submission made by a prospective supplier in response to an invitation to tender. It

makes an offer for the supply of goods or services. As procurement routes have become more

complex, tenders may be sought for a wide range of goods and services (for example, on a

construction management contract the works are constructed by a number of different trade

contractors each contracted to the client) and contractors may take on additional functions such as

design and management.

The 4 main types of tenders are:

 Open tender

 Selective tender
 Negotiated tender

 Single-stage and two-stage tender

Open tender

Open tendering is the main tendering procedures employed by both the government and private

sector. Open tendering allows anyone to submit a tender to supply the goods or services required

and offers an equal opportunity to any organisation to submit a tender. This type of tender is most

common for the engineering and construction industry.

Open tendering provides the greatest competition among suppliers and has the advantage of

creating opportunities for new or emerging suppliers to try to secure work. However, not all those

who bid may be suitable for the contract and more time is required to evaluate the tenders.

Selective tender

Selective tendering only allows suppliers to submit tenders by invitation. These suppliers are those

who are known by their track record to be suitable for a contract of that size, nature and complexity

required. Selective tendering gives clients greater confidence that their requirements will be

satisfied. It may be particularly appropriate for specialist or complex contracts, or contracts where

there are only a few suitable firms. However, it can exclude smaller suppliers or those trying to

establish themselves in a new market.

Negotiated tender

Negotiated tenders are extensively used in the engineering and construction industry commencing

from tendering till dispute resolutions. Negotiating with a single supplier may be appropriate for

highly specialist contracts, or for extending the scope of an existing contract. Costs are reduced and

allows early contractor involvement. Since the contractor is part of the project team at a very stage

of the project, this results in better communication and information flow.

Single-stage and two-stage tender

Single-stage tendering is used when all the information necessary to calculate a realistic price is

available when tendering commences. An invitation to tender is issued to prospective suppliers,

tenders are prepared and returned, a preferred tenderer is selected and following negotiations they

may be appointed.

Two-stage tendering is used to allow early appointment of a supplier, prior to the completion of all

the information required to enable them to offer a fixed price. In the first stage, a limited

appointment is agreed to allow work to begin and in the second stage a fixed price is negotiated for

the contract.

Other types of tender include serial tendering, framework tendering and public procurement. Serial

tendering involves the preparation of tenders based on a typical or notional bill of quantities or

schedule of works. Framework tendering allow the client to invite tenders from suppliers of goods

and services to be carried out over a period on a call-off basis as and when required. Lastly, public

procurement is for public projects held by the government.

5.3 Single sourcing

Practice of using one supply source without a competitive bidding process for a justifiable reason. it

can also be said to be the award for supply of a good or service that can only be purchased from one

supplier because of its specialized or unique characteristics

5.4 Sole Sourcing

A sole source is defined as the only supplier that can provide you with the goods or products you

need. The sole source has either established a monopoly or is the only provider within a geographic

region from which business owners can obtain what they need. In some instances, the sole source is

the choice because it is the only vendor available at a specific time that can handle what a business
owner requires, or it is the only vendor that carries that product. For example, a vendor who carries

automobile parts that are no longer manufactured is considered a sole source because any company

that needs that part must sign a contract with that specific vendor.

The request for quotations is a procurement method that is used for small value procurements of

readily available off-the-shelf goods, small value construction works, or small value services

procurements.

This procurement method is also known as invitation to quote and shopping, and it does not require

the preparation of tender documents to the same extent as open tendering, request for proposals or

two-stage tendering.

The invitations are not complex, and this method is considered non-competitive because the

procuring entity determines which contractors, suppliers or service providers to request quotations

from as long as a minimum of three are invited.

This procurement method is used under conditions stipulated in the procurement legal and

regulatory framework and, accordingly, can be requested in writing: email, fax, courier, but not

telephonically. Sometimes there are limitations set on the period of time and frequency within

which this method can be used for the procurement of similar goods, work or services. This is to

prevent the procuring entity from splitting requirements in order for them to fall within the

threshold level where the request for quotation method can be applied.

Quotations received in response to a request for quotation should be first evaluated to determine

compliance with the technical specifications or scope of work of the requirement and also for

compliance with administrative requirements of the request for quotations. Only after the

administrative and technical compliance determination, a price comparison is made between firms

found to be compliant, and then a purchase order is signed with the bidder submitting the lowest

price quotation within the stipulated delivery or completion date.

Advantages

• Procurement lead-time is significantly reduced given that there’s no need to prepare solicitation

documents, or to advertise requirements. And the period for quotations submission is also equally

reduced.

