purchase management-1 final-1-15.doc

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COURSE - I

PURCHASING MANAGEMENT

SYLLABUS

LESSON -1 : Purchasing functions as a sub system of the integrated Materials

Management -Objectives and scope of Purchasing -Role of Purchase

Managers -Organisation for Purchasing.

LESSON -2 : Concept of Right Quality -Determination and description of quality

-Methods of description.

LESSON -3 : Concept of right source -Source of information of potential

suppliers -Need for evaluation-Different methods of evaluation –

Categorical method -Weight point method -Cost ratio method

-Illustrative problems.LESSON -4 : Concept of right Price -Price analysis –Tendering systems -Different

methods of tendering.

LESSON -5 : Pricing tools -breakeven analysis -Learning curve -Illustrative

Problems.

LESSON -6 : Purchasing under fluctuating prices-optimal strategy-examples.

LESSON -7 : Concept of right time -Buying policies -Hand to mouth buying

-Forward buying -Average cost buying-speculative buying.

LESSON -8 : Buying practices in fluctuating markets –volume timing of

purchasing -Rupees budgeting-concept of Hedging illustrative

examples.

LESSON -9 : Purchasing under uncertainty-Statistical criteria-Illustrative

examples.

LESSON-10 : Creative purchasing-Negotiations in purchasing- purchase budget

-Bill market system -Insurance.

LESSON-11 : Make of buy decisions Influencing factors-use of Breakeven

analysis -Role of Pert in make/buy decisions illustrative problems.

LESSON-12 : Value analysis -Importance as a cost reduction technique-application Practical cases or examples.

LESSON-13 : International purchasing -Import orders - Payment through" LC

and Foreign currency -Foreign exchange regulations.

LESSON-14 : Legal aspects of purchasing-Law of agency-law of contact-Break of

contract -Sale of goods act.

LESSON-15 : Buyer-Seller relationship and ethics –Evaluation of purchasing

performance-Methods of performance appraisal-various indices of


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performance appraisal.


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LESSON –1

PURCHASING FUNCTION

OBJECTIVES

1.To know about materials management

2.To know the scope of Materials management

3.To know the objectives and scope of purchasing

4.To know the Role of purchase manager

5.To know about organizational structure for purchasing

CONTENT

1.0Introduction

1.1 Materials Management –An introduction

1.2 Objectives of Materials management

1.3 Scope of materials management

1.4 Objectives of Purchasing

1.5 Scope of Purchasing

1.6 Role of purchase Manager

1.7 Organisation for Purchasing

1.8 Revision Points

1.9 Intext Questions

1.10Summary

1.11Terminal Exercises

1.12Suggested Reading/Reference Books/Set Books

1.13Key words

1.0 INTRODUCTION

Materials Management was recognised during the World Wars and its utmost

importance was very keenly felt in the defense and military operations. The concepts

of planning, sequencing, programming, production, inspection, storage, transport

and delivery were very carefully thought of and an awareness was created.

Consequent to such a need for proper supply of materials, equipment, spare parts

etc. the total Materials Management was evolved. The Materials Management


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embraces in its field, essentially the material planning till its end use, like the

concept of 'cradle to cremation'. Therefore, in its sphere, material planning,

procurement, inspection. Transport, storage issue and accounting etc. are all

covered.

The Material Management therefore is grouped broadly as under:

Material planning, indenting, budgeting, material proerurement, purchase and

delivery, inspection, storage, preservation, stock verification, material accounting-

numerical and value, bills, payments.

Further for the purpose of studies and in-depth knowledge, it could be

classified as below:

-Material planning and control

-Purchase management

-Stores management

Purchase management is the key area of the materials management. It is

looked up very critically by the management of the Company/Organisation, as it is

this area wherein about 60 to 70% of the company's finances are ploughed. In fact in

many companies, public enterprises, State enterprises. This area is very critically

and closely followed and monitored. The Purchase Management has to face lot of

opposing divergent forces from different internal departments like production, stores

and finance but yet to show good results. Great amount of skill, strategy are needed

in this vital department so that it serves all these internal departments without any

friction or production loss. Again it is this part which faces the suppliers and

expected to solve their problems carefully maintaining good rapport and

relationship. It is also a public relation job. It is so critica1 and sensitive area as it is

always under the close watch of the top management audit section and vigilance

section. Against all the controls and critical review Purchase Management has to

function and fulfill all its end objective in the interest of the Company and achieve

the targets/goals set by the management. Therefore, it can be easily understand as

to how important the purchase management is.

One of the basic functions of any management is to employ its capital efficiently

so that maximum return on it is obtained. Materials Management is a body of

knowledge which helps the Manager of the Company to improve its productivity of

capital by reducing material cost, preventing large amount of capital being locked up

for longer periods, reducing inventory and improving the capital turn over ratio. Lots

of techniques were evolved during Second World War and now those are fully


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followed in the industries. Within the ambit of materials management, the Purchase

Management is one of the basic functions and forms a major part of it. The moment

the purchaser places an order he commits a substantial part of the funds of the

Company thereby working capital and cash flow are to be regulated. The purchase

department is associated with commercial and finance departments, closely tied up

with purchase actions. If purchase commitments are chosen wrongly, the Company

may end up with losses and even turn out to be its burial. Proper policy of the

company on the purchase are to be formulated and then goals/objectives of the

purchase department duly drawn out with reference to the company's end product,

its acceptability in the market. Carefully drawn out procedures, policy and deploying

the right Executive in the purchase department shall prove to be a most successful

organisation.

1.1 MATERIALS MANAGEMENT –AN INTRODUCTIONMaterials management a comparatively new concept at has now been

recognised as a part of the total management of any Company in order to achieve

best results and best return on investments. Terms such as purchasing, storing,

transport, preservation, legalistic supports known in a very elementary and vague

manner have all now being accepted as a major element that plays a key and vital

role in the' integrated Materials Management. Like advanced countries of the west

Japan in the east who have made giant strides in the successful use of material

management techniques, India has also emerged as one to adopt such techniques.

Indian Institute of Materials Management and its functions are similar to AmericanMaterials Management Association and Japan Materials Management Association.

The Material Management in a fast developing country like India is quite unique and

with peculiar problems of its own. Materials are the largest single expenditure in any

Company and the other areas of expenditures are establishment including salaries,

allowances, perks, traveling, contribution to pension fund, leave travel concessions,

bonus, incentive, extratia payments expenditure due to auditing, payments to

statutes etc. While the materials account for 60 to 70% of the sale in value of the

product, the others shall range between 30 to 40% only. It will be very difficult to

make any change or alternatives in the area other than materials as all these involvehuman and industrial relations point which is very sensitive as men speak and

claim their rights while machines/materials do not speak. Under these

circumstances changes/savings are always needed on the material side. A small

change in materials cost can result in large sum of money saved. Materials

Management is therefore considered as a function of prime importance for any

industry and its economy. The importance of materials management very much lies

in the fact that any significant contribution made by the materials manager in


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reducing the cost of the material will go a long way in improving the profitability and

the rate of return on the investment.

Materials management offers a wide scope for reducing costs, savings in foreign

exchange, conserving scarce raw materials. Improving productivity and increasing

profits. It will be much easier to reduce the materials cost than the cost in the other

areas as narrated above as materials cost predominate in the total cost of a product.

1.2 OBJECTIVES OF MATERIALS MANAGEMENT

a. Maintaining continuity and steady uninterrupted production, operations by

ensuring a uniform/ desired flow of materials, spares, consumables,

bought-outs, semi finished products of high/ desired quality.

b. Reducing cost of such materials by use of scientific methods, techniques,

tools etc.

c. Purchasing the right quality, right quantity at a light price from a right

source and at right delivery.

d. Releasing of working capital for productive purposes by efficiently and

effectively controlling the inventory.

e. Savings in foreign exchange through most economic use of imported

purchases and import substitutes by a proper indigenisation.

f. Establishing a good buyer-seller relationship.

g. Keeping the departmental charges as low as possible by high efficiency.

h. Setting high ethical standards.

