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Purchasing Function in Materials Management

Purchasing function, in a business environment , is one of the most critical functions as it provides the input for the organisation to convert into output. Materials today are lifeblood of industry. They must be available at the proper time, in the proper quantity, at the proper place, and the proper price. Company costs and company profits are greatly affected by them as normally, a manufacturing organisation spends nearly 50% of its revenue in purchasing.

Purchasing Function vs. Purchase department : Purchasing function is a function commonly seen in all those organisations that undertake purchasing activities.

Purchase department is a unit of an organisation that performs purchasing function.

The purchasing function is usually performed by a specialised and centralised purchasing department, directed by an efficient manager to

achieve the performance in an economical manner.

Profit making Centre ? Purchasing is responsible for spending nearly half of a company's income for buying the input materials.

Obviously, any saving achieved by it results into direct saving for the company and all such savings are a company's profit.

Going by a thumb rule "even 1% saving achieved in Purchasing results in 5% profit for any organisation". Procurement vs. Purchasing It is used to define one of several supply functions involved in logistics activities. In the broadest sense procurement includes the entire process by which all classes of resources (people, materials, facilities and services) for a particular project are obtained. Since purchasing is a unique function, it differs a bit from procurement in the sense that while procurement , with the same objective has a wider domain , purchasing with the same objective is included in it !

Objectives of Purchasing: The classical definition of objectives of purchasing is to buy materials and services of the right quality, in the right quantity, at the right place , from the right source and at the right time. However, in general management parlance the objectives of purchasing are:

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

To buy competitively and wisely *

To help keep a minimum Inventory *

To develop reliable alternate sources of supply *

To develop good vendor relationship and a good continuing supplier relationship *

To achieve maximum integration with the other departments of the firm *

To train and develop highly competent personnel *

who are motivated to make the firm as well as their department succeed *

To develop policies and procedures which permit accomplishment of the preceeding seven objectives at the lowest reasonable operating cost

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

Purchasing is no doubt a vast subject and as the competition among the firms grows this function of business is expected to see a lot of evolution

Types of Purchasing: Considering the nature of business an organisation has there could be different approaches and hence Purchasing can be any of these types:

Forward Buying Tender Buying Speculative Buying Systems Contracting Rate Contract Reciprocity Zero Stock buying Blanket Order

Tender Buying

With competition growing as ever, Information technology replacing the arduous manual mode of purchasing and transparency in dealings more required than ever, many professionally managed firms have started looking for more sources of supplies, beyond their normal boundaries. Not that Tender buying did not exist earlier. Rather, it has always been considered the only way of buying materials / services in the government and quasi government procurements.

What is Tender buying ?

As the word suggests, Tender buying is selecting a supply source (supplier) out of many sources available. That is, many tenderers are invited to participate in the tendering process and then one or more than one tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts).

The main focus through tender buying is on competition of price and quality. Usually, the best quality (T1 or Q1) is selected after assessment of the technical offers and then the lowest offered price (L1) tender is selected for order placement.

Process of tender buying : A typical purchase function starts with the raising of a requisition (Indent / Material Procurement Requisition) for an item which is required for a stated purpose. This requisition is then converted into an enquiry form which is issued to the probable vendors who are asked to respond within a given date and time (called Tender opening date) as mentioned in the enquiry issued to them. The interested vendors respond to the tender enquiry by giving their tenders. Tenders thus received are opened on the Tender opening date at the fixed time.

The tenders are then subjected to evaluation with respect to a tenderer's capability, Financial as well as Technical and other criteria as laid down in the tender enquiry. This step also witnesses series of discussions, clarifications and negotiation with the tenderers. Some tenders can be rejected at this stage as they might not meet the requirement of the purchaser. Finally, the tenders which are found suitable are subjected to price comparision and usually the tenderer offering the lowest price (L1) is selected for placement of order.

The process explained above shows a great deal of variations depending upon a company's procurement policy. In some places, the best quality offering tenders are accepted for subsequent price comparision whereas in some other place all the tenderers who meet the minimum requirement are considered accepted for price comparision and order placement. Similarly, in some places the order is placed only on L1 (lowest offered price) whereas in some other places it may not be rigidly followed so.

Types of Tenders : Since the tenders are sent to the probable vendors, knowledge of vendors for the item in question is a necessity. It's based on this concept that the types or mode of tendering is decided against a particular purchase requisition.

Most commonly used Types of tendering / tender buying are as below :

1) Global Tender : As the name suggests a global tender is floated with a view to elicit offers / response from any vendor situated anywhere in the world. The need for a global tender arises when the purchaser either does not know about the vendors for a particular item in question or when he thinks that a wider choice of vendor is possible through it, irrespective of his nation's boundaries. A few clear reasons are :

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Lack of information on vendors *

Only a few vendors known *

When there are chances of cartel formation among known vendors *

Anticipation that more response may come

What is of importance in this popular mode is the way a global tender is floated. With internet becoming the most powerful tool transcending the national boundaries ,a wide range of applications are now possible. There are tender portals ( www.tendertiger.com,  www.indiatenders.com  etc.) on which one can upload the whole tender enquiry and then ask the interested vendors to make offers. Besides,this increasingly popular way of inviting tenders, listing the tender in international trade journals, leading world newspapers etc. are other ways of putting up a global tender enquiry. The idea is to give wide publicity of the tender, worldwide and circumstances permitting ,to place the order on a foreign supplier too.

2) Open Tender : An Open tender too like a Global tender tends to invite tender from any interested vendor. The basic difference assumed between an open tender and a global tender enquiry is essentially the range of its applicability. While a global tender gets the worldwide publicity, an open tender is limited only within a country. Otherwise, the concept remains the same as it also seeks to elicit better or wider response.

Since the Open tender enquiry is limited within the country itself, besides the internet mode , the enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide publicity, within the country. Any vendor who meets the tender requirements can make an offer.

Now a days, since e-procurement is replacing the old manual mode of working, one of the most commonly used mode for Open tendering is uploading the tender on the internet. What is of interest now is the narrowing down of differences between the global tender and an open tender. Any content published on the internet is expected to be available to anybody located anywhere in the world unless due to some mechanism such as firewall etc the reach of internet is restricted.

3) Limited Tender : When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the purchaser. It is considered better than Global and Open tender modes as there is always an element of uncertainty in those two modes with respect to the capabilities of the vendors. For issuing LTE, a purchaser maintains a list of approved / registered vendors whose capabilities are checked periodically.

4) Single Tender Enquiry : An STE is issued only when either the item is proprietory in nature, that is only one supplier produces that item or where there may be more vendors but due to certain exigencies it is not possible to devote time on evaluating the vendors' offers / one supplier can ,for sure, fulfill the needs.

Which mode to use and when depends on many factors as well a company's procurement policy. For example, for a small value purchase, if the policy does not prohibit, Single tender enquiry or Limited tender enquiry is considered ideal. These are also ideal for high value and frequently bought items. On the other hand, for high value and non frequently bought items / systems, Open / Global tenders are suited.

In many government organisations, whose procurements are also called public procurements for the reason that they spend public money for the public cause ,all the tenders are to be invited only through Open / Global tenders.