Every organization, big or small, depends on materials and services from other organizations to varying extents.

These materials and services are obtained through exchange of money and the physical arrangement of it all is called Materials Management or even Material Management.
Various materials used as inputs, such as raw materials, consumables & spares, are required to be purchased and made available to the shops / users as & when needed to ensure uninterrupted production. Therefore, efficient management of input materials is of paramount importance in a business organization for maximizing materials productivity, which ultimately adds to the profitability of the organization

The main concern of any Business management is to maximise the Return on Investment (ROI). The relationship of various entities here can be expressed as: Profit Sales ROI = ---------- X ----------------------------------------Sales Current Asset + Fixed Asset Thus ROI = profit margin + asset turnover rate A firm's profit margin reflects management's ability to control costs in relations to revenue. The asset turnover rate reflects management's ability to effectively utilize the firm's productive assets. Hence a firm can improve ROI in three ways :

By reducing cost By getting more sales from available assets or Get Currency converter By some combination of the above Thus , it is the cost control that holds the key

In many manufacturing organisations, the cost of materials alone happens to range from 40 % to 60 % of the total expenditure. Obviously, a better management of material is expected to ensure reduction in overall cost of operation and smoothness in supply of inputs. This requires well coordinated approach towards various issues involving decision making with respect to materials. All the materials related activities such as material planning & indenting, purchase systems & procedure, variety reduction through standardization & rationalization, reducing uncertainties in demand & supply, handling & transportation, inspection, proper storage & issue of materials to the internal customers, inventory management, vendor management & finally disposal of obsolete, surplus & scrap materials etc. taken

together is termed as INTEGRATED MATERIALS MANAGEMENT To carry out these functions efficiently, it is essential to have a very good supplier base, order booking process & inventory management system as well as expert MATERIALS MANAGEMENT (MM) professionals. Materials Management is a key business function that is responsible for co-ordination of planning, sourcing, purchasing, moving , storing and controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost. In its process of managing , materials management has such sub fields as inventory management , value analysis, receiving, stores and management of obsolete , slow moving and non moving. Materials Management's scope is vast. Its sub functions include Materials planning and control, Purchasing, Stores and Inventory Management besides others. The various activities represent these four functions: Planning and control Purchasing Value analysis and Physical distribution The planning and control functions are inventory management , production planning and scheduling. Purchasing functions are buying, subcontracting, value analysis and follow ups. Distribution functions are receiving , packaging, shipping, transportation and storage, making it the Integrated Materials Management. We expect business institutes , colleges and universities , worldwide, to make use of this site to promote international traineeships for the students.
Material management is an approach for planning, organizing, and controlling all those activities principally concerned with the flow of materials into an organisation.

The scope of Materials Management varies greatly from company to company and may include material planning and control, production planning, Purchasing, inventory control, in-plant materials movement, and waste management. It is a business function for planning, purchasing, moving, storing material in a optimum way which help organisation to minimise the various costs like inventory, purchasing, material handling and distribution costs. The fundamental objectives of the Materials Management function ,often called the famous 5 Rs of Materials Management, are acquisition of materials and services :

of the right quality

in the right quantity at the right time from the right source at the right time From the management point of view , the key objectives of MM are :

To buy at the lowest price , consistent with desired quality and service To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory losses occurring due to deteriorations , obsolescence and pilferage To maintain continuity of supply , preventing interruption of the flow of materials and services to users To maintain the specified material quality level and a consistency of quality which permits efficient and effective operation To develop reliable alternate sources of supply to promote a competitive atmosphere in performance and pricing To minimize the overall cost of acquisition by improving the efficiency of operations and procedures To hire, develop, motivate and train personnel and to provide a reservoir of talent To develop and maintain good supplier relationships in order to create a supplier attitude and desire furnish the organisation with new ideas , products, and better prices and service To achieve a high degree of cooperation and coordination with user departments To maintain good records and controls that provide an audit trail and ensure efficiency and honesty To participate in Make or Buy decisions

Materials Management thus can be defined as that function of business that is responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide service to the customer, at a pre-decided level at a minimum cost.
The broad Materials function has the following as identified and interlinked sub functions:

Materials planning and control: Materials required for any operation are based on the sales forecasts and production plans.

Planning and control is done for the materials taking into account the materials not available for the operation and those in hand or in pipe line. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales. Purchasing: Basically, the job of a materials manager is to provide , to the user departments right material at the right time in right quantity of right quality at right price from the right source. To meet these objectives the activities undertaken include selection of sources of supply, finalisation of terms of purchase, placement of purchase orders, follow up, maintenance of relations with vendors, approval of payments to vendors, evaluating, rating and developing vendors. Stores : Once the material is delivered , its physical control , preservation , minimisation of obsolescence and damage through timely disposal and efficient handling, maintenance of records, proper locations and stocking is done in Stores.

