P. J. H. Baily B.sc. (Econ.), A.C.I.S., F. Inst. P.S. (Auth.)-Purchasing and Supply Management-Springer US (1978)

8/9/2019 P. J. H. Baily B.sc. (Econ.), A.C.I.S., F. Inst. P.S. (Auth.)-Purchasing and Supply Management-Springer US (1978)

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P

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P

urc

ha

sing

an

dSu

pp

ly

an

ag

em

ent

P J HBaily

B.Sc. Ec

on.), A.C.l.S.,

F.I

nst.P.S.

FOUR

TH E

DITION

Spr

inger-Scien

ce+Busine

ss Media, B

.V.


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First published 1963

Second edition 1969

Third edition

1973

Reprinted 1976

Fourth edition

1978

© P.J.H. Baily 1963, 1969, 1973, 1978

Originally published by Chapman and Hall in

1978

Photoset by Red Lion Setters, Holborn, London

ISBN 978-0-412-15690-8 ISBN 978-1-4899-6900-2 (eBook)

DOI 10.1007/978-1-4899-6900-2

This limp bound edition is sold subject to the condition that it

shall not, by way of trade or otherwise, be lent, re-sold, hired

out, or otherwise circulated without the publisher's prior

consent in any form of binding

or

cover other than that in

which it is published and without a similar condition including

this condition being imposed on the subsequent purchaser.

All rights reserved. No part of this book may be reprinted, or

reproduced or utilized in any form or by any electronic,

mechanical or other means, now known or hereafter invented,

including photocopying and recording, or in any information

storage and retrieval system, without permission in writing

from the Publisher.

Distributed in the USA

by Halsted Press, a Division

of John Wiley

&

Sons, Inc.

NewYork


5/310

Contents

Preface

Part one: Fundamentals

of

purchasing and supply

1 Scope and objectives

2 Make

or

buy?

3 Purchasing practice

and

procedure

4 Information technology

5 Planning physical storage

6 Storesoperation

and

procedure

7 Materials coding and classification

8 Principles of inventory management

9 Stock control practice and procedure

Part two: Practice and techniques

10 Purehase specifications and quality control

11

Market structure

and

behaviour

12

Selecting suppliers; problems and systems

13 Trading with suppliers

14 Purehase contracts

and

contract clauses

Part three The management

of

purchasing

and

supply

15

Planning

16

Personnel

17

Organization

18 Control

Index

vii

3

19

30

53

63

77

90

98

118

141

154

169

190

211

233

256

266

285

307


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7/310

PAR

TONE:

Fundamentals

of

Purchasing

and supply


8/310

1

Scope and objectives

Organizational purchasing is the process by which organizations define

their needs for goods and services, identify and compare the suppliers and

supplies available to them, negotiate with sources of supply or in some

other way arrive at agreed terms

of

trading, make contracts and place

orders, and finally receive the goods and services and pay for them.

Typically this process is complex. It can involve a number of people at

various

Ievels

in the hierarchy andin several functional departments. It can

be a lengthy process: major 'one-off' decisions may take years to finalize.

Even routine repeat orders which are placed immediately may be placed in

accordance with policy decisions reached after much consultation and

experiment.

The purchase decision process is made more complex by its detailed

involvement with several other decision and control processes within the

organization. These may include, for instance:

(l) in manufacturing organizations, and in some retail chains, the

designing and specifying of products

(2) in distributive organizations, the merchandising decisions: what

goods

will be

carried and sold

(3) the physical supply cycle which the actual goods pass through as they

are despatched

by

the supplier, transported, received, stored, and issued or

sold

(4)

the administrative cycle

of

requesting, ordering, progressing, receiv

ing, paying for and accounting for goods

(5) the stock control policies and procedures which determine, control

and replenish the range of items stocked

(6)

in

manufacturing, the production planning and control function


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10/310

Sc

ope and obj

ectives

5

work in the

canon

of

E

nglish litera

ture, severa

l o

f

the ho

rseback pilg

rims

are

described

as 'p urchasou

rs'

or

(Fren

ch having b

een the lang

uage

of

the

ruling class

es until rec

ently) 'acha

tours' . No

salesmen m

ade the pilg

rim

a

ge.

Many of Chaucer's pilgrims have occupational titles which with the

passage

of time have c

om e to sou

nd more l

ike surname

s; there w

as a

'm

anciple', fo

r instance, d

escribed as

an expert ca

tering buye

r. There was

a

'reeve

' who could

'b etter tha

n his Iord

purchase', a

nd no aud

itor could

catch .h

im out. The m

erchant wa

s stately in

his bargain

ing, and as

for the

sergean

t o

f

law,

So

great

a purchaso

ur was now

here none .

..

N

owhere so b

usy a man

as he there w

as,

And yet he seemed busier than he was.

There a

re buyers t

oday who

have never

made a pil

grimage and

do not

know a r

eeve from a

manciple

of whom the

same could

be said.

Coming clo

ser to our

own time, d

uring the n

ineteenth an

d early twe

n

tieth c

enturies m

any leading

businessm

en adopted

an entrep

reneurial

approach to

purchasing

which mad

e a m ajor co

ntribution

to the succe

ss of

their org

anizations,

as has been

discussed

elsewhere[l

].

Organizational buying today

The

present-day

organizatio

ns which a

re the sub

ject

of

this

book are

en

gaged in m

anufacturing

goods, pro

viding serv

ices or distr

ibuting goo

ds

to consum

ers and us

ers. Buying

for such or

ganizations

has indeed

some

th

ing in comm

on with th

e sort

of

bu

ying which

all o

f

us do

when w

e

ma

ke

purchase

s for ou r pe

rsonal needs

or those

of our familie

s, but it is a

lso in a

num

ber

of

way

s different,

and it shoul

d not be ass

umed that e

xperience in

the one

provides ex

pertise in th

e other.

The scope

and objectiv

es o

f

the pur

chasing fun

ction and it

s im portanc

e

in the achievement of organizational objectives varies from one organiza

tion

to another.

In this cha

pter w

e

co n

sider next t

he differenc

es and simi

larities

between pu

rchasing an

d supply i

n th ree ma

jor sectors

of the

e

conomy: th

e distributi

ve trade, t

he public s

ector, and

m anufactur

ing

in dustry.

T heseterm

sare all used

in a broad

sense; manu

facturing in

dustry

fo

r this purpo

se comprise

s all those o

rganization

s, public or

private, larg

e

or sma

ll, which m

ake or proc

ess goods o

r m aterials

for sale; th

e public

sec

tor compris

es central a

nd local go

vernment a

nd certain

other publi

c

services

; and the di

stributive tra

de or indu

stry compris

es all those

organi

zations which buy and stock goods for resale, whether wholesale or retail,

witho

ut alteration

.


11/310


12/310


7

the main reasons for the growth of the great chains during the middle part

of the century. The physical supply arrangements may be either direct from

suppliers to branches, or from suppliers to one or more central warehouses

and from there to branches.

