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An Experience Contribution by Nagesh Talekar

“Purchasing is a spending Function and every rupee saved in purchasing goes directly to the profit column of the concern.”

An Experience Contribution by Nagesh Talekar

When an Organisation has several plants located in different geographical regions, there are two alternatives. One, to have a centralised purchase department located at the headquarters. The other, to have a decentralised purchasing department set up in each plant.

Joint Managing Director

Executive Staff Centralised Purchase

Purchase In-ChargeDharwad Plant

Purchase In-ChargeVerna Plant

Purchase In-ChargeBangalore Plant

An Experience Contribution by Nagesh Talekar

Combining the requirements of Plants and buying in bulk leads to substantial reduction in purchase cost.

There is only one department dealing with limited items, a high order of purchase skill can be expected.

Inter-Plant transfer of materials in an emergency is possible.

Surplus Materials in one Plant can be utilized in meeting the requirements of another.

The Centralised Purchase Department at Headquarters may lay down common policies, procedures and systems for all the plants.

A periodic reporting system may be established between the plants and the Centralised Purchase Department at Headquarters.

Organisations having Multi-plant operations would benefit by adopting a judicious blend of decentralised setup with centralised control.

An Experience Contribution by Nagesh Talekar

Material Requisition

PO Copy

Enquiry

QuotationPlant

Centralised Purchase

DomesticSupplier

OverseasSupplier

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Invoice Pur

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Purchase Order

Quotation

Payment

Follow Up

Purchasing, in ordinary sense, is the procurement of raw materials, components, consumables, machines, equipments, etc. on payment. In the present environment of frequently varying price conditions and increasing material variety and competition, the purchasing function needs professionalism to reduce the total investment in purchase while making the required materials of right quality at right price available on time.

Bulk Order Quantity is a quantity which is larger than the Economic Order Quantity and which combines the ordering quantity of more than 1 order so as to round off to 3,6, or 12 monthly requirements and place a single order for the total requirement of the period as decided. It differs from 1 item to another depending upon the market conditions, financial commitments, production programmes, and storage facilities available.

Bulk order gives better purchase price, reduced procurement cost and reduced operation in the purchase organisation. But bulk order increases the inventory carrying cost and financial commitment.

Maintenance of regular flow of materials for production activity is the main aim of any purchase organisation. For this, right quantity of materials is to be purchased. The decision of right quantity is related to the period for which it is to be purchased and also to the minimum total cost which may obviate shortages. Excess purchases should be avoided as they result in overstocking, and capital is unnecessarily blocked and inventory carrying cost goes up. This naturally needs avoidance.

It is not always possible to strictly adhere to the economic order quantity and bulk order quantity because of varying market conditions, uncertain consumption, uncertain lead time, uncertain availability of funds, uncertain order from the market and consequently uncertain production schedule, etc. In Such cases one has to apply one’s own discretion and fix an Arbitrary Order Quantity from time to time.

An Experience Contribution by Nagesh Talekar

Purchase Tasks

At Right Time

In Right Quantity

From Right Source

At Right Place

At Right Price

Of Right Quality

Purchasing principles are usually epitomised as buying materials of right quality, in right quantity, at the right time, at the right price, from the right source and also at right place.

The right quality is that which can be purchased at the lowest cost to fulfill the need or satisfy the intended function for which the material is being purchased. For building goodwill, right production, avoidance of waste, standardisation and better results from men and machine, right quality purchases are very essential.

We have to take into consideration the order quantity which is defined as the quantity that is ordered at a given time. The order quantity is further divided into three classes

Economic Order Quantity where the total cost i.e., ordering cost + inventory carrying cost should be least and minimum. Ordering cost and inventory carrying cost are equal.

The right time for the procurement of an item is said to be the point of minimum stock, the point at which the materials are expected to arrive in the plant.Price per unit of an item comprises the unit purchase price, transportation cost, handling cost, inspection, insurance and the administrative variable cost. The right price simply means the lowest possible total price for the organisation

Right source relates to the supplier. Right source for the procurement of the material is the supplier who can supply the material of right quantity, of right quality as ordered, at the time which asked to supply, at an agreed price, at the place of delivery.

Right Place to mean at the place of delivery. FOB, FOR prices, Freight is based on point of destination.

An Experience Contribution by Nagesh Talekar

The Centralised Purchase Department at Headquarters has to work in close coordination with all Decentralised Purchase Departments at Plants and Finance Department at Headquarters. Only an atmosphere of mutual trust will ensure that these departments will work towards the total organisational objectives.

DharwadPlant

CentralisedPurchase

FinanceHO

BangalorePlant

VernaPlant

An Experience Contribution by Nagesh Talekar

Lead Time Index = Average Lead Time (Current Year)

Average Lead Time (Previous Year)

Order Cost Index = Total Purchase Department Cost

Total No. of Orders Placed

Rush Order Cost (Index) = Price Paid for Rush Order Material

Price Normally Paid for this Material

Process Time Index = Total Time Taken To Process Indents

Total No. of Indents Processed

Purchase Efficiency = Total Purchase Value

Total Expenses of Purchasing Dept.