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Questions:
1. Give a brief presentation of the case
2. If you were the Purchase manager of MM Industries Pvt.
Limited, what are the changes you would like to bring to
increase the purchase effectiveness

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 Purchasing activities
Purchasing plays a crucial role in the material cycle,
because it is in charge of the input stage up to consumption
in manufacturing.
The efficiency of the purchase cycle is reflected the
Japanese slogan “we live by sales, but make our profits by
purchase”

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 Purchasing activities
Purchasing activities include
1. the identification requirements
2. Selection of proper source of supply
3. Deciding on quantity and quality
4. Finalizing delivery schedules and price
5. Placing a purchase order
6. The suppliers
7. Transporting the goods
8. Receive them in stores
9. Accept them for consumption after getting the items inspected
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 Purchasing cycle
• The process of purchasing cycle has the following
activities:

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 1. Indent status
• A purchase requisition is a request to Purchase/ procure a certain
quantity of a material or a service so that it is available at a certain
point in time.
• In procurement, the internal requisition for materials or services
triggers a procurement process.
• The normal practice is to get checked by the stores person, in order
to verify whether these are available in stock.
• Usually purchase requisition clearance power is given according to
the purchase manual. In some situation, clearance from many
departments is required and in such cases indent will be in the form
of travelling purchase requisitions.
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 2. A to Z of Purchase Order
• After getting the complete description from the user
department of the items, the buyer classifies the indents as
capital, consumables, spares, repetitive, non-repetitive,
standard, non-standard, budgeted, special etc. The
availability of the items is ascertained from the sources and
bids are requested in order to determine the price. If
necessary, negotiations are conducted to arrive at the right
price.
• The purchase order is a legal document that commits the
buyer to the seller, a careful drafting of the order is a must.

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A to Z of Purchase Order: The purchase order
placed should have the following details:
Delivery date and schedule
• The order number
• Date Packing instructions
• Serial number Transport instruction
• Full name and address of the supplier Freight payment terms
• Consignees name and address Inspection procedures
• Terms and conditions printed on the Insurance
reverse of the purchase order
• Description of goods in all aspects Warranty
• Quantity Cancellation provisions
• Supplier’s quotation reference Authorized signatories
• Billing Acknowledgement
• Price terms Remove of rejections, Penalty
• Mode of payment
Bonus and Other special terms and conditions
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 3. Chasing and follow-up
• The buyer has to keep track of what is happening to the order or
whether the supplier will adhere to the delivery schedule. Hence
buying is called purchasing. There may be occasions when he has
to expedite the order to prevent the shortages. Such a follow-up can
prevent delays and the buyer will know the bottlenecks at the
supplier’s end.
• Follow-up is absolutely necessary for job orders or custom built
capital equipment and subcontracted items.
• For effective follow-up, the buyer has to have good liaison with
receipt section, supplier, transportation, clearing section, inspection
etc.

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 4. Transportation
• The materials have to be transported to the buyer’s
premises from the seller premises. Formalities like sales
tax, GST, … have to be completed by means of filling
necessary forms.
• The transportation selection must also be coordinated
with other activities such as finished goods dispatching in
order to achieve overall economies.

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 5. Incoming Inspection
• On receipt of the material in stores, the receipt section
checks the quantity with that mentioned in the invoice.
The inspection methods and procedure will also be
mentioned in the contract.
• The buyer has to be satisfied about the quality of the
materials . The details of the inspection will be mentioned
in the contract

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 6. Bill Settlement
• The system of payment varies with the type of market
from cash and carry system to pay advance now, take the
material later are operated in

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 7. Documentation
The job is not finished until paper work is done whi h is the
motto behind the purchase cycle. Effective documentation
is a critical factor in the purchasing function as they are
essential to ensure adequate accountability and to prevent
misunderstanding.

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 Meaning of Right Price
• Price is an opinion and Cost is the fact according to the
fundamentals of finance because price is just what you pay,
whereas the buyer is ignorant of the cost comprising of
materials cost, labor charges, depreciations and overheads.
• The difference between the price and cost is the Profit, which
can be very high when the supplier wants to exploit an urgent
situation.
• Right price depends on the type of the material, market
conditions, supply, demand and social, Political, and
Economic aspects.
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 Price Analysis
• No commercial organization is a philanthropic institution, its basic
purpose is to obtain return on investment, which is reflected in the
pricing by the profit term.
• One way to determine the right price is the mechanism of cost plus
pricing. The sales price of a product has to contribute to the direct cost
of manufacturing the product, bear a certain amount of overhead
expenditure and yield a reasonable profit as return on investment made,
in the form of capital employed by the organization.
• The direct cost of manufacture includes the cost of material, manpower,
fuel, power and utilities used in the manufacture of a product.