When amultiple operates retail outlets which differ in character,

as weil

as in size or location, stores managers may be given some discretion in the

selection and pricing of merchandise even though central buying

is

the

normal policy. (This approach is adopted in the UK at present by John

Lewis and House of Fraser. l t is of interest also that Harrods and

Carrefour, the old and the new as it were, both give full purchasing

responsibility to the department head or buyer despite the trend towards

central buying.)

Inevitably this growth in central buying has led to a diminution in the

roJe

of

the wholesaler. Retailers obtained most

of

their merchandise from

wholesalers in the early part of the century. Wholesalers 'broke bulk', i.e.

bought arge lots from manufacturers and supplied small lots to retailers,

often on credit. Although major retail chains now deal direct with manu

facturers, some wholesalers still do weil as special middlemen for the

smaller retail outlet, with developments such

as cash-and-carry ware

houses and voluntary buying chains. Industrial distributors, who supply

goods and other services on a wholesale basis to manufacturers and public

sector organizations, have also played an increasing part in the

UK

and the

USA in recent years.

There are obvious differences between the work

of

the retail buyer and

that of the industrial or public sector buyer, but also (as considered later in

chapter 16) there

is

much common ground. Industry and the public sector

have taken a particular interest in the purchasing policies and procedures

of one very successful retail chain, Marks & Spencer Ltd, which pioneered

a new approach to supplier relationships.

The company's annual reports usually refer to supplier relationships in

glowing terms. In 1972 for instance the chairman said:

The unique relationship we enjoy with our manufacturers has been built

up over many years of joint effort to extend and improve the range of

St. Michael merchandise. Our partnership is based on commercial and

technical collaboration between independent companies with a common

interest and approach to production, management and human relations.

We are working together on a range of

problems from technology,

engineering and administration to staff management and welfare.

We

have noted with pleasure their parallel growth to ours and appreciate

that they have increased their productive capacity to be able to meet the

growing demands of our public.

Goods are made to detailed specifications by carefully selected suppliers.

Production and quality control advisory services are offered by Marks and

Spencer to guide and assist suppliers in complying with exacting standards.


13/310

8 Fundamentals ofpurchasing and supply

In the words

ofthe

firm's official history[2], 'through its technical services

and its merchandising departments Marks & Spencer undertook to ensure

that at every stage of production back to the primary producer of the raw

fibre the needs of the consumer were represented, and at each stage of

production its specialists and technologists collaborated with the firm

responsible'.

These specialists and technologists were not 'backroom boys who

operated in mysterious isolation. They were fully integrated into the

commercial organization of the business,

so

that they were active and

indispensable members of its buying department'.

The public sector

The term 'public sector' denotes a collection

of

services which come more

or less directly under government control. It

is

generally considered to

include:

(1) central government itself, with its many departments and agencies

(2) certain other services provided nationally, such as in the UK, the

Health Service or in the USA, NASA

(3) for some purposes, the nationalized industries

(4) local authorities.

Centrat government

The increasing scale

of

government actlVltles and interventions place

government procurement agencies high among the big spenders of the

world. Probably the largest single purchaser of goods and services in

existence is

the United States federal government, if indeed when so many

departments and individuals are involved it is meaningful to speak of a

single purchaser.

The United Kingdom government buys about

lOOJo

of the entire output

of UK manufacturing industry. The range of purchases is immense, from

such things as paint and cleaning materials which are in common supply, to

complex weapon systems, and is shown in Figure 1.1. Certain industries,

such as aerospace and computers, are heavily dependent on public sector

patronage, both in the UK and in the USA. Complex issues of power and

control and the relationship between the public and private sectors are

raised by some of these transactions.

The main aim in government buying has been defined as 'to obtain what

is needed at the right time and in such a way as to ensure the best value for

money spent' (White Paper on Public Purchasing, 1967, Cmnd 3291). This

is

almost a textbook definition

of

the main declared aim

of

most organiza

tional buying, yet between the normal practice in industry and the normal

practice in government buying, considerable procedural differences have

developed.

The basic reason for these procedural differences is the need for public


14/310

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15/310

10

Fundamentals

of


accountability in the expenditure of public money. Government buying, it

is

thought, should be organized and executed

in

such a way that it not only

is, but can be seen and shown to be, honest, fair and impartial. This

laudable objective has led to procedures which provide enough recorded

data to construct and support an answer to any public criticism, including

questions in Parliament, and to satisfy the external auditor. (When

Chaucer praised the purchasing ability of his sergeant

of law

because 'there

was none auditor could on him win', he

was

no doubt drawing on his own

experience as a government employee.) Since job security isahigh priority

for the public sector employee, and since

his

normal payment system

provides little scope for rewarding unusual successes but plenty of scope

for penalizing failures, there has also been a tendency for all purchasing

decisions to be taken by committees so that no individual could be held

accountable for success or failure.

Attempts are being made to change this, and the organization and

methods used for government buying are under constant review. Most of

the many Civil Service buying units already have extensive buying responsi

bilities. The Procurement Executive, for instance, handles all the require

ments of the armed forces. The Stationery Office buys paper and supplies

printed documents. The Property Services Agency provides accommoda

tion and equipment for all government departments. There is much scope

for standardization in such items as office furniture, carpets and cleaning

materials which are in common use, and bulk purchasing

of

standardized

requirements can bring substantial savings; but there are Iimits to what can

be achieved. There is the need to stimulate innovation by suppliers and to

keep competition alive; the capacity of firms is also in some cases a Iimita

tion. Large-scale central contracting has been shown to

be

economical in

some cases, but in other cases local contracts with short local deliveries

have been equally economical and have generally provided a good service.

I t is advisable to avoid doctrinaire positions in matters of this kind and to

Iook at the facts which apply in particular cases at particular times.

Other public services

The public sectoralso includes other public services provided nationally. In

the UK this includes the Health Service, comprising hospitals and other

health care institutions located all over the country, whose combined pur

chasing power would be equivalent to a major industry.

I t

is a major, and

in some cases a monopoly customer for the pharmaceutical and related

manufacturing industries.

The nationa/ized industries

The nationalized industries are a diverse collection, constantly being added

to. Some are entire productive industries such as coal mining and steel

making, formerly comprising many private organizations which have been

taken over by Act

of

Parliament and converted into state monopolies.


16/310


11

Some are parastatal organizations which have never existed except as

public property, such as the British Broadcasting Corporation. Some are

major concerns which were taken over to avoid bankruptcy and maintain

employment. The Post Office was for 300 years a government department

or Crown Office until it was converted into a public corporation on the

nationalized industry model.

The nationalized industries are part of the public sector firstly because

they are public property; and secondly because, as a result of this, a high

standard of propriety is required in the allocation of contracts. Public

accountability is a proper accompaniment of the expenditur"e of public

funds, and although it

is

not interpreted in quite the same way for

nationalized industries as it

is

for government departments, nevertheless

the several investigations which have been made into, for instance, the

Purchasing and Stores operations

of

the National Coal Board, were

probably more severe and detailed and conducted more in the spotlight of

public scrutiny than would have been the case if the Board had not been

heavily subsidised by the taxpayer.

