PURCHASE MANAGEMENT A PROJECT REPORT ON

PRODUCTION & MATERIAL MANAGEMENT

SUBMITED BY

YATIN, PRABHJOT, SANGEETA, ANISH, VISHWANATH, DANDAPANI, MOSHAMI

SUBMITED TO

NES RATNAM COLLEGE

PROJECT GUIDE

PREETI KHITANI

N.E.S RATNAM COLLEGE OF ARTS, SCIENCE &COMMERCE

BHANDUP (W),

MUMBAI.400078

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STUDENTS INVOLVED

SR NO. NAME ROLL NO.

1 SANGEETA PATEL 30

2 YATIN PATIL 31

3 MOSHAMI PATRA 32

4 ANISH PINGALE 33

5 VISHWANATH POOJARI 34

6 PRABHJOT KAUR 35

7 DANDAPANI REDDY 36

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DECLARATION

WE YATIN PATIL, PRABHJOT KAUR, ANISH PINGALE, SANGEETA PATEL, MOSHAMI PATRA, VISHWANATH POOJARI AND DANDA PANI ARE THE STUDENTS OF F.Y.BMS OF NES RATNAM COLLEGE HERE BY DECLARED THAT WE HAVE COMPLETED THIS PROJECT ON PURCHASE MANAGEMENT FOR THE ACADEMICYEAR 2011-12 THE INFORMATION SUBMITTED IS TRUE AND ORIGNAL TO THE BEST OF OUR KNOWLEDGE.

STUDENTS SIGN.

1…………………….

DATE:……………… 2…………………….

3…………………….

4…………………….

SIGN.OF TEACHER 5…………………….

6…………………....

7……………………..

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ACKNOWLEDGEMENT

We would like to acknowledge and extend our heartfelt gratitude to the following persons who have made the

completion of this Lecture Notes possible: 

Our project guide Mrs. PREETI GETHANI for her vital encouragement and support. As well as for the help and

inspiration she extended.  

We would also like to thank our group members, friends and families who have provided us with help up to a large

extent. 

And to God , who made all things possible.

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INDEX

SR NO.

PARTICULARS PAGE NO.

1 INTRODUCTION 06

2 PRINCIPAL OF PURCHASE 07

3 OBJECTIVES OF PURHASE DEPARTMENT 11

4 ORGANIZATION OF PURCHASE 14

5 SYSTEM IN PURCHASE DEPARTMENT 176 TYPES OF PURCHASES 227 CONCLUSION 298 BIBLOGRAPHY 30

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INTRODUCTION The Purchase is a main activity in the area of Materials Management. It is the most important Function in any organization. This is the place where money is spent out of the organization. It decides the profitability of the company. It is studied that one percent saved in the purchase function improves the profit of the company as much as 2 to 3 percent.

Purchase departments buy raw materials, parts, machinery, and services used by production systems.

The objective of purchase management is to procure the right equipment, materials, supplies and services in the right quantity, of the right quality, from the right suppliers, at the right time, at the lowest price.

While the value of purchased items varies from industry to industry, it adds up to more than fifty percent of sales in all industries. Purchase management is regarded as a significant activity in many organizations because of the high cost involved in carrying out purchasing activities, increasing quality benchmarks, and increasing global competition.

Purchase activities can be organized by using two basic approaches: centralization and decentralization.

Many manufacturing organizations use a blend of these two approaches to organize their purchase activities. The purchase manager, who heads the purchase department, is responsible for developing vendor networks, selecting suppliers, negotiating contract terms and conditions with suppliers, and ensuring the timely delivery of the required supplies.

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PRINCIPLES OF PURCHASEPrinciples of Purchasing can be called by “7 Rs”. They are as follows:

1) Buying the materials at right price.2) Buying materials of right quality.3) In the right quantity.4) At the right time.5) From the right source.6) At the right place.7) With right mode of transport.

