Purchasing and Vendor Management

Prepared by Narendra Singh Chaudhary

Introduction

Purchase is the procurement of goods or services from some external sources. Acquisition of some kind in lieu of accepted price on consideration in return. Purchasing is the procurement of

the materials, supplies, machines, tools and operation of a manufacturing plant.---------- Alford & Beatty

Objectives of Purchasing:

To acquire the goods or services at minimum cost. To ensure the continuous flow of production. To develop the main and attenuate sources of supply. To ensure timely delivery. To make optimum utilization of capital. To acquire quality product so that quality output is served to the consumer.

Types of Purchasing

Purchase made as per requirement: No purchase is made in advance. Purchase is done as need arises. Method usually applied for emergency requirement or infrequent goods. Contract Purchasing: Contract of material is given to an agency. It has an advantage that low price of those materials whose cost fluctuates highly.

Market Purchase: Purchase is made from the market to take advantage of price fluctuations. Schedule Purchasing: It is a cyclic purchase model. A schedule of purchase is made and it is used for those commodities whose price do not fluctuate.

Purchasing Procedure

Purchase Requisition: All the departments of the organization are asked to make a requisition for purchase. Decision of Purchase: Collecting requisition from various departments and handed it to Purchase department / committee head. Purchase head decide what to purchase and in what quantity.

Study of Market conditions: Market trends are analysed to generate an idea of price and availability of product. Selection of Vendors. Placing of Purchase order. Receiving of order.

Functions / Responsibilities of Purchase Department

Obtaining prices Selecting vendors Placing Purchase order Settlement of complaints Making and maintaining harmonious relations with vendors.

Purchasing Management Process

Purchasing Management Process consists usually of 3 stages: Purchasing Planning Purchasing Tracking Purchasing Reporting

Purchasing Planning
Purchasing Planning may include steps as follows: creating purchasing projects and tasks providing related information (files, links, notes etc.) assigning purchasing tasks to employees setting task priorities, start/finish dates etc. assigning supervisors setting reminders control and evaluation

Purchasing Tracking

Purchasing Tracking consists of: Checking task's status and/or history of changes Receiving status notifications Sorting, grouping or filtering tasks by current status Highlighting overdue tasks,

Purchasing Reporting

Purchasing Reporting includes: Comparing actual and estimated values Calculating purchasing task and project statistics Sorting, grouping or filtering tasks by attributes Creating charts to visualize key statistics and KPIs

Centralized Purchasing

Centralized purchasing means buying and managing purchases from one location for all locations within an organization. This can also be run by a central location buying in to a distribution warehouse that feeds smaller warehouses. This is called a hub and spoke system. The responsibility and authority to purchase, lease, or rent materials, supplies, goods, equipment, or services are placed with the Division of Finance and Operations, Purchasing and Stores Department. Purchasing is centralized to: realize economy, efficiency, and effectiveness in the procurement function; pursue quality assurance and standardization; maintain the highest standards of ethics;

The control by a central department of all the purchasing undertaken within an organization. In a large organization centralized purchasing is often located in the headquarters. Centralization has the advantages of reducing duplication of effort, pooling volume purchases for discounts, enabling more effective inventory control, consolidating transport loads to achieve lower costs, increasing skills development in purchasing personnel, and enhancing relationships with suppliers.

Advantages of Centralized Purchasing

Volume purchasing When the district is able to purchase a single item in mass, vendors are often willing to provide a discount. Purchasing in mass to take advantage of discounts is called volume purchasing. Warehouse In order to take advantage of volume pricing, the district purchases items in bulk. Vendors typically require that the district take delivery of the items in mass. These bulk purchases are stored in the warehouse until the items are requested by the sites. Save time in researching products Individuals spend hours to research the products and to find best price. The purchasing department has resources to help reduce the time to research products.

Disadvantages of Centralized Purchasing

Good processes are not without their shortcomings. Listed below are some of the challenges of buying in a school district and suggestions on how to help the Purchasing department minimize their effects. Extended procurement time One problem that is commonly associated with centralized purchasing is the perception it takes too long. In reality, the purchasing department processes vendor requisitions typically within one (1) day. Typically the delay in the request is either: time spent to research the product, funding sources (account code check and budget approval), vendor stock status, and shipping.

Decentralized Purchasing

Decentralized purchasing refers to purchasing materials by all departments and branches independently to fulfill their needs. Such a purchasing occurs when departments and branches purchase separately and individually. Under decentralized purchasing, there is no one purchasing manager who has the right to purchase materials for all departments and divisions. The defects of centralized purchasing can be overcome by decentralized purchasing system. Decentralized purchasing helps to purchase the materials immediately in case of an urgent situation.

Advantages Of DP

Materials can be purchased by each department locally as and when required. Materials are purchased in right quantity of right quality for each department easily. No heavy investment is required initially. Purchase orders can be placed quickly. The replacement of defective

Disadvantages Of DP

Organization losses the benefit of a bulk purchase. Specialized knowledge may be lacking in purchasing staff. There is a chance of over and underpurchasing of materials. Fewer chances of effective control of materials. Lack of proper co-operation and coordination among various departments.