Thirdly, nationalized industries belong with the public sector because the

government, through the appropriate minister, retains powers of last

resort, such as to appoint and discharge the chief executive, and to approve

or reject major capital expenditure proposals. The minister may also have

or seek to exercise ill-defined powers to influence policies and decisions

in

the industry in accordance with the wishes

of

the government

of

the day.

Purchasing policies at the highest Ievels have been affected,

in

the UK, by

government pressure to buy British computers or British aircraft; and in

the USA by similar pressures to buy American computers or American

aircraft. Many governments- Arab, American, British, African- also

try to use international trade as a Iever or instrument in furthering their

diplomatic policies. Firms are urged or compelled not to deal with

countries which areout of favour with the government, and ministers tend

to lean most heavily on the nationalized industries.

But at the operational

Ievel

there

is

often little difference between

industrial purchasing in a nationalized industry and industrial purchasing

in one which

is

not nationalized. There

is

free interchange of purchasing

staff. Policies, practices and career prospects in nationalized industries

such

as

the British Gas Corporation seem to resemble those in comparable

private sector organizations such as Unilever, Shell or ICI more than those

in

government departments.

Local authorities

Until the mid-seventies the number

of

local authorities existing in the

UK

was arge- about 1800- and although their total expenditure

was

size

able ({6827m, equivalent to about 1511Jo of the gross national product in

1970), many of them were small organizations and most had no arrange

ments for central purchasing.


17/310

12 Fundamentals

of


Two significant changes then occurred, with far reaching effects on Iocal

authority supply. The first was brought about

by

the Local Authorities

(Goods and Services) Act, which became

Jaw

in

1970.

This empowered

local authorities to engage in joint purchasing arrangements, and started a

movemenf towards consortia buying. The second was the restructuring in

1974 of the local authorities themselves into fewer (under 500) and conse

quently arger organizations. This meant that more of them were of

sufficient size to justify the employment of specialist purchasing and

supply staff, either

in

a relatively small contracts section, or

in

a fully

fledged supplies department with central storage and transport fleet.

It might be thought surprising that the Local Authorities (Goods and

Services) Act needed tobe passed. Local authorities are not like businesses

competing for customers in the market. They each serve a defined area and

provide similar services to the people

of

those areas. Despite the possible

existence of parochial or rivalrous attitudes among elected members or

officials of the authorities, it seems obvious that the scope for collabora

tion is immense, and that joint purchasing arrangements are an obvious

and desirable form of collaboration. However the legality of such arrange

ments

was

considered dubious unless specifically authorized by a local Act

(as was the case with the Greater London Council); there was a possibility

that expenditure by one authority for the benefit of another might have

been regarded as ultra vires. The Act therefore specifically authorized

every public body within its scope to make arrangements with any other

for:

(1) the supply of goods and materials

(2) the provision of administrative, technical and professional services

(3) the use of any vehicle, plant or apparatus

(4) the maintenance of land or buildings.

Each Jocal authority needs to proeure goods and services for a hetero

geneaus collection of departments, such as libraries, parks, highways,

schools and catering establishments. Collaboration between authorities

enables buyers to pool the requirements

of

similar departments in different

authorities, and two main purchasing advantages are claimed for this.

Firstly, lower prices can often be obtained when Iarger quantities are

purchased on a single contract; and operating costs can also be reduced if

storage and distribution facilities are shared by authorities. Joint purchas

ing by authorities can thus reduce both invoice cost and overheads; but it

does presuppose that the authorities have standardized their requirements.

Secondly, a larger scale of Operation can justify the employment of

specialist staff skilled in modern purchasing techniques and possibly with

expertise in special areas such as catering, office furniture or printing and

stationery.

Substantial savings have been reported; 2507o price reductions for items

in common use, net savings after allowing for overheads of 10-15%, for

instance. User departments often react initially to such claims with


18/310


13

distrust. Their understandable misgivings were challenged by the Joint

Advisory Committee on Local Purchasing (JACLAP) in a 1972 report as

follows:

Whether individually small or arge, local authorities collectively are

big business and it is up to local authorities to see that either individually

or

by

acting together they purchase as supermarkets and not as corner

shops ... Central purchasing is too often associated, in the minds of

elected members and officers, with the provision of unsuitable goods,

in inappropriate quantities and in unappealing plain packs, from the

quartermaster's stores; and reservations are rightly expressed about

imposing patterns of consumption on children's homes and other local

authority services having a high degree

of

involvement with individuals.

But the aim

of

central purchasing

is

not to impose a uniform pattern.

Variety reduction does not mean reduction to a single variety. The aim

of central purchasing is to allow local authorities to provide the best

possible services to ratepayers and inhabitants for their money, through

buying what in their own estimation is the most suitable product at the

best possible price.

A buying consortium which serves the needs of 4 million people and

spends f200m a year has opportunities to buy more effectively and

efficiently than the various buying activities

of

the associated authorities

acting independently. These purchasing groups include:

(1) The Yorkshire Purchasing Organization; based in West Yorkshire,

serving about

30

public bodies within a 90 mile radius, usually on a

catalogue basis, although it also makes contracts for direct supply.

(2) The Welsh Purchasing Consortium, comprising the Gwent, South,

Mid and West Glamorgan supply departments acting in consort, although

retaining their separate identities.

(3) The Consortium of Purchasing and

Distribution-

Avon, Cornwall,

Dyfed, Dorset, Gloucestershire, Somerset, Wiltshire, etc.

(4) The Greater London Council Supply Department, which has long

offered its services to London boroughs, education authorities and other

rate-supported organizations such as theatres and youth clubs, and has

more recently catered for Thames Water Authority, London Transport

and others. Clients can draw goods from the GLC warehouses against a

catalogue and price Iist, and can also use its facilities for the negotiation of

contracts for direct delivery at invoice price plus a small percentage.

Manujacturing industry

Manufacturing industry is still the largest sector of the economy, despite

the growth in service industry and government. The way the purchasing

function is implemented varies with size of firm, type of industry, and

system of production. Raw materials are a major purchase for the chemical


19/310


20/310


15

other users of purchased parts, materials and services, who are the internal

customers of purchasing and supply. Later chapters examine these topics

in greater detail.

Some organizations issue an internal Charter or Purchasing Manual

which incorporates a formal statement signed by management

of

what the

responsibilities of the department are and what services it

is

expected to

provide. Croell for instance suggests the following[3]:

(l) Provide all materials and services that the company elects not to

provide internally. In accomplishing this, purchasing must perform the

following basic tasks.

(a) Select and develop as required, vendors capable of meeting company

needs.

(b) Prepare and sign all purchase orders/contracts, so that the needs of the

company and all pertinent terms and conditions related to the purchase are

clearly understood by the supplier and documented accordingly.

(c) Monitor supplier performance and related company activities during

the course of the contract to assure that performance is accomplished by

both parties in accordance with that originally intended.

(d) Re-negotiate or terminate purchase orders/contracts as required when

changes occur, or as other conditions·develop that warrantsuch action.

(2) Provide information to and participate in management planning

sessions on subjects related to purchased materials services.

