NTPC

THREE DAYS PROGRAM ON

ENHANCING CONTRACT& PROCUREMENT
SKILLS
FOR UPRVUNL EXECUTIVES / ENGINEERS

Program organized by
Power Management Institute,
NTPC Ltd.,
Noida- 201301 (UP)

POWER MANAGEMENT INSTITUTE

PROGRAMME TITLE
DURATION
PARTICIPANTS
VENUE

Enhancing Contract & Procurement Skills

22- 24 January, 2013 AND 26-28 February,2013

UPRVUNL Executives / Engineers
UPRVUNL, Panki, Kanpur
PROGRAM SCHEDULE

DATESession
I-II

Day I
III-IV

I-II

SESSION TOPIC
Integrated Material Management (IMM):
Key Terminologies in IMM, Definition Functions & Objectives of Purchasing
(Right Quality, Right Price, Right Source, Right Quantity, Right Time & Place)
Purchasing Process
Various Stages of Purchasing, Stock & Non-stock items, Recognition Of Need,
Description of needs, PAC, Approval of requisition, Scrutiny of Purchase Requisition
at Stores & at Purchase
Purchasing Process - contd.
Selection of Possible Sources Of supplies, Tendering, Identifying Potential Sources.
Tender Evaluation, Loading For deviations, Price/Cost Analysis, Placement of orders,
Distribution of copies of PO
Purchasing Process - contd.
Follow up & Expending, Amending /Canceling orders, Payment of Invoices,
Processing of Discrepancies & Rejections, Closing of Orders/ Contracts
Buying at Right Price.
Pre-requisite of Competitive Biding, Conditions must be Fulfilled for Biding, Broad
Types of tenders Procedure for Tendering, Pricing agreements
Right-time & Lead-time Analysis, Steps to reduce Lead-time

Day II
III-IV

I-II

METH.

Suppliers Evaluation
Suppliers Appraisal, Suppliers Performance Rating, Subjective/ Quantitative Rating,
Attributes & weightage
A case Study on INCOTERMS (Price Basis)
Legal Aspects of Purchasing, Differences between Purchasing & Contracting

L, D

L, D

L, D

L, D

L, D

Legal Aspects of Contracts - Indian Contract Act, Essential Elements of Valid

Contract

Day III
III-IV

Contract Management/Administration
Systems & Processes in Contract Management/ Admn.
Contract Management Activities
Service Delivery Management, Relationship Management, Contract Administration
Legends

: L-Lecture,

D-Discussion,

L, D

3
THREE DAYS PROGRAM ON ENHANCING CONTRACT & PROCUREMENT SKILLS
FOR UPRVUNL EXECUTIVES/ ENGINEERS
Reading Materials
1.
2.
3.
4.
5.
6.
7.
8.
9
10.
11.
12.
13.
14.
15
16
17
18.
19
20
21.
22
23.
24,

Integrated Materials Management

Defining Concept of Purchasing, Procurement, supply Management, Supply Chain
Management Materials Management
Responsibilities, Functions & Objectives of Purchasing
Purchasing Process
Buying at Right Price
Right Time & Lead-time Analysis
The Right Quantity
Right Sourcing & Suppliers Development
Vendor Enlistment
Suppliers Evaluation
Buyer Seller Relation
Negotiation- An Effective Tool of Purchasing
The Right Quality
Specification
Just in Time Purchasing & Inventory Management
Professional Ethics of Purchasing
Budgetary Control in Purchasing
Evaluation of Purchase Functions
Value Analysis/Engineering
PERT & Its Role in Materials Management
Make & Buy Decisions
Purchasing Policy & Strategies
Contract & Contract Management
Legal Aspects of Purchasing

Compiled by
S.C. Sehgal,
Materials Management Consultant
Kamal Villa 55 E.C. Road, Dehradun-248 001(UA)
Phone (0135) 2710143
Mobile: 9412056463/9999088111
E-Mail: scsehgal@scom.in

Integrated Materials Management:

Definition:
Materials management is a function responsible for the co-ordination of planning, sourcing,
purchasing, moving, storing and controlling materials in an optimum manner so as to provide
a pre- decided service to the customers at a minimum cost.
Broad Functions:
Materials Planning and Programming
Purchasing
Inventory Control
Receiving
Store- keeping And Materials Handling
Scrap & surplus Disposal

Objectives of Materials Management:

Primary objectives

Secondary objectives

1.

Right price

1.

New materials and products

2.

High turnover

2.

Make & Buy Decisions

3.

Low Procurement and Storage cost

3.

Standardization

4.

Continuity of supply

4.

Product Improvements

5.

Consistency in Quality

5.

Interdepartmental Harmony

6.

Good Supplier Relations

6.

Forecasting

7.

Development of Personnel

8.

Information System

Organizational Structure:
Placement of Materials Management in organizational structure:

There are basically two approaches to place materials management functions in an

organizations structure.
1.

Materials Management Function as sub-ordinate functions reporting to any other

functional head:
Chief
Executive
Production
Manager
Production Control
Stores

Purchasing
Manager
Stock Control
Purchasing

Sales
Manager

Other
Manager

Transportation

2.
Materials Management function as integrated and independent management function
at par with any other management functions.

Chief
Executive
Production
Manager

Materials
Manager

Sales
Manager

Other
Manager

Purchasing
Stores
Stock Control
Transport
Which of the two organizational structures are to be adopted depends on many factors viz.:
How important are materials management activities to the unit and for that matter to
the organization as a whole?
Will the unit suffer substantially if Materials Management does not perform
effectively, as it might be?

6
How much funds are blocked in inventory and constraints of working capital?
How important it is that materials management activity be closely co-coordinated with
operation, maintenance and accounts department?
Is it essential that material cost be controlled tightly?
What is absolute value of purchases?
What are range and varieties of materials purchased?
What is the percentage of materials cost in total production cost?
What are the market conditions?
And last but not the least, do we intend to develop a profession team of Materials personnel to
effectively contribute in overall organizational objectives? Organization will certainly be
benefited from a higher caliber, creative materials management department, should it be
treated as a profit- making centre, which receives close attention of general management. It is,
however, realized that Accounts, Production, Engineering or Maintenance Departments have
their own priorities, which are in conflict with basic objectives of sound Material
Management. Modern tendencies as such are to de-link materials functions from these
departments. Integrated materials management function is recognized as top management
function and Head of Materials Management Department reports directly to head of unit or
organization.
Even if the Material is primarily treated as service activity, it should report to that functional
head that it serves most.
Integrated Materials Management Approach:
This is essentially an organizational concept that brings together, under one organizational
component i.e. Materials Management Department, the responsibility for planning,
purchasing, transportation, storing, disbursing and controlling materials.
The following are some of the advantages of integration of materials management functions:

7
Better coordination and reduction of inter-departmental conflicts. This is accomplished
by eliminating buck passing between sub-functions and providing a Central Figure
(Head of Materials Management Department) to balance conflicting objectives. This
also establishes better accountability for materials functions

Reduction of inventory level and greater assurance of materials availability by better

coordination and communication with user departments and among different sections
of Materials Management Department
Improved supplier relations results from establishing delivery schedule on the basis of
latest inventory position and production requirements.
Paper work and duplication of work reduced through better coordination and proper
communication among persons performing the related functions.
Improved customer services often results from reduced delivery time.
Reduced overall cost of materials as a result of using more scientific and economical
methods in planning, acquisition, storage and control of materials.
Centralization versus Decentralization of Materials Functions:
A Company with several operating plants faces one additional organizational problem. To
what extent should materials management functions be centralized at corporate level? There
may be complete centralization or complete decentralization or develop an organization
somewhere between these two extremes.
Factors to be considered:
Similarity of the classes of materials used in each of the plant. If a firms plants use
entirely different materials, centralization offers only minimal benefits,
Size of each individual materials department. Centralization is more advantageous
when a firms individual plants do not have large materials department.

8
Geographical dispersion of plants: The closure the firms plant is located
geographically, the feasible centralization becomes.
Number and size of plants: If there are large number of plants of fairly big size,
centralization will become difficult and create more problems in availability of
materials than any gains.
Advantages of Multi-plant Centralization:
Scope of greater specialization.
Consolidation of materials requirements and economy through bulk purchases.
Better coordination with suppliers
Lesser buying cost.
Advantages of Multi-plant Decentralization:
Better coordination with operating departments.
Greater flexibility with operating departments.
Effective use of local suppliers and facilities.
Greater autonomy and accountability.
Lesser lead- time and resultant reduction in inventories.
Faster decision on purchases and clarifications to vendors.
Faster payment to the supplier.
Lesser stock-out and rush purchases.

Defining Concept of Purchasing, Procurement, supply Management, Supply Chain

Management Materials Management
DEFINITION OF PURCHASING
Purchasing is a function of procuring goods and services from sources external to the
organization
In the words of Alford and Beaty
Purchasing is the procuring of materials, supplies, machine tools & services required
for equipment, maintenance & operation of a manufacturing plant.
According to yet another authority
Purchasing is procuring of materials, tools, stores (or supplies) and services
required for manufacturing of a product, maintenance of machines &
uninterrupted running of manufacturing plant in a manner that guarantees
marketing of companys products in quantities desired at the time promised &
competitive price consistent with quality desired
Yet in another way organization Purchasing is defined as
That functions responsible for obtaining by purchase, lease or other legal means,
equipments, materials, supplies and services required by organization for use in
production. In this definition, term production is used in economic sense of
creating utilities i.e. goods and services that satisfy needs.
In common parlances organizational purchasing can further be defined as:

10
Process by which organizations define & compare supplies and suppliers
available to them, solicit offers or negotiate with sources of supply or in some
other way arrive at agreed terms of trading, make contracts and place orders and
finally receive, accept and pay for the goods and services required
Purchasing in essence is a task of buying goods of right quality, in the right quantities at the
right time and place and at the right price
These essentials of professional purchasing are though complimentary to each other yet
achievement of one does not guarantee the other. There may be a source capable of giving
quality goods but may not have enough capacity to meet quantity requirement in time or the
source may have capabilities to supply goods of right quality and in right in right quantities
but may not supply at right price or at right time. But if buyer has right kind of sources, he
may get goods of right quality, in the right quantities, at the right time and at right price. For
scientific purchasing greater stress has to be placed on locating, selecting, developing and
retaining right kind of suppliers
Somebody has rightly said that half of battle in purchasing is won if we are able to locate and
retain right sources of supplies i.e. reliable, capable and resourceful suppliers
Purchasing & Procurement
In common parlances purchasing & procurement are used interchangeably but they are
different
The term purchasing covers function of identifying & notifying need for items, locating &
selecting vendors, negotiating & other terms of contract, follow up with vendor till receipt of
ordered goods
Procurement on the other hand implies much broader area & includes functions of
purchasing,

materials

planning

&

budgeting,

inventory

control,

movement

(transportation), receiving and incoming inspection of materials, disposal of redundant/

surplus, obsolete and scrap materials

11

Dobler & Burt in their book Purchasing & supply Management have differentiated
these terms as under
Purchasing functions comprises essential activities associated with acquisition of the
materials,
Major activities are
1.

Coordination with user Deptts to identify purchase needs

2.

Discussions with sales representatives

3.

Identification of potential suppliers

Conduct of market studies for important materials

5.

Negotiation with potential suppliers

6.

Analysis/ evaluation of proposals

7.

Selection of suppliers

8.

Issuance of purchase orders

9.

Administration of contracts and resolution of related problems

10.

Maintenance of variety of purchase record

Earlier the purchasing functions which handled as a staff support became subsequently
more professional with managerial emphasizes. Organizations that have seen strategic
potential inherent in this function have enhanced its basic activities by expending them and
developing procurement or supply management operations
Procurement
Process or concept, encompasses a wider range of supply activities than included in
purchasing functions and it typically includes a broadened view of traditional buying
role with more buyer participation in related materials activities i e.
1

Participation in development of material & service requirement & their specifications

12
2.

Conduct of materials studies & management of value analysis activities.

3.

Conduct of more extensive material market studies.

4.

Conduct of all purchasing functions

5.

Management of supplier quality

6.

Purchase of inbound transportation

7.

Management of investment recovery activities (salvage of surplus and scraps)

In essence, procurement tends to be broader and more proactive with some focus of strategic
matter as compared to typical purchasing concept.
Supply Management
Supply Management is a process responsible for development and management of an
organizations total supply system- both internal and external components
At operational level, it includes and expands activities of purchasing functions and the
procurement process. Its major focus, however, is strategic. This is reflected in the activities
added to the scope of its responsibilities- all of which have two characteristics:
(1) They deal with activities which have greater potential impacting success of
organization
(2) They tend to be interdisciplinary in nature and integrate supply action with those of
other key players in the organization
(3)
Activities included in Supply Management
1.

Early purchasing involvement (EPI) and early supplier involvement (ESI) in product
design and subsequent spec. development for important items, typically through cross
functional teams

13
2.

Conduct of all purchasing functions & procurement process activities.

3.

Heavy use of cross- functional teams in supplier qualification & selection

4.

Heavy use of purchasing partnering

arrangements and strategic alliances with

suppliers- to develop close and mutually beneficial linkages with key suppliers in
value chain and to control quality and cost
5.

Continuous identification of threats and opportunities in firms supply environment

6.