1.3 SCOPE OF MATERIALS MANAGEMENT

The scope of integrated Materials Management shall indude:

Material planning, budgeting

Purchasing stores, inventory control

Material handling, dispatch, shipping and disposal

Stock verification and accounting

In addition, Materials Management as a function in the total overall

management is responsible for the planning, sourcing. Purchasing, transporting,

handling, staling, controlling, co-ordination with other inter departments in an

efficient manner as to provide the agreed service to the inter departments at a least

cost. It could therefore be grouped broadly as:


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(i) Materials planning and control: Materials planning and control are action

based on sales forecast and production planning. This involves estimating

the individual requirements of parts, preparing material budget, forecasting

in the level of inventories, scheduling the orders, monitoring, follow up and

expediting.

(ii) Purchasing: Includes selection of supply sources, finallisation of terms and

conditions, specification for the purchase, placement of orders, follow up,

maintenance of smooth reactions with the suppliers, payment to suppliers

evaluation and rating of suppliers.

(iii)Stores and inventory control: include receipt, storage, preservation and

issue of materials, accounting, efficient handling, declaring

surplus/unserviceable materials, keeping stores records. Inventory Control

covers all aspects of maxima/minima -Recorder level. ABC analysis,

economic order quantity -setting safety stocks, lead-time analysis and

reporting.

(iv)Materials accounting, finance, budget and Management reports:

Integrated materials management has the advantage of better accountability,

better co-ordination better performance as it has in its fold all the sections,

interfacing of various activities of the materials from planning stage till their

use and end product.

1.4 OBJECTIVES OF PURCHASING

As discussed earlier, purchasing is one of the important and basic functions of

the integrated materials management. It involves many decisions on what to buy,

when to buy, what quantity, what specification, where to buy, how much to buy, how

much to pay and how much to stock. Therefore, it naturally involves many creative

functions such as development of new sources, introducing new materials, import

substitution. In the process, it further involves in variety reduction, standaridsation

and value analysis. Therefore, To meet all the above functions. It needs considerable

expertise not only in skills and negotiating, but also in the mechanics of

competitiveness. A very close study of the materials available, new materials

developed due to advancement of science and technology, research thereon,

economic trend are required and are to be closely watched to take the best

advantage in the purchase. By placing supply/purchase orders, the purchase

department makes a commitment legally to supplier towards accepting the materials

if found technically acceptable and make payment at the agreed rate and at the

terms of payment agreed upon. Therefore, it is a spending function and therefore will

be watched critically as every Rupee saved shall naturally go to add the profit. Being


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such a delicate/sensitive area and job, person of very high caliber, integrity, honesty,

determined to save the Company funds, high quality, character beyond any

temptation shall be entrusted with this function.

Every organisation or company, be it a public sector enterprise, state sector

enterprise, private sector, partnership firm or family concern of any industry such

as agricultural, power, chemicals, textiles, agro, heavy machineries, roadways,

telephones, rubber etc. needs raw materials of some kind/variety or other,

depending upon the plant/factory design and end product, consumables like

building materials, timber, paints and varnishes, oils, lubricants, petrol, hardware,

steel, structurals etc., tools, spare parts as needed for the machineries installed,

supplies and services of others. Services from others are needed as no single

company can make all the products due to its own economies, skills, technologies

etc. Procurement of articles is therefore a basic need for every company and itstimely and scientific action shall meet the objectives of the Company.

The objectives of purchasing can be stated as below:

to maintain continuity of production,

to contribute to the competitiveness of the end product.

to contribute towards higher productivity.

to buy the best material.

to reduce the cost of the end products

to improve the quality of the end product.

to eliminate extra material cost.

to contribute towards standardization, variety reduction.

to increase profit of the company

to maintain good relationship and understanding with the inter

departments like planning, production, sales and finance not sacrificing

the scope and objective and importance of the Purchase department.

to maintain good rapport with the suppliers.

to maintain good and cordial relationship with the statutory /taxation

authorities.

to avoid any dispute, legal action.

to feed back information’s and data on the performance of the

firm/company.


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Therefore, the objective of the purchasing as mentioned above, is rather very

extensive and needs very careful and close approach by the Executives engaged in

the Purchase department so that these objectives are met with.

1.5 SCOPE OF PURCHASING

material specification, quantity required with complete technical data,

drawings in support and complete and correct description.

Purchase requisition -Preparation & Forwarding.

Procurement methods and procedures.

Negotiations if need be.

Technical and commercial analysis of the offers/bids selection of the

supplier.

Placement, of purchase/supply order.

Follow up, expediting, stage inspection approval for shop drawings

quality control during manufacture.

Test reports, insurance, transport arrangements.

Receipt, inspection, preservation, storage.

Rejections, discrepancies.

Bills payments, invoices.

Completion of the supply order, report to management.

The above can be broadly grouped as under:

Pre-purchase activities/systems.

Purchase activities/system.

Post-purchase activities/systems.

All these aspects are discussed in the subsequent paragraphs.

1.5.1 Material PlanningMaterial planning is the basic first step towards purchase. It is generally

carried out by the Engineering department. Depending upon the company's end

product and the forecast by the Sales department production targets are set by the

management. This process is carried out on an annual basis at a joint meeting of

the heads of the various departments like Sales, Production, Planning, Purchase,

Finance and Marketing. On the basis of market studies, demand, competition by

other similar agencies. Sales department fixes its own sales targets. But such a


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target will be discussed jointly by all the heads of various departments specifying

their portion as well as their inputs needed. For example, the production head may

say that machines are of such condition that they cannot deliver beyond certain

quantity per day or per month. Finance department may say that the function

position is such that to meet the sales target envisaged by the Sales department,

they may need to borrow or float shares or over draft from Banks and so on. On the

basis of the viewpoints by various departments in their function, a reasonable target

is fixed which is achievable, marketable and fetch returns and profits.

On the basis of the target fixed materials of various items, spare parts

consumable, tools are prepared based on engineering norms or standards or on the

basis of observed data or earlier experience. These are listed out on the basis of the

codification of materials. Such a list will show details as under: -

Description of the material, total quantity required Quantity on time basis likemonthly, quarterly based on the production schedule and storage position, technical

specification of the material required, supported by drawings, if any.

Such a list is sent to Material Controller, who in turn raises the demand on the

purchase department. While sending the list, The Material Controller takes into

account the stock on hand, goods in transit. The Material Controller converts such a

list into a Purchase requisition to the Purchase department. Upto this activity it can

be said as Pre-purchase.

SALES FORECASTS

PRODUCTIONCAPACITY OF THE

MACHINES

FINANCE

DISCUSSION

STOCK

FUNDS

AVAILABILITY(BUDGET)

TARGETS FIXED

INCOMING

GOODS

MATERIALPLANNING

FINALISED ITEM QTYMATERIALPLANNING


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1.5.2 Make/Buy Decision -Economies

On the basis of the material planning any remanufacturing company has to

decide one of the followings based on various factors:

Whether the goods are to be purchased from the open market.

Whether some parts or components can be purchased from the open

market and the balance manufactured in the factory or plant of its own.

Whether the goods are to be manufactured in the factory or plant itself

completely.