Inventory control : One of the powerful ways of controlling the materials is through Inventory control. It covers aspects such as setting inventory levels, doing various analyses such as ABC , XYZ etc ,fixing economic order quantities (EOQ), setting safety stock levels, lead time analysis and reporting. Materials Management's scope: The scope is vast. Its sub functions include Materials planning and control, Purchasing, Stores and Inventory Management besides others. Basically, under its scope are :

emphasis on the acquisition aspect inventory control and stores management material logistics, movement control and handling aspect purchasing, supply , transportation , materials handling etc supply management or logistics management all the interrelated activities concerned with materials

Materials management can thus also be defined as a joint action of various materials activities directed towards a common goal and that is to achieve an integrated

management approach to planning, acquiring, processing and distributing production materials from the raw material state to the finished product state. In its process of managing , materials management has such sub fields as inventory management , value analysis, receiving, stores and management of obsolete , slow moving and non moving items. The various activities represent these four functions:

Planning and control Purchasing Value analysis and Physical distribution

The overall objectives of an organisation tend to be achieved most efficiently when the organisation is structured by grouping similar activities together. The process begins by dividing the total operation into its basic functional components. Each component , in turn, is divided into a number of sub-functions. The process is continued until each individual job encompasses a reasonable number of related tasks. The basic aim is to have a system that is functionalised , has proper control over the activities and is well co-ordinated. Materials Management provides an integrated systems approach to the co-ordination of the materials activities and the control of total material costs. Obviously, the MM organisation is derived from its fundamental objectives. Since Materials management function ranges from receiving the material requisition to placement of purchase orders and then on the other hand to receiving the material and making it available to the users , a commonly seen organisation of materials management is divided into an integrated sections as :

Purchasing Stores Inspection Traffic Once the whole Materials Management function has been divided into its different sub-functions as above, the sub-functions too are divided into their functions which are usually seen to be as : urchasing

Administrative : Purchasing administration involves all the tasks associated with the management process, with emphasis on the development of policies , procedures, controls and the mechanics for coordinating purchasing operations with those of other departments.

Buying : It addresses to a wide gamut of activities such as reviewing

requisitions , analyzing specifications, investigating vendors, interviewing sales people studying costs and prices and negotiating.

Expediting : This is basically the order follow up activity involving various types of vendor relationship work. Reviewing Order status, providing clarifications on transportation, writing and emailing vendors etc.

Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive business environment , purchasing authorities have to keep building the capacity to do better by taking up as special projects activities such as vendor development, vendor registration, value analysis, market studies, system studies etc

Routine : Purchasing process or procedure involving routine or every day activities such as dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.

Stores

Receiving Bay Custody Inventory control Disposal

Material Planning

In any integrated Materials Management environment, planning for getting the materials is the starting point for the whole MM function. Materials planning sets the procurement function and the subsequent material functions rolling. Material planning is a scientific way of determining the requirements starting with raw materials, consumables, spare parts and all other materials that are required to meet the given production plan for a certain period. Material planning is derived from the over all organisational planning and hence it is always a sub-plan of the broad organisational plan. What it does is forecasting and initiating for procurement of materials Factors affecting Material planning : 1) Macro factors : Global factors such as price trends, business cycles, government's import and export policies etc are called the Macro factors. Credit policy of the government is a critical factor as banks follow these guidelines only while extending financial support to a business entity.

2) Micro factors : These are essentially the factors existing within the organisation such as corporate policy on Inventory holding, production plan, investments etc. For any organisation, factors such as Lead time of procurement , acceptable inventory levels, working capital, seasonality, delegation of power are micro factors. Techniques of planning materials : There are a few techniques used for planning material for the given period. The following two are , however, commonly used : 1) Materials Requirement Planning (MRP) 2) Requirement based on past consumption MRP has ,as its starting point, the annual production plan of the manufacturing concern. Once a firm determines its annual production plan , the over all material requirement , to meet the given production plan, is worked out. It is a detailed analysis encompassing the materials and quantities available for use, materials with quantities not available and hence needing procurement, the actual lead time of procurement etc. Since , it is always possible to have a situation where some parts of an assembly are available and some others not available, Bill of Materials is exploded. It is quantifying all the materials (components) needed for various assemblies , all needed as per the production plan. BOM is thus a list displaying the code, nomenclature of an item , its unit and quantity , location of use and also the estimated price of each component. An explosion chart is a series of bills of materials grouped together in a matrix form so that combining the requirements for different components can be made. Once the BOM is ready , the same is handed over to the Purchasing wing which initiates the purchasing acivities. MRP thus keeps in view the Lead time also. Using computers, preparation of BOM through explosion of lists is quite easy and smooth.

