MMK::BMS Purchasing Strategy

Material Management

WE STUDENTS OF SYBMS “A” THANK PROFESSOR KHILNANI

FOR GIVING US THE OPPORTUNITY TO MAKE A PROJECT

ON PURCHASING STRATEGY

COMPILED BY
RAHAT ADENWALLA 1
SAMINA VIRANI 59
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INTRODUCTION TO MATERIALS MANAGEMENT AND ITS EVOLUTION

Material is the central item and activity of any organization. Organizations exist for
material, works for material and due to material. The main purpose of any organization is to
make profit, this profit or loss is generated due to material. Every organization deals with
material whatever be the business.

As early as the nineteenth century, purchasing which is a division of logistics, was regarded
as an independent and important function by many of the US railway organizations. Since the
beginning of the twentieth century there were several movements in the evolution of
purchasing or materials management functions, as depicted below:

CLERICAL WORLD WAR 2 MANAGERIAL EMPHASIS STRATEGY

(Pre- 1939) (1940-49) (1950-70) (1970--)

Evolution of Material Management over time

In the 1990s it became clear that organizations must have an efficient and effective
purchasing and materials function if they were to compete successfully in the domestic and
international markets. The future will see a gradual shift from the predominantly defensive
strategies to aggressive ones in order to remain competitive. Organizations will take an
imaginative approach for achieving their materials management objectives to satisfy long
term and short term goals.

PURCHASING STRATEGY

WHAT IS PURCHASING????
The term purchasing doesn’t just mean buying it is much more than buying. The
buyer must find out the description and details of the materials needed, send
enquires and obtain quotations from reliable suppliers negotiate the price and
terms and conditions of the supply, place the order, and follow up with the supplier
to ensure the timely delivery of the goods. Moreover he has to keep the supplier
happy by a prompt payment of the bills. Thus the function of the purchasing
includes a lot of activities.
The objective of purchasing function is to supply materials of the right
quality at the right time. To ensure this, purchases have to be made from the right
sources and at the right time. A small shopkeeper may be able to obtain, for
himself all the goods he requires but if his shop becomes departmental store he
will obviously not be able to manage procurement

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PICTURE OF PURCHASING

TYPES OF PURCHASING:

FORWARD BUYING

It is nothing but committing an organization into the future. The buyer commits to
buy at a future date a contracted quantity at a contracted price. Whatever may be
the ruling market price then the trader makes such moves with a speculative
interest with an idea that the actual prices will rise in the future and hence he will
be able to make profits. He seeks to protect his organization from any future
shortages or undue increases in price. He is interested in having an uninterrupted
supply of materials.

The various factors that have to be taken into account for forward buying are the
availability of the item, financial constraints, and the economic order quantity, the
minimum quantity for obtaining, discounts, and shelf life of items etc. forward
buying practices are usually meant within the commodity markets.

Eg: agricultural produces like cotton, oil seeds and grains and prime metals like
aluminum, iron and steel are usually traded in forward markets.

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BLANKET ORDERS

Blanket orders are generally entered into for valued items. The main consideration
is that the system should be so designed as not to increase the cost of the item
significantly due to ordering. For example if an item cost is Rs 25 is ordered four
times in a year when the ordering cost is Rs 60 per order, the total cost is Rs 340.
If it is ordered once the total cost will be only Rs 160.
It is also useful for the purchase of those items whose annual requirements cannot
be very effectively forecasted.

Blanket orders are usually entered into for a period of one year. The time limits
vary. The price can be agreed on or can be the prevailing market price when the
supply is affected. Being a blanket order the items maybe indicated individually or
can be generally categorized. The major advantage of a blanket order is that the
entire routine of purchasing is not gone through for a minor low value item and the
time thus gained can be gainfully used elsewhere for procuring high value items.
The clerical work involved in purchasing is also reduced. The buyer may get some
quantity discounts as he is placing orders for a longer period. The seller will have
to concentrate more on service than on trying to convince the buyers.