However, it may be extremely impossible in real practice to manufacture the

goods completely and totally in its own factory/plant. There are many issues

involved in the decision to make or buy. Some firms, with small addition ofmachinery and capital investment can make some parts/components and in many

cases, it cannot produce them without additional installation of equipment at an

expensive capital investment. Then it calls for investment analysis.

(i) Factors in favour of making it in the plant itself

Less cost than purchasing it.

Additional/ spare capacity of the plant available.

Skill/Labour available to spare.

Particular technical process know-how.

Close quality control, quantity needs.

Design secrecy which cannot be parted with.

(ii) Factors in favour of buying it from market.

Less cost than manufacturing it in the plant.

A Ready availability in the market, thereby reduction in procurement

lead-time.

Special skill and technical' know-how available only with the suppliers.

Quantity may be small and it may not be economical to manufacture it.

Reliable and dependable sources are available.

Economic consideration shall be made in respect of cost of each element

in the process and best decision to be taken either to buy or make it.


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1.5.3 Purchase Activities

Each company management shall prepare a purchase manual which shall

inscribe in detail the procedure to be followed in respect of purchase of

consumables, spare parts, materials, raw materials, capital goods, replacements etc.

The procedure shall also lay down inventory norms, control measures, delegation of


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powers, tendering methods or evaluation process, procedure and selection of the

source, placement of order, follow up, transport, taxes & duties, receipt of goods,

inspection, acceptance and payments. It will also contain the general conditions

under which the purchases are to be made, in respect of transport Taxes, duties,

insurance etc. These terms and conditions shall be generally followed by the

Purchase department. This Purchase Manual shall be the guidelines on the

purchases by the management.

Generally purchases of any item are affected on the basis of anyone of the

following:

i. Global Tender or Internatioanl Competitive Bidding (ICB)

ii. Advertised tender or Domestic

iii. Competitive Bidding (DCB)

iv. Limited Tender Enquiry (LTE)

v. Single Tender

vi. DGS & D. Rate Contract

vii. Repeat Order

viii. Negotiation

ix. Local purchase

The mode of tender enquiry depends upon the item to be procured, its

estimated value, quantity, time at which it is required, availability in the market etc.

However, in any method adopted, there is necessity to have a detailed

supply/purchase order issued.

(i) Global Tender or International Competitive Bidding is resorted to, in the

case of items/materials not indigenously available, but available abroad

only and therefore to be imported. Besides terms and condition currency

in which payment will be made, any credit availability, foreign exchange

release, import-export policy public notification, customs duties have to be

spelt out in the enquiry. Local taxes, shipping arrangements, insurer'sname, Letter of Credit, price basis with suitable formula for price variation

to take care of escalation have to be clearly indicated in the tender enquiry.

(ii) Press/Advertised tender is resorted to generally if the value, quality,

sources available are more and to draw competition by many bidders

participating in the tender. The Press Tender Enquiry shall consist of

technical specification drawings, quantity required, and delivery schedule,

Taxes & duties payable, payment terms and its conditions, guarantee on


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performance and time, liquidated damages clause if any delay is caused,

Time extension, force majeure, excise duties, sales tax, octroi and such

other duties imposed from time to time by Governments transport

methods, conditions, payment, insurance aspects, risks to be covered and

payment for such charges as premium. The enquiry shall also include

inspection methods and procedure and quality standards. Both in the case

of Global Tender as well as Press Tender, press advertisement shall be

issued broadly indicating the scope of work, quantity to be supplied,

tender schedules availability etc. price due date of submission of the offers,

date and time of opening of the offers/bids. Generally these tender

documents are priced. In the case of Global Tender inviting competitive

offers from different countries abroad, it is a condition that the tender

documents are made available in the Embassy of the country in India and

Indian Embassy in other countries to enable wide publicity. Sufficient time

must also be given to prepare the tender proposals and bid submission.

(iii)Limited Tender Enquiry is resorted to where the quantity of the material

required is not considerable and is needed urgently. The tender documents

as per press tender needs are prepared and sent to the list of

suppliers/vendors in the approved list. The time for submission and

opening of the tenders can be kept less as this type of tendering is resorted

to only standard products. For this method, there should be a list of

suppliers whose performance rating has been assessed and such supplierslisted for that item.

(iv)Single Tender enquiry is resorted to in the case of items which are

proprietary nature and there is only one source available for this item. For

example for Petrol, Diesel, Steel etc. generally the tender enquiry shall

contain all the clauses. Terms and conditions except Liquidated Damages

clause.

(v) D.G.S. & D (Director General of Supplies & Disposals) concludes contracts

for common items like furniture, tools, A.C. units, refrigerators, fans,certain electrical goods and rates/prices and payment terms are fixed up

on an annual basis. A rate contract for a particular item is thus fixed up

and published. Such a publication contains the items, Sources and

rate/price. On the basis of this rate contract. Supply order can be placed

for the item coming under the purview of rate contract. This method will

reduce the lead time for purchase and purchase can be done very quickly

as much part of the work like tender enquiry evaluation selection of the


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suppliers sources are already prepared and kept ready under Rate

Contract (RC).

(vi)Repeat Order is resorted to in case there is already a supply order which is

under execution and suddenly a demand is received for the same item. Insuch cases in the same current order the quantity is increased by a Repeat

Order while all other terms and conditions including prices are same.

Except the quantity. This type will help and vasten the supply.

(vii)Negotiations: For very urgent requirements for any item, a known, reliable

and dependable firm is called for negotiations on price, terms and

conditions and supply order issued after due agreement on all the issues.

Care must be exercised in selecting the firm in this case to avoid any

failure.

(viii)Local PurchaseFor emergency needs, purchases are made locally in the

market without resorting to any tendering procedure, this will be on the

basis of 'cash and carry' but involves risk as rates are not obtained on

competitive basis and no guarantees are made.

Under any system of tendering, the bids/offers submitted in due stipulated

time are opened in the presence of those bidders or their representatives and

important technical and commercial parameters are openly read out. Care should be

taken to see that no discussions are encouraged, as it is not 'negotiation' but only

'tender opening', Proper records and documentations are carried out so that any bidder raises any issue, it can be duly answered.

A Tender Committee will examine all the offers, facts, technical suitability and

evaluate them taking into account all costs involved in getting the material to the

stores of the firm, Generally lowest technically suitable offer is recommended for

purchase and in few cases it could be negotiated also, On the basis of the Tender

Committee's recommendations and with the approval of the competent authority

delegated with such powers, supply /purchase order is placed.

1.5.4 Supply/ Purchase Order

A supply/purchase order is prepared on the basis of tender

specifications/documents, offers, points negotiated and agreed upon and on the

basis of the agreed tends and conditions including price. It is a very important

document as it makes lot of commitments on both sides, namely

supplier/purchaser. The obligations on both the purchaser and supplier are

mentioned therein and it is a legal document of commitments agreed by both the

parties. All the terms and conditions mentioned in the supply order shall be clear


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and without any ambiguity and shall not lead to different interpretations. It shall

contain:

Name and address of the buyer.

Name and address of the supplier.

Description of the item to be supplied.

Quantity to be supplied.

Place per unit.

Payment.

Delivery -rate of delivery -terms like F.O.R. Ex.Works etc.

Time schedule.

Time guaranteed by way of liquidated damages.

Warranty -period and condition.

Excise duty.

Sales Tax.

Octroi and other taxes. If any.

Inspection and acceptance.

Insurance during transit.

Force Majored.

Settlement of disputes.

Termination.

In addition to the above clauses, in the case of an order for imported item

against a firm abroad, the following shall also be included.

Currency of payment.

Import license details.

Letter of Credit.

Marine insurance.

Marine transit.

Customs duties

Port handling


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Such a detailed supply order shall be prepared and get vetted by legal' and

finance departments before release. After release, it must be get signed in one copy

by a representative who has a power' of attorney issued by the management.