Development of strategic, long term acquisition plan for all major materials.

7.

Monitoring of continuous improvement in the supply chain.

8.

Active participation in the corporate strategic planning process.

Supply Management concept, represents advance stage in evolutionary development of the

purchasing/ procurement/ supply sphere activity (Scope is further widen with development of
supply chain management which also includes & integrate, apart from activities of
purchasing/procurement of materials, its transformation into intermediates & finished
products and distribution of finished goods to customers). Major characteristics that
differentiate it from conventional purchasing/procurement is that it focuses heavily on
strategic aspect of key elements of firms supply system.
Supply Chain Management
Defining the term
A supply chain is a network of facilities & distribution option that perform functions of
procurement of materials, transformation of these materials into intermediates &
finished products and distribution of finished goods to customers
Traditionally these functions operated independently having their own objectives which at
time seen conflicting and need for integrating these functions felt.
SCM is a strategy through which this integration can be achieved.
Supply chain exists both in services & manufacturing organization though complexity of
chain may vary from industry to industry and firm to firm

14
SCM can be compared with well balanced and practiced relay team. Such a team is more
competitive & cohesive when each player knows how to be positioned for hand-offrelationships are stronger between who directly pass-on the baton but entire team needs to
make coordinated efforts to win the race.
SCM can also be defined as
A network of autonomous or semi- autonomous business entities collectively
responsible for procurement, manufacturing & distribution activities associated with
one or more families of related products
Lee & Billington have defined SCM as
A supply chain is network of facilities that procure raw materials, transform them into
intermediate goods and than finished products and deliver the products to customers
through a distribution system
Materials Management
Materials Management concept is quite different from purchasing/ procurement/ supply
management concept.
It is basically an organization concept that, from the managerial prospective, is designed
to enhance coordination and control of various materials activities
Required coordination can occur in two ways
First it may be achieved by developing a straightforward set of reporting, communication, and
control procedures designed to enhance coordinated decision making among the involved
groups.
Second approach involves an organizational rearrangement that consolidates some of the
individual material activities into larger groups for administrative purposes.
In this case coordination typically is easier to achieve because one manager has line
responsibility and authority for those activities grouped in his her operating unit, with
possibilities of developing a more effective team- oriented operations.
Specific materials activities typically found in a materials management organization are:
1

Purchasing & supply management

Inventory management

Receiving activities

Stores & warehousing

activities

15
5

In- plant materials handling

Traffic & Transportation

Responsibilities Functions & Objectives of Purchasing:

Definition of Purchasing:
Organizational purchasing may be defined as:
That function responsible for obtaining by purchase, lease or other legal means,
equipment, materials, supplies and services required by an undertaking for use in
production. In this definition term production is used in economic sense of creating
utilities i.e. goods and services that satisfy needs.
Organizational purchasing can be defined as the process by which organizations define and
compare supplies and suppliers available to them, negotiate with sources of supply or in some
other way arrive at agreed terms of trading, make contracts and place orders and finally
receive, accept and pay for the goods and services required.
Organizational Buyers:

16
Are those buyers of goods and services for the specific purpose of industrial or agricultural
production or for use in the operation or conduct of plant, business, institution, profession or
service.
Industrial Buyers:
Are those buyers of goods and services in some tangibly productive and commercially
significant purposes e.g. manufacturers, primary (extractive) producers, agricultural, forestry
fishery etc.
Institutional Buyers:
Are those buying goods and services for institutions (in the sense of providing a service,
which is often intangible) and not necessarily commercially significant purpose e.g. schools,
hospitals, armed forces, central and local governments.
Intermediate Buyers:
Are those buying goods and services for re-sale or for facilitating the resale of other goods in
the industrial or ultimate consumer market e.g. distributors, dealers, wholesalers, retailers
service traders.
Responsibilities of Purchasing:
Provide all materials and services that organization decides not to provide internally.
This involves:
a)

Select and develop as required, vendors capable of meeting organizations needs.

b)

Prepare and sign all purchase orders/contracts so that needs of the organization
and all pertinent terms and conditions related to purchase are clearly understood
by the suppliers and documented accordingly.

c)

Monitor suppliers performance and related organization activities during the

course of contract to assume that performance is accomplished by both parties in
accordance with that originally intended.

d)

Renegotiate or terminate purchase orders/contracts as required when changes

occur or as other conditions develop that warrant such action.

17
Provide information to and participate in management planning sessions on subject
related to purchase of materials.
Review purchase specifications and assist operating departments in selection of
required materials and services for standardization purposes and ensure their
availability from competent suppliers.
Protect the organization from all unnecessary or unauthorized commitments, which
may result from inappropriate contracts or discussions with suppliers.
Dispose of all obsolete materials, equipment or scrap that is no longer required for
organizations operations.
Systematic evaluation of vendors performance based upon parameters of price,
quality, delivery and other attributes as necessary for the organization.
Purchasing Functions:
To support organizations operations with an uninterrupted flow of materials and
services, as and when, they are required.
To buy competitively and wisely- competitively involves keeping abreast of market
conditions and environment and buying at right price. Wisely involves a constant
search for better value in terms of quality and services.
To ensure to buy products at right place and right quality i.e. they perform the
functional needs efficiently.
To keep investment in inventory at the optimum levels and meet both financial
requirements of working capital and operational requirements of uninterrupted
production.
To develop reliable alternate sources of supplies or critical items for strategic reasons.
To strive hard for import substitutions to save foreign exchange and improve
availability.
To develop new sources of supplies for high consumption value spares to reduce
dependency of original equipment manufacturers.

18
To reduce lead- time of procurement and enter long- term rate contract for items of
regular consumption.
To develop good and continuing business relations with suppliers, ensure faster
payment and treat them as partners in the business.
To critically evaluate the performance of suppliers so as to weed out those whose
performance is not up to the mark.
Integrating purchasing functions with other departments to attain organizational goals.
To develop policies and procedures, which permit easy, accomplishment of purchasing
functions at optimum operating costs.
To train and develop a professionally competent team of purchasing personnel to
perform above functions and make purchasing a profit center.
Objectives of Industrial Purchasing:
Purchasing objectives are to buy materials and services at right price, of right quality, in right
quantity, from right sources and at right time and place. These are known as 5 Rights of
purchasing which are briefly explained as under:
Right Quality:
Dictionary meaning of quality is merit, excellence, superiority, worth etc. etc.
In the industrial purchasing quality have different meanings. Here quality is related
with functional suitability and cost of product and just not to intrinsic excellence.
Highest quality is not always the right quality- right quality is one, which meets
intended use at the right price.
Quality of equipment also includes the quality of after sales services and availability
of spares at reasonable rates for the equipment, apart from quality of equipment.
When involved in purchasing, one therefore need to have following:
-

Knowledge of materials that are being purchased.

Technical information regarding what is being purchased.

Knowledge of market and economic trend.

19
Quality in purchasing, therefore, is determined by two major considerations.
1.

Technical consideration of suitability of products purchased.

2.

Economic consideration of price and availability of products purchased.

Some other aspects of quality are:

Quality has to be basically determined by technical department but purchaser need to
ensure that requirements/parameters are properly spelled out and understood by
suppliers.
Purchaser has to ensure that such quality requirements are properly described in tender
enquiries and purchase orders. This shall not only help supplier to supply right
materials but also enable purchaser to contest if any departures are made.
At time purchaser has to question user regarding rigid standards of quality as
procurement of such items, at time, is restricted to only limited sources.
Purchaser shall also standardize requirements in consultation with user to reduce
chances of sub-standard supplies and rejection of materials.
Purchaser has to make necessary provisions in contracts/orders regarding inspection
i.e. Inspection- Before- Despatch of Materials (including inspection during different
manufacturing stages for critical items) at suppliers works and inspection after receipt
of materials at site. Purchaser has to suitably reserve his right to reject the materials if
quality requirements are not satisfied.
In order to ensure supply of consistently good quality materials, it is imperative on the
part of buyers organization to develop Quality Plans for major critical and high value
items. The detail of such quality plan shall be furnished to suppliers along with tender
enquiries

and subsequently along with purchase order/contract so that process of inspection is

made known to them before hand.
Right Price:

20

Right price for one supplier may not be the right price for another.
The quoted lowest price by a vendor may not be the right price until landed cost is
worked out for different rates quoted by different vendors (landed cost means total
cost incurred in bringing the goods to purchasers works).
Prices are often dependent on factors such as delivery schedule, the quantity ordered,
the relative manufacturing and labour cost at a specific time and general economic
conditions
Items, which have seasonal availability, shall be purchased during season when the
rates are low i.e. the right price.
Lowest price is not always the right price; price has to be related with the requisite
quality for the intended use. In purchasing we look for evaluated lowest price meeting
the technical suitability.
Methods for obtaining the right price:
-

Published price list

Competitive bidding

Negotiations

Price and cost analysis

Right Source
In many organizations there are two options of setting up sources of supply viz.
manufacturing the goods themselves or purchasing the goods from external sources. Such
decisions are taken on Make or Buy philosophy.
If the prime business is totally different to the needs of the organization, it is then
logical to purchase the materials from external sources.

In purchasing it is said that half of battle is won if right sources of supply are
identified. Price is not the only ruling factor in purchasing- ultimate aim is to make

21
available quality materials at right time and it is possible when right sources are
located. One look from a right supplier:
-

Quality product/services

Reliability

Back-up services

Competitive prices

General efficiency

Ideally purchaser wishes to create a long lasting relationship with his supplier and set
up a net- work of such suppliers to meet all his requirements. This relationship,
however, need to be on reciprocal basis.
-

Treat supplier as business partners

Be fair, prompt and courteous to suppliers representatives

Ensure prompt payment to them

Be responsive to their problems in executing orders.

Following are some of the consideration in choosing right sources:

Reliability of suppliers. Continued, consistent- in case of urgency supplier even
strives hard to improve upon agreed delivery schedule.
Reputation of supplier: -Previous track records, including period it had been in
business.
Size of supplier: is he competent and capable of meeting needs.
Net- work of back-up services including faster availability of spares.
Local versus imported suppliers- depending upon quality, reliability, prices.
Single source or multiple sources:
Traditionally a purchaser looks at multiple sources of supply- where several suppliers
compete with each other to ensure one gets the best deal.

22
For critical items purchaser bifurcate the orders so that failure of one supplier do not stop
operations of buyers organization. Japanese philosophy, however, is different. They believe
that one should look for a best supplier and develop thus one source of supply. This implies
that one does not pit suppliers against each other; rather develop a perfect relationship with a
single source.
This approach has following advantages:
-

Generally improved quality

Considerable reduction in administrative costs.

Closer relationship

Supplier can do more long term planning

Planning is easier.

However, in most parts of the world, especially in Government Departments, where tendering
systems are followed, this philosophy does not work.
Source information
-

Other organizations in the same or similar industries

Professional consultant

Suppliers catalogues/trade directories.

Trade Journal/Trade Exhibitions

Press advertisement for tendering.

Checking up of Credential of Prospective reliable sources of supply:

-

Checking on reference

Plant visits including manufacturing capacity, labour relations, testing and

inspection facilities.

Financial position.

After sales services net- work.

23
-

Evaluation of performance of existing supplier on continuous basis.

Right Quantity:
Purchaser must ensure to buy right quantity- right in the sense- if supplies are less,
operations will suffer- if in excess, more capital shall be block and increased inventory
carrying cost- right quantity is balanced one where both these situations are avoided.
Profit is earned on supplies if they are processed and sold- surplus materials eat away
profit.
Right quantity normally has to be economic order quantity- unless there are valid
reasons for departure.
Seasonal raw materials have to be purchased in bulk to take advantage of lower prices.
Each case of quantity discount offered by supplier to buy higher quantity shall be
critically examined before accepting increased quantity.
Right quantity has to be worked out, keeping in view cost of handling and holding
stocks, quantitative discounts, stock limits, future market trend of commodity, its
availability in the market, price fluctuations etc.
Right Time & Place:
Time is essence of every purchase order and delivery period is invariably incorporated
in Purchase Orders.
Materials are mostly purchased in planned way and for future requirements, and it is
therefore necessary that materials reach to buyers work at right time.
Many a times, most suitable offers are ignored due to unsuitable delivery schedules.
While working out right time, transit period of distant suppliers shall also be taken into
consideration.
Where a purchaser has many plants/works he shall ensure that right place/places of
delivery is/are incorporated in the orders.
A small mistake in indicating the station of delivery shall lead to dislocation of
materials in transit.

24
Just- in- Time is based on the philosophy of delivery at right time and place.
Apart from the above Five Rights, Right terms and conditions of order/contract also play an
important role in satisfactory execution of supplies. The following are some of the
consideration to be kept in mind:
A purchase order/contract must be drafted very carefully because it is a legal
document, in the event of any dispute.
Language of the order shall not be ambiguous
Purchaser shall be well conversant with Contract Act and Sales of Goods Act.
Terms and conditions, governing purchases shall be made kwon to supplier from the
very beginning i.e. at the time of Notice of Inviting Tender.
Supplier also normally quotes with his or her own standard/special terms and
conditions, which shall be examined carefully, and contradictions, if any, shall be
clarified before placing orders.
The terms and conditions shall be so formulated that they ensure timely delivery of
materials at right place.
Some important provision viz. price basis, price variation/firm price, liquidated
damages, statutory increase in Government levies (duties/taxes), inspection,
guarantee/warranty, delivery schedule, payment terms etc. must be incorporated.