(3)

Review purchase specifications and assist operating departments in

selection of required materials and services for standardization purposes,

and to assure their availability from competent suppliers at reasonable

prices.

(4) Protect the company from all unnecessary or unauthorized commit

ments which may result from inappropriate contacts or discussions with

suppliers.

(5) Dispose of all obsolete materials, equipment, or scrap that is no

Ionger required for company Operations.

Marketing and purchasing

The buying department and the selling department are the two departments

which are mainly concerned with external relations, with reaching out into

the supply markets and the sales markets outside the firm. To what extent

does it make sense to say that both are engaged in marketing? This

question

is

partly semantic (what words mean and how they are used) and

partly it is about what departments do and how their work

is

perceived.

Definitions and discussions of marketing have certainly been dominated

by selling considerations in recent years, although not in earlier periods.

Consumer product manufacturers in the West which were competing for

discretionary spending by consumers took to the marketing concept in a big

way. The marketing concept, so called, could be described as the realiza

tion that firms need to find out what their customers want and take steps


21/310

16 Fundamentals

oj


to provide it if they are to prosper; rather than producing the goods they

were interested in producing, they needed to provide the goods the

consumer was interested in purchasing. The marketing concept was less

prevalent in industrial marketing, where many firms remained firmly and

indeed proudly product-oriented rather than customer-oriented.

Industrial marketing differs from consumer markering in several ways.

Firstly,

it

usually sells different products.

It

deals in heavy equipment, such

as tractors and machine tools; light equipment, such as photocopiers and

handpower tools; construction, e.g. of factories, docks and housing estates.

I t

sells raw materials, such as iron ore and coal; processed materials, such as

steel bar, chemieals and plywood; components, such as ball bearings and

electric motors and semiconductors; consumable supplies, such as cleaning

materials and cutting oils; and a variety of services, such as those of the

forwarding agent, the contract painter, or machine maintenance.

Secondly, it usually sells to different customers. Consumer marketing

aims at households and individuals. Irrdustrial marketing aims at organiza

tions, and these have different and often much more complex buying

processes. Consequently, when products such as motor cars or typewriters

are sold both to consumers and to organizations the markering approach

tends to be very different for the two.

As Webster and

Windpoint

out,

industrial and institutional marketers have often been urged to base

their strategies on careful appraisal

of buying behaviour within

key

accounts and in principal market segments. When they search the

available Iiterature on buyer behaviour, however, they find virtually

exclusive emphasis on consumers, not industrial buyers. Research find

ings and theoretical discussions about consumer behaviour often have

little relevance for the industrial marketer[4].

Yet the total value of inter-firm purchases of raw materials, components

and semi-finished parts, finished parts, tools and supplies, is considerably

greater than the total of sales to retail consumers. Rowe and Alexander

quote an estimate to the effect that interfirm sales are worth about 2·5

times as much as sales to individual consumers- 3·5 times as much if sales

to the government are included. They conclude that:

resource allocation, in effect the sorting or matehing of needs to supply

ing ability, is what marketing and selling is all about when looked at

from the economist's viewpoint, and nowhere

is

this function more in

need of being expertly carried out than in the area of interfirm trans

actions where industries are becoming interlocked in increasing inter

dependence[5].

This remains at least equally true if the words 'purchasing and supply'

are substituted for the words 'marketing and selling'. I t could indeed

be

said that the sorting or matehing of needs to supplying ability is what


22/310


17

purchasing

is

all about, and that in the area

of

inter-firm transactions this

often calls for marketing initiatives on the buying side.

This

is

sometimes described as 'marketing in reverse'. But one definition

of

'to market', in the most popular dictionary in the UK, is ' to buy or sell

in market', and the very word 'market' derives from a Latin word which

means 'to buy' (mercan). In earlier days the merchant venturers set forth

through unknown seas and distant countries in search, not so much of

customers although they had to have something to trade, but more of new

suppliers of new

products-

spices, furs, carpets, turkeys, tomatoes,

oranges - as well as of new sources of known materials such as gold,

diamonds and tin. Sourcing, and buying generally, was the venturesome

and creative part of their marketing effort.

In the distributive industries, the selection and pricing of merchandise to

sell

is

fundamental to marketing plans, and buying

is

therefore an

important part of marketing for the retailer. In the manufacturing indus

tries on the other hand, it

is

the selection and pricing of products to make

which corresponds to this, and the procurement of parts and material to

make them tends to be seen as part of the production process rather than

part of the marketing process.

Even here, some buying activities call for creative and entrepreneurial

skills, for commercial innovation and persuasion. l t

is

widely feared that

shortages of materials and certain products will be increasingly common as

the twentieth century draws to a close. And Kotler for instance argues that

in times of shortage the marketing problern shifts its location from selling

to buying[6, 7]. The development of

new

suppliers isanother example of

purchasing firms marketing their buying requirements to the supply

markets. And in the negotiation of major contracts (for the design and

development of equipment at the frontier

of

the art) to meet customer

requirements, the term marketing may well be equally appropriate to the

proposals and arguments coming from each side (if indeed it

is

appropriate

at all in this situation).

The increasing concentration

of

markets has been a noticeable feature

of

recent years and accounts for part of the difference between industrial

marketing and consumer marketing. l f three detergent manufacturers sell

to tens of millions of households, scientific studies can be made of the

market and how it can be segmented, of

marketing methods and how best

to apply them. But if an industrial manufacturer sells to six major

industrial customers plus a number of minor customers, the scope for

science is less, and it is more a matter of art. The shotgun communications

of mass media advertising are used in the first case; the sharpshooter

methods

of

field salesmen and low budget advertising in specialist trade

journals are used in the second case.

In many industries a small number of manufacturers produce most of

the output; and in quite a high proportion of cases, a small number of

customers take most

of

the output. Buying and selling are both affected by


23/310


the situation; after all, every purchase

is

someone's sale, purchasing and

marketing are the two sides of one coin. Purehase cost analysis, negotiated

prices based on mutually agreed figures for cost, arger and more expert

departments both for buying and for selling, are typical features.

When two

or

three arge firms supply equiva ent or interchangeable

products to the same market, at prices which each is reluctant to change

because of the risk of retaliation

by

the others, two obvious

ways

to

increase security as weH as profits are: firstly by product differentiation,

and secondly by cost reduction. Product differentiation makes the pro

ducts seem less equivalent or interchangeable to the customer. Cost

reduction enables a manufacturer to increase profits without starting a

price war.

Cost reduction in the fifties concentrated on the reduction

of manufac

turing costs, with much success in many firms. But

as

one managing

director said:

we have over the years by dint of research, engineering development

and good management, reduced Operating costs to such an extent that

now nearly 800Jo of total cost consists

of

purchased materials. Obviously

it is important that buyers have an

eye

for more than the cheap price.

Purchasing and supply have a major part to play in reducing cost and

increasing profit.

References

1 Baily, P.J.H. and Farmer, D.H. (1977), Purchasing Principles &

Techniques, 3rd ed., Pitmans, London.