Purchasing Function in Materials Management

Purchasing function , in a business environment , is one of the most critical functions as it provides the input for the organisation to convert into output. Materials today are lifeblood of industry. They must be available at the proper time, in the proper quantity , at the proper place, and the proper price. Company costs and company profits are greatly affected by them as normally , a manufacturing organisation spends nearly 50% of its revenue in purchasing. Purchasing Function vs. Purchase department : Purchasing function is a function commonly seen in all those organisations that undertake purchasing activities. Purchase department is a unit of an organisation that performs purchasing function. The purchasing function is usually performed by a specialised and centralised purchasing department , directed by an efficient manager to achieve the performance in an economical manner.

Profit making Centre ? Purchasing is responsible for spending nearly half of a company's income for buying the input materials. Obviously, any saving achieved by it results into direct saving for the company and all such savings are a company's profit. Going by a thumb rule "even 1% saving achieved in Purchasing results in 5% profit for any organisation". Procurement vs. Purchasing It is used to define one of several supply functions involved in logistics activities. In the broadest sense procurement includes the entire process by which all classes of resources (people, materials, facilities and services) for a particular project are obtained. Since purchasing is a unique function , it differs a bit from procurement in the sense that while procurement , with the same objective has a wider domain , purchasing with the same objective is included in it ! Objectives of Purchasing: The classical definition of objectives of purchasing is to buy materials and services of the right quality , in the right quantity, at the right place , from the right source and at the right time. However , in general management parlance the objectives of purchasing are:

To support company operations with an uninterrupted flow of materials and services.

To buy competitively and wisely To help keep a minimum Inventory

To develop reliable alternate sources of supply

To develop good vendor relationship and a good continuing supplier relationship

To achieve maximum integration with the other departments of the firm

To train and develop highly competent personnel

who are motivated to make the firm as well as their department succeed To develop policies and procedures which permit accomplishment of the preceeding seven objectives at the lowest reasonable operating cost

The basic objective , in pure practical terms is ,of course, to derive the maximum value for each unit of currency spent in buying.

Purchasing is no doubt a vast subject and as the competition among the firms grows this function of business is expected to see a lot of evolution Types of Purchasing: Considering the nature of business an organisation has there could be different approaches and hence Purchasing can be any of these types: Forward Buying Tender Buying Speculative Buying Systems Contracting Rate Contract Reciprocity Zero Stock buying Blanket Order

Forward Buying as the name suggests is the system under which buying is done with longer term in perspective. It is not meant for meeting the present consumption requirement. It is rather a commitment on part of both the buyer and the seller , normally for a period of one year. Depending upon the availability of the item, the financial policies, the economic order quantity, the quantitative discounts, and the staggered delivery, the future commitment is decided. A few organisations do hedge, particularly in the commodity market by selling or buying contracts. Forward buying helps a firm in booking capacity of a supplier and thus often results into a safeguard against a competitor acquiring his capacity. It is usually done for Raw materials but is not limited to it. Now a days , with competition becoming globalised such an arrangement is a win-win situation for both , the buyer and the supplier.

Purchasing Systems
For any organization, purchasing function assumes importance for the reason that it fulfills , to a great extent , the input needs of the organization. Whether product or service, an organization needs input of right quality, at right price, from the right source in right quantity at the right time. Often called 5 Rs (right things to do) these determine the broad parameters within which purchasing functions in any organization. Depending upon the size and nature of operation, the quantum of purchase of product and services vary. In some organizations the total purchase bill is to the tune of 60% of