Purchasing Process:
Since there are wide variations among industries, companies, product and personnel, it would
not be feasible to establish a single set of procedures that should suit to all cases. A typical
purchase transaction, however, in an organization goes through four stages i.e. originating,
selecting, ordering and completing as under:

25

STAGES

STEPS

DOCUMENTS USED

ORIGINATING

1. Recognizing need
2. Description of
requirement

Purchase requisition
Buy-list, schedule
requisition, traveling
Requisition

SELECTING

1. Selection of possible
Sources of supply
2. Determination of price
And availability

Enquiry. Request for

information, Request
for quotation, tender,
quotations, purchase records,
Bid summary, quote analysis,
Pre-qualification questionnaires.

1. Placement or order,
2. Follow up & expediting
Orders
3. Post order
Clarification, amendment
Etc.

Purchase order, period

contracts, call of contract,
release, standing orders,
schedule orders, amendments

1. Verification of invoices
2. Processing of
Discrepancies &
Rejections.
3, Closing of completed
Orders.

Advice Note, Packing Slip,

Invoice, Goods Received
Note, Inspection Report,
Discrepancy Report.

3
ORDERING

4
COMPLETING

(Stages of Typical Purchase Transactions)

The basic steps of operation of purchasing are briefly explained below:
Recognition of Need:
The first step in the process of purchasing is recognition of need of materials and services,
which may include:
-

Merchandise for resale.

26
-

Materials and parts for production.

Maintenance, repair and operating (MRO) supplies.

Capital, plant and equipment.

Services such as maintenance of equipments, cleaning, catering & security etc

Some of the requirements are bought for stock to meet future requirements whereas some are
to meet specific requirements immediately. These needs may be recognized either by stores
department (Stock control) or by user departments.
For the purpose of materials planning, items are divided in to two categories i.e. stock items
(also known as recurring items) and non-stock items (non-recurring items). Stock items are
those items, which are required by many user departments (in exceptional case even by one
department) regularly and have a stabilized/regular consumption pattern so that those are
brought under automatic replenishment system (also known as Minimum & Maximum system
of stock control by fixing their minimum stock (also known as safety stock), reorder level,
reorder quantity and maximum stock. As soon as available stock and quantity in pipe- line for
an item reaches to reorder level, need for replenishment is felt. Stores raise a purchase
requisition for pre-determined order quantity. Inventory levels are fixed keeping in mind, past
consumption pattern, anticipated changes in future requirement, average length of lead-time,
criticality of each items etc. Consolidated purchase requisitions for stock items are raised by
stores rather than for piece-meal requirement by various users. No other departments except
stores are allowed to raise purchase requisition for stock items. However, if items are nonstock, material, planning is done by individual user departments and they raise purchase
requisitions. It is preferable to have two different types of format of purchase requisitions for
stock and non-stock items.
Description of Requirements:
Once the need for an item is felt in the organization, the next step is to properly describe it
and communicate to purchase for initiating procurement action. This is done through a
document known as PURCHASE REQUISITION. This is written by Stores, if the item is a
stock item and by individual department if item is non-stock This document not only notify to

27
purchasing the requirements but also serves as an authority for purchasing to initiate
procurement action. In organizational purchases, no procurement is made without a purchase
requisition either from Stores or concerned user department as the case may be.
Requirements for purchasing can also be communicated to purchase through Traveling
Requisition or Buy List or Schedule Requisitions
Traveling requisitions are documents, which travel from the originator to purchase in order to
initiate purchasing action and then after transaction details have been recorded on, travel back
to originating department where they are kept for use next time the items are required. Such
forms are printed on heavy weight cards and contain all relevant data required for
replenishing the stock.
Buy-list (also known as blanket or schedule requisitions) is used when large number of items
needs to be ordered at one time. This happens with some stock control system (review
system) and some production planning system (MRP). No special forms are used for this
schedule of requirements.
A purchase requisition shall normally have following Information:
a)

Material Specifications:
The requirement shall be properly spelled out with complete description including
National, International or organizations own standard, if any. Drawings/blue prints, if
any, shall also be provided with purchase requisitions, in sufficient copies, which
could be distributed to prospective sources of supply. Requirements for calling sample,
if needed shall be indicated. If the materials are to be manufactured to particular
specifications/drawings/blue prints, requirements of approval of sample before bulk
supplies shall also be indicated. It shall be advisable to develop code catalogues with
standard specifications and code number of each item shall be mentioned in purchase
requisitions.

b)

Quantity and Delivery

28
In order to optimize stock-holding level, quantities required shall be worked out,
keeping in view, as stated earlier, past consumption pattern, anticipated changes in
usage, length of lead- time, criticality of item, buying and stock holding cost etc. The
right quantity for purchase shall also be suitably adjusted with regard to outstanding
purchase requisitions and/or purchase orders and available stock. Purchase requisitions
for non-stock items shall also need to be routed through stores for the purpose of stock
control. It is also desirable that the purpose for which materials are required shall be
indicated.
The purchase requisition shall also indicate as to when materials are required. The
period of delivery shall be determined keeping in view the lead-time of particular
materials i.e. purchase section shall have sufficient time for procurement action,
delivery by supplier and transportation.
c)

Cost Estimate:
A purchase requisition is an authority for expenditure and it is therefore imperative to
indicate estimate of cost. This not only helps purchaser to evaluate the bids from the
suppliers but also can be used as a means of budgetary control.

d)

Suggested suppliers:
Provisions are also made in a purchase requisition to incorporate details of known
sources of supply. The information shall be very useful to purchasing for sourcing,
although they also maintain records of sources of supply for various categories of
materials.

d)

Proprietary Article Certificate:

If the purchases are to be made on single tender basis, it is customary in some
organization to furnish along with purchase requisition an additional document called
Proprietary Article Certificate through which user department confirms that the items
requisitioned are proprietary in nature i.e. there is only one source of supply for
requisite type and quality of materials. Such certificates are normally issued for spares
of particular equipment or some-time for equipments/instruments, which the user
department feels, are produced by only one manufacturer. In exceptional cases some-

29
time procurement on single tender basis is recommended to buy a particular product
only to meet the specific needs of user department, although there might of a number
of other similar make in the market. Similarly a certificate of standardization has to be
provided by use department if materials are required to be purchased on single source
or multi source standardized parties only. A person at senior level approves such
certificates as by resorting to single tender procurement, competition in the market is
curbed.
e)

Approval of Purchase Requisitions

Anybody who needs materials can raise a purchase requisition but before furnishing it
to purchase, it has to be approved by one of the few senior/competent person, who can
authorize expenditure. Authority for expenditure can be delegated at middle/senior
level management whereas for capital expenditure; it has to be with top management.

f)

Scrutiny of Purchase Requisition by Purchasing:

Two copies of purchase requisition (after one copy being retained by originator)
complete in all respect are sent to purchase. Upon receipt of purchase requisition,
purchaser checks that specifications are complete and in order, delivery period is
realistic and those are approved by competent authority. Purchase refers back to
originator if any clarifications are required. One copy of purchase requisition after
allotment of control number by purchase is sent back to user department for future
reference
In order to exert positive control on inventory holding, in some organization, standing
Screening Committee consisting of representative from purchase, user department and
finance department is constituted and high value purchase requisitions are referred to
them for quantitative review. Procurement action for such requisition is taken only
after the review by the committee and for the quantity and the items so agree by them.

Selection of possible Sources of Supply:

30
After receipt of purchase requisition by purchaser, the process of selection of possible
sources of supply starts. In certain cases, an annual supply contract may be in
existence and as such the selection stage is already carried. The order or call off is sent
to agreed suppliers.

IS THIS A REGULAR
PURCHASE?

NO

YES

YES

IS THERE AN
ANNUAL
CONTRACT FOR IT?

MAKE SHORT
LIST
OF POSSIBLE
SOURCES

NO

WAS THE LAST

SUPPLIER
SATISFACTORY?

OBTAIN
QUOTATION
AND OTHER
INFORMATION

NO

YES
IS IT TIME TO
CHECK THE MARKET?

YES

NO
PLACE ORDER

Supplier Selection
(Source Baily 1983)
EVALUATE
PERFORMANC
E

SELECT SUPPLIER
AND AGREE
PRICE AND
TERMS

31
Even if, there is no annual contract, there may be established supplier and a competent buyer
does not change the suppliers until there are valid reasons. The buyer may place the order on
the last supplier or may check the market again by requesting the established suppliers to
quote their rates.
Identifying the Potential Suppliers:
If the items are to be purchased on Single Tender basis, (Proprietary Article Certificate/Single
source standardization certificate/single tender procurement certificate due to certain specific
requirements, is furnished along with purchase requisition) the process become very easy as
enquiry is sent to single source. Even in multi source standardization tender enquiries are sent
to pre-determined standardized sources only.
But most of the time, especially in Government Organization, purchases are made through
one of the following two methods of inviting competitive bidding.
Limited tender (also known as selective tendering/informal tendering)
In this case, value of purchases up to certain financial limit, tender enquiries are sent to
certain known sources of supplies. Such sources may be registered and approved suppliers of
various categories of materials, identified against tender notification to the press. Potential
supplier can also be identified by buyers, relying on their own trade knowledge, trade
magazines, trade-shows/exhibitions, call by companys representatives, catalogues and
literature delivered by post, information from colleagues in other departments or sharing of
information with other units of the organization. Through personal contact or membership of
professional associations, buyers may be able to consult people in other organizations. Thus
purchaser updates and maintains details of suppliers for various categories of materials.
Open tender (also known as Press tender/formal tendering:
Under this system of bidding Notice for Inviting tender is published in newspapers, which
also include Qualifying Requirements for prospective bidder. Those suppliers who meet the
qualifying requirements are invited to bid. The cost of tendering through NIT is very high
(expenditure incurred on account of publication of tenders in the newspapers) and as such

32
resorted to only when the value of purchases is above certain financial limits. Tender
documents are sold to prospective bidders on payment of specified charges. Normally twopart bidding is done. Prospective bidders are advised to furnish technical bid along with bid
guarantee amount (earnest money) in the first envelop and commercial bid in the second
envelop. In the fist envelope suppliers are also advised to furnish necessary documents in
support of their having met qualifying requirements (details such as capability, performance
records, financial status and other relevant information). The aim of this exercise is to identify
potential suppliers who appear qualified to under take the work. After scrutiny of technical
bids, commercial bids of only those bids are open whose products have been technical
evaluated as acceptable and who also meet qualifying requirements.
Quotation and Offer:
Dictionary definition of quotation is: amount stated as current price of stocks or commodities.
A supplier may send a quotation by saying, we are currently selling this article at these rates,
delivery in four weeks from receipt of order. This is a quotation and not an offer to sell so
much as a statement of facts. The supplier may also reply by saying that In reply to your
enquiry, we offer to supply you with the articles specified at a price ..for delivery four
weeks from receipt of your order. This is an offer to sell, which can be converted into a
contract by acceptance, by sending an order.
Sometime the supplier may also furnish offer with his own terms and conditions, some of
which may not be in conformity with terms of buyer. In order to avoid legal complication
such deviation need to be sorted out before the placement of order. It is also customary on the
part of buyer to request suppliers to keep their offers valid for 30 to 120 days so that purchase
orders are placed within the validity period. Suppliers are not bound to accept the order, if
placed beyond the validity of such offers. In Government buying validity of offer for a certain
period of time is essential so as to enable the buyer to evaluate the offers and place order
within this period. In the event of any anticipated delay in decisions taking process, bidders
are requested to suitably extend the validity of offers.
Determination of price and availability:

33
At the closing date and time, all the offers received from the prospective suppliers are opened.
Many organizations allow the bidder to depute their representative to witness the tender
opening, if they so desire. Offers received after the due date and time are not entertained and
returned back to bidders unopened. Although late offers are not considered, in some
organizations delayed offers (offers posted at least one day before scheduled opening date
through Registered post cover but delayed due to postal time.)
As a normal practice, the key data from suppliers offer are recorded on to a bid summary
sheet (also known as comparative statement). This is convenient both for comparison and
subsequent reference. When price basis, payment terms, transportation cost, insurance
charges, taxes and duties etc. differ, such bid summary are very helpful for direct comparison.
Any deviation between enquiry documents and offer have to be sorted out at this stage of
evaluation The best way is to work out the landed cost of each item of offer i.e. making
provisions for taxes, duties, transportation, insurance, packing and forwarding charges,
payment terms etc. While comparing the offer, quality requirement (technical evaluation to be
done by user department) and delivery period has to be considered. Impact of fixed price or
price variation clause also has to be considered at this stage. After doing necessary loading for
deviation, evaluated price is also indicated in the bid summary and grading of offers is
marked (lowest evaluated L1, L2 and so on).
Some examples of loading for deviation, to bring the bidders on common and comparable
grounds, which are commonly applied by many organizations including Public Sector
Undertaking and Government Departments, are as under.
Packing and Forwarding Charges:
Offers are normally invited on F.O.R. destination basis. However, if a bidder has
quoted Ex-works price, loading on basic price @ ranging between 1-2% is done.
Freight Charges:
Similarly for Ex-works price or F.O.R. Station of Despatch price, loading towards
freight charges as percentage (say 2% is bidder is within 300 KM, 3% if within 300500 KM, 4% if within 500-1000 KM and 5% if above 1000 KM) or for bulk items like
industrial chemicals, steel, cement etc. on actual freight payment is done.

