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UNIT 6 PURCHASE AND STORES
MANAGEMENT
Structure
6.1 Introduction
Objectives
6.2 Elements of Purchasing
6.3 Materials Purchasing System
6.3.1 Indenting
6.3.2 Enquiry Stage
6.3.3 Offer Processing Stage
6.3.4 Ordering Systems
6.3.5 Receipt of Material. Transportation and Inspection
6.3.6 Material Procurement Cycle
6.4 Warehouses or Stores
6.4.1 Objectives and Functions of Stores
6.4.2 Location and Layout of Stores
6.5 Preservation of Store Materials
6.6 Stores Systems and Procedures
6.6.1 Management of Receipts
6.6.2 Issue Control
6.6.3 Stores Documentation
6.7 Stock Valuation and Verification
6.7.1 Methods of Valuation
6.7.2 Stock Verification
6.8 Waste ~ana~ement - Disposal of Surplus,
Obsolete and Scrap
6.9 Summary
6.10 Answers to
SAQs
6.1 INTRODUCTION
- -
---
Purchasing has come to stay as the most important function of materials management.
The moment purchasing department places an order, it commits a considerable portion of
the finance of the organisation which affects the working capital and cash flow position.
The basic purpose of the purchasing and procurement function is to ensure continuity of
supply of raw materials, sub-contracted items and spare parts of equipment and at the
same time reduce the overall cost of the project. In other words, the objective is not so
much to procure the raw materials at the lowest price but to reduce the cost of final
product.
After purchasing and procuring the materials, the question of effective storing comes.
Stores play a vital role in the materials management operations of the organisation. The
most important purpose served by the stores is to ensure unitermpted service to the user
departments of the organisation.
In this unit, we will study the various aspects involved in material purchasing and
procurement activity. We will also see how to evolve effective stores systems and
procedures for an efficient stores management.
Objectives
After studying this unit, you should be able to
describe the various parameters of purchasing,
discuss complete materials procurement cycle from indent to issue,
explain stores systems and procedures, and
use stock valuation methodologies effectively.
Materials 6.2 ELEMENTS OF PURCHASING
As mentioned earlier, the basic objective of the purchasing function is to ensure the
continuity of supply of raw materials, sub-contracted items, and spare parts and at the
same time to reduce the overall cost of the project. To achieve this, there are a large
number of well defined elements such as right price, right quality, right contractual terms,
right time, right source, right material, right place, right mode of transportation, right
quantity, and right attitude. For effective purchasing function, all these elements need to
be considered jointly. A diagram indicating these elements is shown in Figure 6.1. The
details of some of the important elements are given in subsequent paragraphs.
Figure 6.1 : Elements of Furchasing
Right Price
It is the primaty concern of any organisation to get an item at the right price. But
the right price need not be the lowest price always. While it is very difficult to
determine the right price, general guidelines can be had from the cost structure of
the product. The tender system of buying is normally used in most of the
be to identify the lowest responsible bidder
organisations but the objective should
and not the lowest bidder. The concept of "learning curve" also helps the purchase
agent to determine the price of items with high labour content. Sometimes, price
negotiation also helps to determine the right prices.
Right Quality
Right quality implies that quality should be available, measurable and
understandable as far as practicable. The quality particulars are normally obtained
from the indents. Drawings are also attached to the indents, particularly for spare
parts.
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. While determining the purchases, the
buyer has to consider emergency situations like floods, strikes etc. However, rush
purchase should be resorted to only in exceptional.
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.
Techniques such as value analysis enables the buyer to locate the right material.
Right mode of transportation have to be identified as this forms a critical segment
in the cost profile of an item. It is an established fact that the cost of the shipping Purehase and
of ore, gravel, sand etc. is normally more than the cost of the item itself. Stores Management
Right Quantity
The right quantity is the most important parameter in buying. Concepts such as
economic order quantity, fixed period and fixed quantity systems serves as broad
guidelines to ensure right quantity. But still, the buyer has to use his knowledge,
experience and commonsense to determine the quantity after considering factors
such as price stnicture, discounts, availability of the item, favourable reciprocal
relations, and make or buy consideration.
Right Place
Right place means the right place of delivery. Every purchase contract, in addition
to time of delivery, must clearly state the place of delivery and such other terms
like free delivery or ex-factory delivery. Generally, FOB (Free on Board), FOR
(Free on Rail), CIF (Cost, Insurance and Freight) paid terms are part of the price
agreement.
