Types of Purchasing

PURCHASE MANAGEMENT Purchase Management is a function of materials management in a company. Their basic function is procuring the inputs for production function. This function encompasses suppliers in the market external to the organization and several internal to the organization.

The effectiveness of purchasing activities can be enhanced by proper organization and coordination of the activities. There are four types of purchasing system:1. 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. 2. Contract Purchasing: Contract of material is given to an agency. It has an advantage that low price of those materials whose cost fluctuates highly. 3. Market Purchase: Purchase is made from the market to take advantage of price fluctuations. 4. 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. 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

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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 •

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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 is the opposite where each plant or office buys what it needs. This operation allows any employee to buy what he needs. You can also run this operation with a designated buyer assigned to the site to do the buying. The more decentralized an operation is, the less control the home office has. You have a duplication of effort in buying and less buyer specialization. You lose discounts on quantity buys. You lose freight options based on dollars or weight. Also some support is lost from the supplier as there is no single contact for the supplier to deal with. Volume buying may not be calculated for all your sites. Advantages of decentralized purchaseing Advocates of decentralization claim that local management has the incentive to control cost when the local operation is set up as a profit center. Many companies operate with a mixed system. The central operation may buy major commodities but allow local operations to buy all MRO supplies. It is difficult to change from decentralized purchasing to centralized purchasing. Employees feel their privileges are being taken away. They feel they are losing control of their site. Some will refuse to really cooperate in the changes in hopes to making the program look unsuccessful. Advantages Of Decentralized Purchasing - 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 materials takes little time. Disadvantages Of Decentralized Purchasing - Organization losses the benefit of a bulk purchase. - Specialized knowledge may be lacking in purchasing staff. - There is a chance of over and under-purchasing of materials. - Fewer chances of effective control of materials. - Lack of proper co-operation and co-ordination among various departments.

The centralized purchasing avails the following advantages: 1) As the duplication of efforts in buying function is eliminated, its cost will be relatively less and it will be managed efficiently 2) The Manager of manufacturing departments, departmental heads and office managers are relieved from the responsibility of purchasing their own requirements. They can concentrate in their assigned areas of activities in a better way. 3) It is possible to tap the advantage of the specialized skill of the buying staff. 4) Bulk buying strengthens the bargaining position of the buyer. Moreover, the advantage of the quantity discount can be tapped. Direct contact with the suppliers will be possible which will eliminate the link of the intermediaries 5) It enables to develop and maintain good relations with the suppliers. Moreover, it facilitates the supplier to maintain relations with few buyers and thus it enables him to pass over some benefits on buyers. 6) It will enable the purchase of standardized items through standardized procedure. 7) It will reduce the inventory carrying costs. The minimum level of inventory are not maintained at different centers but at centralized center which reduce investments in inventories along with the other incidental storing costs. The central buying staff manages the stock levels, recording material usage, lead time and prices effectively. 8) The receiving of large supply through consolidated orders reduces the transport cost per unit.

9) The cost of order processing such as order placing, receiving, inspection, accounts etc are reduced substantially due to few orders of large quantities 10) As the responsibility center is fixed on one departmental head, the shifting of responsibility for wrong decisions is eliminated. 11) The inter-section requirements of the materials can be easily adjusted. Scarce materials can be allocated according to the economical advantage. Disadvantages The centralized purchasing suffers from the following limitations: 1) The specific requirements of the individual items may not be attended successfully. At times, it may result in absence of matching of mind between the needy section and the buying section resulting in wrong buying. 2) The centralized standard procedure may result in delays in receiving the materials. 3) It is likely that the centralized buying staff may not be expert in buying varied types of items. 4) In case of multi-plant units located at distant places and receiving their requirements from centralized storing, it may not be possible to tap the local resources. However, this situation can be handled effectively authorizing the regional purchase agent to make local purchases if they involve cost advantage. 5) It adversely affects the employee morale. It can be concluded that the company should centralize all policy matters, the purchase of major raw materials and capital equipment should be made by the head office, while the individual divisions should be allowed to make their own purchases in accordance with the policies established by central office. If the company adopts the “profit center decentralized” set up the decentralized should be made accordingly. Purchasing manual: The purchasing manual is an important means of effective purchasing. It outlines the policies and procedures to be followed by the purchasing personnel. It contains the approved statement of policies and thus provides standing answer to recurring questions. Purchasing manual sometimes becomes a source of irritation and conflict. Many purchasing managers consider it to restrictive. In fact such situations can be eliminated if the following aspects are considered while preparing the manual: 1) The purchase authorities should be clearly defined 2) It should clarify the relationship with other departments. 3) The co-operation of the personnel should be sought while preparing the manual 4) It should be drafted clearly. 5) The policies and procedures should be segregated. Generally, policies are of permanent nature while procedures are subject of frequent changes. Purchasing manual is an important tool for managing the purchase function efficiently. It is not only useful to the large organization, but is required in small organizations as well. In the large organization, the purchase function is relatively complex and can be eased with the help of the purchasing manual. In the small organization, it is essentially required because in such organization, purchasing function becomes a one man show and the absence of such key man

may paralyze the purchase activity. Purchasing manual attempts to reduce such over dependence of one man.