34
Excise Duty:
If the bidder is silent about excise duty or quoted excise duty as applicable at the time
of dispatch and specifies present rate of excise duty, in such case offer is evaluated
considering the maximum rate of excise duty payable for the product as per Excise
Tariff of Government of India. However, order is released for excise duty inclusive
(where bidder is silent about the excise duty) duty actually paid at the time of dispatch
(where bidder has quoted variable excise duty). Loading of excise duty is done on
basic price + Packing and forwarding, if quoted or loaded separately. In case the
bidder quoted with fixed rate of excise duty or specify excise duty as Nil, the offer
shall be evaluated accordingly and payment to bidder is also restricted accordingly, if
order is placed on him. This will, however, be subject proof of actually having paid the
excise duty. No upward revision of excise duty at later stage is allowed.
Sales Tax:
As per terms of enquiry, bidders are advised to indicate as to whether the offered price
is inclusive or exclusive of sales tax. If sales tax extra, the percentage (both full sales
tax or concessional sales tax against submission of form C for Central Sales Tax for
relevant form for State Sales tax). In case the bidder is silent about the sales tax,
evaluation shall be done on sales tax extra and if the bidder is still evaluated lowest
one, order is placed as price inclusive of sales tax. Loading for sales tax is done on
basic price + P&F if break-up given separately = Excise duty.
Loading of insurance charges:
In case the bidder has quoted ex-works price of F.O.R. Station of Despatch, loading
towards insurance charges as per the marine insurance policy being operated by the
buyers organization. Loading is, however, done on basic price + P&F + ED + ST.
Payment Terms:
Normally the standard payment term is 100% payment within 30 days from the date
of receipt and acceptance of materials i.e. one month credit.
However if bidder demand payment against delivery or payment through bank,
loading for interest on advance payment @ ranging 1 to 1.5% of cost per month is
done. If part payment to be made through bank or against delivery and balance within
3o days from the date of receipt a d acceptance of materials, the loading shall be only

35
on part payment. Loading towards deviation in payment terms is on basic price + P&F
+ ED + ST
Price Variation Clause:
Normally as per terms of tender enquiry bidders are advised to offer firm price (a very
convenient price for Government buying). Sometime bidder may quote a variable
without any specific mention of any percentage; loading of 10-15 towards price
escalation per annum may be done proportionately on the basis of delivery period.
In Government buying post bid opening clarification from the bidders are prohibited except
from the evaluated lowest bidder.
It is further desirable all the above loading factors except price variation are made known to
the bidder before hand to avoid any complications after bid opening. In view of this, these
details are communicated to the prospective bidders through Instruction to bidder furnished
along with tender enquiry or tender documents.
Cheapest offer is not always the best buy. The best buy has to be decided by technical and
commercial evaluation. Quoted price is only one factor in obtaining the best value for money.
But there are other factors such as specification and design standards, delivery reliability,
durability, maintenance cost, and reliable after-sales-services etc. In view of these factors, the
apparent lowest cost may turn out higher during the lifetime of equipment. It is therefore
imperative that these factors need to be considered while buying the equipment and other
critical materials and while evaluating the offers.
When every thing is equal except price, order is place to supplier, which quoted lowest
evaluated price.
Price Analysis and Cost Analysis:
In considering the offers, some form of price analysis is used. Prices can be compared with
offers submitted by various bidders, paid in the past or with the ongoing rate contracts, if any.
It may be compared with alternative materials or articles, which may be used.

36

Sometime, one of the several offers is found much lower and a purchaser must find out the
reasons for this. If the lowest offer is more than 25% below the other offers, the buyer shall
clarify with the supplier before finalizing the order to avoid non-execution of order at later
stage. Sometime the supplier may be short of orders and may quote-lower prices to just cover
labour and materials cost without contributing to full profit and overheads. Purchaser may
place the order on such suppliers unless they are short of order due to unsatisfactory
performance. Lower prices are also offered by the supplier to potential customer to give them
fair trial for business association. This is a legitimate ploy, and there is no harm in switching
to untried supplier although there is some risk.
Cost analysis is not the same as price analysis. Cost analysis is aimed at systematic
determination of costbased price by analyzing cost of labour, materials, overheads and
reasonable element of profit. This technique is very useful when competitive bids do not
provide simple way to check the price. It is very important tool for negotiating high value
contracts.
Suppliers are asked to furnish cost break-up in support of their quoted price. Buyer seeks the
help of qualified estimator or cost-analyst to analyze the cost of products. It is, however,
found that suppliers are most the time unwilling to provide this break-up. Even if they
provide, it is noticed
that such break-up is jacked up. The buyer does his own analysis and price is settled, during
negotiation somewhere between the estimate of buyer and break-up provided by the supplier.
Break-Even-Analysis\
Components made on special tooling have two cost viz. cost of cost of tools, jigs and dies and
cost of component made with the aid of these tools. High tooling cost always gives high per
piece cost and vice-versa. One way of assessing these two cost bids is to decide a write-off
quantity for the tool, divide the tooling cost by this quantity and add the resultant figure to per
piece cost. It is, however, not easy to decide write-off quantity due to uncertainty of life of

37
tools, the future requirement of component and holding cost of higher inventory. Under these
circumstances, it is better to use break-even-analysis.
For example following three bids are received.
Supplier A Rs. 100000 for tooling, per component at Rs. 3000
Supplier B Rs. 200000 for tooling, per component at Rs. 2000
Supplier C Rs. 400000 for tooling, per component at Rs. 1000
The break-even point can be derived by calculations. The difference between A and B supplier
component piece price is Rs. 1000. Dividing one difference cost into the other gives breakeven point between suppliers A B as 100 units. In the same way break-even point between B
and C can be calculated.
(Tooling cost of C- tooling cost of B)
Component price of B- component price of C
= 400000 - 200000
2000 1000
= 200 units.
From this, it can be seen that total invoice cost is lowest for supplier A until off-take exceed
100 units when B becomes the lowest cost source, while for total off-takes greater than 200
units C
becomes lowest source. This can also be made clear with break-even chart as under:
A

600000
500000

Cost (Rs)
400000
Break even
point B and C
Cost
300000

38

200000
Break-even
point A and B
100000

50

100

150

200

Quantity (Units)
Discounts and Rebates:
A discount normally is the deduction from list price, quoted price or usual price or from the
invoice total, which is given due to variety of reasons and is expressed as percentage. It may
be a simple discount or chain discounts. A rebate is defined as deduction from the sum to be
paid, and thus happen to be another word for discount.
Cash discount/settlement discount:
The supplier, for earlier payment than usual period, gives settlement discounts. Such
settlement discounts are usually called cash discounts, a term which is correctly used for
discount for immediate payment in cash rather than credit. Cash discount may range between
0.5% to 5%and normally a purchaser arranges faster payment to avail these discounts. This
also helps supplier the rapid turn- over of working capital.
Trade Discount:
The trade discounts are the discount given to tradesman i.e. distribution channel used by the
manufacturers. This discount is also offered to major customers as such direct sale helps
supplier to reduce his marketing expenses. This discount is expressed as percentage of price
list.
Special Discounts:

39
Special discounts are sometime available to buyer, who takes the goods during off- season
such as refrigerator during winter season. The advantage to supplier is that the production can
be smoothed and cost of holding the stock is reduced. Manufacturers also announce special
discounts as sale promotion during festival times or also discount on return of worn out/old
items against purchase of new ones.
Quantity Discounts:
Quantity discounts are offered on large orders or to large customers. The seller is benefited
from big orders, which enable them to reduce direct and indirect costs. Before availing cash
discount, the buyer needs to weigh the advantage of lower purchase cost against additional
inventory holding cost. This can be quantified. A prudent buyer always looks for such
discounts. An example is Group Contracts: a group of establishments can often get a lower
price if they agree to deal with single source for a particular item.
Placement of Orders:
After having evaluated the bids and chosen most suitable supplier for quality goods at
competitive price, the next logical step in the process is to prepare a purchase proposal for
approval of competent authority as per delegation of power. Such proposals are sent to
Finance for financial concurrence before approval of competent authority For high value
purchases, such decisions are taken on the basis of recommendations of Tender Committee
(Committee consist of representative of appropriate level from user department, Finance &
Accounts department and purchasing. The concept of tender committee helps in faster
decisions, as files do not move from one department to the other. Tech-commercial evaluation
of offers is done during the meeting of tender committee.
The next step in process is to place the purchase order. This decision of buying can be
communicated to the suppliers by words of mouth, in writing, by phone or using standard
order forms. The purchase order standard form is used in the organization in view of
following reasons.

40
A purchase order is a contract and can be used as a legal document in the event of any
dispute. It is therefore imperative that agreed terms of purchase should be clearly
spelled out in the well-documented form of purchase order.
An organization employing large number of people and processing thousand of
invoices every month, needs standard procedure to ensure that payments are not made
for the goods which have not been ordered or have wrongly been brought in for
private use on companys account.
To ensure that non-purchasing employees do not make any commitment to the
supplier on behalf of the organization. A large number of salesmen keep on meeting
the non purchasing employees of the organization to offer them materials to meet their
needs. They may pressurize them to sign their order form or obtain their verbal
consent for supply of unwanted materials or materials at excessive prices or excessive
quantities. This type of trouble can be avoided by stipulating that everything to be
bought for the organization must be bought by use of standard purchase requisitions
countersigned by responsible and

authorized person and through standard purchase order to be signed by purchase on

behalf of the organization.
In the bigger organization, many departments are involved in acquisition of materials
viz. user department, stores department, inspection (quality assurance), accounts
department
etc. All these departments can be communicated by furnishing standard order form
prepared in multiple copies.
Distribution of copies of purchase orders:
Two copies of purchase order are sent to supplier. The extra copy to the supplier is for
the purpose of acknowledgement, supplier is requested to sign this copy and return to
purchaser as token of having received and accepted the order on the terms and
conditions stated therein. Sometime due to resistance of indifferent attitude of supplier,

41
it becomes difficult to get signed copy back. Sometime suppliers sign after crossing
the conditions, which are not acceptable to them, or attach their own order- acceptance
form with quite different sets of terms and conditions detailed on it. Such situation
can, however, be avoided if all commercial terms and conditions are sorted out before
hand.
One copy of order is sent to the requisitioning department (indentor), as intimation
that purchase order is finalized for the materials requisitioned by them.
One copy of purchase order is sent to goods receiving section of stores department to
check and inspect the materials on their arrival and complete receiving documentation.
One copy of purchase order is sent to accounts department for invoice checking and
payment to the supplier
One copy is retained by purchase department for purchase file records, expediting the
supplies, processing of invoices.
Blanket Order and Period Contract
Blanket order is the most popular alternative to the single item fixed price order. This is an
agreement to provide designated quantities of specified items over a period of time at an
agreed fixed price or a price with variation from time to time in an agreed manner. Deliveries
are made under specified release system or cal-off orders. Another form of blanket order is
an agreement to supply all buyers needs for specified items for a designated period of time
(Period contracts). Under this type of contract, the quantity is not fixed, until the time period
is elapsed.
The unique purpose of blanket order is to purchase variety of low unit value items for which
there are frequent deliveries from one source.
The time period for fixed price blanket order is normally one year and it can be for longer
period also if suppliers are willing hold their prices fixed or a suitable price variation formula
is mutually agreed upon.
Call Of Orders:

42
Blanket orders or period contracts are not usually instruction to deliver the materials. They are
rather agreement as to total quantity or period, description of materials, prices and commercial
terms and conditions on which goods are to be supplied.
Instructions which tell the supplier to deliver which materials, in what quantity and when
against such contracts may be in variety of forms, such as
i)

Call-off orders- which call-off materials for delivery.

ii)

Contract release form, which releases the materials for delivery.

iii)

The normal purchase order form with specific reference of No. and date of blanket
order or period contract.

iv)

Specified purchases form similar to purchase requisition except that it is addressed to

the supplier instead of purchase department. Such orders usually state that it is not
valid for value say Rs. 10,000.00 and is signed by authorized person outside purchase
department, normally the user.

It is, however, felt that arrangements at serial iii) above are the best to meet procedural and
control requirements although other forms are also widely used.
Advantages of Blanket order to Purchase:
Simplification of paper work involved in finalizing orders and processing invoices.
Assurance of regular supply- since the items and quantities are agreed upon in
advance, the supplier holds the stocks for immediate shipment upon request.
Shorter procurement lead-time through reliable, immediately available stocks,
resulting in reduction of investment in inventories.
Purchasing has time to deal with other crucial issues related to procurement of high
value and critical materials.
Advantages to Suppliers:
Suppliers paper work is also reduced significantly due to simplified system.