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 Determination of Right Price
Right price brings the best ultimate value to the product. The
factors considered while fixing the price should be quality,
quantity, delivery, shelf-life, availability, demand, supply,
standard/non-standard, repetitive/non-repetitive, seasonal/non-
seasonal..etc..
Prices may be ascertained by previous purchase, catalogues,
list price, market price, by telephonic enquiry, by oral enquiry,
by tender process, through negotiations….etc.
Big Organizations , have vendor committee to fix the right price.
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 Influencing factors on Pricing
• Material cost
• Inventory cost
• overheads
• Rejection of materials due to quality
• Changes in the government taxes
• Transportation
• Natural calamities
• Overdraft and borrowings in the state government
• Deficit financing and public borrowing in case of central government
• Trade deficit and decreasing the foreign exchange reserves
• Government’s fiscal policy measures such as administered price, levy price, etc for
small industries

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 Classification of Pricing
The purchasing requirements can be classified as follows:
1. Commodity or raw material, which are in their prime form
2. Standard manufactured items like nut, bolts, stationery
3. Specially manufactured products like machine tools, generators ..etc
• The price of items like tobacco, cotton, agricultural commodities, metals etc are
determined by the cost of input that goes into their production, level of
production, macro supply and demand condition
• The standard manufactured items like cloth, stationery etc are produced by the
manufacturers based on the perception of the market requirements and pricing
is done accordingly. In bulk transactions, discounts can be considered.
• This needs customization and long production cycle. For pricing all relevant
factors are considered
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 Price Forecasting
• Forecasting is very important for the buyer as he should
have some idea of the future quantity requirements and
future price of the items for better planning and budget.
• Usually Price forecasting error is up to +/-10%. A large
number of factors including demand and supply play a
very important role.

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 Right Place
• Geographical location the supply affects the cost of transportation
and lead-time which certainly occupies a prominent place where
evaluating a supplier.
• A vendor located at a relatively is far-off place compared to a local
stockiest or short distance supplier, is much more difficult to tackle
and follow-up even in this age of advanced communicating world.

• Accidents, strikes floods, transport inadequacy, supplier’s own

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 Purchase Budgets
• Budget is a coordinated financial forecast of the income
and expenditure of an organization and the purpose of
the budget is to plan and control the activities of various
departments, in order to achieve the corporate goal.
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 Right time of buying
• Lead time: the total duration that elapses between the
recognition of the need for an item and its fulfilment is
known as the lead-time for that item, which plays an
important part in identifying the right time.
• Lead time is the time that elapses between ordering
goods, receiving them and placing them into use at the
point of order.

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 Concept of lead time
• The effects on lead time reduction on
• Basic lead time elements of purchasing activity include
the following:

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Lead time gap

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How to reduce Lead time gap

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Bull-whip effect reduces- efficiency of supply chain. Blanket order is part of the purchased inventory
from the vendor and it is used to analyse the shipment

Examples of supplier evaluation method are 1.Analytical Hierarchy Method 2.Cost Ratio Method
3.Categorical method

VMI stands for -Vendor Managed Inventory. First stage of vendor rating is - Survey Stage
Process where 2 or more companies undertake responsibility to share information is known as-
Collaboration. Effective material management system contributes to it being _ Profit Center
Categorical method vendor rating method depends on past history of supplier performance.

Weighted point method quantifies evaluation criteria. Categorical Methods is used for Supplier
Evaluation

Purchase order is a legal binding contract only if it is Accepted by the supplier. The parameters for
vendor rating include- Price, Service, Delivery etc.

Electronic procurement generally helps to reduce Both Cost and Delivery time. Quality factors in
supplier selection do not include durability. Procurement is not a part of management of stores

Both negotiation with vendors and setting price conditions are main functions of the purchasing
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• Drop Shipping is a process in which vendors gives goods directly to the customers.
• Vendor Negotiation is done when buyer gets right quality at right price from the supplier
• A purchase order is different from requisition as it is Legal.
• Centralised purchasing reduces inventory investment
• Procurement is the main part of the secondary activities of a value chain.
• Role of vendor manager- develop strategies for vendor management, create vendor selection
criteria, create a bid document, etc
• Value sourcing contributes to high quality work culture.
• Vendor Analysis is the process by which the existing and future vendors are analysed for the
ability.
• Supplier Evaluation Method based on cost is known as-Cost-Ratio Method. Cost-Ratio
Method relates all identifiable purchasing costs to the value of the shipments received from
the respective suppliers. Effective Supplier Management provides Value to the organisation.
collaboration at all levels is important to maintain supplier relationship. Vendor rating is the
outcome of a vendor evaluation system.

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