2 Rees, G. (1969), St Michael, A History ofMarks & Spencer, Weidenfeld

and Nicholson, London.

3 Croell, R.C. (1977), Measuring purchasing effectiveness, Journal

of

Purchasing and Materials Management, 13, No.

1,

3-4.

4 Webster, F.E. and Wind,

Y.

(1972),

Organisational Buying Behaviour,

Prentice-Hall, Englewood Cliffs, N.J.

5 Rowe, D. and Alexander, I. (1968), Selling Industria/ Products,

Hutchinson, London.

6 Kotler, P. and Balachandrian,

V.

(1975), Strategie remarketing: the

preferred response to shortages and inflation, Sloan Management

Review, August.

7 Kotler,

P.

and Levy, S.J. (1973), Buying

is

marketing too, Journal of

Marketing, January.


24/310

M ake

r

buy

Before any

purchase o

rder,

or

pro

duction ord

er, can be is

sued, some

body

in th

e organizat

ion must h

ave decided

that the ite

m in quest

ion is to be

pur

chased, or

is tobe m an

ufactured i

nternally, as

the case m

ay be. Thes

e

decisio

ns as to wh

ich things to

m anufactu

re and whi

ch things to

buy out

may in pr

inciple be t

op managem

ent decisio

ns. But in p

ractice they

often

see

m to be tak

en as requir

ed by desig

n, producti

on o

r

purcha

sing people

,

acting toget

her or sepa

rately, with

no written

policy gui

de and with

no

appa

rent provisi

on for regu

lar review.

Here

we must dis

tinguish be

tween tacti

cal decision

s and stra

tegic

decisions

. M ake-or-b

uy decision

s taken

at departmen

tal Ie

vel

are

th ose

w

hich simply

apply the

existing

policy- they a

re tactical

decisions.

I t is

only

when a ch

ange in pol

icy is consid

ered that t

he decision

needs to be

taken at hi

gher Ievels

where comp

any strateg

y is decided

.

The existin

g policy

of a m anufa

cturing org

anization

is in a sens

e

crystalli

zed into th

e m anufact

uring plant

and faciliti

es it has a

vailable.

D

ecisions to

mak e intern

ally parts w

hich can be

made econo

mically, and

to

buy p

arts which c

an ' t , are th

us routine a

pplications

of the existin

g policy.

R

outine doe

s not necess

arily mean s

imple. Com

paring make

costs with

buy

costs

to see which

alternative

to adop t inv

olves some

consideratio

ns which

are hard to

evaluate. M

ost execut

ives will adm

it that the

custom

of the

compan

y, the cost

ing convent

ions adopte

d, prejudic

e and othe

r partly

a

rbitrary fac

tors play th

eir part.

This ap

plies even m

ore to tho

se make-or

-buy questio

ns where e

xisting

plant and fa

cilities wou

ld have to be

extended b

efore manu

facture coul

d be

underta

ken. These

involve a ch

ange in pol

icy. Neverth

eless there a

re times

w

hen a supp

ly m anager

may wish t

o re comme

nd such a c

hange.


25/310

20

Fundamentals

of


Routine make-or-buy decisions

Large organizations sometimes set up a make-or-buy committee, with

representatives from design, production, buying, and costing departments.

Deciding which parts can be made economically on available plant

is

of

course simpler than deciding whether or not to invest in

new

plant, and the

decisions have a shorter time-span - they can often be reversed the next

time the item is required. The economics of particular cases can be

complicated, especially when capacity

is

under-employed. Another diffi

cult problern occurs when capacity is fully employed and the question

is

which parts to sub-contract. As new suppliers appear or new processes are

introduced, the make-or-buy cost balance may alter.

There are two main reasons why a factory buys out parts which it is

equipped to make in: the first

is

that it can often buy eheaper than it can

make, and the second is that it may not be able to make all it needs of the

sort of part for which its plant

is

suitable because it hasn't got enough

plant. This capacity shortage may result from a rush of orders, or from an

expansion in sales which is outrunning the expansion in manufacturing

facilities; or

it may result from a deliberate policy of gearing capacity to

average

output and sub-contracting exceptionally high output

in

order to

run the factory at a stable base load.

How can a factory buy parts eheaper than it can make them, if it

is

equipped with suitable plant, when the buy price must include the seller's

selling expenses, distribution expenses, and profit?

The short answer is through specialization. This enables the specialist

supplier to get long runs and use special tackle. Any machine shop can turn

black steel bar into bright bar, but it is less expensive to buy bright bar in

the first place if that is what is wanted. Any machine shop can make a

white meta bearing, but costs will be reduced substantially if one of the

wide range of commercially available standard designs can be adopted.

Many parts can be made in any machine shop in short runs on general

purpose plant. But making them in long runs on special purpose equipment

enables the specialist supplier to take his profit and deliver the product to

the buyer's door, often through distributors who also have costs to cover

and profits to take, at a selling price which may actually be lower than the

buyer's bare direct cost for making in.

But specialization extends beyond tooling up for long runs. The motor

car industry buys in quantities which give long runs on a single order, and

has never been slow to equip itself with special plant; yet it

supports a host

of specialist suppliers employing between them four times as many people

as the motor car firms themselves. Some

of

these suppliers are large firms,

but many are tiny concerns in the backstreets of Birmingham and the Black

Country. How can a gasket supplier employing a hundred or so people sell

successfully to a motor car firm with a totallabour forceweil up in the tens

of thousands and whose qualified design staff alone heavily outnumbers


26/310

Makeorbuy?

21

the whole payroll of the gasket manufacturer? Why doesn't the motor

manufacturer buy out the gasket firm?

The fact

is

that specialization does not stop at the plant, the process and

the product; it extends to research and management too. In buying out

components such as gaskets and lamps and brakes the motor car men are

buying research and development as

weil

as just components. Car manu

facturers used at one time to make their own brakes, make the brake shoes

and rivet the linings on; but they found that by buying them out they also

bought specialist design talent and a trade knowledge based on experience

in the service of the whole industry.

In general therefore most factories concentrate their research facilities,

talents, and development on the main product, and buy from, rather than

compete with, suppliers who have specialized in the accessories and sub

sidiary parts they require. But there are plenty

of

exceptions to this rule.

Make-or-buy decisions are based on facts which may alter, when buyers

and others concerned should request a reappraisal in the light of changes

and developments both in their own plant and outside.

Make-or-buy questions involving capital investment

Serious problems in quality, delivery or price, or in guaranteeing continu

ity of supplies, sometimes justify the purchasing manager in making a

recommendation that consideration should be given to investing in new

manufacturing facilities in order to switch items from purchase to produc

tion. Such a recommendation will usually be made with reluctance,

because it could be construed as an easy way out of a purchasing problem,

because it does involve some loss of flexibility, and because of course it

builds up someone else's empire, at the expense

of

one's own.

Ensuring that very tight quality specifications are met by making the

parts within the organization is a traditional approach to quality problems.