43
Potential savings in selling costs, which are almost eliminated once, the order is
finalized.
Assurance of specified estimated volume of sales, which enables the supplier to plan
his production and inventory more accurately.
Disadvantages to Suppliers:
The figures of anticipated usage are often unrealistic and inflated.
When the actual usage is below the estimate, the supplier is burdened with needless
inventories at the end of the contract.
Provisions of cost plus pricing contract require the supplier to exhibit accounts to the
purchaser and sometime price-breakup if price-variation formula warrants thus.
A discontinued large contract may leave the supplier with a large void in sales if a
subsequent contract is given to another competitor.
Suppliers also reported many other problems with blanket orders. In some instances purchaser
indicate unrealistic or inflated rate of potential requirement. This may cause losses to
suppliers who based his quotation price on anticipated high requirement and may also result
in over-stocked inventories.
Blanket ordering system is in line with Japanese philosophy of developing single source for
an item and strengthen dealing with it. Such philosophy is further important in arranging
materials just- in- time.
Other effect of blanket order purchasing include; the stimulation of greater service from the
supplier to include assembly, acquisition of related items, and technical services, a significant
increase in standardization of requirement by buying firm, motivation to develop more
comprehensive supplier evaluation system. Blanket order also makes EOQ concept as
obsolete since the cost of purchasing input to the formula will no longer be valid.
National Contracts:

44
Multi-plant companies sometime resort to purchasing through nation-wide contracts. Such
type of contracts, known as National Contracts, are negotiated and finalized by Corporate
Purchasing Group. The purpose of such contract is to apply overall purchasing strength by
consolidating requirement in negotiating process to get the best deal and also cut down lead
time of various units and reduce their buying cost.
Once the national agreement are signed, the individual plants are notified of its existence and
advised to place order (release) which is governed by price and commercial terms and
conditions of master agreement. National contracts are aimed at to gain a volume bargaining
advantage; it does not constitute an attempt to centralize completely the purchasing functions
at corporate level.
Stockless Buying:
Under this buying system, the purchasing organization has no financial liability for inventory
of goods being purchased. The supplier owes the stocks. The goods are located at buyer place
or suppliers place (if supplier is nearby). The term consignment buying is also used for such
type of arrangements. To make the stockless buying a success, both buyer and supplier have
to work very closely to monitor demand and stock- holding. In stockless purchasing system,
sometime the prices may be slightly higher as supplier has to bear the inventory holding cost.
However, the ultimate cost at the point of usage may be much lower. Seller may be able to
perform these functions much economically then purchaser because they are specialist in the
products and handle their own inventory in any case.
Normally the stockless arrangements cover standard off- the- shelf items required by several
industries, price among suppliers remaining relatively constant. Weekly, fortnightly or
monthly billing is done by the supplier for the quantities drawn for actual usage. The
purchaser needs to furnish data of anticipated consumption. Changes in consumption pattern
also need to be communicated promptly so that the supplier plans stocks accordingly.
Advantages of Stockless Buying:

45
Advantages to Purchaser:
Savings in inventory holding cost due to reduction of amount of capital tied up in
inventory.
Paper work is substantially reduced and purchase personnel may devote this time for
other crucial areas.
Service level is improved and no fear of obsolescence.
Knowing all of customer business involved, the supplier may be inclined to make
concession in prices for better payment terms.
Advantages to Suppliers:
Assurance of full customer business during the contract period and marketing effort
can be devoted to other customers.
Significant reduction in the paper work.
If the stocks are held at buyers place, sellers requirement of storage space is reduced.
Seller with future knowledge of customers requirement can schedule production of
contracted item on the most efficient basis.
Small order and 80-20 law
The well-known rule of thumb states that about 80% of any organizations purchase
expenditure account 20% of the things purchased. On the other end of the scale, more than
three-quarters of the orders placed tend to account for less than a fifth of total expenditure.
It is therefore, desirable that a purchaser should concentrate more efforts on 20% high
expenditure value items and contribute to the profitability of the organization.
It is, however, notice that administrative efforts tends to be allocated to transactions in
proportion to their number, rather than their value of importance. Special procedure, therefore,
need to be developed to avoid such situations.

46
There are no problems as far as individual small order but small orders considered as a whole,
do constitute a problem. It is difficult to anticipate the need for small, non-recurring
purchases, because situation that generates them are not usually related to each other, thus
precluding the possibilities of combining orders to increase total value. Such items are further
needed promptly and purchase cannot hold and accumulate requirements to increase total
value of orders. If such purchases pass through normal procurement procedures they may not
only delay the process but also sometime even cost more to procure than the cost of materials.
It is therefore, imperative to develop specialized procedure to by-pass the usual ordering,
receiving, inspection, storage and similar functions. This short cutting not only reduces the
amount of paper work but also speed up the purchasing cycle. Some such methods are as
under:
Petty Cash Purchase System
A petty cash is a system that virtually eliminates paper- work by setting aside a sum of money
for cash payment of minor expenses. For the purpose of control, some monetary limits are
fixed for cash purchases. A small mount in the form of imprest money can be made available
to various user departments or with a roving buyer if the purchasing wants to keep such
purchases under its control. The user department may buy the small requirements directly
from the market and recoup their imprest account from time to time. If such petty cash
purchases are to be arranged by roving buyer a requisition is given to him with source
indicated. The buyer then makes arrangement for pick-up and pays for the items immediately.
The sale slip becomes both receiving document and cash voucher. Invoicing, account payable
as well purchase order procedures are eliminated.
Cash on Delivery
This is another form of cash purchases. The buyer calls off delivery from local suppliers who
are paid cash by stores upon delivery of goods at Receiving Section.
Telephone orders:
The use of telephone to order small value non-recurring purchase is another logical method.
When a buyer receives a requisition from user department, in any event, has to get in touch
with suppliers to ascertain availability and price. He takes this opportunity to advice them to

47
supply the goods also and provide the supplier order number which is used to identify
requisition. The written purchase order is thus eliminated.
Follow up and Expediting Orders:
Purchaser job does not end with placement of order. He has to ensure that supplies are
executed as per delivery schedule of orders and some administrative efforts need to be made
to achieve this. Like quality assurance, there is a need for delivery assurance, which means
making it sure that suppliers shall meet very tight schedule without any expediting. Timely
deliveries are the pre-requisite for Just- in Time system. The buyer has to device a system to
initiate action of expediting when deliveries are due.
In absence of systematic expediting process only fire- fighting arrangements can be done i.e.
follow up action is taken when requirements become extremely critical and there are enquiries
from stores or user departments.
The first step in this direction is to draw a very realistic delivery plan keeping in view the
delivery period indicated by the supplier. At the time of placing the order it should be decided
as to whether there is any need for progressing and if so, when. Most orders need not be
progressed until they are late. An important small number of items need to be expedited at
various stages i.e. when design work should be completed, when tooling should be ready,
When prototypes shall be delivered etc.
The following are some of the systems in use for follow up action.
The simplest reminder system is a desk diary. Each day, the orders placed during the
previous day, which need progressing, are entered under the date at which progress is
needed. In this way regular expediting is done.
Other system use progressing cards, coloured tags attached to copies of orders, wall
chart etc. If more than a quarter orders need progressing, an extra copy of orders may
be made
which are put into files numbers 1 to 31 of current months and January to December
for next 12 months plus a slot for orders due for progressing in more 12 than months

48
time. Each day copies of orders for the day are taken out and those, which are in
transit or have been received, are filed in records file. Rest is progressed.
Purchase order file can also be computerized and reminder can be generated, when
due, for progressing.
Routine reminders may be in the form of standard letter asking confirmation from the supplier
that delivery is on the way or will be made as per schedule or order. No reply or unsatisfactory
reply tend to personal letter, phone call or visit to supplier place.
In critical cases buyer may start looking for alternative arrangements and may consult higher
management to see that extra pressure can be applied.
Amending or canceling orders:
Amendments to orders are made due to many reasons, which have mutually been agreed upon
(amendments extending delivery period, change in payment terms, payment of taxes and
duties, changes in quantities or amendments pertaining to any other commercial terms and
conditions). Sometime due to failure of supplier, order needs to be cancelled. Such
cancellation, however, is resorted due to failure of supplier in spite of reminders to execute
order and serving final notice to cancel the order if supplies are not made.
Verification of Invoices and payments to Suppliers:
A purchaser has also to ensure that payments are made to the suppliers after executing the
supplies as per terms of orders. Normally Accounts department processes invoices but in
some organizations purchaser is made responsible for checking and verification of invoices
In case dispatch documents are routed through bank against part or full payment purchase has
to co-ordinate very closely with Accounts to ensure that documents are retired from the banks
after release of payment. In case of any deficiencies in the documents, it is the purchaser who
takes up the matter with supplier and sort of issues to facilitate retirement of documents.
Processing of Discrepancies and Rejections:

49
When the goods are received sometime they are found damaged, defective, excess/short to
invoice quantity or fail to comply with specifications. Such discrepancies are immediately
notified to the supplier so as to settle the discrepancies and also provide them with an
opportunity to inspect the goods at site. As a normal practice discrepancies in supplies are
notified to the supplier by stores department under intimation to purchase so that efforts for
settlement are supplemented. Rejected goods can be held at stores for collection by the
suppliers or returned to them at their expenses, as agreed upon. Sometime, the rejected goods
are accepted at reduced price to compensate for extra processing or repaired/rectified at cost
of supplier. Even if the goods are insured by the buying organization, suppliers help is need
for repair/rectification of damaged components, equipment and instruments, if they are
repairable economically. As regards shortages from the intact packages delivered by the
carrier, it is the supplier who has to make good the shortages as such claims are not
entertained by the underwriters. Purchaser settles these all issues with the supplier in light of
commercial terms and conditions of the orders.
Closing of completed orders and maintenance of records:
Once the buyer is satisfied that orders are fully executed and supplier/buyer have met all
obligations of the order (issues like settlement of discrepancies in supplies, payments to the
supplier, release of security deposit or performance bank guarantee, if any), purchase order
file of such orders are closed and kept in record room to meet provision of Limitation Act.
The record-keeping need to be in such a way that information is retrieved promptly as and
when required.

Buying at Right Price:

Price: Can be defined as value of commodity or service measured in terms of standard
monetary unit. In comparing two quotations price enables us to appraise relative value offered
by each supplier.
Some facts about the price:

50
The lowest price is not always the right price; price has to be related with the quality
of goods.
The quoted lowest price by a vendor may not be the right price until landed cost is
worked out for different rates quoted by different vendors with different price basis
and commercial terms (landed cost means total cost incurred in bringing the goods to
purchasers works).
Prices are often dependant on factors, apart from quality, such as delivery schedule,
the quantity ordered, the relative manufacturing and labour cost at a specific time and
general economic conditions.
Right price for one supplier may not be the right price for another.
Items, which have seasonal availability, shall be purchased during the season when the
rates are low i.e. the right price.
Price Information:
1.

Price Catalogues:
Price indicated may be asking price or may be subject to trade, Cash, quantity
discounts. Difficulty in these prices is that they frequently become dated and as such
need to be revised and re-issued from time to time. If latest catalogues are not
available, these may be misleading.

2.

Trade Journals:
These provide useful information on current price applicable to particular
commodities.

3.

Tendering:
Dictionary meaning of tendering is to present anything for approval and acceptance. In
purchasing tendering may be defined as procedure by which potential suppliers are
invited to make a firm and unequivocal offer of the price and terms, which, shall be
the basis of subsequent contract.
Although tendering is sometime used by private sector organization, it is widely used
by Government Departments and Public Sector to ensure observance of the principle
of public accountability.

51
Due to public accountability a Government/ Public Sector Undertaking buyer is
required to award the order on the lowest bidder provided the lowest bidder is deemed
qualified to perform the contract. However there is no legal requirement which
compels a private firm to award a contract to lowest bidder, the competitive bidding
process itself implies that lowest qualified bidder will get the contract. It is this
expectation that motivates a supplier to compute its cost and assess its competitive
position carefully before submitting its bids. To consistently obtain suppliers best
prices on the first bid a buyer should therefore, in most cases award the contract to
lowest evaluated bidder. This situation gives rise to two important policies.
Two important policies of competitive bidding (tendering) are:
Buyers be willing to do business with every supplier from they solicited a bid. The
resultant policy states that supplier requested to bid must be determined in advance as
qualified supplier.
Whenever lowest bidder does not receive the contract, buyer is obliged to explain the
reason.
Pre-requisite of competitive bidding:
Rupee value of specific purchase must be sufficient to justify the expenses both to
buyer and seller that accompanies this method of source selection and pricing.
The specification of item or the services to be purchased must be explicitly clear to
both buyer and seller.
Market must consist of adequate number of sellers.
The sellers that make the market must be technically qualified and actively want the
contract and therefore, be willing to quote competitively.
The time available must of sufficient.
Conditions that must be fulfilled for Competitive Buying
At least two qualified sources (preferably three in Government buying) have
responded to solicitation.
Proposals are responsive to the buying firms requirements.