Sometimes, to save time, a Letter of Intent is issued so that manufacture can be

started as in many cases it takes sometime to prepare the order and release it. An

order copy is sent to finance, stores and the user department for follow up action in

their respective areas.

Many companies issue supply orders on Ex.Works'basis to avoid Excise Duty on

transport charges and insurance charges payable by the buyer. The buyer enters

into a contract for transport of goods through bank approved transport carrier.

Therefore, the buyer arranges the transport through such transport carrier and pays

it directly. In the case of insurance many companies take an Open Policy on annual

basis and make payment direct to insurance department.

In some cases, even the inspection, expediting, follow up to the receipt of

materials are attended to by the Purchase Executive. It depends upon the policy of

the company. But it is a post-purchase activity and it involves co-ordination with

transport, stores and accounts departments.

1.6 ROLE OF PURCHASE MANAGER

The role of the Purchase Manager in any Company, Public or Private or State

sector, Small scale industry, partnership concern or any is becoming more and more

difficult and complex due to the factor, he has to satisfy various departmentsinternally and statutory authorities, suppliers, transport agencies, insurance

companies, banking sector and the like. The role is more complex as each

department looks upon its needs only and is not able to appreciate the problems

faced by the purchase executive. Scarcity of the goods in the market, uncertainty in

the supply of raw materials; frequent changes in the taxes and duties, acts of Good,

acts of Governments, power failure, transport problems industrial relationship, low

productivity etc. have been conquered with and goods procured. There are many

opposing forces. Above all, queries/audit, objections have to be answered.

Purchase Manager is a most key person in the company as it is he who

commits on behalf of the company to outside forms. Since he makes a

financial commitment he has a very great responsibility. He has to interact

with the production department so that the production needs are met with in

respect of quality and quantity by timely supplies. He has to interact with the

finance department in respect of budget allocation, payment of bills. He has

to, interact with the stores department so that incoming goods are properly

organised and inventory is held at the desired level.


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The Purchase Manager shall maintain good rapport with the suppliers. He is,

to some extent, Public Relation Officer (PRO). He must visit the factories as

often as possible to acquaint himself of the development taken place.

Sometimes, reciprocal buying is also adopted. That means against what is

sold, some other items required are purchased. Good co-operation,

understanding can help both the buyer and seller.

The Purchase Manager has to keep a close watch on the duties and taxes and

is expected to meet the Excise authorities and sales tax personnel. A close co-

ordination and relationship is to be maintained with the Customs authorities

and banks and insurance departments and shipping department.

Under all these conditions the Purchase Manager has to ensure quality.

Goods are supplied in the required quantity at the required time and a

competitive price and from a good source. To meet this, he has to develop

additional sources also. It could be on trial order basis, additional sources

can be developed.

1. ORGANISATION FOR PURCHASING

An organisation shall be established or created to meet the end objective or

goals set by the company. Various major functions needed to perform and

achieve the end objective are to be clearly set out and defined. Generally, the

functions involved in any production of a product shall be production,

materials, personnel, sales and marketing, finance and audit. Therefore,these functional groups are to be headed by a senior executive and duly

supported by staff down below. A system of relationship between functions is

also to be defined. Work to be carried out under each function is to be drawn

out clearly. Then it should be assigned to individuals. Care should be taken

to see that clear line of authority adequate delegation of powers,

responsibility and span of control are established.

One of the functions is Materials Management. It embraces all activities like

'cradle to cremation' viz. Material planning to its use. The purchase is one ofthe major activity in the materials management function. In some big

organisations, it is Central Purchase organization and in few cases it is unit

purchases. It very much depends upon the location of the factory and

corporate office. If factories are located at different places like BHEL with

Corporate Office at New Delhi, it can have unit purchase organisation.

A purchase organisation is to be headed by a Purchase Manager and assisted

by Assistant Purchase Managers and Purchase executives. The Purchase


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Manager will be reporting to the Chief Materials Manager. A typical

organisation shall be as under:

1.! REVISION POINTS

Scope of Materials Management

Objectives and Scope of Purchasing

Purchasing organisation

1." INTE#T $UESTIONS

1. Discuss the scope for an integrated Materials Management.

2. Purchase management is a key function in a Company -Discuss.

3. Describe in detail, the points in favour and against 'make or buy'

decision.

4. Explain the relationship between the, Purchase Manager and other Inter

departments Company.

5. Discuss the scope of purchasing in materials management.

6. Explain the functions of Materials Management

PURCHASE MANAGER

PRIVATE

SECRETARY

APM APM APM APM APM

RAW

MATERIALS

&

CONSUMABLES

PLANT AND

MACHINERY

SPARES AND

TOOLS

OIL

LUBRICANTS

IRON AND

STEEL &BEARINGS

CO-ORDINATION

MONITORING &

REPORTING

COMPUTER


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7. Give the organizational Structure of a purchase department and explain

their functions.

1.10 SUMMARY

In this lesson, concept of materials management and their scope are given in

detail.

Scope and objective of purchasing, role of purchase manager and purchasing

organization are explained in detail.

1.11 TERMINAL E#ERCISE

1. Define concept of materials management?

2. Define purchasing?

3. Explain the role of purchase manager

4. Draw a flow chart for purchase organization.1.12 REFERENCE BOO%&SUGGESTED READING&SET BOO%S

1. P. Gopalakrishnan, “Purchasing and materials Management” Tata

Mc Graw-Hill, 2000.

2. S.C. Sharma, “ Materials management and Materials Handling” Khanna,

3, 2000.

1.13 %EY 'ORDS(

Materials Management, purchasing, material Planning, Make-or-Buy

Decision, Purchase activities, Tender, Purchase order.


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LESSON-2

CONCEPT OF RIGHT $UALITY

OBJECTIVES

1. To review the concept of quality

2. To understand the basic considerations in the purchasing of the right

quality of material.

3. To know about description of Materials by specification

4. To know the advantages and Disadvantages of specification.

CONTENT

2.0. Introduction

2.1. Concept of Quality

2.2. Right Quality

2.3. Determination and Description of Quality

2.4. Describing the Quality

2.5. Advantages and Disadvantages of specifications

2.6. Principle Disadvantages of specification Buying

2.7. Responsibility for Quality control

2.8. Determining quality-inspection

2.9. Revision Points

2.10. Intext Questions

2.11. Summary

2.12. Terminal Exercises

2.13. Suggested reading/reference books/set books

2.14. Key words

2.0 INTRODUCTION

In the Industry, today, there are number of products, end products, semi-finished products developed which are needed for various uses and functions. The

products are manufactured depending upon the use from different raw materials,

additives, different process technology adopted. The products are used in the

various sectors like domestic appliances, agricultural sector, mining, chemical

industry, power generation, utilities, heavy machineries, railways, ship building,

aviation sector, automobile industry, office equipment tele communication sector,

transport and handling sector and so on. In each of this sector, different end


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functions are called upon and the product has to meet and match with. These

products are to withstand dynamic loading, stress and strain, temperature,

pressure, impact, shocks and other engineering characteristics. Failure in anyone

area by any product/ component may end up in a break down which will cause loss

of production and affect the profits. But a quality product shall function and

perform well and shall not cause a failure and help the industry in its operation.

Quality is a function of use and shall meet the technical specification and

requirement.

