6 Major Principles of Purchasing
Some of the major principles of purchasing are: 1. Right Quality 2. Right Quantity 3. Right Time 4. Right Source 5. Right Price and 6. Right Place.
1. Right Quality:
The term right quality refers to a suitability of an item for the purpose it is required. For producing the goods of best quality, the best grade of raw material may be the right quality whereas for producing items of medium quality, the average lowest grade may be the right quality. The quality of the item is called as grades. It can be measured by physical tests, chemical analysis or by any other methods depending upon the nature of a product. The use of standard specification, brand name or trade name helps in purchasing the squired qualities of materials. ‘The quality must be built into the product’. It is the duty of the purchasing department to ensure that materials are purchased from those suppliers.
For creating goodwill, right production, standardisation, elimination of waste and for better results, right quality purchases are very essential. Quality for different materials is decided by the concerned departments.
In case of workshop equipment, the decision is taken by the plant engineer and for stationery it is the user department. However, purchase department may question the requirements of the different departments on the basis of its experience and suggest various alternatives. The inspection department must verify whether the goods supplied are in accordance with the order placed.
Thus, the right quality is the suitability of items purchased for a given purpose. The best quality of materials purchased need not be the right quality.
2. Right Quantity:
Materials purchased should be of right quantity. The right quantity is the quantity that may be purchased at a time with the minimum total cost and which obviates shortage of materials. Ensuring and maintaining a regular flow of materials for carrying the production activity is the vital aim of any purchase organisation. Excess purchases should be avoided, it results in overstocking and capital is unnecessarily blocked and inventory carrying cost goes up.
Economic Order Quantity (EOQ) helps in determining the right quantity of materials to be ordered. It is calculated by applying the following formula:
A stands for annual consumption of material, C for cost of placing an order and S for Annual Storage and carrying cost per unit.
For dedicing the amount of right quantity to be purchased, certain important factors must be considered by the management. These are the nature of the manufacturing process, the nature of material to be used, prevailing market conditions i.e., changes in the tastes and preferences of the people, cost of materials to be purchased, cost of possession and storing capacity of the organisation.
Along with the economic order quantity, there are two more concepts, viz.; bulk order quantity and arbitrary order quantity which needs to be understood.
Bulk Order Quantity is the quantity which is larger than the economic order quantity. It combines the ordering quantity of more than one order so as to round off to 3, 6 or 12 monthly requirements and place a single order for the full requirements of a period under consideration.
Bulk order quantity ensures various economies of price, lesser operational cost in the purchase department. Inexpensive and slow moving items are generally purchased in bulk quantity.
Arbitrary Order Quantity is the outcome of the weaknesses of economic order quantity and bulk order quantity. Due to varying market conditions, it is not advisable to always strictly adhere to the economic and bulk order quantities.
Certain factors viz.; uncertain order from the market, uncertain financial position, uncertain production schedule and uncertain lead time are responsible for the adoption of arbitrary order quantity on the part of the purchase manager.
3. Right Time:
The time at which the purchases are to be made is of vital importance. In case of items used regularly, right time means the time when the stock reaches the minimum level. The reorder level of material is fixed for each item under the principle of right time.
Action for the purchase of new supplies should be immediately initiated, when the material reaches the reorder level. Reorder level for each type of material is calculated by applying the following formula.
Reorder level = Maximum Consumption x Maximum Reorder Period. The materials control department sends the purchase requisition to be purchase department for the purchase of materials. In case materials are required for special jobs, the Purchase Department ensures that the materials are delivered in time.
Another important factor to be considered is the delivery of materials from stores to production departments. Any under delay in supplying the materials on different jobs delays the production.
4. Right Source:
Selecting the right source for the purchase of materials is an important consideration in the purchase procedure. The right source for the procurement of materials is that supplier who can supply the material of right quality as ordered, in right quantity as ordered, at a right time at which the materials were required to be supplied, at an agreed price with the supplier, who is in a position to honour the commitment without much follow- up, who has necessary financial resources and adequate man-power to handle the order and who is well established with higher reputation and proven business integrity.
The source of material should be located within a reasonable distance from the buyer’s organisation. This will minimise the delivery delays, higher transportation charges and improve the personal contact between the buyer and the supplier and enable better after-sales service etc.
As far as possible the middlemen and brokers should be avoided in the purchase of materials. A direct liaison should be established with the supplier. It would be helpful in improving the quality of the material in future.
While selecting the supplier certain factors must be kept in mind, viz., location of the supplier, warehousing facilities available with the supplier, relations of the employers with the labour, credit worthiness of the supplier, size of the supplier’s firm and quality control observed by the employer etc. A personal visit to prospective supplier’s premises will be helpful in assessing the capabilities of the supplier.
5. Right Price:
Determination of right price is a difficult task. It is the main object of any organisation to procure the material items at the right price. It is that price which brings the best ultimate value of the money invested in purchasing the materials.
Deciding the right price of a product depends on variety of factors, viz.; quality, delivery time and ultimate life of the material, demand and supply curve, extent of competition, government restrictions, after sales services, discount offered, and terms of purchase etc. It may be pointed out here that the determination of proper price depends not only on market knowledge but also a clear understanding of the pricing process.
The buyer should keep in touch himself with the above mentioned factors in the process of determination of price. He must consider that whether a proposed item to be purchased represents the best value for money or not.
This is known as “value analysis”. The prevailing market prices also provide basis for the price determination. There should be negotiation between the purchase department and the suppliers for the determination of proper price.
6. Right Place:
Besides obtaining the materials of the right quality and quantity from the right source at the right price, it should be ensured that the materials are available at the right place. Transportation and material handling costs are greatly affected by the selection of the right place from where the materials are to be acquired. For minimising these costs, selection of right place for the acquisition of material is of utmost importance. If local as well as outside supplier fulfills these conditions, the former should be preferred. The above mentioned principles of purchasing can be summed up as the six R’s of purchasing. These are also known as the “essentials” to be followed by the purchasing executive.