52
Suppliers competed independently for the award.
The supplier submitting the lowest offer does not have an unfair advantage over its
competitors.
The lowest evaluated price is reasonable.
The following conditions shall not be present when employing competitive bidding as the
means for source selection:
Situation in which it is impossible to estimate costs with a high degree of certainty viz.
high technology requirements, with items requiring a long time to develop and
produce
Situation in which price is not the only important variable. For example quality,
delivery schedule and service may well be negotiable variable of equal importance.
Situation in which purchasing firm anticipates a need to make changes in specification
or other aspects of the purchase contract.
Situation in which special tooling or set up costs is major factors. The allocation of
such costs and title of special tooling are issued best resolved through negotiations.
The broad procedure of tendering is:
The standing procedure prescribes a monetary limit, above which tender must be
invited.
Tender may take three forms, single tender, selective (limited) tender and open tender
(press tender- Notice for inviting tender). Single tender system is resorted when the
items
are purchased against Proprietary Article Certificate issued by user department
including spares for equipments, source standardization on single source, single tender
procurement to meet certain specific needs although item is not proprietary or single
tender procurement due to urgency. In selective tender (limited tender), tender enquiry
is sent to some short- listed suppliers only. For open tender, press notifications in
leading newspapers are issued and all prospective suppliers, who meet the qualifying
requirements, if any, are invited to quote. Sometime open tenders are issued only for

53
the purpose of enlistment of suppliers. Future selective tenders are issued to those
approved suppliers who are so enlisted through open tender.
Since cost of open tender (involving publication in newspaper) is high, suitable
monetary limits are fixed, above which press tenders are resorted. In open tender, bid
documents are issued at some cost to ensure that only serious bidders approach.
Full and identical specifications along with Instructions to Bidders (this also
including details of loading for deviations), General Conditions of Purchase and other
relevant documents are issued to all the prospective suppliers who are required to
submit their tender in a sealed and identifiable envelope by a prescribed date and time
(Envelopes are required to be superscribed with details i.e. Tender No. & Date, Due
date and Time). Details of Earnest Money also need to be subscribed on the envelope.
In order to ensure that suppliers accept the order against the tender invitation, it is
customary to demand earnest money (bid bond) along with offers, which is forfeited if
the supplier fails to accept the order or execute the order. It further ensures that only
serious/capable supplier participates in tendering. Offers received without Earnest
Money are normally not opened and returned back to bidders.
The time allowed to the prospective bidders to submit the most competitive offer shall
be reasonable. Normally 21 days time is allowed for limited tender/single ender (from
the date of issue of tender enquiries) and 30 days in case of open tender (reckoned
from the date of publication of NIT- while determining the date of opening, margin of
10 days is incorporated for routing the press advertisement for publication in
newspapers.
Since the offers after opening are evaluated on Techno-commercial basis, it takes time
to finalize order. In view of these prospective bidders are advised to keep the offers
valid for
60 to 180 days from the date of opening. In case the buyer anticipates any delay,
bidders are requested to suitably extend the validity of their offers.
Offers may be invited in single envelope, containing technical data, prices and
commercial terms and conditions and also earnest money in the required mode. Offers
may be invited in two part bidding i.e. first envelope contains technical data,
documents in support of bidders meeting qualifying requirements and the earnest

54
money. Those who fail to furnish requisite earnest money, their offers are rejected.
Similarly those who do not apparently meet the qualifying requirements or whose
offer is rejected on technical grounds, their commercial bids are not opened and
returned back to them.
If for extra ordinary reasons, the bid opening date is extended to give an interested
supplier more time, it is buyer responsibility to notify all bidders of the new bid
opening date.
Many a times bid opening date is extended due to poor response on the first instance.
At this stage enquiries can be sent to some more prospective bidders also so as to
ensure adequate response.
On due date and time, a committee of representative from Materials Management
Department and Accounts Department opens offers. Some organization allow
representative of suppliers to be present at the time of opening of tender, if they so
desire
Late tenders usually are not considered and returned to suppliers unopened. Offers
posted by registered post, at least one day before the bid opening date but delayed due
to postal time are considered in some organization provided decision taking process to
award is in initial stages.
If the tender enquiries are sent to manufacturers and offers are submitted by the sister
organization for their dealers/distributor, there must be a letter from the manufacturers
to this effect otherwise such offers are treated as Unsolicited and rejected.
Tenders are initialed, listed and entered into tender opening register and bid analysis
sheet showing details of price, price basis, taxes, duties- inclusive or extra,
transportation charges, delivery, payment terms and other information essential for
tender evaluation.
In order to facilitate techno- commercial evaluation, suitable loading is done for
deviations in quoted conditions; to bring the offers at par. Orders are normally placed
on technical acceptable and evaluated lowest offer.
Standing procedure, normally delegate power to Purchase Manager or officers of
purchasing functions to place order up to a specified value, if the orders are placed on

55
the lowest tender to the specification is accepted. Where the acceptance of lowest
tender is not recommended or value of purchase is above the specific limits, higher
authority as per the procedures of the organization approves purchase proposals.
Buyer must inform all unsuccessful bidders that the contract has been awarded. It is
important that the bidders be told of their failure to get the contract in the courteous
and objective manner. Although a bidder realizes that it cannot get every order, it is
likely to be more competitive on future jobs, if it is not dissatisfied with its treatment.
It is also imperative on the part of buyer to arrange for immediate return of Earnest
Money/ Bid bonds of unsuccessful bidders.
Pre-award Conference
When the rupee value is substantially high, complexity or criticality of the work to be
performed warrants, buyer may arrange a conference with the prospective bidder (Evaluated
lowest bidder), immediate before award of contract. Such conference from buyers side may
include himself, Production, Planning, Quality Assurance, Finance or representative from
other concerned departments. Bidder is also requested to bring his team of related experts of
appropriate level. The issue discussed will have been addressed in technical terms in the
request for proposal and proposed contracts. The pre-award conference is the vehicle, a
professional buyer uses to ensure that the provisions of tender documents/proposed contract
are fully understood and implemented. Major issues to be discussed may be:
-

All important terms and conditions

Delivery or operations schedule

Invoicing procedure and documentation

Quality plans and modalities of stage inspection and/or final inspection before
dispatch.

Mode of dispatches and selection of carrier for faster deliveries.

Guarantees and warranties.

Replacements towards rejections/damages in transit.

As regards service contracts, following additional issues can also be addressed during the preaward conference.

56
-

Staffing and supervision

Site conditions, work rules, safety (if appropriate)

Background check and security clearances.

Accident insurance for the personnel

Labour permits

Payment of minimum wages and statutory contribution for the personnel.

Possible conflict with other work.

Buyers responsibilities. Buyers supplied items such as tools, equipment,

facilities, and so on. Timeliness of buyer review and approvals for studies,
reports, plans and specifications etc must be established and accepted by both
parties.

Limitation of competitive bidding:

Suppliers may quote too low prices leading to subsequent problems viz. unsatisfactory
quality, delayed supplies etc.
Cost of buying, especially in case of open tender (Press notification) is very high.
Tendering procedure is too slow for emergencies and even otherwise, lead- time is
long especially in case of open tender.
Tenders are normally accepted on principle of lowest prices; credit may not be given
to supplier for past performance. Long lasting business dealing with supplier are
difficult to develop.
4.

Negotiations:

Negotiations after competitive bidding:

For high value contracts for plant and equipments or other critical materials, cases where
orders cannot be finalized on the basis of quotations/offers, prices and important terms and
conditions may be determined through negotiations.
The initial quoted price, however, form the basis for further negotiations between buyer and
seller so as to reach an agreement on price, quality delivery etc.
In order to ensure that competing firms offer low bids, the orders shall be placed on lowest
qualified bidder after the bids are opened. If purchase firm gains the reputation for negotiating

57
with lowest bidder after bids are opened and evaluated, then in future bidders will tend not to
offer their best prices initially, believing they may better in any subsequent negotiation, they
will adopt a strategy of submitting a bid low enough to allow them to be in any negotiations.
But their initial bid will not be as low as when they are confident that award will be made to
lowest bidder without further negotiations. In view of this a prudent buyer will never go for
negotiations after opening the bids until there are compelling and valid reasons for this.
Negotiations as means of source selection and price determination:
When all pre-requisites to the use of competitive biding, as stated earlier, are not satisfied, the
negotiation process should be employed to select sources and to arrive at a price.
Several progressive purchasing and supply management professionals favour use of
negotiations over competitive bidding for critical procurements due to following reasons:

The negotiation process is far more likely to lead to a complete understanding of all
issues of procurement. This improved understanding greatly reduces subsequent
quality and schedule problems.
Competitive bidding tend to put greater pressure on suppliers to reduce their costs in
order to be able to bid a low (but profitable) price. This cot pressure may result in
sacrifices in product quality, development efforts and other vital services.
This method is, however, good for private sector buyers and may not be feasible for
Government/Public Sector Undertaking buyers due to limitation of public accountability and
strict adherence to systems and procedures which are competitive bidding oriented.
Negotiation in PSU and govt. Departments
Avoidance of Negotiation:
In view of above and the instructions issued by Central vigilance Commissioner from time to
time, negotiation after competitive bidding shall be avoided. No price negotiation shall be
undertaken where three, techno- commercially accepted, offers are available. Order shall be
processed on L1 acceptable bidder after establishing the price reasonability.

58
Exceptional cases of Negotiation with L1 Bidder
However, in exceptional cases of high value contracts for plant and machinery or other critical
materials, negotiation with evaluated L1 bidder in following situation can be undertaken on
recommendations by Tender Committee and with prior approval of award approving authority
a)

Only two acceptable offers have been received against a tender and rates of
evaluated L1 bidder are quite high as compared to cost estimate or the last
purchase price, if available.

b)

The bidder have formed a cartel and rates of L1 bidder are considered
substantially higher than cost estimate or last purchase price, if available.

Negotiation with Bidder other than evaluated L1

When the material being procured is one of the critical input of plant and buyer may feel to
enter into parallel contracts with two or more parties. In these cases NIT and bidding
documents shall specifically stipulate this requirement so that bidders are aware before hand
the requirement of awarding parallel contract. Under these circumstances negotiation with
prior approval of competent authority shall be conducted with L2 bidder to match their prices
and conditions with evaluated L1 bidder. If the negotiation succeed, parallel contract (s) is/
are awarded. However if negotiation fail, further negotiation can be held with all bidders to
match their prices with evaluated L1 bidder.
What needed is that quantity ordered may be distributed in such a manner that
purchase is done in a fair, transparent and equitable manner.
Pricing Agreements:
Fixed Price:
Once determined, price remains fixed until completion of order apart from the change in the
scope of order/contract. This is applicable most to standard items from stock or for short- term
production.
Advantages to Buyers:
They provide greater certainty to the buyer who knows from the start what he is likely
to pay.
In case of tendering, especially in government buying, comparison of tenders is
convenient.

59
It provides an incentive to the supplier to complete the work within prescribed time. If
work is delayed any increase in the cost of inputs will have to be born by the supplier.
Re-determinable Fixed Price:
Firm price is determined at an agreed point of contract (say 30% completion) in the light of
actual experience of production cost. The price may be retrospective to the commencement of
contract and prospective to completion.
Such types of prices are applicable where development and production proceed concurrently,
such as import substitution.
Fixed Price Subject to Adjustment i.e. Price ruling at the date of Despatch
In this case fixed price as per offer/order is adjusted on agreed basis to cover escalation in cost
of labour and materials.
Such types of prices are applicable to contract extending over a period of time during which
the supplier may require to allow for increase in the cost due to inflation or other factors
affecting labour and materials.
This type of price is also applicable for items, prices of which are administered or controlled
by government.
Even for short- term contract, a monopoly supplier insists on such price.
In such types of contracts, all financial risk accrues to buyer. They are difficult and expensive
to administer, since the suppliers cost schedule will be required to be checked by the cost
department of buyer or sometimes services of specialist may be required.
Operation of such price becomes easy if a price- variation formula with attributes quantifiable
is agreed upon, before award of contract.
Cost-Plus Price:

60
Final price is determined on the basis of actual cost plus an agreed formula for determination
of profit; the basis may be (a) cost plus a fixed fee (b) Cost plus an agreed percentage (c) cost
sharing.
Such type of price is applicable to construction and service contract, repair work.
Choice of Right Price Basis
Another important area to ensure the most economical landed cost of the goods purchased,
especially imports, is the choice of right price basis.
The following are the price basis commonly used:
Inland trade
Ex-works
F.O.R. (Free on rail head) Station of dispatch
F.O.R destination
F.O.R. station of dispatch but freight up to destination borne by supplier.
Door delivery
International trade
F.A.S. (free alongside shore)
F.O.B. (Free on board)
C.I.F. (Cost, insurance and freight)
Following are the aspects implied to various price bases:
The point at which legal title passes from seller to buyer.
Who has to bear packing and forwarding charges?
Who has to bear freight?
Who has choice to select mode of transportation?
Who is to bear the transit damages and if required to arrange transit insurance.
Who is to pursue claims with carriers/ underwriters?