its annual expenditure!! Obviously , for any organization engaged in a continuous set of activities, where inputs are processed , on a regular basis for producing outputs , formalized systems and procedures are required to run its purchasing function, to ease in operation and accountability. Formal procedures are required to be laid down for initiating purchase, selecting suppliers, placing purchase orders, follow-up, receiving materials and so on. The whole system of purchasing , in terms of phases or grouping of related activities, can be classified as follows : (1) Pre-purchase (Ordering) system; (2) Ordering system; (3) Post-purchase (Ordering) system The salient features in each of the systems mentioned are as follows : (1) Pre-purchase system : Activities such as initiating the purchase through raising requisitions, requirement programs, selection of suppliers, obtaining quotations and evaluating them, are broadly the pre-purchase activities. (A) Requisitions : The department concerned (within the orgnisation), in need of a material, usually presents a completed requisition form. Different types of requisitions used are: I) Standard requisition :- Also called as Indent for material (or service), Materials requisition plan etc. a requisition is made by an authorized person in the concerned department. However, it has to be countersigned by a senior officer who checks the entries made in. Normally, a requisition , in a pre printed format, contains particulars such as the detailed description of materials or services to be purchased, desired quantity, schedule for receipt of such material / service , the estimated price, possible sources and the account head, requisitioners identity. In any organisation only a limited number of personnel are empowered to countersign the requisition as it amounts to authorisation of the expenditure. Purchase department usually maintains a list of such officers so as to check the validity of the purchase requisitions. Normally, there is a delegation of power of authority for authorising a requisition. This is expressed in terms of the financial limits up to which an officer can authorise a requisition for a capital or revenue item. These details must also be available with the purchase department. (II) Travelling requisition : As the name suggests, this requisition form travels from the requisitioning department to the Purchaser directly who then only authorizes the supplier through a Purchase order to deliver the required material. This document is generally used for requisitioning items that are required frequently in bulk quantities over a long period of time. Usually, for repeat items such as in inventory a card containing the details of previous supply containing material specifications, suppliers

details, last purchased price , reorder point, usage details are written permanently and provisions for entering date, quantity required, names of requisitioner and authoriser are available. On getting it , the purchaser only has to take these details for placement of order. The traveling requisition which is a permanent document of the originating department is returned to it. It reduces the paper work and eases the operation. III) Bills of materials : Bill of material is a comprehensive list of materials needed to produce a product or service. It is basically the details of materials needed, their specification, quantity , required delivery schedule etc. It is often used as a sequel to firming of a production plan , a stage where the exact material / service needs are known. (B) Request for Quotation (RFQ): Also called as Tender Enquiries , an organization through its Purchase department, invites suppliers to quote rates for supply of materials / service. This is the step taken after receiving the requisition for an item. For this purpose often a standard format is used (customized also in case of large contracts). Against this document the prospective vendors quote their price and other terms and conditions of sale. C) Quotation : It is also called tender. A quotation is a proposal from a prospective vendor who has quoted in response to the RFQ sent to him by the purchaser. It contains price offered by the vendor as also the terms and conditions of sale as per the policy of the vendor . (2) Ordering System : After the offers (quotation / tender) are received and evaluated in respect to their fulfillment of the organizational requirement the appropriate supplier for his quoted rates is selected. This is expressed in terms of the buyer placing the formal purchase order on him. The purchase order containing suitable business terms and conditions is now a binding contract between the buyer and the supplier. A typical Purchase Order contains the following particulars: (a) Purchase order reference number , as a communicating mode between the supplier and the buyer for linking of various subsequent correspondences, (b) Material description with detailed specifications, (c) Quantity ordered (d) Required Delivery schedule, (e) Price , discounts, taxes and duties applicable (f ) Terms and conditions of purchase in details (g) Destination where the materials are to be delivered (usually the name and address of the consignee), (h) Shipping instructions, (i ) Authorisation of the Materials Manager who signs the purchase order

The Purchase Order is made in multiple copies that are sent after their release from the Materials Manager to several agencies such as : i) Supplier , with the original and a copy which the supplier is supposed to sign and return to the buyer as a mark of acceptance of the P.O. ii) Indentor , as an information of order placement and for taking steps as provided for in the P.O. iii) Finance , for making payment as per the provision of the P.O. iv) Consignee , for receiving the material and clearing it for subsequent use by the organization These are the indicative lists and not the exhaustive one (3) Post-Purchasing System : Purchase orders are placed for getting material or service. As such after P.O. placement , follow-up with suppliers , receipt of material and making payment ,once the materials have been received are involved. Generally, in case of relatively big orders, many small jobs are required to be done as part of follow up with the supplier. Since after the P.O. the executive authority (usually the Indentor) comes into play , action such as receipt and clearance of drawing with supplier, clearing various doubtful issues contained in the P.O., at times, are involved. Also since the P.O. indicates a clear delivery schedule , the buyer is often required to chase up for ensuring that. In the process, the following action may be required: i) Receipt and clearance of drawing and documents submitted by the supplier ii) Inspection , in part or full, of the material being manufactured by the supplier iii) Handing over of site to the supplier to effect installation and commissioning iv) Making available the necessary Goods carrying documents to the supplier Inspection of the manufactured goods is often a major post purchase order activity. Large organizations usually have locational offices called site offices spread across the country for carrying out inspection, ensuring dispatch of material and liasoning with many other agencies. Critical items require regular follow-up with the supplier. A few organisations operate with decentralised inspection facilities for on-the-spot inspection and acceptance. Purchase Order (P.O.) status reports are prepared so that follow-up is done where ever required.