From these basic elements of purchasing, fundamental objectives of purchasing is given
in subsequent paragraph. ,
Fundamental Objectives of Purchasing
Fundamental objectives of purchasing may be enumerated as follows :
(a) to maintain continuity of supply to support the scheduling of the project,
(b) in doing so, minimum investment in stores and materials inventory must be
ensured, consistent with safety and economy,
(c) duplication of purchases, wastes, obsolescence and costly delays must be
avoided,
(d) proper quality standards based on suitability criteria, must be maintained,
(e) materials must be
procuredaat the lowest possible cost, consistent with
quality and service requirements, and
(f) it must maintain, in-so-far as materials costs are concerned, organisation's
competitive position in the market.
SAQ I
(a) Discuss the various elements of purchasing with the help of suitable case
examples.
(b) What are the main objectives of purchasing ? What are the various prerequisites
for becoming a
good purchase manager ?
6.3 MATEWLS PCTRCHASINC SYSTEM
In organisations, depending on the size and its nature of operation, the quantum of
purchase varies anywhere between a few thousands of rupees to hundreds of crores of
formalised systems and procedures for the ease
rupees. Naturally, this necessitates some
of operation and accountability. Formal procedures have to be laid down in initiating
purchase, selecting suppliers, placing purchase orders, follow-up, receiving materials and
so on. in this section, we will deal with various systems that are used in a purchase
department. In fact, these systems follow a definite cycle from indent to issue. It is called
"material procurement cycle". At the end of the section, this cycle is also illustrated.
Now, different stages of this cycle is described one-by-one in subsequent paragraphs.
6.3.1 Indenting
-- - - - -
The purchase order should be typed without mistakes with all terms & conditions duly Purchase and
mentioned in it. Copies of this should be made available to the end-user department, Stores Management
ctnrpc nnd nrrnllntc Cinrp the xxrhnle nrnemcc nf nrpnnAnrr nnnrehooa nrrlar :r In-, -,,-I
Construction Materials An indent typically has the following points oi exp!anation :
Management (a) Name of the item,
(b) Description of the item,
(c) Item code (if it is a standard item),
(d) Quantity of the item,
(e) Specifications,
(f) Dateltime by which the item is desired,
(g) End user department's name and location where the item is desired or is to be
delivered,
(h) Indent originator's name (for coordinating delivery or for clarifications),
(i) Other related information, if the item is budgetted, and
(j) Signature of the Authority for normal procurement, and/or signature of Senior
Management Personnel, if it is not budgetted.
6.3.2 Enquiry Stage
In this stage, the enquiry for quotations is sent to the vendors. Details of the indent
applicable are included here. It is usually sent to the approved vendors and typically
contains the following :
(a) Name of the item,
(b) Description of the item,
(c) Quantity of the items,
(d) Time till which the offer is to be valid,
(e) Specifications,
(f) Dateltime by which the item is desired,
(g) End user department's name and location where the item is desired or is to be
delivered, and
(h) Standard terms and conditions which the company follows and desires for its
vendors to accept these conditions regarding insurance, warranty and gaurantee
expected, payment details, mode of transportation, point of transfer of goods
from vendor to company etc.
6.3.3 Offer Processing Stage
At this stage, the focus is on viewing offers on a platform which is fair and objective
oriented while comparing it to the the ideal one. It is necessary to have the ideal one
handy (one can use the enquiry stage to convey to the vendor, the ideal terms &
conditions and even the prices that one is looking forward to).
However, determining the best one is problematic for following reasons
:
Somebody might accede to all the standard terms
(a) & conditions mentioned in the
enquiry, but be too expensive on the price,
(b) A vendor's price may seem less, but that may be because he has not included
insurance and freight in his price, and
(c) Another vendor's price may seem the least, but he has imported material and no
service centre in India or the place where service is desired.
The basic aim at the offer processing stage is to "COMPARE APPLES WITH APPLES".
This work could involve asking for requoting from some vendors or calculating the
implications in terms of cost to "level" the playing field. Sometimes, for this purpose,
negotiations may also be required.
6.3.4 Ordering Systems
After deciding on the vendor to whom the order is to be placed, the Purqhase Order (PO)
is to be drafted. Since this is a legal contractual document that binds both the seller and
the buyer to certain conditions, this has to be carefully and thoughtfully done.
Inconvenient terms may have to be renegotiated.
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