The need for the quality in any product need not be emphasized. It is the

quality that makes the product to perform very well to the desired level and such

products of quality will have a great demand in the market. Once the quality of a

product is proven. The Company's name is well established in the market and many

time people demand that product only. To produce such quality products andmaintain its quality, many manufacturing firm have created a quality control

department. The Quality Control department functions independently and has full

authority and powers. In recent management principles, even a Quality Circle is

created. This Quality Circle consists of executives from different departments like

production planning, quality control and inspection. The executives meet frequently

and discuss the production methods. And methodology, standards, order, quality

control checks and measures and inspection procedure to ensure quality. Areas

where there is weakness and improvement called for, remedial measures are

suggested and carried out.2.1 CONCEPT OF $UALITY

Towards the manufacture of any product, Planning and Engineering

departments prepare design and drawings. The department also prepares

materials/components required for the manufacture of the product and draws out

technical specification for these items. These include chemical and physical

properties and other parameters. These details shall act as a guidance in deciding

and procuring these materials/components. To produce the good quality material

and components of right quality as per technical and engineering specification are to

be procured and used. Also the correct process of manufacturing is to be adopted so

that quality can be maintained in the end product. The machines installed in the

manufacture, consumables used in the manufacture, tools, jigs, vices etc., used in

the manufacture shall also be of good quality so that the end product and storage

and preservation of the product certain quality standards are to be adhered to, so

that they are kept in the quality as manufactured without any deterioration. The

Supervisors, Foremen, Skilled workers engaged in the manufacture of the product


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shall also of quality conscious people and shall not sacrifice or compromise the

quality in production at any cost.

The systematic control of quality and development of standards had their

inception with the industrial revolution and the production technique thataccompanied it. In earlier days, such quality control was relatively a simple matter

as the variety of products were not there and many usage under different climate

were not envisaged. For example, in the surface transport, we had only bullock carts

or jutkas. These were relatively, small with few parts and were not used for high

speeds with heavy loads. There was also not much risk/damages caused in case of

failure. But today we see lot of buses, lorries, two-wheelers, tractors, etc. moving on

the road at a high speed carrying heavy load of passengers/cargo. In case of any

accident due to any failure of any part, the risk involved is considerable and the

damage to life and property are unexplainable. In these cases. Therefore all theparts/components shall be of quality product to ensure non-failure at all. Due to

technological revolution all over the world, the old conventional methods are getting

changed to machine methods and also due to the heavy demand. Therefore it means

clear and precise description of products to be manufactured and this led to the use

of samples, brands and specifications. Such description is made in the form of

standard which is an acceptable level of quality design. Standards are evolved as a

result of experience and are widely published and are readily available to any buyer.

Such standards are prepared and Indian Standards Institute (ISI) publishes them.

2.2 RIGHT $UALITY

The design and engineering department generally specifies the quality of the

material needed for the manufacture of the product. This quality will always have

some tolerances and allowances. Such specifications of the quality means that the

quality should be just enough and right to meet the specification requirements. It

shall be neither too high or too low. Such a quality standard is called the 'right

quality'. It is the role of the Purchase Manger to bring it to the notice of the user

department the different qualities available. Wherever possible, the user department

can carryout the shop tests or on-line tests to determine the right quality.

Specification can be really worked out and drawn on the basis of these tests. For

example, where a Galvanised Iron bolts will meet the technical function and

specification requirements, there is no need to use Stainless Steel bolts. When the

purpose can be achieved/ensured by a cardboard case, there is no need to provide a

plastic box or wooden box. Therefore, right quality is the one which meets the

technical specification and can function well and should just right one either too

high or too low. Such a right quality product will definitely be of reasonable and just

price, which will ultimately control the cost, and unit price of the product.


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2.3 DETERMINATIONS AND DESCRIPTION OF $UALITY

The following are the basic considerations in the purchasing of the right quality

of material. They are

Determination of the quality.

Defining, the properties of the same clearly correctly and

Controlling it through certain methods.

Out of these above, the 'determination of quality' is considered the relationship

to technical suitability. Physical availability and economic considerations. The other

two viz. controlling it through certain method are purely procedural.

2.3.1 Determination of Quality

Quality of any material, spare parts, components, consumables etc. have a

very direct relationship to the function to which it is intended. Quality can therefore

be said in terms of the ultimate functions, the material has to perform and must be

procured at the least cost so that the price of the end product will be competitive.

The purchase department is particularly is in an advantageous position to

contribute its share to the profits of company, at it brings out quality material at a

least cost. As it is well known that materials constitute about 60-70% of the cost of

the end product and savings is only possible in the purchase as other costs are less

besides touches the human demand. The engineering and technical departments are

mainly concerned with the technical aspects, specifications, parameters and the

user department is mainly concerned with its suitability. The Purchase department's

concern is only that the technical suitability of the material is ensured. The

Purchaser becomes concerned about the price on the technically suitable product

only. There is no use in selecting a material which is less costly but not technically

suitable. To some extent, therefore, the required quality determines the price. Since

the quality is foremost, even before the price, the purchase department can then

anlayse the availability source etc. Purchase department cannot question the

requirement and the quality but it is prerogative of the user and engineering

department. It is those area of responsibility and domain. Purchase department has

a secondary role in the matter of quality. For the required function or performance

the engineering department will examine the various products and choose the best

suited only to meet the requirement and function and quality so determined shall be

the one to be purchased. Purchase department is to ensure the availability of such

quality material in a steady and continuous manner without any interruption and

on competitive basis.


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available as per ISI. So, there may not be any difficulty, in meeting the quality

standards. But in practice, there could be no manufacturer at all for a particular

product of a particular design/ specification. But in the market alternative may be

available but it will also meet the end function designed. In such cases, the quality

requirements may be suitably changed with the materials available in the market.

This would be a practical and realistic approach. The other alternative would be to

develop a source for the item so designed and desirable. Where quality standards

cannot be altered, but has to be maintained, then a new source has to be developed.

Many times, it is achieved by a trial order. In few cases, the modifications may not be

acceptable at all. Many companies, through their Sales and Marketing department

personnel, collect data of the available material in the collected data and

information’s to the design department and even Production planning department.

The departments may then take care on the design, the available material and fit it

into the designs. This way will be very easy to locate the source for a material of a

particular specification which is really needed.

2.3.4 Development of New Sources

If it becomes necessary that material quality standards cannot be altered and

the material of the same specification is needed and not available in the market.

Then the Purchase department has to procure the material only; a Tender enquiry

has to be issued for this material with specification and special condition to be

carried out. Since it is a new source for this material, there shall be enough

encouragement and motivation to undertake the job. In many cases certain amount

of incentive is also considered like supply of shop drawings, parting with the know-

how etc. exclusively for this purpose, deletion of penalty clause and advance

payment etc. Many times a clause is added that once the product is found

technically suitable, a long-term contract will be reached between the buyer and

seller for this item. Such a clause will ensure the prospective seller to evince more

interest in developing the product as he may get a long-term business. In the same

way, Even alternate materials can be found, such suitable substitute materials are

put to tests and accepted. Costs also has a role to play. Cost/price being one of the

most vital factors, the purchase department has a large role to play. Once a new

source" and the alternate materials are found and acceptable, and then they can be

put in the list of approved suppliers

2.3.5 Vendor Co-operation

Vendors’ co-operation is very essential in the purchase of a product/

machinery/ spare parts etc. In the case of purchase order for the manufacture of

major equipment like Boilers, Turbines, Transformers, Condensers, Reactors,

SUPPLIER

SUPPLY ORDER-QUALITY REQUIREMENTS

PROCESS OFMANUFACTURE

C R E D I B I L I T Y

G O O D M

A R K E T

& R E T U R N

RIGHTQUALITY

RAW

MATERIAL

RIGHTTECH-

NOLOGY

RIGHTSKILLED

PERSONAL

INSPECTIONDURING

MANU-

FACTURE

QUALITYSEND

PRODUCT

INSPECTION

ACCEPTANCE


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Compressors, Handling equipment Mining machineries like dozers, dumpers, loader,

excavators etc. the supplier/vendor may suggest alternate material or even points

which may be technically suitable and acceptable. It may not also have any effect on

the output/end function. Perhaps, there will be cost reduction. It has to be accepted

by the purchaser. Such an adjustment may' create a healthy trend and tie up in

buyer-seller relationship.