For instance spool Axminster carpets with floral patterns may use sixty or

seventy different hues. Getting these colours right requires great and

repeatable accuracy in the dyeing of the yarn. l t is quite easy for two

shades of green to diverge slightly from the standards and become indis

tinguishable. Consequently many firms which weave spool Axminster

operate their own dyehouses despite the facts that dyeing is a specialist

trade and a very different one from weaving, and that there are many

textile dyeing and finishing firms producing high quality work. Carpet

manufacture is an old industry, and supplier education and development to

meet difficult quality Standards

is

the more usual approach in the newer

industries.

Delivery problems have prompted firms to take over their suppliers in

seller's market conditions. In the post-war period when machine tool

manufacturers enjoyed fantastic boom conditions

by

the Standards of

more recent times, supply shortages often set Iimits on their output.


27/310

22 Fundamentals

of


Several machine tool firms bought iron foundries as captive suppliers in

this period. Such decisions are board Ievel, requiring substantial capital

investment and some diversification of the business in order to ensure

supplies of sufficient quantities at the time required.

Price problems can sometimes be solved by threatening to make the part

internally instead of purchasing it. The threat

is

often implied. The buyer

does not use crude statementssuch as 'if you don't get this ridiculous price

down to a sensible Ievel we'll just have to make it ourselves'. Instead he

insists on cost breakdowns from the supplier. He then compares these with

internally prepared cost estimates. His cost estimator, who usually sits in

on the negotiation, adopts the position that these are the costs which apply

inyour (the supplier's) industry. Nobody has tospell out that these are the

costs which we (the purchaser) estimate we should incur

if

we decide to

make it ourselves. There has to be a serious possibility that the purchaser

will embark on manufacture if he thinks it necessary, for this tactic to be

effective.

Continuity of supplies can be a problern

in

bilateral oligopoly markets.

The motor car industry is rich

in

examples of situations where two or three

firms supply some specialist item to the whole trade. I f one or other of the

vehicle manufacturers decides to increase its security by taking over one of

the supplier firms, the result is a sharp decrease in the security of the other

vehicle manufacturers. There used

tobe

two or three specialist suppliers of

steel pressings who made car bopies for the whole British motor car

industry. A long strike at the firm which supplied car bodies to Jowett Cars

forced this estimable little manufacturer to close down. Ford Motor

pondered this situation, and decided to take over their main body

supplier - not, as the chairman explicitly stated in his annual report,

because of any dissatisfaction with their quality, delivery or price.

For many years Briggs supplied us with almost all our body require

ments. A car body today costs about

40


28/310

Makeorbuy?

23

problem? What eise could

we

try apart from making in? Is it really a

permanent difficulty or might it clear itself up in, say, a year? What would

it cost to give effect to the proposal? What sort of problems might it

involve? Could we absorb all the output ourselves? If we could make it pay

only by selling part

of

the output,

is

this the sort

of

business

we

want to go

into? Should we aim at making the whole of our requirements, or at

making part and buying part? Would this harm or help our relations with

suppliers?

Suppliers within the group

Topmanagement must decide what plant will be provided and hence what

things can be made, and what plant will not be provided and hence what

things must be bought out. This

is

because there

is

no general rule; policy

depends largely on what skills and talents the management has and where

its interests lie, as weil as on what funds are available and on the strict

economics of the situation.

l t is true that there is a difference between industries here. In old and

declining industries there may sometimes be a tendency for successful firms

to acquire their suppliers in order to eke out a slim pro fit margin by vertical

integration. In expanding industries horizontal integration, broadening the

end-product, may provide a better return on investment. But the difference

between firms in a single industry

is

far greater than the difference between

industries. In every industry there are firms which have succeeded by

specializing-

and others, equally successful, which have diversified.

There are also firms which have not been saved from failure by specializa

tion, and firms which have diversified and still failed. There

is

one firm

which makes nothing but aperients for parrots, a specialization so extreme

as to strike awe in the beholder; at the other extreme great combines like

Imperial Chemical Industries produce paint, plastics, wallpaper, dyestuffs,

metals: a score or more of specialist product groups.

Diversification on this scale brings purchasing problems

of

its own.

When one division buys the product of another division in the group, the

operation is intermediate between making in and buying out. In the short

term the price paid may not matter much, since it is like transferring money

from one of your suits to another; the money stays in the group. But in the

long term inter-divisional pricing does matter and does affect group profit

ability; because of its effect on relative profitability of divisions it affects

the allocation

of

resources between divisions. Price bargaining between the

divisions of a great corporation is consequently often as keen as price

bargaining between the company and its outside suppliers. And in theory

at least the buying division is often free to place its orders with an outside

source if the supplier within the group cannot match the outside price. But

in practice this freedom is far from absolute.

Research into the policies of

193

companies in the

UK

revealed that arge


29/310

24

Fundamentalsofpurchasing

and

supply

firms, and firms with a decentralized management style, gave considerably

more freedom to buyers in this respect than others did[2].

Transfer prices

Large concerns have to find some way to set transfer prices - the prices at

which goods manufactured by one division are transferred as supplies to

another division. In highly centralized firms these prices are set centrally in

three-quarters of cases[2]. This is said tobe because only centrat staff have

enough information to set prices properly. In multi-national companies,

transfer prices between divisions in different countries involve highly

complicated considerations of exchange rates and different tax laws, and

may be set with the main object of reducing the total tax liability of the

company.

Prices negotiated between selling division and buying division are not

always a happy solution. I f the seller

is

compelled to

sell

internally his

negotiating position

is

poor.

I f

he buyer is not allowed to buy externally, his

position is poor. Personalities and positions in corporate hierarchies com

plicate matters. A great deal of time can be taken up by these internal

negotiations.

Yet

some negotiation is necessary, and purchasing managers

for instance try to negotiate a discount off market price where this is the

basis chosen for transfer pricing on the grounds that market price includes

selling overheads such as advertising and salesmen which an internal

supplier does not need to incur.

Market price, and full cost of production, emerge as the two most widely

used methods of setting transfer prices. Market price is preferred when firms

are interested in divisional profitability, and production cost when they are

more interested in the profitability of the product[2]. Setting up product

divisions as pro fit centres is the standard method of running arge manufac

turing businesses. The authority and the accountability

of

the division chief

cannot be quite as untrammelled as that of the managing director of an

independent business.

I f

it were, the whole firm would degenerate into a

collection of separate units gaining nothing by association. But within

defined Iimits, and subject to centrat or corporate management's reserva

tion

of

certain matters such as sources

of

finance and major capital

expenditure, division chiefs have a good deal of autonomy so long as they

earn acceptable returns on the assets they employ.

This is why it matters to them how prices are fixed for goods or services

supplied by one division

of

the company to another division.

I f

Division A

supplies goods to Division B at an excessively high price, then Division A

is

profitable and its return on assets

is

high.

It

gets all the finance it wants.

Corporate headquarters backs the winner. Meanwhile Division B cannot get

approval for sorely needed development. Butthefigures are misleading; A's

good results, and B's poor results, are due to an unfair transfer price.

In principle the fairest approach

is

to charge opportunity costs: that is,


30/310

Makeorbuy?