These are the basic principles of purchases. Every company and organization having their own purchasing polices and style; for example:

The purpose of this web site is to provide easy access to Procter & Gamble information that is of value to prospective and current P&G suppliers, agencies, and providers of goods, equipment, services and sponsorship opportunities. The information on this site outlines the fundamentals of how P&G conducts business with its suppliers and how the Company views supplier relationships in general. It gives a brief sketch of how P&G Purchases is organized and offers an avenue for those interested in becoming P&G suppliers. It also provides information to current P&G suppliers who want to enhance their understanding and connectivity with P&G.

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Global Sourcing PrinciplesIn addition to embracing the Company’s Purpose, Values and Principles, our Purchases people are guided by five global principles for strategic sourcing. These five principles establish a foundation for our discipline and serve as guidelines in our daily activities as we interact with external suppliers.

These principles consist of the following:

Best Total Value

We make sourcing decisions on the basis of best total value offered to supply our requirements for goods and services. Best total value is driven by business needs and includes a number of components that include total cost of ownership, quality of goods or services performed, supplier responsiveness and account service, speed or time-to-market, minority/women ownership, localized supply, and supplier willingness to share risk/provide resources

Honest, Ethical and Fair Dealings

We treat all suppliers with respect and deal with them honestly, ethically, and fairly. We conduct business in compliance with all applicable laws and regulations wherever we operate. We believe that buyers and suppliers optimize their working relationship when there is a foundation of trust. By treating suppliers and

potential suppliers honestly, ethically and fairly, we do our part in building that foundation, and expect that the supplier will do likewise. We do this not only because we believe it is right, but also because it makes working with P&G attractive to current and potential suppliers.

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Externally-Linked Supply Solutions

We deliver solutions that meet P&G business needs by bringing the Company’s deep supply and market knowledge and access to supplier competencies, resources, and relationships around the globe. We create effective business alternatives to develop commercial and supply solutions for P&G businesses that deliver improved service, revenue and profit, while flexible enough to accommodate market changes.

Competition and Collaboration

We apply the strategic use of competition, collaboration or a blend of the two in our approach towards managing our supplier relationships. The Company has a long-held belief that competition encourages the innovation and efficiency from our supply base that ultimately

delivers optimum value over the long-term. P&G also believes that we must collaborate with suppliers to access and engage their core competencies, capabilities, and resources to support us in creating value for our consumers and customers. The choice to emphasize competition or collaboration or blend the two is driven by business circumstances, supply market dynamics, supplier capability, supplier compatibility with P&G, and the level of interdependency necessary between P&G and the supplier to deliver best value.

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Supplier Incumbency

We seek to balance stability in our supply base and orderly shifts of business with the need to seek out new suppliers who offer superior value. We prefer ongoing relationships with incumbent suppliers because we believe they deliver lower long-term costs and higher value to our business. Therefore, to win our business, new suppliers must provide meaningfully better total value than the incumbent. Incumbency is applied to each specific situation where a number of elements are considered that includes P&G business needs, past performance and future potential of a supplier, impact of business shifts on overall marketplace competitiveness and long-term buyer/supplier relationships, and costs for start-up, qualification, and/or shut-down.

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OBJECTIVES OF PURCHASE DEPARTMENT

Businesses often buy as many goods and services as they sell. They buy materials to help produce products. They hire service professionals on a contract basis when they don't have the expertise within their staff to get things done. To monitor the purchasing process and ensure that it stays within the parameters of keeping the company profitable, a business uses the purchasing department to oversee suppliers, service providers, equipment purchases and even research into quality control.

The main objectives are as follows:

1) To procure at the lowest possible cost consistent with quality and service requirements. Thereby ensure the minimum possible investment in carrying out operations related to purchase materials. These are such as transportation, inspection, storing, record keeping etc.

2) If the quality of the company’s product is decided by the quality of the input material then this is the area, where the quality begins. So for building quality product it holds importance. The quality of the input material takes the product quality level high. To make the user departments of the organization from time to time aware of the range of the quality of materials available in the market and to maintain right quality

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of purchased materials based on standards, technical specifications and suitability as determined by the user departments.

3) From the point of view of keeping the production line flowing the purchase activity plays an important role. Uninterrupted production is possible by the proper action by the purchase department.

