OPERATIONS MANAGEMENT

Lecture 14

Functions Of Purchasing Department

Purchasing Function: 1. Selection of Best Supplier:
a. b. c. d. Previous experience of the vendor Goodwill in the market regarding quality of product Concessions offered in the form of discount or credit Time period allowed for the supply of goods as per business requirement e. Avoiding the influence of commercial gifts or other incentives on the cost of supply.

Functions Of Purchasing Department

2. Adequate Investment in Stock:
a. b. c. d. e. Keeping in view the interest on loans used The availability of storage facility Price fluctuations in the near future Availability of purchase budgets Following the policy of Economic Order Quantity

3. Provision of adequate storing facilities 4. Providing Internal Control:

a. Establishment of limits like maximum and minimum level. b. Adopting a system of open quotations through press and selection by committee consisting of representatives of purchase, sales, stores and accounts department.

Functions Of Purchasing Department

4. Proper Internal Control: c. Orders to be checked by accounts department also with regard to the budget provision. d. Inspection about the quantity and quality on the receipt of goods in the store department. e. Approval of payments in reconciliation with the inspection report. f. Issue of material through material requisition and any returns of surplus through written intimation. g. Physical checking of available stock at different occasions.

Purchasing Policy
1. Centralized Purchasing Policy: purchasing is handled by one special department. It is a policy whereby all requirements of departments and branches are procured by the head office and then supplied to individual units. Merits of Centralized Purchasing Policy: a. Availability of quantity discounts b. Adequate investment avoiding over stocking for keeping safety margins in different departments c. Better financial control d. Proper quality control e. Transfer of surplus stock from the quota of one department to another

Purchasing Policy
Demerits of Centralized Purchasing Policy: a. Delay and inconvenience in dealing with the purchase of minor and secondary items b. Loss of time in Head Office c. More transportation cost d. Delay in meeting the contingencies/emergency orders e. Discouraging confidence of branch persons

Purchasing Policy
2. Decentralized Purchasing Policy: Individual departments or separate locations handle their own purchasing requirements. Whereby each branch or department is independent for the procurement of it s required number of items without interference from the head office. Merits of Decentralized Purchasing Policy:
a. Awareness of differing local needs b. Better ability to respond to the individual needs c. Ability to save transportation costs where locations are widely scattered

Purchasing Policy
Demerits of Decentralized Purchasing Policy:
a. b. c. d. e. Non-availability of quantity discounts Less financial control Ineffective quality control Chances of excess surplus in many departments or branches More investment tied up in maintaining safety margins

Purchasing Policy
3. i. ii. iii. iv. v. vi. vii. viii. ix. Flexible Purchasing Policy: Whereby efforts are made to confine the features of both centralized and decentralized purchasing policy in the following manner: Deciding purchase budget for each branch or department at the beginning of the year Purchasing allowed within the budget with no provision for deficit and extra demand of funds A list of suppliers to approved by the head office for major and minor items Maximum order limit for one order by individual branch Inspection report sent to the Head office about quantity and quality of the stock receipt Payment to be made by the Head office in the light of inspection report Half yearly reconciliation between the head office and the branches Request the Head office for an extra need Petty cash facility for each branch or department.