25

what the seller division could charge an outside customer, or what the buyer

division would have to pay an outside supplier. Market price, in fact: but

this is not easy to establish unless the item is a standard price-list part. With

made-to-order castings, forgings, fabrications, the price may be set by

selling some

of

the output, and buying some

of

the input, externally.

The stated policy may then be to buy from the best source, inside or

outside the company. Buying departments get dispirited when they find

what seems a better source outside the company only to see their decision to

switch to an outside supplier overruled. But the real policy may in fact be to

sell the output of the supplier division at opportunity cost. This is equal to

outside supplier price when the internal supplier division is fully employed,

but it would change downwards if the division had unused capacity.

Market price can hardly be used as the basis for transfer pricing when

there

is

no real opportunity to buy outside. Production cost (fuil cost or

standard cost rather than marginal cost) is then the usual basis for transfer

prices.

Psychological complications make thoroughly rational policies on trans-

fer pricing difficult to implement. As Edwards and Townsend point out:

the material suppliers within a group may be supported even beyond the

point that a cool appreciation of the economics

of

the situation would

justify. Pride

is

at stake; the investment has been made and its results must

be bolstered. Loyalty

is

also at stake; once an undertaking has been

acquired, those who run it are in the family and therefore to be supported

in bad times as

weil

as good'[3].

Cyert and March describe the real-world firm as a 'coalition of partici

pants in which conflict is only partly resolved'[4]. When divisional results

depend partly on how

weil

a division has coped with external circum

stances and partly on the transfer payments they have managed to arrange

with other divisions, prices result in practice from a permanent bargain

ing process, rather than from the solution of a theoretical problern in

'resource allocation, performance disaggregation, or cost distribution',

and divisions whose results are poor

will

bargain hard for better results.

'In general we should find that transfer payments are made on the basis

of a

few

simple rules that

(1)

have some crude face validity and (2) have

shown some historical viability. We should find that they are the focus of

conflict between sub-units in the same way as other allocative devices.'

Organizing sub-contracting

Purchases

of

components which can be bought more economicaily than

they could be made in are regarded as normal purchases. But purchases of

components which could weil be made in but for a capacity shortage are

often regarded as a special type of purchase. Since what is being bought is

not

so

much components as capacity, the choice between different


31/310

26

Fundamentals

oj


components for sub-contracting involves consideration of relative machin

ing times as weil as price.

Sub-contracting is nearly always a combined operation of more than one

department. The purchasing department is involved because this is a

commercial operation in which company money

is

being spent with an out

side supplier; and the production control department is involved because

what is being bought is not so much particular things as a short-term

extension

of

the productive machinery; and inspection

is

involved since the

sub-contracted parts will usually be inspected by the buyer company's

internal inspection department just as if the parts had been made in. Much

of the detailed planning and progressing may be undertaken by the produc

tion control department as an extension of their normal work. Controlling

sub-contracting usually involves less desk work and more chasing about

than most purchasing jobs. One buyer who was put in charge

of

sub

contracting for a arge Yorkshire engineering factory found that he had to

spend about half his time visiting sub-contractors, which

is

very much

more than most buyers spend visiting most suppliers, and about a quarter

of histime in discussions with colleagues in his company's drawing office

and production planning department.

When there isn't enough sub-contract work to assign a man to it

full-time close and thorough co-operation between departments is

especially important. To stake out one area of work for purchasing and

another part of the job as a production control preserve is difficult and

unlikely to be rewarding; both departments should work

so

closely

together that such questions are academic.

Case study 2.1: Midland Motors (1920) Ltd

*

Midlands Motors (1920) Ltd is a manufacturer of heavy commercial

vehicles, many of

which are specially adapted to meet customer needs. The

company, successful, but relatively small, is a public limited company,

though over

5007o

of the shares are held by the White family. Sir Harold

White, the son of the founder,

is

the present managing director.

The company competes with the big guns of the industry by identifying

and filling small sectors

of

the market. Labour relations have always been

very good at Midlands Motors. Sir Harold has often in the past been heard

to say: 'We've got a good bunch of lads here, and we know how to Iook

after them.' Indeed welfare services and recreational facilities are second to

none. Midlands has always, as at present, paid wages in excess of general

rates.

In recent months a great deal of unrest had spread through the work

force (about 800 shop floor employees) of the company; production was

falling and absenteeism rising. Sir Harold was completely at a loss as to the

*Reprinted by permission

of

Purchasing Development Services, consultants in

purchasing and supply.


32/310

Makeorbuy?

27

reason for this situation. He had remarked to many people in the firm that

he was absolutely aghast at the attitude of his workers. The personnel

manager had conducted some research in an effort to identify the causes of

the unrest, and had come up with the following points:

(I)

The 'social contract' had meant that the rates

of

pay

of

shop floor

workers had remained at around the same Ievel, yet it was common

knowledge that management jobs had been 'shuffled' and renamed as a

device to circumnavigate the social contract.

(2) There had been re-organization of work on the factory floor. The

foremen in the machine shop had been asked to take on additional

inspection duties,

so

that the inspection department staff could be

redeployed in the finished vehicle area. This had affected: the machinists,

as the rate

of

rejection

of

finished pieces had risen, thereby reducing their

bonus; the foremen, who had more work to do; the inspectors who had

been moved; and the final assembly workers.

(3)

I t

was discovered that the attitude of top management, who saw

themselves as benevolent, was reckoned by some of the newer workers to

be patronizing and anachronistic and that Sir Harold was regarded as a

'supercilious' type.

Recently things had come to a head with the walk-out of the machine

shop foremen. Agreed procedures had been followed since the first request

for a meeting three weeks ago when the foremen had asked for an upgrad

ing in

view

of

their increased responsibilities, but management

was

adamant that this was not possible.

I t

was generally known that other

departments would not be disrupted immediately, as there was a reason

able stock of

most manufactured parts.

Mike Mullins, the buyer, was sitting in his office privately reflecting that

the attitude of Sir Harold was probably a result of his hurt pride -

employees had never had the temerity to ask him for anything in the past,

he had always anticipated well and increased wage rates in advance of

need, but that he seemed to be getting rather cantankerous. Just then the

door opened and Sir Harold walked in. 'Look Mike', he said, 'you must

buy from overseas if possible, for delivery as soon as can

be

arranged,

some of the parts which we would normally machine 'in-house' for the five

trucks on the Middle East contract. We can't afford to let this customer

down because of those silly beggars in the machine shop, and there should

be enough time to get what we need. I've had my assistant do some

checking, and the parts that are not yet manufactured are on this list.' He

handed Mike a sheet of paper and said, 'Let

me

know how you get on by

9.30 tomorrow.'

Mike spent most of the rest of the day working on the problern which

was not a particularly difficult one, there being only seven items on the list,

all of them fairly simple ones and to be made in batches of five. I t was

simply a case of finding a general machine shop on the continent or else

where which was willing to supply at short notice (a 'premium' price would


33/310


be charged

of

course).