Quality Control and its Benefits


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(a) Standardization: Rightly it has been said that principle of scientific

management control lies in planning standardization. Standards formulated at the

national and the company level generally defines the quality clearly and often

prescribes the means to evaluate the specified quality. When standardization at the

national level is firmly developed and a large number of standards have been

formulated by a national body or bodies, these standards lead to the specification of

quality, reduction in sizes and varieties, interchangeability of parts and products

and efficient utilization of materials. Standardization thus is introduced here in

order to emphasize its role in relation to total materials costs. When a firm's

requirements of materials are highly standardized, it is more likely that it will get the

suitable materials readily available in the market at reasonable prices. Thus the

need for non-standard materials and justifying higher prices to be paid for them

should never be assumed and all such requests should always be verified andchallenged by the, Purchasing Department.

(b) Cost factors: Either individually or collectively, technical and economic

considerations highly influence quality. In terms of costs, economic considerations

are seldom accorded the same analysis as considerations that govern technical

suitability and as such, unnecessarily profits are sacrificed as a result. Value

analysis is probably one of the most powerful cost-saving techniques which focus

attention on cost side of the quality problem. Price paid for materials cost payments.

Transportation, receiving delivery, materials handling etc. (including costs of storage,

upkeep, maintenance etc.) are also included in the costs of materials used, in

production. Incremental costs arising out of the use of certain materials in the

manufacturing process are also included. There are also some materials which are

easier to work than others, which permit easy machining and save men and

machine hours, and thus reduce costs. Therefore, the primary aim of the purchase

department should be to strive constantly for integration of the technical and

economic factors of quality.

2.4 DESCRIBING THE $UALITY

Describing the quality is more difficult manner as that a vendor an easilyunderstand the buyer’s quality needs. Industrial purchasing is entirely different

from personal buying. Often routine personal discussion is rendered impossible by

virtue of vendors being away at some distant place from the purchaser's place of

business. As such personal negotiation is often out of question, while at the same

time the vendor must understand the buyer's needs from a written statement on the

purchase order, which describes the quality. Under such circumstances, the

purchase order must describe in writing all the quality characteristics the vendors


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may like to know about the desired item. The main purpose of the quality.

Description is three-fold: (1) to describe the quality of the item or items in as clear

tenns as possible, (2) to let the vendor know all the factors that he may want to know

about the item ordered, and later on (3) permitting inspection by specified

measurements or quality test which can verify that the material or materials

received are infact the materials described on the purchase order and conform to the

quality requirements of the vendor.

The description may take a variety of form or a combination of forms, but the

general practice is to describe the quality of the purchase order by the following

methods:

1.By brand name or trade name in case of branded products.

2.By commercial standards in case of standardized products, components or

materials.

3.By specification: (a) by specifying physical or chemical characteristics, (b) by

specifying performance characteristics and (c) by specifying materials and

methods of manufacture.

4.By using blueprints of engineering drawings followed by descriptions.

5.By market grades and samples in case of graded commodities.

However, in many cases one of the above methods is quite inadequate to

describe the quality properly and clearly. In such cases, a combination of two or

more of the above methods is used. Each of these, methods is discussed briefly as

below:

2.4.1 B)*+, N*- /) T)*, N*-

A manufacturer in deciding to market a product-market generally decides to

brand it. A brand name or trade name is put on the product in order to identify its

origin, which ultimately creates goodwill for the manufacturer. By branding it, he

protects it against substitutes, gains repeat sales, maintains, price-stability and

simply competes with other manufacturers in the market. By repeated

advertisements and sales promotional efforts, he differentiates his product fromothers in the market and the buyer also puts reliance upon the inequity and

reputation of the manufacturer. There are circumstances under which such product

differentiation is not only desirable, but also necessary for various reasons.

Brand or trade names are easiest to describe on a purchase order. But the

buyer is confronted with questions. How to select on the basis of a brand and why?

Only testing can provide an answer. The original selection of a brand may be based


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on a specific test or preliminary trial' and it may not be necessary to put it to

periodic test.

2.4.2 C/--)* S*+,*),

A commercial standard is a complete quality description of the standards item.

Such' description includes quality characteristics, workmanship, methods of testing

both for materials and workmanship. Repeated necessity for the same materials

leads the industry and government to develop commercial standards which may be

said to be the keystone of the mass-production and mass-consumption industrial

system. Materials ordered by standardized specifications have certain definite

advantages. There is no room for doubt about what is wanted. Either on the part of

the seller or the buyer and the materials is readily available. Standard specifications

are developed carefully on the basis of study and experience and substantial effort is

expanded to promote them. More on the outer hand, these standard specificationsare so broad that some of them may be unsuitable to the requirements of particular

users.

However, they generally contribute to the simplification of design. Purchase

procedures and lead to cost-reduction and inventory control in a variety of ways.

2.4.3 Description of Materials by Specifications

(a) Physical or Chemical Characteristics Description of materials on the basis

of specifications is one of the best-known methods employed, by industry. While

preparing its own specification a manufacturer should however make it as close as

industry standard as possible. Describing quality by physical or chemical

characteristics, however, involves some risk, as for example, by specifying the

tolerances or exact chemical specification the buyer assumes complete responsibility

for the performance of the material. The cost of inspection may also be high, as the

very nature of the purchased materials under such descriptive methods needs

special inspection efforts.

(b) Performance Characteristics Performance characteristics method is

employed when it is thought desirable to throw the whole responsibility back on the

seller. It is result and use oriented method, and this enables the supplier to take

advantage of the latest technological developments. But at the same time, it is highly

conditioned by securing a right supplier who can assure satisfactory performance

and the price paid for this may prove to be very high.

As such, performance specification method is used only for complex and

complicated items which require reliable performance over time. The buyer secures

assurance of actually obtaining the desired performance and if the vendor is

competent enough he can assures inclusion of all new developments.


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(c) Materials and method of manufacture This type includes both materials

used and method of manufacture and is generally applied when special

requirements exist and the buyer is willing to assume the responsibility for product

performance. There are two distinct advantages; one is securing of competitive bids

and since the item is generally a non-standard one. The supplier cannot charge

arbitrary -price if the costs of materials and manufacture are known to the buyer.

2.4.4 Specifications

Specifications are a detailed description or listing of the characteristics of an

item. Compiling specifications often requires considerable time and may prove costly

by comparison with other methods of communicating to the supplier what is

desired. Nevertheless, buying by specifications is one of the commonest methods.

Since a great majority of business purchases require its use.

(a) Dimensional and Material Specifications:Specifications may take the

form of a listing of the physical or chemical properties desired in the product. These

are sometimes called dimensional specifications because they state the desired

properties in measurable terms. Such commodities as metallic raw materials, oil,

and paint are examples of items for which this type of specifications are frequently

used. Conformity to dimensional and material specifications can usually be checked

quite simply.

Another form of specification is the minute prescribing of both material and

method of manufacture. This method is sometimes used in military purchasing, butin industry it is rarely used except when unique requirements exist. Ordinarily, if the

vendor knows the use of the 'good, he is in better position than the buyer to

determine what materials and methods of manufacture are necessary. The buyer

assumes a heavy responsibility under this procedure, since he- has no recourse if

the products are unsatisfactory, so long as his specifications were met by the

supplier. The buyer incurs the methods of production with which he may not be

familiar. Also, costly inspection at the vendor's plant may be involved.