61
A prudent buyer always prefers for station of dispatch price basis, which offer to him
following opportunities.
To select an effective carrier keeping in view the urgency of his requirement.
To effect economy in freight and insurance charges.
To develop his own reliable and effective carrier and good relations with him.
In the field of international procurement, choice of F.O.B. price basis has the following
additional advantages:
Right of nominating a carrier lies with buyer who would like to get the materials
through Indian national carriers i.e. Air India and Shipping Corporation of India.
Big buyers like NTPC may also like to avail services of Consolidating Agents and
save substantial amount in freight apart from safe movement.
Similarly substantial saving can be achieved by obtaining insurance cover through
Indian underwriting companies as premium is less and settlement of claims, if any,
is easy.
The biggest advantage of arranging transportation and insurance through Indian
companies is the saving in foreign exchange, as payment to them are made in
Indian Rupees and not in the foreign currencies.
Depending upon urgency of requirement if any, subsequent changes in mode of
transportation are easy.
INCOTERMS AND THE EXPORTER
International Commercial Terms, known as Incoterms, are internationally accepted terms
defining the responsibilities of exporters and importers in the arrangement of shipments and
the transfer of liability involved at various stages of the transaction. Incoterms do not cover
ownership or the transfer of title of goods. It is crucial to agree on an Incoterm at the start of
a negotiation/quotation of a sale, as it will affect the costs and responsibilities involved in
shipping, insurance and tariffs. The new Incoterms 2010 rules were revised by the
International Chamber of Commerce and will become effective January 1, 2011. Four terms
were eliminated (DAF, DEQ, DES, DDU) and two were added: Delivered at Place (DAP) and
Delivered at Terminal (DAT).

62
The modifications affect obligations, risk transfer, and cost sharing for the seller and buyer,
resulting in better clarification and application of the eleven (11) Incoterms, and consistent
with the way global trade is actually conducted since the last update in 2000.
In any sales transaction, it is important for the seller and buyer to agree on the terms of sale
and know precisely what is included in the sale price. Exporters should choose the Incoterm
that works best for their company, but also be prepared to quote on other terms.
See VEDP Fast Facts- Responding to Inquiries
Inexperienced exporters may want to use the Incoterm Ex Works (EXW), because this
term carries the least burden for them. Under EXW, an exporters responsibility ends at their
facilitys loading dock, which includes making the goods available for pick up and providing
any product information needed for filing the Electronic Export Information (EEI). The
importers agent (i.e. their designated U.S. freight forwarder) will arrange and pay for the
pre-carriage, shipping, insurance and any additional costs from the exporters door. A sale
based on the Incoterm CIF, on the other hand, requires the exporter to arrange and pay for
the pre-carriage, shipping, and insurance to a named port. In this case, the sale price
(invoice) includes not only the (C) ost of goods, but also (I) nsurance and (F)reight costs that
the importing buyer pays the exporting seller.
When designating the Incoterm on a commercial invoice or a quotation to the buyer, the
term should be followed by the city or port of load/discharge, such as EXW Factory,
Richmond, VA or CIF Rotterdam. Using the actual address is better to avoid any
confusion or misinterpretation. Communication throughout the entire process is crucial. For
example, under Ex Works, the shipper should notify the importer when the goods are ready
and after they have been picked up by the importers selected carrier. The exporters freight
forwarder often provides the vessel and sail date, or air cargo service used, and any ocean
bill of lading or airway bill number to keep the parties informed of the arrangements and
status of the shipment (even though technically under Ex Works the exporters responsibility
ends at their loading dock).
The most burdensome Incoterm for the exporter is Delivered Duty Paid (DDP), because all
arrangements and costs are borne by the exporter, usually with the assistance of agents
(freight forwarders and customs house brokers). With DDP, the exporter bears all risks and
costs of transportation, including duties and tariffs, until the goods are received by the

63
importer, usually at the importers factory or warehouse. Since DDP represents the
maximum obligation to the seller, it is not recommended for companies that are new-toexport.

64
DDP Example: Four palletized drums of chemicals at US$ 40,000, DDP 123 Main St., Santiago,
Chile.
In the DDP example, for $40,000 total, the exporter arranges and pays for all transit costs,
including delivery to a designated facility at 123 Main Street, Santiago, including any insurance
coverage and duties/tariff charges. While these costs are added to the products price and are
sometimes itemized on the commercial invoice, the exporter takes full responsibility for the
added logistics costs and potential headaches, such as delays at customs, demurrage or
detention, or changes in inland or ocean transportation costs. Shipping DDP should only be
used by the most experienced exporters. Many details must be considered, such as trade
barriers, duties, currency exchange, reputability of service providers, and delivery to the final
destination. For example, if your product is a large, custom-made piece of machinery for a
factory:
Are there local out-of-gauge, heavy lift service providers?
Does the road to the factory allow access by an oversized truck?
What are the dimensions and capability of the buyers receiving dock?
How will you repair any damage that may occur during transit?
INCOTERM DEFINITIONS/CHANGES
The 11 Incoterms consist of two groups and are listed below in order of increasing risk/liability to
the exporter. Under the revised terms, buyers and sellers are being urged to contract precisely
where delivery is made and what charges are covered. This should avoid double-billing of
terminal handling charges at the port of discharge. References to ships rail were taken out to
clarify that delivery means on-board the vessel. Insurance, electronic documentation, and
supply chain security are addressed in more detail, and gender-neutral language is now used.
Rules for Sea and Inland Waterway Transport:
FAS - Free Alongside Ship: Risk passes to buyer, including payment of all transportation and
insurance costs, once delivered alongside the ship (realistically at named port terminal) by the
seller. The export clearance obligation rests with the seller. FOB - Free On Board: Risk passes
to buyer, including payment of all transportation and insurance costs, once delivered on board
the ship by the seller. A step further than FAS.

65
CFR - Cost and Freight: Seller delivers goods and risk passes to buyer when on board the
vessel. Seller arranges and pays cost and freight to the named destination port. A step further
than FOB.
CIF - Cost, Insurance and Freight: Risk passes to buyer when delivered on board the ship.
Seller arranges and pays cost, freight and insurance to destination port. Adds insurance costs
to CFR.
Rules for Any Mode or Modes of Transportation:
EXW - Ex Works: Seller delivers (without loading) the goods at disposal of buyer at sellers
premises. Long held as the most preferable term for those new-to-export because it represents
the minimum liability to the seller. On these routed transactions, the buyer has limited
obligation to provide export information to the seller.
FCA - Free Carrier: Seller delivers the goods to the carrier and may be responsible for clearing
the goods for export (filing the EEI). More realistic than EXW because it includes loading at
pick-up, which is commonly expected, and sellers are more concerned about export violations.

66
CPT - Carriage Paid To: Seller delivers goods to the carrier at an agreed place, shifting risk to
the buyer, but seller must pay cost of carriage to the named place of destination.
CIP - Carriage and Insurance Paid To: Seller delivers goods to the carrier at an agreed place,
shifting risk to the buyer, but seller pays carriage and insurance to the named place of
destination.
DAT - Delivered at Terminal: Seller bears cost, risk and responsibility until goods are unloaded
(delivered) at named quay, warehouse, yard, or terminal at destination. Demurrage or detention
charges may apply to seller. Seller clears goods for export, not import. DAT replaces DEQ,
DES.
DAP - Delivered at Place: Seller bears cost, risk and responsibility for goods until made
available to buyer at named place of destination. Seller clears goods for export, not import. DAP
replaces DAF, DDU.
DDP - Delivered Duty Paid: Seller bears cost, risk and responsibility for cleared goods at named
place of destination at buyers disposal. Buyer is responsible for unloading. Seller is responsible
for import clearance, duties and taxes so buyer is not importer of record.
INCOTERMS DO NOT
Neither determines ownership or transfer title to the goods, nor evoke payment terms.
Apply to service contracts, nor define contractual rights or obligations (except for delivery) or
breach of contract remedies.
Protect parties from their own risk or loss, nor cover the goods before or after delivery.
Specify details of the transfer, transport, and delivery of the goods. Container loading is NOT
considered packaging, and must be addressed in the sales contract.
Remember, Incoterms are not law and there is NO default Incoterm!
U.S. Department of Commerce: www.export.gov/logistics/eg_main_018114.asp
Wikipedia Online Dictionary. Incoterms: http://en.wikipedia.org/wiki/Incoterm
*Information provided by VEDP Fast Facts is intended as advice and guidance only. The
information is in no way exhaustive and the VEDP is not a licensed broker, banker, shipper or
customs agency. VEDP shall not be liable for any damages or costs of any type arising out of,
or in any way connected with the use of, these Fast Facts

67

Incoterms

From Wikipedia, the free encyclopedia

National Incoterms chambers
The Incoterms rules or International Commercial terms are a series of pre-defined commercial
terms published by the International Chamber of Commerce (ICC) widely used in international
commercial transactions. A series of three-letter trade terms related to common sales practices, the
Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated
with the transportation and delivery of goods. The Incoterms rules are accepted by governments,
legal authorities and practitioners worldwide for the interpretation of most commonly used terms in
international trade. They are intended to reduce or remove altogether uncertainties arising from
different interpretation of the rules in different countries. First published in 1936, the Incoterms
rules have been periodically updated, with the eighth versionIncoterms 2010having been
published on January 1, 2011. "Incoterms" is a registered trademark of the ICC.

History
The Incoterms rules began development in 1921 with the forming of the idea by the International
Chamber of Commerce.[1] In 1936, the first set of the Incoterms rules was published. [2] The first set
remained in use for almost 20 years before the second publication in 1953. Additional amendments
and expansions followed in 1967, 1976, 1980, 1990 and 2000. The eighth and current version of the
Incoterms rulesIncoterms 2010was published on January 1,
Incoterms 2010
The eighth published set of pre-defined terms, Incoterms 2010 defines 11 rules, reducing the 13
used in Incoterms 2000 by introducing two new rules ("Delivered at Terminal", DAT; "Delivered at
Place", DAP) that replace four rules of the prior version ("Delivered at Frontier", DAF; "Delivered
Ex Ship", DES; "Delivered Ex Quay", DEQ; "Delivered Duty Unpaid", DDU).[6] In the prior

68
version, the rules were divided into four categories, but the 11 pre-defined terms of Incoterms 2010
are subdivided into two categories based only on method of delivery. The larger group of seven
rules applies regardless of the method of transport, with the smaller group of four being applicable
only to sales that solely involve transportation over water.
Rules for Any Mode(s) of Transport
The seven rules defined by Incoterms 2010 for any mode(s) of transportation are:
EXW Ex Works (named place of delivery)
The seller makes the goods available at its premises. This term places the maximum
obligation on the buyer and minimum obligations on the seller. The Ex Works term is often
used when making an initial quotation for the sale of goods without any costs included.
EXW means that a seller has the goods ready for collection at his premises (works, factory,
warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also
bears the risks for bringing the goods to their final destination. The seller doesn't load the
goods on collecting vehicles and doesn't clear them for export. If the seller does load the
good, he does so at buyer's risk and cost. If parties wish seller to be responsible for the
loading of the goods on departure and to bear the risk and all costs of such loading, this
must be made clear by adding explicit wording to this effect in the contract of sale.
FCA Free Carrier (named place of delivery)
The seller hands over the goods, cleared for export, into the disposal of the first carrier
(named by the buyer) at the named place. The seller pays for carriage to the named point of
delivery, and risk passes when the goods are handed over to the first carrier.
CPT - Carriage Paid To (named place of destination)
The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first
carrier.
CIP Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF- Seller pays for carriage and
insurance to the named destination point, but risk passes when the goods are handed over to
the first carrier.
DAT Delivered at Terminal (named terminal at port or place of destination)
Seller pays for carriage to the terminal, except for costs related to import clearance, and
assumes all risks up to the point that the goods are unloaded at the terminal.

69
DAP Delivered at Place (named place of destination)
Seller pays for carriage to the named place, except for costs related to import clearance, and
assumes all risks prior to the point that the goods are ready for unloading by the buyer.
DDP Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer,
and pays all costs in bringing the goods to the destination including import duties and taxes.
This term places the maximum obligations on the seller and minimum obligations on the
buyer.
Rules for Sea and Inland Waterway Transport
The four rules defined by Incoterms 2010 for international trade where transportation is entirely
conducted by water are:
FAS Free Alongside Ship (named port of shipment)
The seller must place the goods alongside the ship at the named port. The seller must clear
the goods for export. Suitable only for maritime transport but NOT for multimodal sea
transport in containers (see Incoterms 2010, ICC publication 715) This term is typically
used for heavy-lift or bulk cargo.
FOB Free on Board (named port of shipment)
The seller must load the goods on board the vessel nominated by the buyer. Cost and risk are
divided when the goods are actually on board of the vessel (this rule is new!). The seller
must clear the goods for export. The term is applicable for maritime and inland waterway
transport only but NOT for multimodal sea transport in containers(see Incoterms 2010, ICC
publication 715). The buyer must instruct the seller the details of the vessel and the port
where the goods are to be loaded, and there is no reference to, or provision for, the use of a
carrier or forwarder. This term has been greatly misused over the last three decades ever
since Incoterms 1980 explained that FCA should be used for container shipments.
CFR Cost and Freight (named port of destination)
Seller must pay the costs and freight to bring the goods to the port of destination. However,
risk is transferred to the buyer once the goods are loaded on the vessel (this rule is new!).