4) Material inventory of all types is the place where the company’s money is dumped. To maintain the continuity of the supply to ensure that the scheduled activities are not interrupted. Purchase department controls the inventory control activity. The manner in which the inventory is controlled the efficiency of the company depends.

5) In any organization the purchase department is centrally placed organizationally. It has connections with almost every department in the organization. It integrates the requirements of all departments of the organization. Takes the advantage of economy of scale. Wherever possible avoid duplications of purchases resulting in waste and obsolescence. To achieve maximum integration with other departments of the company. This requires understanding needs of other departments so that these needs can be translated into materials support action. These actions will vary from company to company. However they normally require the purchase department to support another department in one of its major responsibilities. The most common areas of support are in developing favorable reciprocity

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agreements, effective standardization programmes, forecasts of future prices and general business condition, economic make or buy decisions and a repository of information and knowledge from suppliers regarding new materials, processes and prices.

6) It has connection with outside world of the company through the medium of vendors. It has lot to do in creating the company’s image in the outside world. It has to create for the organization through healthy buyer-supplier relationship.

7) Help the design and development departments to develop new products and related new components of those products.

8) To develop good and continuing vendor relationships. Good vendor relationships are invaluable. Under such relationships number of problems which arise buyer and seller get solved readily. A vendor naturally directs his research, gives advance information on new products and prices, and gives better service to his permanent customers.

9) To train and develop highly competent personnel who are motivated to make the company as well as their department succeed. Such personnel, in addition to fulfilling his responsibilities of the purchasing department, also serve as a reservoir of talent from which future executives of the firm can be selected.

10) To develop policies and procedures which permit accomplishment of the above mentioned objectives at the lowest reasonable operating cost.

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ORGANIZATION OF PURCHASE

Purchasing department is usually under the General Manager at par with other functional departments such as engineering, finance, accounts, manufacturing, marketing etc. sometimes it is kept along with other related departments like stores, inventory and materials control, under materials manager who in turn is under General Manager. Choice of an organizational structure depends on the volume of work and value of the purchase. A good structure encourages the assignment of specific responsibilities, specific authorities and smooth chains of

command of delegation. It should lead to development of policies that permit routine decisions to be made by subordinates.

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Within purchase department, the structure may be worked out using following approaches.

a) Organization by function: It is based on the principle that job should be organized so as to promote maximum specialization of skills. Total purchasing job is broken up on the basis of specialization, such as follows.

Processing of purchase requisitions, Sending out enquiries Negotiating with the vendors and selection of suppliers, Preparation of purchase orders, Receipt of material, inspection and storing. Dealing with accounts section, Maintenance of records etc.

Each job, or a group of jobs, is assigned to individuals or group of individuals who specialize in that work. No doubt that people get expertise doing same job and day out. The company will benefit to get low prices. However, they will lose their identity with the product and each component.

b) Organization by product:

In the company different products are developed, manufactured and marketed. Each product has to have its own purchase cell. The persons get better knowledge of the product. So they can have better understanding of need of quality as well as quantity requirements of the items. These persons can help planning part of the production function.

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The items purchased are classified into groups and each group is assigned to a team of personnel who specialize in purchase of that particular type of materials. For example, a team may be specialist in buying raw materials. While other in components and sub-assemblies, and so forth. get good exposure to purchase knowhow. Also since each product has different variety of the components involving different processes, they get good technical knowledge of the processes and the persons involved have to handle all the responsibilities of the purchase functions. So they vendors accordingly,

c) Organization by location: There are multiple locations for a company. This is applicable for the organizations, which are large and have several plants. Each plant has a purchase department under the overall supervision of the central purchasing department. The central purchase may help for organizational

needs but each individual purchase department will have its own freedom to decide their prices and rules.

These purchase people find local vendors to feed their components. As the region has its own culture, quality concepts, skills, and economic condition, accordingly the resulting components will follow the outcome.

d) Organization by process:

The Company is basically involved in very standardized processes. The buyers need to be expert in the

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manufacturing processes. In such case of manufacturing, sometimes it is advisable to organize the purchase activities according to the stage of manufacturing.

Objectives of Evaluation of Purchase Department

a) To measure performance of the purchase department.b) To inspect the vendor and its activity.c) Order placement decision is easy.