Purchase Functions

Procuring Materials-One role of the purchasing department is to procure all necessary materials needed for production or daily operation of the company or government organization. For a manufacturing company, this might include raw materials such as iron, steel, aluminum or plastics, but it also might include tools, machinery, delivery trucks or even the office supplies needed for the secretaries and sales team. In a retail environment, the purchasing department makes sure there is always sufficient product on the shelves or in the warehouses to keep the customers happy and keep the store well-stocked.

Evaluating Price

A purchasing department also is charged with continuously evaluating whether it is receiving these materials at the best possible price in order to maximize profitability. This can be challenging for a small business that may purchase in lesser quantities than a larger vendor and which thus may not receive the same type of bulk discounts. A purchasing department in a small business needs to shop around to find the best vendors at the most reasonable prices for the company's particular size orders. Purchasing department staff may communicate with alternate vendors, negotiate better pricing for bulk orders or investigate the possibility of procuring cheaper materials from alternative sources as part of their daily activities.

Paperwork and Accounting

Purchasing departments handle all of the paperwork involved with purchasing and delivery of supplies and materials. Purchasing ensures timely delivery of materials from vendors, generates and tracks purchase orders and works alongside the receiving department and the accounts payable department to ensure that promised deliveries were received in full and are being paid for on time. In a small business, this means working closely with the accounting department to ensure that there is sufficient capital to buy the items purchased and that cash is flowing smoothly and all payments are made on time.

Policy Compliance
The purchasing department also must ensure that it is complying with all company policies. For example, in a small business, individual staff members may communicate with the purchasing department about purchasing needs for things such as office supplies or computers. Before making a purchase, the purchasing department must ensure that it heeds the proper protocols for purchase and budget approval and must ensure that any items are purchased in accordance with the overall purchasing policy of the organization.

Vendor Rating

Vendor ratings are used to rate vendors as entities; however, they are also used to rate different aspects of a vendor, such as its strategy, organization, products, technology, marketing, financials or support. Vendors with a clear focus, solid products and an advantageous market position may be rated "positive" or "strong positive." Vendors or product lines that lack these qualities may be rated "caution" or "strong negative." Vendors that have potential, but which we believe should be very carefully evaluated, are rated "promising. Additionally, vendors that are rated a "strong negative" are put on a vendor alert list, while vendors that are rated a "strong positive" are put on a vendor opportunity list. These vendors, in particular, will be closely monitored.

Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables.

CRITERIA FOR EVALUATION

Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service. Each area has a number of factors that some firms deem critical to successful vendor performance.

Pricing factors include the following:

Competitive pricing. The prices paid should be comparable to those of vendors providing similar product and services. Quote requests should compare favorably to other vendors. Price stability. Prices should be reasonably stable over time. Price accuracy. There should be a low number of variances from purchase-order prices on invoiced received. Advance notice of price changes. The vendor should provide adequate advance notice of price changes.

Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom line and show an understanding of its needs. Possible cost savings could be suggested. The vendor should also exhibit knowledge of the market and share this insight with the buying firm. Billing. Are vendor invoices are accurate? The average length of time to receive credit memos should be reasonable. Estimates should not vary significantly from the final invoice. Effective vendor bills are timely and easy to read and understand.

Quality factors include:

Compliance with purchase order. The vendor should comply with terms and conditions as stated in the purchase order. Does the vendor show an understanding of the customer firm's expectations? Conformity to specifications. The product or service must conform to the specifications identified in the request for proposal and purchase order. Does the product perform as expected? Reliability. Is the rate of product failure within reasonable limits?

Reliability of repairs. Is all repair and rework acceptable? Durability. Is the time until replacement is necessary reasonable? Support. Is quality support available from the vendor? Immediate response to and resolution of the problem is desirable. Warranty. State-of-the-art product/service.

Delivery factors

Time Quantity Lead time Packaging Documentation Emergency delivery

Service factors to consider

Good vendor representatives have sincere desire to serve. Vendor reps display courteous and professional approach, and handle complaints effectively. The vendor should also provide up-todate catalogs, price information, and technical information. Does the vendor act as the buying firm's advocate within the supplying firm? Inside sales. Inside sales should display knowledge of buying firms needs. It should also be helpful with customer inquiries involving order confirmation, shipping schedules, shipping discrepancies, and invoice errors.

Technical support. Does the vendor provide technical support for maintenance, repair, and installation situations? Does it provide technical instructions, documentation, general information? Are support personnel courteous, professional, and knowledgeable? The vendor should provide training on the effective use of its products or services. Emergency support. Does the vendor provide emergency support for repair or replacement of a failed product. Problem resolution. The vendor should respond in a timely manner to resolve problems. An excellent vendor provides follow-up on status of problem correction.