Once the material is received at the described site final inspection is carried out for its acceptance. In the process, adequate documentation is generated. On the basis of the item code , proper identification tag etc is attached. In fact , now the procedure is taken over by the Stores / Warehouse wing. Payment release : The supplier also sends the invoice for the materials supplied for payment. On receipt of it the invoice is matched against the receipt details, quantity accepted etc so that payments can be made as per the agreed term of the P.O. Normally, invoices are sent to the finance department who releases the payment after following the procedure at its end.

Tender Buying
With competition growing as ever , Information technology replacing the arduous manual mode of purchasing and transparency in dealings more required than ever, many professionally managed firms have started looking for more sources of supplies, beyond their normal boundaries. Not that Tender buying did not exist earlier. Rather, it has always been considered the only way of buying materials / services in the government and quasi government procurements. As the word suggests , Tender buying is selecting a supply source (supplier) out of many sources available. That is, many tenderers are invited to participate in the tendering process and then one or more than one tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts). The main focus through tender buying is on competition of price and quality. Usually, the best quality (T1 or Q1) is selected after assessment of the technical offers and then the lowest offered price (L1) tender is selected for order placement. Process of tender buying : A typical purchase function starts with the raising of a requisition (Indent / Material Procurement Requisition) for an item which is required for a stated purpose. This requisition is then converted into an enquiry form which is issued to the probable vendors who are asked to respond within a given date and time (called Tender opening date) as mentioned in the enquiry issued to them. The interested vendors respond to the tender enquiry by giving their tenders. Tenders thus received are opened on the Tender opening date at the fixed time. The tenders are then subjected to evaluation with respect to a tenderer's capability, Financial as well as Technical and other criteria as laid down in the tender enquiry. This step also witnesses series of discussions, clarifications and negotiation with the tenderers. Some tenders can be rejected at this stage as they might not meet the requirement of the purchaser. Finally, the tenders which are found suitable are subjected to price comparision and usually the tenderer offering the lowest price (L1) is selected for placement of order.

The process explained above shows a great deal of variations depending upon a company's procurement policy. In some places, the best quality offering tenders are accepted for subsequent price comparision whereas in some other place all the tenderers who meet the minimum requirement are considered accepted for price comparision and order placement. Similarly, in some places the order is placed only on L1 (lowest offered price) whereas in some other places it may not be rigidly followed so. Types of Tenders : Since the tenders are sent to the probable vendors , knowledge of vendors for the item in question is a necessity. It's based on this concept that the types or mode of tendering is decided against a particular purchase requisition. Most commonly used Types of tendering / tender buying are as below : 1) Global Tender : As the name suggests a global tender is floated with a view to elicit offers / response from any vendor situated anywhere in the world. The need for a global tender arises when the purchaser either does not know about the vendors for a particular item in question or when he thinks that a wider choice of vendor is possible through it, irrespective of his nation's boundaries. A few clear reasons are :

Lack of information on vendors Only a few vendors known When there are chances of cartel formation among known vendors Anticipation that more response may come

What is of importance in this popular mode is the way a global tender is floated. With internet becoming the most powerful tool transcending the national boundaries ,a wide range of applications are now possible. There are tender portals ( www.tendertiger.com , www.indiatenders.com etc.) on which one can upload the whole tender enquiry and then ask the interested vendors to make offers. Besides,this increasingly popular way of inviting tenders , listing the tender in international trade journals, leading world newspapers etc. are other ways of putting up a global tender enquiry. The idea is to give wide publicity of the tender, worldwide and circumstances permitting ,to place the order on a foreign supplier too. 2) Open Tender : An Open tender too like a Global tender tends to invite tender from any interested vendor. The basic difference assumed between an open tender and a global tender enquiry is essentially the range of its applicability. While a global tender gets the worldwide publicity, an open tender is limited only within a country. Otherwise, the concept