SYSTEM IN PURCHASE DEPARTMENT

The procedure of the purchase is shown as per the flow chart shown in the next page. These are the step in which purchase transactions carried through from its inception to its conclusion. Since there are wide variations among industries, companies, organizations, products and personnel, there will be some slight deviation in the procedure to suit the particular set up of the company.

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1)Purchase requisition This is the document, which initiates the activity of purchasing any matter in the organization. Any person needing some material in the company fills up this form. The initiator gets the component drawing and finds the annual requirements for the item. He calculates the rate for the item if it is not available. If the item is new, the rate for the item has to be calculated. The document has to be authorized before it is released to the purchase department, because it generates inventory in the organization.

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2)

Requisition of quotation

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After the purchase department receives the purchase request, it gets trigger for further chain of activities. The buyer releases the enquiry to the vendor. There should be generally 3 vendors. All of them should be capable to make the item as per the quality required. Also the vendor should be having capability to invest finance required to generate the goods. In the “enquiry” form it is essential to fill up quality requirements of the item and annual requirements for vendor to understand the business content in the enquiry. The vendor also must know clearly, the name and designation and telephone number of the person to whom he has deal. Many buyers methodically rotate their lists of potential suppliers in requesting quotations. If supplier is high bidder on several quotations, his name in term porarily dropped from the list. Suppliers who already have a substantial amount of the buying company’s business may also be dropped temporarily. Buyer should not request a quotation from supplier with whom he has no intention of doing business. Quotations are expensive to prepare, and it is unethical to ask suppliers to prepare them when they will not get an order regardless of what price the quote. The buyer can do nothing with the supplier’s quotation until engineering department approves or rejects in the purposed change. If the change is approved, he usually will get new quotation from other bidders.

3)Purchase order

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The buyer gets quotation from different vendors. He has his cost estimation ready. He then tabulates the quotations. Find who the lowest quotation vendor is. He also evaluates the credential of the vendors. He then invites top one or two vendors who are eligible for getting order of discussion. He negotiates the price and places order on the party. If there is urgency he gives letter of indent to the party to start the work, before he can give authorized order copy to the vendor. There is very rare case when the order can be placed in good time, which can give “proper lead time” to the vendor to process material. So it is essential to expenditure the matters to place the order.

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4)Planning and follow-up Follow up is the important function in the life of buyer. Also it is highly undervalued and seen as unpleasant. But unfortunately nothing ever gets done unless good follow up is done. Very rare vendor Is found, who supplies material as he promises and as what is discussed and agreed amongst two parties.So the buyer has to have good skills follow up. This activity demands following:(a) Telephoning at regular intervals.(b) Visit to the vendor’s factory and seeing progress regularly (c) Calling vendor at regular interval for discussion on plans.(d) For new components development attending tool trials and

expediting sample inspection reports

The follow up has to be done to see that the matters are moving as per the plans.

There are different methods to make the plans.

Gantt charts or bar charts PERT- program evaluation review

technique CPM- critical path method.

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TYPES OF PURCHASES As per the company and needs of the occasion the purchase method has to be adopted. The normal procedure may be proper for the regular items. But it is not always advisable to go through that procedure.

For different purposes it will be better to follow different methods as per the need.

TENDER SYSTEM:

This method is usually followed in government organization, Municipal Corporations or public sector organizations, for buying number of types of items or services. Intention is mainly to curb the possibilities of favoritism and give good way to auditing function. The method motivates buying process impersonal .It also gives opportunities to the variety of known and unknown suppliers.

Generally the value of order is high in this case. For larger value project and higher technical requirements global tenders are invited. The methodology takes more time and the pipe line of activities is long and the authorization system is highly defined and hierarchy levels are very important to be maintained. There is no quick fixing mechanism available in this method.

Methodology followed is as under:

(1) Define the requirement/Project clearly.(2) The advertisement to be given in minimum three

national level. English papers and trade journal, calling for offers.

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(3) Generally offers are to be placed with earnest money and before a stipulated date, after which it will not be accepted. They are to be filled up on a prescribed tender form.