Measurement criteria 7 C's.

Competencymanagerial, technical, administrative, and professional competence of the supplying firm. Capacitysupplier's ability to meet physical, intellectual and financial requirements. Commitmentsupplier's willingness to commit physical, intellectual and financial resources. Controleffective management control and information systems.

Cash resourcesfinancial resources and stability of the supplier. Profit, ROI, ROE, asset-turnover ratio. Costtotal acquisition cost, not just price. Consistencysupplier's ability to exhibit quality and reliability over time.

Benefits of vendor rating systems

Helping minimize subjectivity in judgment and make it possible to consider all relevant criteria in assessing suppliers. Providing feedback from all areas in one package. Facilitating better communication with vendors. Providing overall control of the vendor base.

Requiring specific action to correct identified performance weaknesses. Establishing continuous review standards for vendors, thus ensuring continuous improvement of vendor performance. Building vendor partnerships, especially with suppliers having strategic links. Developing a performance-based

TECHNIQUES OF VENDOR RATING

CATEGORICAL PLAN

Under this method the members of the buying staff related with the supplier are required to assess the performance of each supplier. Members:- Receiving section, quality control department, manufacturing department etc. The rating sheets are provided with the record of the supplier, their products and the list of factors for the evaluation purposes. The members of the buying staff are required to assign the plus or minus notations against each factor.

The periodic meetings, usually at the interval of one month, are held by senior men of the buying staff to consider the individual rating of each section. The consolidation of the individual rating is done on the basis of the net plus value. The suppliers are assigned the categories such as preferred, neutral or unsatisfactory.

This is a very simple and inexpensive method. Its quality heavily depends on the experience and ability of the buyer to judge the situation. As compared to other methods, the degree of subjective judgement is very high as rating is based on personal whim and the vague impressions of the buyer. The rating is done on the basis of memory, and thus it becomes only a routine exercise without any critical analysis.

COST RATIO PLAN

Under this method, the vendor rating is done on the basis of various costs incurred for procuring the materials from various suppliers. The cost-ratios are ascertained for the different rating variables such as quality, price and timely delivery etc. The cost-ratio is calculated in percentage on the basis of total individual cost and total value of purchase. For example :The total delivery cost is Rs. 5000 and the total purchases are Rs. 1,00,000, then delivery cost-ratio will be : 5000*100 = 5 % 100000

All such cost-ratios will be adjusted with the quoted price per unit. The plus cost ratio will increase the unit price while the minus cost ratio will decrease the unit price. The net adjusted unit price will indicate the vendor rating. The vendor with the lowest net adjusted unit price will be the best supplier. Under this method, the most strategic issue is the identification of various costs and their allocation among different variables and suppliers. Certain important heads of quality costs and delivery costs can be listed as under :

WEIGHTED-POINT METHOD Attributes for quality, price and delivery are separately identified. Relatives weightages of attributes are assigned by the process of grading. Quality Q-Factor comparison Points Q1=Accepted without remarks 100 Q2=Accepted with some rejections 60 Q3=Accepted due to acute shortage 40 Q4=Totally rejected 0 Accepted rate=(Accepted lots/Total lots) *100 It will be multiplied by the weighted-point of quality factor.

Price P-Factor comparison P=Pa-Po/Po*100 Where Po=lowest price Pa=accepted price Points P1=20% 60 P2=60% 40 P3=75% 30 Net price=(Lowest net price/Respective net price)*100 This % will be multiplied by the weighted point of price

Delivery D-Factor comparison D=No. of scheduled delivery/No. of actual deliveries*100 Points D1=90-100% 100 D2=60-75% 60 D3=40-50% 50

Critical Incident Method

Records of events and occurrences of buyer-vendor relationship is maintained They reflect positive and negative aspects of actual performance. Improved performance Determining the competence of a vendor

Checklist System
Vendor rating is done on the basis of: Financial strength Size Product service Price Quality

Store management

Store management is the management of business unit containing the storage, packaging, distribution and sales of goods. These goods can be anything from raw materials to finished products. Goods like vegetables, clothes, shoes, medicines, electronics goods or any other products which need to be stored and managed appropriately.

Store management personnel have the responsibility to look after the daily operations and works of a store. A store manager needs to be equipped with all the information in relation to: Sales, Finance, Customer care, House keeping, Special requirements of storing goods, HR and legal aspects of store management, Keeping inventory, Handling grievances of customers as well as employees and Advertising and marketing

Functions of Store Management

Store management involves a lot of administration. Keeping inventories, maintaining environment depending on type of goods, financial aspects of related to stores such as payments of goods, employees etc and customer services are part of store management profession. A person with extraordinary communication skills has a good chance to succeed in this profession, as it helps in communicating with the customers and clients a lot. Similarly, a person needs to have good interpersonal skills in order to maintain a cordial environment with the colleagues and subordinates.

Thank You