remains the same as it also seeks to elicit better or wider response. Since the Open tender enquiry is limited within the country itself , besides the internet mode , the enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide publicity, within the country. Any vendor who meets the tender requirements can make an offer. Now a days, since e-procurement is replacing the old manual mode of working , one of the most commonly used mode for Open tendering is uploading the tender on the internet. What is of interest now is the narrowing down of differences between the global tender and an open tender. Any content published on the internet is expected to be available to anybody located anywhere in the world unless due to some mechanism such as firewall etc the reach of internet is restricted. 3) Limited Tender : When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the purchaser. It is considered better than Global and Open tender modes as there is always an element of uncertainty in those two modes with respect to the capabilities of the vendors. For issuing LTE , a purchaser maintains a list of approved / registered vendors whose capabilities are checked periodically. 4) Single Tender Enquiry : An STE is issued only when either the item is proprietory in nature, that is only one supplier produces that item or where there may be more vendors but due to certain exigencies it is not possible to devote time on evaluating the vendors' offers / one supplier can ,for sure , fulfill the needs. Which mode to use and when depends on many factors as well a company's procurement policy. For example, for a small value purchase , if the policy does not prohibit, Single tender enquiry or Limited tender enquiry is considered ideal. These are also ideal for high value and frequently bought items. On the other hand, for high value and non frequently bought items / systems , Open / Global tenders are suited. In many government organisations, whose procurements are also called public procurements for the reason that they spend public money for the public cause ,all the tenders are to be invited only through Open / Global tenders.

Systems Contracting
Systems contract ,as the term suggets, is a contract of system of buyer with that of the seller. It is a release system in which items, usually, commonly available off-the-shelf, are identified and pre-priced in anticipation of certain usage. Delivery releases are made against existing orders placed by purchase. This is a procedure intended to help the buyer and the seller to reduce administrative expenses and at the same time to ensure proper controls. The system authorises the designated persons of the buyer to place orders directly to the supplier with the specific materials during a given contract period. The contract is thus finalised only after it is ensured that an attempt has been made to integrate as many buyer-seller materials management functions as possible. In this system the original indent, duly approved by competent authorities, is shipped back with the items and avoiding the usual documents like purchase orders, materials requisitions, expediting letters and acknowledgements, goods in transit report, etc. The contract is simple, covering only delivery period, price and invoicing procedure. Systems contracting is particularly useful for items with low unit price and high consumption profile and thus relieves the buyers of the routine work. While Systems contract has certain features in common with other purchasing agreements , it is this integration of buyer-seller operations that clearly distinguishes it from other types of contracts. Speculative Buying When purchasing is done purely from the point of view of taking advantage of a speculated rise in price of the commodity it is called Speculative buying. The intent is not to buy for the internal consumption but to resell the commodity at a later date when the prices have gone up and to make a profit by selling. The items may be those that are needed for internal consumption but the quantity shall be much more than the requirement so as to take advantage of the coming price rise. Rate Contracts

Rate contracts are mutual agreements between the buyer and the seller to operate a set of chosen items, during a given period of time, for a fixed price or price variation. Under this system the rates are fixed and at times even the quantity of the selected items. As and when the need arises the buyer issues a Purchase order directly on the basis of the rate chart available on the supplier who in turn supplies the items. The system of rate contract is prevalent in public sector organistions and

government departments. It is common for the suppliers to advertise that they are on rate contract with the DGS & D (Directorate General of Supply & Disposal), for the specific period for the given items. After negotiation, the seller and the buyer agree to the rates of items. Application of rate contract helps organisations cut down the internal administrative lead time as individual firms need not go through the central purchasing departments and can place orders directly with the suppliers. However, suppliers always demand higher prices for prompt delivery, as rate contracts normally stipulate only the rate and not the schedule on which the item is needed. This difficulty has been avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of fixing a minimum quantity is called the running contract and is being practiced by the railways and the DGS&D.

As mentioned above, this system of buying helps an organisation reduce its internal as well as the external lead time, reduces administrative work load as the files don't need to go up and down, helps in building Buyer-supplier relationship as the contract period id usually one year and then there is always a chance of the same players doing the next contract. The system works well normally in a situation where the selected items are routinely consumed. However, there is no compulsion that the demand be uniform over the period of time.

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" One of the main questions for which this , otherwise simple way of buying, is always under the scanner of purchasing ethics is its undue ability to restrict competition and fair play. One of the major roles that any purchaser plays for his firm is in cost reduction arena which is attempted by generating competition among the suppliers. This principle gets a jolt through reciprocity in buying. However, when factors such as quality, after sales service, price etc are equal normally a buyer would like to buy from his customer , if for nothing then at least for having a good working relationship. However, the distinct disadvantages of reciprocal buying outweigh the limited and narrow advantage that a firm may derive out of it. Some of the main disadvantages of reciprocity are not being able to follow the well laid criteria of quality, price and service.

A purchasing executive should not indulge in reciprocity on his initiative when the terms and conditions are not equal with other suppliers. It is often found that less efficient manufacturers and distributors gain by reciprocity what they are unable to gain by price and quality. Since this tends to discourage competition and might lead to higher prices and fewer suppliers, reciprocity should be practiced on a selective basis.