RATE AND RUNNING CONTRACTS

The principle of a Rate and running contract is for a centralized agency to enter
into a contract with the suppliers on the rates applicable to supply for a particular
period of time. In rates contract only the rate is fixed while in running contract
the quantities with variation allowances are also fixed. The centralized agency also
gets information from its various constituents and their different needs,
consolidates these needs and then enters into a contract with probable suppliers.
Because of the consolidation the quantity is required are high and the rates
entered into are very competitive.
The advantage of such a system is that the constituents do not have to go through
the complications of selecting a source.

CENTRALIZED PURCHASES

In large organization, materials are required in large quantities simply because its
operations are large. In seeking to secure maximum economy in buying and then to
take advantage of what bulk buying may offer, such as price bargains, credit
facilities, etc. long term contracts are only possible for ensuring supply at regular

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intervals, if they are justifiable by their largeness. Contacts with wholesale

markets or even at times with manufacturers direct can only be utilized when they
entail large scale buying.
Economy of central purchases results from the benefits like economy in storage
costs when at the same time storage facilities are also centralized for convenience
of work. Economy in transport cost, material handling cost is other important
considerations to justify its adoption.

SUBCONTRACT

It is type of buying if supplier is not able to supply the full amount of goods so he
buys it from some other manufacturer and produces it with help of some another
producer on the bases of a contract is known as subcontracting. This also applies if
the manufacturer himself cannot manufacture the given quantity of goods so
produces them on contract bases then also it is known as subcontracting.

HAND TO MOUTH BUYING

It is buying in small quantities, one cant every time approach the manufacturer
for small orders as he has also consider geographical factors, i.e. if it is too far it
will be costly. It is convenient to buy the goods from nearest dealer or show room.
It is normal buying which we do it on day to day bases.

CONTRACT SYSTEMS

In this system the seller effectively becomes the material planner for the buyer.
It is a long term contract between the buyer and the seller and provides for the
automatic replenishment of the consumed departments stocks by the seller. The
buyer has to be careful in the choice of the contractor because the agreement is
usually for a long duration. The continuance of the contract will depend up on the
compliance of the seller top the contractual obligations and his maintaining the
quality requirements.

SEASONAL BUYING

If the buyer purchases at regular intervals to meet the requirement of the

factory he will sometimes pay a high or low price, but in a long range, the overall
cost will be equal to market price. Such a conservative policy is inevitable, if the
factory has no facility for storing in access of requirements and the buyer chooses

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not buy forward. The buyer has to balance the probability of the price falling in
the near future, against the cost of buying now and storing it for later use.

TENDER BUYING

Tender system is adopted top procure materials at most competitive raters and to
eliminate chances of undue favor to any supplier. This system is normally adopted
in government departments and public sector undertakings as they will have to
choose the best suppliers with out any bias. Quotations are called from different
sellers, once the quotations are received and the tenders are opened publicly, a
comparative statement is made and the tender is awarded to lowest tender
meeting the technical specifications.

PURCHASING POLICIES

• Policies relating to supply relationships:

Our policy should be to be selective about the types of relationships we
establish with suppliers, but in all cases to treat them with professional
respect and to hold our dealing with them as confidential to the parties
concerned.
We should aim to actively promote an image rather than let one form by
default. We wish to be seen as fair, tough, totally professional and
demonstrably operating according to the highest standards of business
practice.

• Internal policies:
Our policy should be to support internal suppliers to the fullest extent and
to develop product and service quality to the same high standards as those
available in the external market. Employees may not use the company’s name
or purchase leverage to obtain materials or services at preferential rates
for their personal use, or for use by other parties in whom the buyer has an
interest.

• Sourcing policies:
e.g.: Only those suppliers who satisfy the requirements of the company’s
supplier appraisal process and are able to meet their contractual obligations
to the company in full should be used. Buyers should actively source from
the world market where practical, taking into account corporate guidelines
and statutory regulations.

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Under sourcing policies are six principles or six policies of purchasing:

RIGHT QUALITY

In the context of right quality specifications play a crucial role. Specification is

defined as the concise statement of a state of requirements to be satisfied by a
product a material or process, indicating wherever appropriate the procedure by
means of which it may be determined whether the given requirements are
satisfied. We have to specify the material technically, because we should know
what exactly the item is. Consider the case of rice this can be raw, par-boiled,
boiled, old, new, basmati, kichidi with white stones, or any other of numerous
varieties that are available.