By

five o'clock he had got the answer, a firm in

Amsterdam that had supplied goods before. He left the office, and

was

just getting into his car in the staff car park when he heard a voice from

behind-

'Hello Mike'; I t was John McKenzie, one of the foremen, who

went on to say

'I

daresay old Harry will be along to see you soon about

sourcing machined parts outside; take my advice, don't.' McKenzie went

on to say that it would be unfair to do so, in view

of

the just claims of the

foremen, and anyway Mike was an employee too, so there should be some

solidarity. He also made one or two oblique comments about inspectors

and fitters not looking too kindly

at 'inferior' parts from outside.

Mike drove home, and spent a long evening and a arge part of a sleep

less night worrying about the problem. The more he thought about it the

more complex it became, and

he

found hirnself considering the implica

tions for a surprisingly arge number

of

individuals or groups, most

of

them with interests which conflicted in some way. These were as follows:

(a) Sir Harold, who wanted the work to be done at all costs.

(b) The rest of the board, who generally supported Sir Harold but would

probably be ready to recognise the wider implications of resourcing the

work.

(c) The foremen, who would clearly be against the purchase of work

normally within their province.

(d) The other employees at Midlands, who would be in a

way

forced to

'take sides' in the dispute by handling (or not) the bought-in components.

(e) The Middle Bastern company, which was very anxious to have the

trucks delivered on time so that it could meet its own contractual obliga

tions with a third party.

(f)

The Dutch sub-contractor, who would possibly be reluctant to supply if

he was fully aware of other circumstances.

There was also the question of ethics. Mullins regarded hirnself as a man

of

integrity, and an upholder

of

professional standards.

In the early hours of the morning, Mullins made his decision. He would

tell Sir Harold that he feit unable to do this particular

job

and would take

the consequences. With that he slept fitfully for a couple of hours.

It

is

now 9.00 a.m. andin half an hour Sir Harold

will

expect to hear that the

problern has been solved.

Questions

(l) How should Mullins put the situation to Sir Harold?

(2)

Do you think Mullins' decision was the right one? What would you

have done?

(3) Devise a clause tobe included in a 'code of conduct' for buyers designed

to cover such contingencies as this one.


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Makeorbuy?

29

References

1 Ford Motor Co., annual report to shareholders for 1952.

2 Rook, A. (1972),

Transfer Pricing,

British Institute of Management

survey report No.

8.

3 Edwards, R.S. and Townsend, H. (1958), Business Enterprise, Its

Growth and Organization,

Macmillans, London.

4 Cyert, R.M. and March, J.G. (1963), A Behavioral Theory ofthe Firm,

Prentice-Hall, Englewood Cliff, N.J.


35/310

Purchasing practice and procedure

In

for

mal

org

aniz

atio

ns m

aki

ng l

arge

num

ber

s of

pur

cha

ses

it is

nece

ssar

y

t

o a d

opt

stan

dar

d fo

rms

and

to

pre

scrib

e ro

utin

e p

roce

dur

es fo

r th

e p

ur-

cha

sing process. The process itse lf can

be

th ought

of

as comprising the

fo l

lowi

ng s

tage

s:

(l)

In

itiat

ing

the

pur

chas

e

2

)

S

elec

ting

the

sup

plie

r

3

) Plac

ing

the

ord

er

4)

Pr

ogr

essin

g th

e o

rder

5) Rec

eivin

g th

e g

oods

an

d pa

ying

fo

r the

m.

W he

n p

urch

asin

g i

s de

part

men

tali

zed,

mo

st p

urc

hase

s

w

ill be

i

nitia

ted

outs

ide

the

depa

rtm

ent,

and

pa

yme

nt o

f bil

ls

wi

ll

a

lso

be c

arr i

ed o

ut

b

y

a

different departm ent. The intervening stages are mainly the responsibility

o

f th

e p

urch

asin

g d

epar

tme

nt,

altho

ugh

oth

er

depa

rtm

ents

and

fu

ncti

ons

ta

ke

part

to

a va

ryin

g ex

ten t

in

th em

.

Jni

tiati

ng

the p

urc

hase

Va

rio u

s ty

pes

of d

ocu

men

tati

on a

re u

sed

to i

nit i

ate p

urc

hase

s.

Fo

r spe

cifi

c ind

ivid

ual

nee

ds, t

he p

erso

n r

equi

rin g

the

item

w

rites

out

a

purc

has

e re

quis

ition

fo

r it.

A t

ypic

al r

equi

sitio

n fo

rm

i

s

s

how

n in

Fi

gure

3 1. This form serves to noti fy purchasing

of

the re quirement, to authorize

th

e ex

pen

ditu

re an

d to

pro

vid

e a f

iled

reco

rd.

Req

uisi

tion

s can

be

mad

eou

t

by

an

yon

e in

the

orga

niz

ation

, bu

t a

lim

ited

num

ber

of

sen i

or p

eop

le ca

n

a

uth

oriz

e the

ex

pend

itu r

e b y

cou

nte

rsign

in g

the

form

. P

urc

hasi

ng o

ffic

ers

hav

e a

duty

wh

en

spen

din

g th

e or

gan

izat

io n'

s mo

ney

to

ens

ure

that

the

ex

pen

ditu

re i

s pro

per

. A

Iist o

f a

uth o

riz e

d s

igna

to rie

s sh

oul

d

be ava

ilab

le


36/310

Purchasing practice andprocedure

31

P U R C H A S E REQUISITION

Drt.ptr. .tmcnt-

__________ - - - - -

l t t tc

___________

- - - -

NumM ------ --------------

Quant•ty antiPucriptiofl

Figure 3.1 Typical purchase requisition. Handwritten, one copy to

Purchasing and second copy retained

by

originator.

in the purchasing office. I t should mention any limitations on their

authority: for instance the toolroom foreman may be authorized to

countersign requisitions for tool-room requirements up to

±:200

in value,

and above that value the works manager may have to countersign.

Capital expenditure has to be treated as a special case. In one firm, the

requisition has to be signed by a director, and directors are responsible for

obtaining the approval of the capital expenditure sub-committee of the

board. In another firm, purchases of a capital nature have to be approved

in advance of ordering by the board of directors, the requisitions must

quote the Board Approval nurober, and an extra copy of the order goes to

the company secretary (for budgetary, analysis and post mortem pur

poses). Capital expenditure is treated differently in the accounts, and for

taxation purposes. I t often involves extensions to assets and consequently

changes in, rather than maintenance of, the basis of operations, and it

usually involves a long-term investment such as a new machine tool rather

than a short-term investment such as a pile of materials for processing.

Although the distinction between capital expenditure and revenue expendi

ture seems clear in principle, there is in practice a rather vague borderline,

which different firms treat in somewhat different ways, and it is for the

accountants to define where the border runs in any particular firm.

Material requirements p/anning

Requirements programmes may be thought of as groups of specific needs

related in some way which are treated as groups for convenience. The


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38/310

Purchasing practice

and

procedure

33

regu

Documents

P. J. H. Baily B.sc. (Econ.), A.C.I.S., F. Inst. P.S. (Auth.)-Purchasing and Supply Management-Springer US (1978)