Zero Stock Buying

Zero stock buying refers to buying in a manner that the system ensures that the material is delivered by the seller only when it is required and that no prior inventory of the item is maintained by the buyer. As the competition becomes more intense the need for a lean manufacturing system becomes more focussed. Keeping inventory thus is blocking huge money that is idle for the firm. Thus Zero stock buying is more of an inventory safeguard rather than the normal buying. Normally, under this system the firms try to operate on the basis of zero stock and the supplier holds the stock for these firms. Usually, the firms of the buyer and seller are

close to each other so that the raw material of one is the finished product of another. Alternatively, the system could work well if the seller holds the inventory and if the two parties work in close coordination. However the price per item in this system is slightly higher as the supplier may include the inventory carrying cost in the price. In this system, the buyer need not lock up the capital and so the purchasing routine is reduced. This also significantly reduces obsolescence of inventory, lead time and clerical efforts in paper work. Thus, the seller can devote his marketing efforts to other customers and production scheduling becomes easy. In practice, the buyer is called upon to pay to the supplier only when the material is delivered as per the need. For example, in India , say the Indian Oil Limited maintains its petrol and diesel refilling stations inside the manufacturing premises of many companies. As and when petrol or diesel is required ,say in a lorry, IOL fills that and a coupon is signed by the driver of the lorry. Buyer makes the payment to IOL against that coupon. Zero stock is becoming popular with the concepts such as Just-in-time approach that is similar to it. However, in situations where the supplier has to transport material from one place to the other with a fair distance in between ,this system needs careful handling as one never knows the road or weather conditions. Normally, the system caters to those items that are not very critical to manufacturing. It best suits the situations where the output of one firm is the input of the other firm with both the firms located nearby.

Blanket Orders
Under the Blanket Order system an agreement is done between the buyer and the supplier to provide a required quantity of specified items, over a period of time, usually for one year, at an agreed price. This system minimises the administrative expenses and is useful for 'C' class items for which rigid controls are not required. Deliveries are made depending upon the buyers needs. The system relieves the buyer from routine work, giving him more time for focusing attention on high value items such as

'A' and part of 'B' class.

Blanket Order system requires fewer purchase orders and thus reduces clerical work. It often achieves lower prices through quantity discounts by grouping the requirements. The supplier, under the system, maintains adequate inventory to meet the blanket orders, but he does not incur selling costs, once the negotiations are finalised. RATE CONTRACT What is Rate Contract ? In certain situations , mostly in case of manufacturing units but otherwise also, there are items of regular use for which it is advantageous on commercial as well as technical grounds to have one long term order / contract with one or more than one vendors to meet the recurring requirement. The rate contract is entered into when the total annual requirement of certain items is large but not fixed. Rate contracts may also be entered into for items which are identified as of regular and repetitive consumption. What is normally done is that a rate is fixed ,through tendering and selection process of a vendor and then repeated orders are placed depending on as and when the requirement arise. How it is done ? For entering into rate contracts / long term contracts, the mode of tendering to be followed may be decided as per the nature of the item, the available sources, etc. Thus, rate contract enquiries may be either Open Tender/ Limited Tender/ Single Tender , depending upon the nature of the item. All other conditions applicable to issuing tenders are same, such as while issuing LTE for rate contract, it should be ensured that only reliable and reputed manufacturers/ suppliers/ contractors are contacted or else if the source is not known clearly Open tendering may be resorted to. Items such as Chemical & Reagents, Oil & Lubricants can be procured on Rate contracts basis DGS&D RATE CONTRACT

DGS & D is a Central Purchasing & Quality Assurance Organisation of Govt. of India, Department of Supply, Ministry of Commerce. In the year 1860, the British Govt. evolved a concept of Central buying & set up India Stores Department in London for meeting procurement needs of Govt. of India. Established in 1951 in its present form for rendering procurement services to Central & State Govt. by placing Rate Contracts for common user items & contracts against their ad-hoc demands. Adhoc procurement decentralized in December, 1991. Main function now is to conclude RATE CONTRACTS.

Quality assurance functions continue to remain centralized as before Continues to be the NODAL Agency of Govt. of India for purchase policy & procedure. Govt. Departments/Organisations, who have not built-up their own infrastructure for purchase, can raise their demands on DGS&D for ad-hoc procurement. Handling procurement against several World Bank & Asian Development Bank aided projects for modernisation of Polytechnics & Vocational Training Centres, National Aids Control. National / State Highways, Hydrology Project Services continue to be available to Public Sector Undertaking & Autonomous bodies.

