PROFIT

. RIGHT PRICE

It is the primary concern of any manufacturing organization to get an item at the right price. But

right price need not be the lowest price. It is very difficult to determine the right price; general

guidance can be had from the cost structure of the product. The ‘tender system’ of buying is

normally used in public sector organizations but the objective should be to identify the lowest

‘responsible’ bidder and not the lowest bidder. The technique of ‘learning curve’ also helps the

purchase agent to determine the price of items with high labour content. The price can be kept low

by proper planning and not by rush buying. Price negotiation also helps to determine the right prices.

2. RIGHT QUALITY

Right quality implies that quality should be available, measurable and understandable as far as

practicable. In order to determine the quality of a product sampling schemes will be useful. The

right quality is determined by the cost of materials and the technical characteristics as suited to

the specific requirements. The quality particulars are normally obtained from the indents. Since

the objective of purchasing is to ensure continuity of supply to the user departments, the time at

which the material is provided to the user department assumes great importance.

3. RIGHT TIME

For determining the right time, the purchase manager should have lead time information for all

products and analyse its components for reducing the same. Lead time is the total time elapsed

between the recognition of the need of an item till the item arrives and is provided for use. This

covers the entire duration of the materials cycle and consists of pre-contractual administrative

lead time, manufacturing and transporting lead time and inspection lead time. Since the inventory

increases with higher lead time, it is desirable to analyse each component of the lead time so as

to reduce the first and third components which are controllable. While determining the purchases,

the buyer has to consider emergency situations like floods, strikes, etc. He should have ‘contingency

plans’ when force major clauses become operative, for instance, the material is not available due

to strike, lock-out, floods, and earthquakes.

4. RIGHT SOURCE

The source from which the material is procured should be dependable and capable of supplying

items of uniform quality. The buyer has to decide which item should be directly obtained from

the manufacturer. Source selection, source development and vendor rating play an important role

in buyer-seller relationships. In emergencies, open market purchases and bazaar purchases are

restored to.

5. RIGHT QUANTITY

The right quantity is the most important parameter in buying. Concepts, such as, economic order

quantity, economic purchase quantity, fixed period and fixed quantity systems, will serve as broa

1. RECOGNITION OF THE NEED

The initiation of procedure starts with the recognition of the need by the needy section. The

demand is lodged with the purchase department in the prescribed Purchase Requisition Form

forwarded by the authorised person either directly or through the Stores Department. The

purchase requisition clearly specifies the details, such as, specification of materials, quality and

quantity, suggested supplier, etc. Generally, the low value sundries and items of common use are

purchased for stock while costlier and special items are purchased according the production

programmes. Generally, the corporate level executives are authorized signatories to such demands.

Such purchases are approved by the Board of Directors. The reference of the approval is made

on requisition and a copy of the requisition is sent to the secretary for the purpose of overall

planning and budgeting.

2. THE SELECTION OF THE SUPPLIER

The process of selection of supplier involves two basic aspects: searching for all possible sources

and short listing out of the identified sources. The complete information about the supplier is

available from various sources, such as, trade directories, advertisement in trade journals, direct

mailing by the suppliers, interview with suppliers, salesmen, suggestions from business associates,

visit to trade fair, participation in industries convention, etc. Identification of more and more sources

helps in selecting better and economical supplier. It should be noted that the low bidder is not always

the best bidder. When everything except price is equal, the low bidder will be selected. The

important considerations in the selection are the price, ability to supply the required quantity,

maintenance of quality standards, financial standing etc. It should be noted that it is not necessary

to go for this process for all types of purchases. For the repetitive orders and for the purchases

of low-value, small lot items, generally the previous suppliers with good records are preferred.

3. PLACING THE ORDER

Once the supplier is selected the next step is to place the purchase order. Purchase order is a

letter sent to the supplier asking to supply the s