An important factor we have to take care of while specifying is to avoid

both over-specification and under-specification than actually needed for them, as
these strategies lead to increased costs.

Development of new sources of supply:

Large industrial undertakings generally underwrite new and local sources of
supply and by giving large and long-range contracts are often able to develop new
sources of supply. This method of developing new sources in newly developing
industrial areas is increasing because of rapid development of technology, cost-
saving through reduced transportation costs and a policy of decentralized
production.

Standardization:
Rightly it has been said that principal of scientific management control lies
in planning standardization. Standards formulated at the national and the company
level generally defines the quality clearly and often prescribes the means to
evaluate the specified quality. When standardization at the national level is fairly
developed and a large number of standards have been formulated by a national
body or bodies, these standards lead to the specification of quality, reduction in
sizes and varieties, inter-changeability of parts and products and efficient
utilization of materials.

Vendor Rating:
An important factor contributing towards better buyer-seller relations is
proper objective evaluation of the registered suppliers periodically. The four
stages involved in the process of supplier evaluation are discussed below:

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(a) In the survey stage, all possible sources are explored and the capabilities are
evaluated on the basis of prima facie information given by the vendor, or through
advertisements, catalogues and other reports. This process leads to the list of
vendors, who have to be investigated further before registration
(b) In the enquiry stage a detailed analysis is made after getting maximum possible
information through a standard enquiry form containing a large number of
questions.
(c) these vendors who pass the critical enquiry stage are visited to assess their
financial capabilities, technical capacities, labor motivation, credibility with the
customers the satisfactory vendors are then registered and negotiations are
conducted on quality delivery price service and other contractual obligations.
(d) The final stage is termed as the experience stage where the actual
performance of the vendor on quality delivery price service and other parameters
over a period of time is assessed in order to carry on further business with him.

RIGHT TIME

Lead time is also influenced by fluctuations in usage rates and safety stock levels
can be established to cushion the effects of fluctuations. Similarly the
consumption or demand also fluctuates from month to month. Statistical measures
such as standard deviation are used to obtain the reserve stock, which is computed
on the basis of maximum rate of consumption in the past, to cater to the
consumption in fluctuations. The next step is to compute the stocks that have to
be maintained, under normal consumption rate and normal average lead time. This
is called buffer stock. A combination of reserve stock, safety stock and buffer
stock is obtained as the reorder point and this can be translated into time scale as
the right time of placing an order. In order to reduce the inventory the concept
of JIT or material arriving just in time, has been introduced in several
organizations.
In case of regularly used or recurring items, right time means the
duration when the stock reaches the reorder point. The order is placed and till it
is recouped, the responsibility for adhering to this time is shared both by stock
control and purchase section. Purchase section has to avoid delays in finalizing the
orders, will indicate the delivery date on the purchase orders and see that the
materials do arrive according to the delivery date by efficient follow-up.

Arrange delivery much earlier than the required delivery time, or after
production hold-up is not efficient procurement. The former means overstocking

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and blocking of working capital, while the latter implies loss of production. In case
of special requirements, i.e. materials required for special jobs, the purchase
section should allow for a reasonable time and ensure adequate follow-up to
procure the item. A third factor is the delivery of item from stores to production.
Any undue delay in effecting delivery or issues adversely affects the objectives of
purchase management. Avoiding the delays initially the controllable administrative
delays- the buyer can arrive at the real right-time, particularly for the high value
items, resulting in savings in working capital of the organizations.