It enters into Rate contracts for a number of items of wide demand by the different ministries and Public Sector Undertakings ( http://www.dgsnd.gov.in/ ). Such demanding agencies are known as Direct Demanding Office under the DGS&D contracts. DGS & D fixes rates and terms and contracts with many firms and for many items yearly and thus the interested buyers, mostly the direct demanding agencies and PSUs can place orders on such firms for meeting their requirements. The advantage is in economy of time s the buyer doesn't have to go through the tendering process which certainly is time consuming ,at times. The DGS & D finalises the rate contracts in the start of a financial year and the rate, terms and conditions usually hold for the entire financial year. Sometimes, the rates do undergo changes with the consents of the sellers.

Selection of Source (Supplier)-------Purchase procedure (contd..)

'Sourcing' or 'Selection of source/s' is a major challenge for any Purchasing manager. Source of supply of required materials is basically selection of a suitable supplier. The Purchasing manager has to ensure , getting the material / service from the right source (one of 5 R). Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is received in the Purchase department ,the concerned dealing person scrutinizes it , in respect of :

The complete specifications including drawings, if required Consumption pattern Stock in hand and dues in Budget availability Availability of all prescribed enclosures and certificates, Estimates Inspection guidelines, if any

On being fully satisfied that the next stage activities i.e. sourcing is now called for, the mode of selection of source , often called mode of tendering is decided. In many firms , if the number of items is not large then the sources are known and on the basis of suppliers record the Purchase order can be placed. However, in government firms where opportunities are supposed to be given to any eligible supplier, tendering is resorted to. Tendering is a process by which a potential source is contacted through a notice called Notice Inviting Tender (NIT). The NIT contains the details of material / service required , the terms and conditions applicable for entering into an agreement with the seller, offers made in response to NIT by the probable seller (Bidder) , for finally reaching the point of agreement between the selected bidder and the buyer. NIT is issued by the buyer and Tender is submitted by the interested bidders /

Vendor Management

Prerequisite to a successful Materials Management is the availability of a sound vendor base which is now rightly acknowledged as an extended arm of the business. One of main reasons of failure of many Supply Chains , in recent years, has been the inability to hold trusted vendors together. Vendor management, therefore, requires careful planning and execution , over a fairly long period of time. Management of Vendors is attempted through the following three ways :

Vendor Registration Vendor Development Vendor Rating Vendor Exploration

Vendor Registration : For ensuring continuous supply of right quality materials required , at the optimum cost, it is essential to have a dependable, competent & competitive vendor base. The Limited Tender Enquiry (LTE) is issued only when reliable manufacturers/ suppliers/ traders/ contractors are known and for this purpose, there is a need to maintain a list of registered vendors. So, Vendors are empanelled for the supply of various category/ subcategory of items. For this purpose, the vendors interested to supply the specific category/sub-category of items are asked to submit the application along with all the documents required to establish their financial & technical capability. The application forms so received are scrutinized and the vendor capacity assessment is carried out through inspection department / technical experts to establish the technical capability of the vendors. These vendors are listed as registered after following up certain processes. Vendor Development : Many process industries like to search the alternative and less costly material as substitution of the currently used costlier materials. The less the procurement cost the more is the profit. Also, there may be situations where the

existing suppliers may not be willing to supply the items on various grounds, thus, necessitating ,looking into different alternatives. An efficient Materials Manager would devote enough time to develop substitutes & sources of supply with a view to reduce cost of input materials and also to have reliable alternative source for foreign sources. Normally, in large manufacturing organisations, a Vendor Development cell (VDC) remains engaged all through for the purpose. When the need to develop a Vendor for an item is felt the requisition for such items is made by concerned department indicating the trial quantity and the potential vendors . Trial Orders are placed on potential vendors and also necessary help is rendered to them to come up to the desired level. Vendor Rating : The vendors also like to be given priority be the purchaser if it constantly improves its selling performance which from a purchaser point of view is mainly its offered price, quality and punctuality in delivery. For Purchaser ,there shall always be a need to continuously monitor and update its registered vendor base so that the organisation continues to have the most competent & competitive vendors in its list of vendors. For this purpose the efforts are made to monitor supply performance of the vendors and rate them objectively. The major factors usually considered for such vendor rating are competitiveness of vendor (price), quality of supply and delivery adherence. Vendor rating may also be used for removing a vendor from registered vendor list and also in the selection of vendors while issuing Limited Tender Enquiry. Vendor Exploration : To have competitive & competent sources of supply, efforts are made to explore suitable vendors from various sources like internet websites, international bulletins, vendors list of other similar manufacturing organisations etc. This is known as vendor exploration and in the competitive environment it is taken as a serious activity.