• The number of quotations received is limited to the number of bidders quotations were requested

from, so the selection process time is also reduced.

• The procuring and/or requesting entities would usually have a pretty good idea of where and from

whom the goods, services or works can be procured, so there’s a higher probability of response to

the request for quotations.

Disadvantages

• Lends itself to irregularities because the procuring entity decides which suppliers, contractors or

service providers to send request for quotations to, and competition is very limited.

• Could be abused as a result of the breaking of requirements into smaller sizes in order to apply this

method of procurement.

• Could easily lead to requesting quotes from a limited number of firms even if the goods, services

or works are available from a greater number.

 UNIT 6

PURCHASING IN ORGANISATIONS

6.0 DEFINTION

The purchasing organization is an organizational unit which procures articles and negotiates general

purchase price conditions with vendors. It is responsible for all purchasing transactions in the

company.

6.1 Types of Purchasing Organizations

In the construction industry, organization types of purchasing units, which are in the position of

heart of the projects, show differences due to distinctive structures of every company. I will try to

examine the various pros and cons of purchasing organizations in which many variables are

effectual.

A.Central Purchase

This type of organization is the one in which all purchase activities are conducted by a single

central unit. This is an organization created by firms that perform buying/selling for more than one

project/workplace to make purchases in better conditions (price, delivery time, transportation fee,

etc.). There is no purchasing agent in the projects. This type is used more when number of

purchasing item is low but the budgets are large.

However, some Group Companies / Holdings can choose to establish a separate firm for their

purchases with common subjects. Thus, they provide better conditions for purchase by benefiting

from economy of scale, and enabling the group companies to focus on their business by clearing of

businesses that do not create value.

B.Coordinated (Combined) Purchase

This type, intending to minimize the cons of the central purchase organization and to provide quick

response times, is applied by making big-budget purchases by the central group, and small

purchases by the project. The majority of purchase activity is performed by the purchasing agents in

projects, but is constrantly coordinated and controlled by the central purchase.

C.Independent (Local/Separate) Purchase

As the generally-used organization type, this one is conducted entirely by the project (except for the

Procurement unit in energy projects). In this organization, burocracy is in the minimal level as there

are not procedures such as sending documents to the central group and receiving approval.
D.Independent + Active Consultant Style Purchase (Regional)

In my opinion, this is the type of organization that large-scale, project-based firms should use. I

have combined the the Coordinated and Independent purchase approaches here. In this type of

organization, there is a regional active consultant along with the independent purchase type. The

role of the active consultant here, is to link the contracts of big-budget purchases with high discount

rates according to ABC analysis by using the firm-wide control opportunity, and to constantly

investigate purchase activities of the projects remotely in coordination with the central quality

group.
6.2 TYPES OF PURCHASES

Organizations buy many different goods and services. As previously indicated, the challenge for

purchasing is deciding on the supplier that offers the best opportunity for items an organization

must purchase externally. Table 1-5 lists and describes many of the items that a purchasing

department is responsible for buying. Services are a special category of spend and the involvement

of purchasing depends on the organization.

Different Types of Purchases

Type of Purchase Description Examples

Raw materials Items with a lack of processing by the Petroleum, coal, lumber, copper, zinc,

supplier into a newly formed product. Often

gold, and silver

these raw materials are not of equal quality

and are purchased by “grade.”

Semi-finished products
All items purchased from a supplier required
Components, subassemblies,

and components to support an organization’s final that are

assemblies, subsystems, and systems

production. (seat assembly, steering assembly,

doors, and posts)

Finished products Products for internal use or products that

Furniture, computers, cars, and carts

require no major processing before resale to

the end customer.

Maintenance, repair, Items

and that do not go directly into an Spare parts, office and cleaning

organization’s product but are required supplies

operating items (MRO) to

run the business.

Type of Purchase Description Examples

Production support items

Materials required for packaging and Tape, bags, inserts, and shrink-wrap

shipping.

Services Services required to support the facilityCustomer

or support, temporary labor,

the business. facilities, and legal

Capital equipment Assets intended to be used for more than

Machinery,
one computer systems, and

year. material-handling equipment

Transportation and third-

A specialized type of service buying to Rail, truck, ocean, 3PL, and

party purchasing manage inbound and outbound materialmultimodal

flows.

Public Procurement:

This is procurement that is completed within the context of not-for-profit organizations (NFP’s).

Also known as the public sector, the procurement that occurs in this context is typically government

affiliated, which can be central, state, or local.

Private Procurement:

This is procurement that is completed within the context of for-profit organizations (FP’s). Private

procurement happens within privately owned companies; also known as the private sector (Surbhi

2015)