RIGHT TERM
• Term should be acceptable to both, the supplier and the buyer.
Neither the buyer nor the supplier should put forward any terms and
conditions which are out of the reach of either of them
• `The specifications given to vendor should be proper and not
imaginary
• There should be a proper contract signed between the buyer and
supplier.
• The contract should carry all the terms and conditions agreed by
both, the buyer and supplier.
• The term should be renewed periodically so as to none of the parties
can gain the extra benefit of market fluctuations.
• The terms and conditions should be changed from time to time so as
to build a long term relationship.
• Win Win negotiation: The principle that says that the value can be
expanded and both parties gain this value through the negotiation
process. This is discussed as a preferred process of negotiation as
opposed to win-lose (one party wins and the other party loses) or lose-
lose negotiations (where both parties lose).
• Warranties: Warranties ensure that the buyer can legally rely on a
supplier to provide the item needed to do the job.

a. Transportation terms and risk of loss: Depending on the terms of

sale the carrier is either the agent of the buyer or the seller. If the
terms are fob origin the title to goods pass to the buyer when the
goods are loaded on the carrier vehicle. If terms are fob destination
the title to the goods pass to the buyer when the goods are delivered
to the buyer.

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b. Damages: The concept of damages in the UCC is based on the remedy

of a party being made whole. Generally damages are considered to be
in monetary form. The remedy then is for the party that has been
wronged to be paid for the amount of the damages so that party does
not suffer the financial impact.

RIGHT PRICE

Thus the lowest price need not necessarily be the best price, but the lowest
responsible price is the right price. It is indeed very difficult to estimate this and
the aim of any purchasing executive should be to determine the right price that
adheres to the quality, quantity, trade credits, and regularity of supply, reliability
and after sales service. Obviously, the basis for deciding on the right price will
depend upon the type of material, market conditions, availabilities, supply, demand
and socio-politico-economic aspects. Since the basic aim of purchasing is to pay
reasonably low prices for the best values obtainable after considering negotiation
and corporate commitments, determination of right price becomes important.

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

Choice of Method of Transport:

The choice of the mode of transport is indeed complex and depends upon
the type of material, rate charges, distances to be covered, volume, safety,
handling charges, time available loading charges unloading charges, taxes etc. The
usual modes of transport are railways Lorries air cargo, inland waterways, and
international shipping parcel post and courier services. Value of the commodity is
the first factor which largely influences the costs of transportation. Costly items
require careful handling and carry greater liability on the part of transport agency
and this is based on the principle of compensation to transport agency for care and
handling and air traffic is preferable in such cases.

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The Learning Curve:

The learning curve concept is developed in connection with new products.
That the cost of production per unit of a new item decreases as additional units of
that product are manufactured is the basis of it. Because the supplier becomes
more skilled, as the worker repeats an operation and improves his speed and
efficiency this causes him to reduce the labor and supervision costs.

Price Negotiation:
Price is the major consideration during most negotiations. The buyer cannot
afford to force the seller to always reduce his price below his profitable limits.
He must not forget that the seller also exists in business, so that he may obtain a
reasonable return on his investment. If the buyer persists in price reduction then
the solutions that are possible are detrimental to his interests. Price negotiations
will have various dimensions, other than the intrinsic cost consideration, factors
such as rates of trade discounts, quantity discounts taxes freight insurance rates
assured future supply, etc., to be finalized during the negotiations.

RIGHT QUANTITY

EOQ:
At this right quantity, we note that carrying and ordering chargers are equal. This
is called economic ordering quantity. In manufacturing parlance, it is known as
economic lot size, with set up cost replacing the ordering cost. This set up is the
cost incurred due to jobs changes, resetting setting jigs, fixtures, cleaning, etc.
The inventory charges will continue to be the same as manufacturing department
produces the goods which will be stocked for some duration.
Forecasting the consumption of vast variety of items: one should forecast the
demand for all his products so that he can maintain a buffer stock level for his
production. He should plan his purchases according to the production plan.
Advance or delayed purchases based on needs/ circumstances: the purchaser
should delay his purchases if he speculates decline in the price in the future and
should buy in advance if the price is expected to rise in the near future.

RIGHT SOURCE

Source selection: The key concepts in source selection are

(a) There should not be so many sources, that the buying company is no longer
perceived by each supplier as an important customer

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(b) There should not be so few, that price and service competition among suppliers
diminishes there should be a strong relationship between the supplier and the
buyer.

Source Development:
Whenever an organization makes honest and concerted attempt to create a new
source of supply, it is involved in source development activity. Source development
is an extension of the source selection process. Instead of being satisfied with
what is available from the existing sources we have to develop new sources so that
they can supply what we need.