(4) Tender document is available at cost. It contains the terms and conditions .Sufficient time is given to fill the tenders.

(5) The tenders are opened publicly on the decided date and the work is awarded to the lowest bidder.

(6) If the lowest bid is more than the estimated cost, the negotiations are done with that party and then they are awarded the work.

SUBCONTRACTING:

This method is used basically for the purpose of getting the assembly or the sub-assembly of the products done from the vendors. The vendors in this case have generally the small factory. He may be having the small assembly tables at house. The investment in the equipment is low and more of labour force available. The people recruited there may be with low skills and they often need guidance and training from the buyer’s factory.

In fact such small vendors form an extension of the assembly shops of the buyer’s factory. So the supervisors from the buyer’s factory are the real bosses of the vendor. All the technical help, processes, tools, gauges, inspection / check sheets are provided and overseen by the factory supervisors till the assemblies are approved by quality control department. Often the quality control engineers and inspectors do the checking at the vendor’s place,

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So that the approved assemblies can be packed and sent to the warehouse.

This methodology took popularity in the countries like Japan where the small vendors were groomed to develop cottage industry. This concept is taking roots in India.

Reasons for Going for Subcontracting are as follows:

The labor cost is at increase .Overheads are increasing. Assembly technology is not complex and does not need

costly equipments. So the assembly function is easy to be given out.

The small vendor can manage the labor property and can demand high rates of production from operators and paying them lesser salaries.

Often it is found that subassembly of a particular unit was made at the rate of 100 numbers per shift in a big and developed company where an average operator was paid Rs. 10000 per month. Hourly rates of the assembly shop were Rs.80.The same subassembly unit was subcontracted to the vendor. There the operator started making the unit at the rate of Rs.150 units per hour and reached to 190 units after a month or two when he learnt the process well. The hourly rates at the place were about Rupees 20 at the vendor’s place. This gave the benefit of about seven to eight times by subcontracting.

The efficiency and productivity of the operators in the big industries is poor and at decline day by day.

The purchase department has no major job excepting the job of the rate fixing.

There is good need to develop small vendors. The technocrats are required.

There are problems as follows:

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The union has to be cooperative. They fear the reduction of strength.

The secrecy of the technical matters of the products, processes, tools, etc is difficult to maintain. The vendor has to maintain confidentiality.

Lot of material has to send to the vendor with high frequency. In the big and developed company there are number of tedious procedures, paper work and legal commitments. This increases work and irritations of the factory people.

It is argued that the quality of the assemblies produced at vendor’s place is inferior as compared with those made in the factory.

CAPITAL EQUIPMENT PURCHASE:

The purchase of the capital goods is usually is planned in the days of prosperity and when the production

and sale rise is projected. The manufacturing and related departments are generally aware as to what they want for progress and to enhance the capabilities. They are waiting for the signal from the seniors to start. This people know the makes and specifications.

Use department, which is manufacturing department, does mainly the study of the equipment or it may be under the area of general management. The intent is to obtain general info. About the equipment the purchase department has to gather sales proceeds and operating literature together with approximate price and information. The particularity of the schedule date is that often delivery schedule urgent.

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That means till the time the equipment is not there the work was going on. But the moment the sanction for the capital budget is taken there is hurry for the arrival. The purchase department has the chain of activity. The activities go hand in hand with production and account department. In some companies all most all the activities and paperwork is done by the user/production department/plant maintenance department.

Methodology:

Get the mgmt sanction for the indent. Contact the diff. parties who make the equipment. Make comparative study of the specifications and quotations.

The specifications and quotations. The. The manufacturer selling engineer of the manufacturer does lot of the buyer’s drawings. Sometimes the sells person tries to load his efforts on the quotation. It must be kept in picture at every time.

Make the indent for purchase department. Negotiate the price and other details with the vendor. Such

as trials, training, approval, testing of the samples made in trial. SPC study case of criticality of the equipment to arrive at Cp, Cpk etc.

Place the order to the supplier. Often sells price includes the efforts mentioned above for trials and forwarding. Numbers of other details are to be settled in case of overseas supplier. These have to be done along with the Indian selling agents of that party.