(b) Performance SpecificationSpecifications may detail the performance oruse of the purchased item. Here the purchaser indicates his interest in the service

that the product will give, and he tests the end result rather than the product. If the

vendor accepts the specifications, the responsibility for a satisfactory product is' his.

For example, a part may be specified as capable of being bent to a 90-degree angle

and subjected to an 80-degree temperature. These are the least difficult

specifications to formulate. The method is especially suitable for purchase of

machines or tools about which the purchaser has little technical knowledge. It leaves


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the seller free of restrictive prescriptions of materials and processes, and he may

take advantage of the most up-to-date knowledge to provide the best product at the

lowest cost. Satisfactory use of performance specifications requires securing reliable

suppliers and developing competition. Otherwise the seller's responsibility for results

may cause him to suggest better but more expensive item than is needed.

2.4.5 Blueprints

Use of the blueprint, or dimension sheet is an important corollary of many

specifications. The blueprint usually accompanies some descriptive text in the

purchase order. It is the most precise and probably the most accurate of all forms of

description, and is applicable where close tolerances or a high degree of mechanical

perfection is required. Its use is expensive, not only because of the cost of the

blueprint, but also because it usually describes items of special design that is costly

to manufacture. However, for items such as casting, forgings: tools and fixtures,

purchings, and machine parts, which call for extreme accuracy, it is the most

feasible method of description. Blueprints also provide the basis for an accurate

check on compliance with specifications by the inspection department when

material is received.

It is important to remember that an inspector will be governed only by the

purchase order and any drawing or specifications indicated thereon. He may only

inspect to see that the items comply with the drawing and the written specifications.

Therefore, any verbal agreements that have beep made may become a source ofdifficulty when a shipment is received, and care should be taken to make sure that

all special conditions and agreements are made a part of the purchase order.

Specifications should be revised as conditions change. In one instance, in the

purchase of steel, a situation developed in which a purchasing agent and supplier

informally agreed that steel supplied under certain specifications could vary from

the specifications. The specifications called for a thickness tolerance of±0.003. The

informal agreement was that the supplier would aim at this tolerance but that

actual shipments might occasionally vary up to± 0.005. The agreement worked

successfully for 8 years, but when a new buyer was apprised of the agreement by the

supplier, he was unable to get the using department to accept the terms of the

informal agreement. After considerable time however, the specifications were

changed because adherence to the stated requirements threatened to raise the cost

so much that the company would have been unable to compete in the sale of the

final product. All this could have been avoided if the informal agreement had been

expressed in revised specifications


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2.4.6 Market Grade

Another method of describing quality is by the use of market grades. This

method is largely confined to primary materials, such as cotton, wheat, and lumber.

The market grade indicates the relative purity, lack of defects, or differences in

quality of a particular class or kind of material. For example, The purchaser knows

that, when "No.1 Pine" is the specification, he will get lumber that differs from other

grades in that it has fewer knots and imperfections.

This type of grading must be suitable to the purchaser's need to be useful to

him. Difference within a single grade of wheat make it necessary for millers to buy

only after examining a sample of the wheat itself. Similarly cotton-exchange

contracts, which permit delivery of various grades of cotton with subsequent

adjustment of price according to a prescribed scale of premiums and discounts, may

suit the cotton merchant, but not a textile manufacturer. The accuracy of the

grading, confidence in the ability and honesty of those responsible for grading. And

the ability to ascertain differences in grade by inspection are important factors in

determining the suitability of this method of purchase description.

2.4.7 Samples

Where none of the preceding methods of defining quality satisfy, the purchaser

may submit a sample of the item desired. Difficulties may arise if the sample is

subject to physical or chemical change. However, for replacement of mechanical

parts, where age or use has obliterated the identification marks, it may be the onlyfeasible way of assuring receipt of the correct item.

In one instance, difficulties in the proper shape and fit of a brake band for a

tractor were overcome by attaching a sample brake drum to a metal template

indicating the proper placer lent of the band. By using this pattern as a guide the

vendor was able to provide the length, shape, and conformance needed.

A large proportion of commercial orders employ a combination, of the venous

methods of describing quality. The method must be adapted to the product that a

company makes and to the importance of quality in the item being purchased.

2.5 ADVANTAGES AND DISADVANTAGES OF SPECIFICATIONS

The following points summarize the primary advantages and disadvantages of

purchasing according to specifications.

The main advantages of specification buying are:

1. Drawing up the specifications requires careful thought and a review of

the buyer's needs. This frequently results in a simplification of the


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variety of products purchased and often reveals the possibility of using

less costly items. Both factors result in economics.

2. Buying according to specification frequently induces more suppliers to

bid on an order because all suppliers know exactly what is wanted andthat their chances are as good as those of other suppliers because they

are bidding on identical items. This increased competition for the

business often results in lower prices.

3. Specifications ensure the identical nature of items purchased from two

or more sources. Where the purchaser has more than one supplier of

an item this identifies its essential, and specification buying is a virtual

necessity.

4. Puraching to specification gives the buyer's inspection department an

exact standard against which to measure the incoming materials and

results in accurate inspection and a uniform quality of materials.

5. If specification buying is combined with quality control on the part of

the supplier, it may be possible for the buyer to save money by doing a

less complete inspection.

6. Specification buying is a necessary step toward industry-wide

standardization, and standardization programmers hold the promise of

substantial savings.

2.6 THE PRINCIPAL DISADVANTAGES OF SPECIFICATION BUYING ARE

1. It is not economical to prepare specifications for small –lot purchases.

These rules out the possibility of specification buying for many items.

2. Specification buying adds to the purchaser's responsibilities. He must

be able to state precisely, what he wants, and the supplier's obligation

extends only to complying with those terms. If the product does not live

up to expectations, the liability rests with the buyer. This disadvantage

does not apply to performance specifications.

3. In specification buying the cost of inspection is greater than in

purchasing items by brand. Items purchased to specification must be

examined, whereas branded Items need little more than a casual- check

and count.

4. There is always the danger of becoming over refined in preparing

specifications and as a consequence, paying more than necessary for

items.


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5. There is also the danger of assuming that, after specifications are

established, the characteristics of the item have been permanently set.

Unless specifications are reviewed periodically. There is the chance that

the buyer will lose out on product improvements.

Some products defy specification buying. Certain products are patented or

manufactured by patented processes, and others depend so largely on the unique

skill of the maker that specifications are inappropriate.

2. RESPONSIBILITY FOR $UALITY CONTROL

With the growing importance of quality control, the question of organizational

responsibility is a paramount consideration. The responsibility for defining the

quality of purchased materials should rest with that department whose function is

to establish the standards of quality to be maintained in production. Ordinarily, this

is the engineering department or the production engineering department. Where thedecisions involves equipment and supplies not used in production process, the

responsibility usually lies with the department that will use the material. For

example, office equipment and supplies are largely the concern of the office manager

or general management whereas laboratory equipment and supplies are of primary

interest to the laboratory director, and these officials should be responsible for

defining quality for their own equipment.

In large companies where responsibilities may be divided aiming several

departments the joint interests of sales, research, production, purchasing,

inspection and engineering may enter into the decision. The same considerations

must be taken into account in smaller companies, but the number of individuals

conceded will be smaller.

2.! DETERMINING $UALITY INSPECTION

At this point we shall assume that the purchaser had determined the proper

quality of the item to be bought, that he has satisfactorily defined this quality in

terms of specifications, blueprint, part number, market grade, or sample and that

the purchasing agent has accordingly placed an order with the chosen supplier.