Vendor Rating:
An important factor contributing towards better buyer-seller relations is proper
objective evaluation of the registered suppliers periodically. The four stages
involved in the process of supplier evaluation are discussed below:
(a) In the survey stage, all possible sources are explored and the capabilities are
evaluated on the basis of prima facie information given by the vendor, or through
advertisements, catalogues and other reports. This process leads to the list of
vendors, who have to be investigated further before registration
(b) In the enquiry stage a detailed analysis is made after getting maximum possible
information through a standard enquiry form containing a large number of
questions.
(c) these vendors who pass the critical enquiry stage are visited to assess their
financial capabilities, technical capacities, labor motivation, credibility with the
customers the satisfactory vendors are then registered and negotiations are
conducted on quality delivery price service and other contractual obligations.
(d) The final stage is termed as the experience stage where the actual
performance of the vendor on quality delivery price service and other parameters
over a period of time is assessed in order to carry on further business with him.

Self certification:
Vendor certification occurs when the vendor has reached the stage such that it
consistently meets or exceeds the purchaser’s expectation. Consequently, there is
no need for the purchasers to perform routine inspections of the vendor’s product.
Certification motivates vendors to improve their processes and consequently, their
products and services. A vendor must also demonstrate a through understanding of
the strategic quality goals of the customer such that its own strategic goals are in
harmony with those of the customer. Improving key processes through joint
efforts strengthens the relationship between purchaser and vendor. The

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purchaser should therefore assess the vendor’s capabilities on a continuous basis

and provide adequate feedback.

Financial Status of Suppliers:

Unless the supplier has a sound financial he may not be able to meet his
commitments. Therefore information on his capital structure, organization
structure values of material held, turnover profitability and ability to meet
commitments is very relevant. It may not be advisable to enter into a contract
with suppliers who score low on these counts. Similarly we should know the basis
of ownership, sister concerns and the management styles, for this will affect our
dealings.

BUYERS' MARKET:

A disequilibrium condition in a competitive market that has a surplus, such that

buyers are able to force the price down. Note that a buyers' market does not
mean that a lack of competition among demanders have given buyers market

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control. A buyers' market is a competitive market that simply has a temporary

imbalance between the quantity demanded by the buyers and the quantity supplied
by the sellers. The buyers' market phrase is commonly used (mainly by real world
noneconomic types) to describe a surplus in real estate or housing markets. It's
also commonly used when describing assorted financial markets. You might want to
examine the opposite of a buyers' market, which is a sellers' market. Additional
information on the real estate market can be found in the entry on building cycle

A buyer group is powerful if:

• The products it purchases from the industry are standard or
undifferentiated. The buyers are sure that they can always find alternative
suppliers, and may place one off against another.
• The product it purchases from the industry from a component of its product
and represent a significant fraction of its cost. The buyers are likely to
shop for a favorable price and purchase selectively. Where the product sold
by the industry in question is a small fraction of the buyer’s cost, buyers are
usually much less sensitive.
• It earns low profit, which creates great incentive to lower its purchasing
costs. Highly profitable buyers, however, are generally less price sensitive
(where the price does not represent a large fraction of these costs).
• The industry’s product is unimportant to the quality of the buyer’s products
or services. Where the quality of the buyers’ products is very much
affected by the industry’s products, buyers are generally less price
sensitive. Industries in which this situation obtains include oil field
equipment, where a malfunction can lead to large losses, and enclosures for
electronic medical and test instruments where the quality of the enclosure
can influence the user’s impression about the quality of the equipment
inside.
• The industry’s product does not save the buyer money. Where the industry’s
product or service can pay for itself many times over, buyers are rarely
price sensitive; rather, they are interested in quality. This is true in
services like investment banking and public accounting, where errors in
judgment can e costly and embarrassing.
• The buyers pose a credible threat of integrating backwards to make the
industry’s product. Sometimes an industry engenders a threat to buyers
that its members may integrate forward.
• The industry is not an important customer of the supplier group. If the
industry is an important customer, the supplier’s fortunes will be closely tied

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up to the industry, and the supplier will want to protect the industry
through reasonable pricing and assistance in activities like R&D and lobbying

SELLERS' MARKET:

A disequilibrium condition in a competitive market that has a shortage, such that

sellers are able to force the price up. Note that a sellers' market does not mean
that the lack of competition among demanders have given sellers market control. A
sellers' market is a competitive market that is faced with a temporary imbalance
between the quantity supplied by the sellers and the quantity demanded by the
buyers.