In case of imported equipment the import license is to be opened.

When the equipment is ready conduct the exercise of trials as mentioned above.

After satisfaction get the equipment at the factory. Make the payment and inform the accounts department

about closing the sanctioned budget.

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Important consideration is the reliability of the vendor in standing. Once the equipment is installed, unexpected problems can arise. In that case, what is the vendor’s policy on providing replacement?

PETTY CASH SYSTEM (CASH PURCHASE):

Many firms use petty cash funds for making small one time purchases often less expensive for an individual user or a purchasing delivery to buy minor items personally and pay for them from a petty cash to avoid buying them through the conventional buying system. Any inefficiency that may arise because of a lack of buying skills is more than saving the cost of placing a purchase order. This is system that virtually eliminates paper work. A sum of money set aside to meet minor expenses of a business. This procedure is most effective for purchasing small orders from any sources whether registered or unregistered. It is not essential to get the authorized indent for these purchases. Generally these are the items, which do not go to stores, and do not need, in the regular production of the product. These may be sundry items those are readily available in the market and very low in value.

For example: Pliers are available in the market and is not a stock of the company. The production supervisor will buy it on cash purchase method. The cost of pliers is about Rs.60. making the indent and placing order and buying through normal system will take more than Rs.500 and also it will take more than a month or two. All

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that is not essentials. Cash purchase is thus very convenient way to buy small items.

Some companies find it economical to make small one-time purchases basis. Material can be ordered by telephone and paid for on arrival. Purchase can be made with petty cash or with a departmental cheque written from amount sanctioned for such use. Each department in the company is set-aside with the amount as planned for “cash-purchase” purpose. This becomes very convenient for departments and also for purchase department, which avoids complexity of documentation and authorization for small purchases.

STOCK PURCHASING:

The recent material management demands to reduce or avoid inventory. That is aimed at by stockless purchasing. For getting success in that purpose, it is necessary for the buyer and the supplier to work together very closely. There is no financial commitment is from purchasing company. This responsibility is lying on the supplier. The goods may be located either at the supplier’s or the buyer’s location.

The inventories are to be maintained at the supplier’s location generally supplier is preferred who is nearby space.

The cost at the supplier’s end may be lower, because he may be able to perform these functions more economically than the buyer since he is a specialist in the products. Also the cost saving is generated due to the fact that the supplier may be serving a number of similar buyers and thus be in a position to consolidate and lower the total maintenance of

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inventory of the purpose of back up. They may need smaller safety stocks.

ORDER ON TELEPHONE:

For small orders this method is used to reduce the paper work in this method the purchase department does not prepare a formal purchase order when the international material requisition is received. The order is placed by telephone. The requisition is used in the receiving procedure. The requisition form is used for the purpose of international control. The request includes all the data normally included on a purchase order.

CONCLUSION Purchase departments buy raw materials, parts, machinery, and services used by production systems. The objective of purchase management is to procure the right equipment, materials, supplies and services in the right quantity, of the right quality, from the right suppliers, at the right time, at the lowest price. While the value of purchased items varies from

industry to industry, it adds up to more than fifty percent of sales in all industries. Purchase management is regarded as a significant activity in many organizations because of the high cost involved in carrying out purchasing activities, increasing quality benchmarks, and increasing global competition.

Purchase activities can be organized by using two basic approaches: centralization and decentralization.

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Many manufacturing organizations use a blend of these two approaches to organize their purchase activities. The purchase manager, who heads the purchase department, is responsible for developing vendor networks, selecting suppliers, negotiating contract terms and conditions with suppliers, and ensuring the timely delivery of the required supplies.

Whenever a new item is indented, the purchase manager must determine whether to make the item in-house or buy the item from external vendors and suppliers. Many people are of the opinion that the employees working in the purchase department are corrupt because the regular activities of the department involve huge sum of money. Organizations should therefore develop guidelines on ethics for employees in the purchase department.

BIBLIOGRAPHY www.icmrindia.org

www.purchasemanagement.com

www.pgsupplier.com

www.wikipedia.com

Shashikant d. aphale’s production and material management book

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