However, since the supplier has not certified, the quality of this shipment, it now becomes the duty of the inspection department to ensure compliance with the

standard of quality. The inspectors are the monitors who see to it that incoming

material is of the proper quality.

Places of inspection: Inspectors responsibilities sometimes take them into the

vendor's plant. If the product is complicated and manufactured to very precise

standards, its high cost may justify stationing an inspector in the vendor's plant to

oversee the process and the product during manufacture. Or, if the cost of


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transportation is great in relation to the value of the goods, final inspection may be

made before shipment in order to avoid return transportation costs in the event of

rejection. Some large companies find it economical to maintain inspectors at or near

the source of subcontracted items, special items such as heavy forgings and

castings, and goods bought in large quantity. Perhaps the most extensive use of

inspection at the source is by the Department of Defense for military purchases.

Few companies have centralised inspection department. The benefits of this

arrangement are described as follows:

1. Special skills required for proper product inspection involve the training

of fewer people than would be the case if each operating area were to

inspect its own incoming shipments.

2. In case of new products or new suppliers, relatively little information

may be available upon which to formulate proper inspection procedures.

In such cases, a preliminary review by the inspector of the supplier's

plant facilities, formation upon which to base suitable acceptance

inspection plans. In some instances, they have disclosed the prospective

supplier's inability to produce products at satisfactory levels of quality

and, hence, his inability to justify the placing With him of a purchase

contract for a product.

3. Uniformity of inspection methods and acceptance criteria, especially in

the case of “Judgement” items, is more easily maintained a featurenecessary from the user’s and fair the suppliers standpoint.

4. Shipping costs; and to a large extent service delays arising from

rejection of nonconforming material at destination, are eliminated by

rejection at source.

5. For any given value of protection (in respect to both producer’s and

consumer’s risks) a smaller sampling ratio is required for the larger size

lots inspected at the source as compared with the smaller size lots

which would be inspected at destination.6. Irregularities in product are earlier detected and corrected.

7. Optimum flexibility and efficient use of inspection manpower is

facilitated.

In most instances the size and nature of a company’s. operations will preclude

the use of such an elaborate system. Where conditions dictate inspection at the

source, independent testing laboratories or inspection agencies can sometimes be

employed. When the cost of securing and maintaining specialized inspection


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equipment is prohibitive, the purchaser may also choose to rely on an outside

agency for inspection. One possible drawback is that an outsider, not having

complete and accurate knowledge of the application or needs, may not be able to

exercise informed judgment in borderline cases. The cost involved in hiring an

outside agency and the level of quality needed usually will be the determining factors

in deciding whether to employ an independent inspection agency .

In the usual situation purchased material is inspected when shipments arrive

at the purchaser's plant, with, detailed practices varying depending upon the nature

of the product and the production processes involved.

2." REVISION POINTS

Concept of Quality

Materials Specification

Advantages and Disadvantages of Specification

2.10 INTE#T $UESTIONS

1.Quality standards is essential for any product. Discuss.

2.Describe as to how the quality for any product is determined.

3.Define the method of description of a product.

4.What are the advantage and disadvantages of specifications?

5.Discuss the role of supplier and Buyer in Design and specification of right

quality.2.11 SUMMARY

A slogan that has grown up with the quality control movement is: "Quality

cannot be inspected into a product." This being true, the desired quality of

purchased material must be in the material when it arrives. Reasonable assurance

of this comes through careful attention to all responsibilities in the purchaser's

organization. When careful consideration has been given to the exact quality desired,

to the development of adequate description or specification of that quality to making

certain that the supplier understands what is needed and is equipped to do the job,

and to the application of a suitable inspection program. there is little possibility of

failure to achieve the desired results.

2.12 TERMINAL E#ERCISES

1. Define the concept of Quality

2. List the Benefits of quality control


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2.13 SUGGESTED READING&REFERENCE BOO%& SET BOO%S

1.P.Gopalakrishnan, “Purchasing and Materials Management”, Tata Mc-Graw

Hill, 2000.

2.S.C. Sharma, “Materials Management and Materials Handling” Khanna

publisher, 2000.

2.14 %EY 'ORDS

Quality, Specification, Description, Commercial Standards, Performance

Specification, Blueprints, Market Grade., Samples, Quality. Inspection.


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LESSON-3

CONCEPT OF RIGHT SOURCE

OBJECTIVES

1. To have a clear view regarding the source of information of potential

suppliers.

2. To know about the factors to be considered in supplier evaluation.

3. To analysis the different method of evaluation.

CONTENT

Introduction

Source of Information of potential suppliers

Need for Evaluation

Factors to be considered in supplier Evaluation

Different methods of Evaluation

Revision points

Intext Questions

Summary

Terminal Exercises

Suggested Reading/Reference Books/ Set Book

Key word

3.0 INTRODUCTION

The main objective of a purchase function is to procure the required material,

component, spare parts from the right source, at the right quality, right quantity,

right price and at right time. If the source is selected properly, naturally all aspects

will be fulfilled. If the supplier is a dependable, reliable, proven and guaranteed the

supplies will meet the technical specification and timely supplies can be ensured. If

the source selected is not so, the supplies made may not be on time, may not meet

the technical specification and if used, may cause damages and thus there will be

loss of production which in turn will adversely affect the financial position of the

company. Such a wrong selection of a source may lead to disastrous consequences.


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3.1 SOURCE OF INFORMATION OF POTENTIAL SUPPLIERS

S/) /+ ( A B* F/) B7)

The primary aspect of good buying is to determine suitable sources of supply in

order to secure and maintain active interest and co-operation of the suppliers. The

efficiency a buyer exhibits in vendor selection brings forth healthy competition

which results in the development of better products and materials services to a

manufacturing company.

Selection of sources of supply being the essence of buying process it becomes

imperative that the final authority should rest with the purchase department so as

to avoid possibilities of inter-departmental conflict. Supplier development is a

continuous task, changes in production technology and materials development

require periodic review of existing and potential sources of supplies.

The procedure involved in source selection is the preparation of an exhaustive

list of suppliers and then sorting out the one or ones with whom to do the business.

In preparing a list of prospective suppliers the buyer may use anyone or more of the

following sources of supplier information:

1. Past experience with the supplier.

2. Interview with salesmen.

3. Technical and descriptive catalogues.

4. Trade directories and trade journals.

5. Trade fairs and conventions.

6. Trade representatives and agencies.

7. Open and limited tenders requesting for quotations and

8. Periodical advertisements in the press call1ng for registration of suppliers.

The above procedure is one of searching and sorting out of the likely proven

sources depending upon the product needed. A good vendor documentation is to be

prepared and upto dated periodically so that the report is current and correct.

3.1.1 Past Experience with the supplier

Past experience with suppliers is perhaps the most available and widely used

source of Information about prospective suppliers. Since so much purchasing is

respective in nature, a wealth of information is available to the buyer on the basis of

which he can judge the performance of suppliers. When a new item is under

consideration, a buyer should therefore first of all inquire whether any of his present

or past suppliers are likely prospects.


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Most purchasing departments maintain vendor files which contain the names

and addresses of all vendors with whom the company has delay throughout its

history as well as a notation of the classes of goods that have been purchased from

each vendor. Frequently the files are set up to include additional data on such

things as the reliability of the supplier in meeting commitment dates, willingness to

handle emergency and rush orders and defect or reject ratios on shipments received

in the past.

Some companies expand their vendor files to include information on all

suppliers investigated, as well as the ones with whom the company has done

business. Such information may be useful, provided it is still current enough to be

pertinent.

3.1.2 Interview With Salesman

The salesman who call on purchasing agents are extremely valuable sources of

information about suppliers for particular products. In most cases their information

relates to their own c

purchase management-1 final-1-15.doc

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