A supplier group is powerful if:

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• It is dominated by few companies and is more concentrated than the

industry to which it sells;
• Its product is unique or at least differentiated or if it has built up
switching costs. Switching costs are fixed costs buyers face in changing
suppliers. These arise because, among other things, a buyer’s product
specifications tie it to particular suppliers, or it has invested heavily in
specialized ancillary equipment, or in learning how to operate a supplier’s
equipment. (as in computer software), or its production lines are connected
to the supplier’s manufacturing facilities (as in manufacture of beverage
containers )
• It is not obliged to content with other products for sale to the industry.
For instance, the competition between the steel companies and aluminum
companies to sell to the can industry checks the power of each supplier.
• It poses a credible threat of integrating forward into the industry’s
business. This provides a check against the industry’s ability to improve the
terms on which it purchases

Strategies in single source market:

• Market research through third party: one should find out the price in the
market through the third party or agent, so as the relation between supplier
and purchaser will not spoil. One should be aware of the market price about
the product so that one can always look for alternatives.

• Building a strong relation with supplier, i.e.: appreciating the work done by
the supplier. Regular meetings with supplier.

• Alternative sources: finding alternative suppliers for the same product, i.e.
there must constant research for minimizing resources.

• Having complete knowledge of supplier: Do suppliers compete on quality,

service, price, or other factors? What is the level of Government support
provided to the industry? What are the trends in the supply market (for
example, has product price consistently been reducing)? What is the size of
the total market and relative size of each supplier (market share by revenue
and/or profits)? How the suppliers are geographically distributed?

• increase mutual dependency with the supplier: give more business to the
supplier,

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• produce the good/service in-house; if it is possible then manufacture the

whole product with in, or manufacture some parts with in, if the parts are
more expensive if bought from outside.

• Forward buying; buying price according to contract that so much amount of

product will be supplied at so and so date according to contract. This is
beneficial for supplier if the prices rise in the future and will be beneficial
to purchaser if his company faces any shortage, crisis.

• Forming a buying consortium; and/or: this will be helpful as the goods are
bought in bulk, reduce in transport cost, storing cost, handling cost.

• Consider substitute goods and services: if the spare parts or components

used for manufacturing can be substituted i.e. inferior quality of product
can be used instead of the original one and with out affecting the originality
of the product.

• JIT one should follow just in time production technique i.e. it is useful as
minimum of inventory is required to be maintained, once the order is placed
then only the raw materials are ordered. This reduces the inventory cost
and handling cost.

Multi source strategies:

• What is the level of product differentiation between firms: how do

suppliers differ their products supplied, i.e. technical features, quality, etc:
how well product is presented i.e. packing

• Which suppliers are the market leaders and which are market followers: market
leader is one which innovates and bears the expense of developing a new product and market
followers save the expense on innovating hence they charge lesser price compared to market
leaders.

• How many suppliers are there in the market and what is each supplier’s size
(in terms of number of employees and production capabilities) this is useful
whether the supplier is financially strong of taking bulk orders and whether
he has that much of production capacity to take so many bulk orders.

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• Is there any obvious competitive advantage held by a supplier: why should

we go to that supplier, what are the fringe benefits offered such as credit
facilities, discounts, schemes.

• Transport should be born by the supplier.

• Vendor rating: selecting right vendor is very important, if proper source is

not selected one can cheated even in multi source market. So we should do
vendor rating according to financial ability and the quality of goods supplies
and also the other facilities offered by him.

Analyze the market structure: an Analyzing supply market is a useful technique to

assist in the development of purchasing strategies. Information provided through
supply market analysis needs to be incorporated into the department’s/agency’s
plans for significant purchases for the goods and services, as one component of
the entire decision making process

The application of carefully considered procurement strategies means

departments/agencies can use their procurement resources to effectively meet
their business needs and support the advancement of specific government
priorities.

There are four generic structures by which a supply market can be defined. These
range from the extreme situation where there are many firms each selling an
identical product (perfect competition 12) to a situation where only one supplier
exists that is able to meet the needs of the purchaser (monopoly). Markets in
between these two extremes are referred to as oligopolies or monopolistic
competition. In a developed economy, the majority of markets fit somewhere
within these two categories. The table below provides guidance on the
characteristics of each market structure

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Perfect Monopolistic Oligopoly Monopoly

Competition Competition

Number of Many Many Typically 2-10 One

suppliers

Product Homogeneous Some product Substantial No close

differentiation (identical) differentiatio product substitutes
n differentiation
Barriers to None None or very Substantial Substantial
entry limited scale and scope
economies
Concentration of Zero Low Medium to high Maximum
market power concentration (perfect
concentration
)
Price Purely by supply Price as Ability to Ability to set
determinants and demand. No function of influence market price
individual buyer supply and market price by by restricting
or seller can demand, and restricting output
influence market the ability of a output
price firm to charge
more due to
product
differentiatio
n

IMPORTANT FACTORS TO BE CONSIDERED WHILE PURCHASING:

SUPPLIER EVALUATION, SELECTION, AND MEASUREMENT

1. The supplier evaluation and selection process: One prime responsibility

of the purchasing department is to consider various supplier possibilities
and to evaluate the supplier candidate in various categories to determine
if the firm wishes to purchase from that supplier. There are seven

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primary areas in the supplier evaluation and selection process. Those

areas are identified below. See text for further information.
a. Recognize the need for supplier selection
b. Identify key sourcing requirements: What are the key requirements
for the products/services the firm will need to purchase.
c. Determine sourcing strategy: What is the best decision for the firm.
d. Identify potential supply sources: Who are likely candidates and what
products do they sell
e. Limit suppliers in pool: Pare the number of candidates to a limited
number the company will consider.
f. Determine the method of supplier evaluation and selection: How will
the evaluation and selection are done?
g. Select supplier: Select the supplier that seems to be the best
alternative.

2. Key supplier evaluation criteria: The buying firm will evaluate the
possible suppliers according to the following criteria. See text for more
information.
a. Management capability
b. Personnel capabilities
c. Cost structure
d. Total quality performance, systems, and philosophy
e. Process and technological capability
f. Environmental regulation and compliance:
g. Financial capability and stability: Production scheduling and control
systems
h. E Commerce capability
i. Supplier sourcing strategies, policies, and techniques
j. Longer term relationship potential

3. Developing and initial supplier evaluation and selection survey:

Purchasing will gather information from a variety of sources to develop
the evaluation survey and then conduct the evaluation to come to the
best decision. See text for more information.

4. Critical Supplier selection issues: Some of the most important criteria

for supplier selection include the following, size relationship, and use of
international suppliers, competitors as suppliers, counter trade
requirements, and social objectives. See text for discussion.

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MMK::BMS Purchasing Strategy

5. Supplier measurement and evaluation: Even after the supplier is

selected the purchasing department must continually measure the
supplier performance to ensure continued quality performance.

a. Supplier measurement decisions: Key decisions to be made in supplier

measurement include what to measure, (delivery, quality, and cost
reduction), how frequently to measure and report, how the
measurement data will be used by the firm.
b. Types of supplier measurement techniques: The techniques include
categorical system, weighted point system, and a cost based system.

The consumer can easily understand the importance of purchasing efficiency

because of his limited resources. His monthly purchase bill will include items of
food, clothing, fuel, cosmetics and charges for services like transport, electricity,
recreational facilities, etc. A common man will look to fit each and every need in to
his budget. Therefore if he is able to reduce the prices without a reduction in
quality, he will be able to increase his profitability and turnover if he can improve
his purchasing efficiency.
In majority of industries and manufacturing operations, materials and
services bought from outside contribute 60% of the cost of the manufactured
product. The major portion of fixed capital is in plant and machinery and a major
portion of the working capitals is in raw materials, parts and other supplies. All
these items have entered the organization through purchase function, which
thereby effectively controls a major portion of the organization’s finances

Materials Management 21