70
Maritime transport only and Insurance for the goods is NOT included. This term is formerly
known as CNF (C&F).
CIF Cost, Insurance and Freight (named port of destination)
Exactly the same as CFR except that the seller must in addition procure and pay for the
insurance. Maritime transport only
Duties of Albanian Chrome seller according to Incoterms 2010 corrected by Flag Accounting
Loadin
Loadin
Loadin Carriage
Export- CarriagUnloadin g
CarriagUnloadin
Import
g on
g
onto place
Impo
Customs e
tog of truckchargese
tog charges
Insurancustoms
truck
truck inof
rt
declaratioport ofin port ofin portport ofin port of
ce
clearanc
(carrier
port ofdestinatio
taxes
n
export export of
import import
e
)
import n
export
EXWNo
No
No
No
No
No
No
No
No
No
No
No
FCAYes Yes
Yes No
No
No
No
No
No
No
No
No
FASYes Yes
Yes Yes
No
No
No
No
No
No
No
No
FOBYes Yes
Yes Yes
Yes No
No
No
No
No
No
No
CFRYes Yes
Yes Yes
Yes Yes No
No
No
No
No
No
CIF Yes Yes
Yes Yes
Yes Yes No
No
No
Yes
No
No
DATYes Yes
Yes Yes
Yes Yes Yes
No
No
No
No
No
DAPYes Yes
Yes Yes
Yes Yes Yes
Yes Yes
No
No
No
CPTYes Yes
Yes Yes
Yes Yes Yes
Yes Yes
No
No
No
CIP Yes Yes
Yes Yes
Yes Yes Yes
Yes Yes
Yes
No
No
DDPYes Yes
Yes Yes
Yes Yes Yes
Yes Yes
No
Yes
Yes
Previous terms eliminated from Incoterms 2000
DAF Delivered At Frontier (named place of delivery)
This term can be used when the goods are transported by rail and road. The seller pays for
transportation to the named place of delivery at the frontier. The buyer arranges for customs
clearance and pays for transportation from the frontier to his factory. The passing of risk
occurs at the frontier.
DES Delivered Ex Ship (named port of delivery)

71
Where goods are delivered ex ship, the passing of risk does not occur until the ship has
arrived at the named port of destination and the goods made available for unloading to the
buyer. The seller pays the same freight and insurance costs as he would under a CIF
arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also
Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the
goods and any duties, taxes, etc are for the Buyer. A commonly used term in shipping
bulk commodities, such as coal, grain, dry chemicals - - - and where the seller either owns
or has chartered, their own vessel
DEQ Delivered Ex Quay (named port of delivery)
This is similar to DES, but the passing of risk does not occur until the goods have been
unloaded at the port of destination.
DDU Delivered Duty Unpaid (named place of destination)
This term means that the seller delivers the goods to the buyer to the named place of destination in
the contract of sale. The goods are not cleared for import or unloaded from any form of transport at
the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and
any subsequent delivery beyond the place of destination. However, if the buyer wishes the seller to
bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery
beyond the place of destination, then this all needs to be explicitly agreed upon in the contract

72

RIGHT TIME AND LEAD TIME ANALYSIS

Delivery of goods at right time is one of the most important objectives of purchasing
functions.
Time is essence of every buying order and necessary stipulations are made in every contract
as to by which time the suppliers must deliver goods.
If goods arrive late or work is not completed at the right time, production may hamper, sales
may be lost and liquidated damages clause may be invoked by dissatisfied buyer to partially
recover such losses from defaulting suppliers.
User departments blame the buyers, sometime rightly, if supplier fails to deliver the goods on
right time. However, in order to obtain gods at right time, the user departments must know the
lead time for various categories of goods so that they prepare purchase requisitions in such a
planned way that a buyer gets sufficient time for arranging supplies.
It is also imperative on the part of purchasing to convince the supplier to adhere agreed
delivery period and must execute supplies in time.
Sometimes the suppliers may quote delivery period, which they cannot adhere. This may be
an unscrupulous device to get the order, or the quote may be given in good faith but the
circumstance may change and warrant rescheduling of dates of delivery. Sometimes the
suppliers may not be capable at production planning and control. Sometimes purchasers
themselves are to be blamed for this problem as failing to identify a right source of supply or
insisting on a very tight delivery schedule.

73
The first step to obtain delivery on time is to decide firmly and precisely as to what is required
and when it is required. Normally, such time related schedules are prepared by production or
stock control or other related user departments. It is not a good practice to specify the delivery
schedule without keeping in mind the administrative lead-time in finalizing the order,
suppliers lead-time, transportation lead-time and the market realities.
Another important step in achieving the on-time deliveries is that suppliers are rated
continuously including delivery attribute. Feedback shall be furnished to suppliers from time
to time and those who fail to improve shall be discarded for future business dealing.
Yet another way to ensure delivery on right time is to organize a system of order progressing
and expediting. In absence of proper system of expediting, purchasing resort to fire fighting
arrangements only. The expediting can be done either by concerned buyer or a separate group
in purchase department.

The need for expediting, however, can be reduced if

a)

Lead times are known and accepted.

b)

Mutual concern exists between buyer and seller.

c)

Users do not frequently reschedule requirements.

d)

Expeditors do not raise the alarm too often unnecessarily

e)

Capacity and capability of supplier is appraised before ordering.

f)

Specifications are clear, understood by supplier and fall within sellers technical
capability.

g)

Specifications are not frequently changed.

h)

Delivery requirements are specified properly.

i)

Suitable clause for recovery of liquidated damages is incorporated in purchase

orders.

The above checklist is not intended to be exhaustive, but is indicative of the facts that the
need for expediting is perhaps as likely to arise through buyers shortcomings as sellers
failure.

74

LEAD TIME
Lead time mean the time that lapses between raising of a purchase Requisition by the user
department or stores and receipt and acceptance of materials at stores for issue to user
departments.
Its Importance in Inventory Management
Lead-time is of fundamental importance in determining inventory levels. The level of
inventory of an item depends upon the length of lead-time. Longer the lead-time, higher will
be the ordered quantity and as such higher will be inventory carrying cost as it is calculated on
the basis of half of order quantity/value, which is average inventory.
Elements of Lead Time
a) Administrative lead- time for finalizing purchase order.
b) Suppliers lead time to make the materials ready for dispatch.
c) Transit lead time i.e. the time taken for transportation of materials from sellers works
to buyers place.
d) Administrative lead-time of bulk breaking, inspection and completing receiving
activities.
Impact of Lead-time on: a) Working Inventory: - Size of order depends on length of lead-time, longer the leadtime, larger will be the order quantity. Calculation of inventory carrying cost is on half
of ordered quantity/ value.
b) Safety Stock
When the demand during lead-time is fairly stabilized: Safety Stock = K D
Where K is service level and D is demand during lead-time

75
Value of K, which is constant, varies between 1-3. 9 depending upon criticality and
degree of safety / service level required (keeping in view stock-out cost of each item).
If value of K is 1, it shall provide 84% service level i.e. there is 16% chance of stockout inspite of providing safety stock.
Value of K as 2 shall provide 97.7% service level, as 3, 99.87 % service level. For
100% service level, value of K shall be 3.9.
b) If demand during lead time or length of lead time is highly fluctuating and irregular
the calculation of safety stock shall be K
Where K is constant and value depends as above and is standard deviation of
demands during lead times.
Longer the lead-time more will be the requirement during this period and higher will
be safety stock. On the contrary if the lead-time is smaller, lesser will be the
requirements during lead-time and reduced safety stock. In view of above facts, leadtime has direct bearing upon inventory holding, both working and safety stock.
If we are able to reduce length of lead-time, it shall result in reducing stock levels.
HOW TO REDUCE LEAD TIME
Lead-time consists of: Order Prep.
L1
Order Genesis

Order Transit Manufacturers

Assembly
L2
L3
Order Sent
Order Receipt
& manufacturing

Transport
L4
Goods
supplied

Bulk Breaking
& Inspection
L5
Goods
received

Total Lead time = L1+L2+L3+L4+L5

L1 and L5 correspond to internal activities and are controllable. L2+L3+L4 are largely
uncontrollable by the buyer but can be reduced to some extent if systematic efforts are made

76
in this direction by establishing reliable sources of supply, selecting proper mode of
transportation and vigorous expediting.
STEPS TO REDUCE LEAD TIME

Administrative Lead Time for finalizing Purchase Order

Ensure that purchase requisitions are complete in all respects as to initiate immediate
procurement action immediately.
Rationalization of procurement procedures and sufficient delegation of powers at
lower and middle levels.
Financial limits for open tender (NIT) should be increased.
More and more items shall be standardized with standardization of sources of supply
Lesser dependency for spares on OEM development of alternative sources.
Import substitution.
More and more items should be declared as stock item and brought under automatic
replenishment system.
Finalization of long-term rate/running contracts with suppliers.
Finalization of terms and conditions with suppliers specially those from whom we are
buying on PAC basis. (Proprietary items purchased on single tender basis)
Updating list of approved vendors for various categories of items including evaluation
of vendors performances.
Specifications, pre-qualifying requirement for the bidders and quality plan shall be
clearly spelled out.
DELIVERY LEAD TIME OF VENDORS
Post order progressing and expediting with vendors.
Prompt clarifications to vendors queries.

77
Prompt arrangements for PDI, if required. (Pre-dispatch Inspection)
Prompt approval of samples, if required
Good buyer / seller relations including prompt payment to suppliers.
TRNSIT LEAD TIME OF TRANSPORTATION
Select the most suitable mode of transportation.
Efficient collection group with stores.
Post dispatch monitoring expediting deliveries of consignments unduly delayed
deputing chasers / tracers.
Prompt retirement of documents if negotiated through bank.
ADMINISTRATIVE LEAD TIME OF BULK BREAKING, INSPECTION AND
RECEIVING ACTIVITIES
Prompt bulk breaking (opening of packages and checking of contents of incoming
consignments)
Prompt inspection of materials at stores by user or by independent inspection cell.
Making available inspection, testing and other requisite facilities to inspection people.
Prompt handing over of materials to custody group.
Vigorous follow up of settlement of discrepancies replacement supplies / repair etc.
THE OVERALL VIEW OF LEAD-TIME IN PRIVATE AND PUBLIC SECTOR
Lead- Time in private sector is lesser than in public sector organizations.
Reasons for longer led time in Public Sector: Accountability on the part of public sector operating within parameters of well
formulated and laid down procedures including long period taken in adjudication/
Evaluation of offers.

78
Tendency to share responsibilities sometimes-unnecessary consultation, references
and cross-references.
Open tendering (Notice for Inviting Tender) beyond a certain monetary limits, longer
time for purchasing, at time unproven suppliers on lower quoted rates get order, delays
in supply- sub-standard / poor quality materials resulting in higher rejections.
Lack of good buyer / seller relations.

THE RIGHT QUANTITY

The right quantity refers to the value or amount that can most economically be purchased at a
particular time.
The total quantity to be bought over a specified time shall be determined by the type of items
to be bought. In individual organization, for example such items may include as under: ___________________________________________________________________________
TYPE OF PURCHASES
QUANTITES INDICATED BY
________________________________________________________________________
a) Materials or components
Required for a specific order
or application
b) Standard items kept in stock
or regular production e.g.
frequently used steel section.

Material specification for the

job or contract.

(i) Materials budgets derived

from production budgets
Based on sale/ output target
for a specified period.
(ii) One-off material
Specifications showing
quantities of each item
needed to make one unit of the
finished product. These are then

79
multiplied by the number or
products to be manufactured.
(iii) Purchase Requisitions raised by
Storekeeper or stock control
c) Consumable Materials used in
production, plant maintenance or
office administration e.g. oils, paints,
stationery and packing materials.

d) Spares: These may be kept to

maintain production machinery
or they be bought out components
for resale to customer in which the
product in which the component
is incorporated.
component is incorporated. Customers
who have bought the product

Requisitions from stores or stock

control.

i) Requisitions from stores or stock

control.
ii) Information from sales
Department
iii) Requisitions from maintenance
department

The quantities shall be notified requirements based on either known demand or estimated
usage. The rights of buyer to challenge Purchase Requisition include the quantities indicated
therein. By careful scrutiny of quantities, the buyer can effect savings, sometime even more
than obtainable by skilful price negotiation.
The yearly requirements can be purchased in several ways:
Order can be placed with one or several suppliers.
Annual requirements may be purchased through one order or many orders.
Delivery can be taken in one consignment or phased over prescribed intervals.
Economic order Quantity (EOQ)
Is that size of orders, which minimizes the total cost of ordering and holding of stock. If the
item is ordered frequently, naturally in small quantities, order cost shall be more but
inventory- holding cost will be less. As against this, if the item is ordered infrequently i.e. in
larger quantities, ordering cost shall be less but inventory holding cost will be more. The total

80
cost is optimum when both the opposing costs are balanced and quantity that represents this
equilibrium is known as Economic Order Quantity.
Materials Requirement Planning (MRP)
EOQ is based on the assumption that demand for an item is independent of demand for any
other item. For production, the parts and materials to make a product, this shall not hold good.
The requirement of materials and components, which make an end product, are related to each
other. Item by item demand forecasting using moving average is not appropriate and leads to
shortages as well excessive stock of some components and others.
The requirements for parts and materials for manufacture of an end product to meet
production schedule as such is planned together as a single group and not as a lot of
independent items. This is known as Materials Requirement Planning (MRP).
The aim of MRP is to synchronize ordering to ensure that interdependent items are available
when required while keeping the stock at minimum.
MRP is a technique used for production planning and control as it involves:
The preparation of an end product master showing the production quantities required
for a given period for each of product. Usually for each product the quantities due for
completion are listed or scheduled week by week for next three months and months by
month for next nine months.
The next step is to explode this into detailed requirements for the components and
materials needed, using bill of materials, which show what is needed to make each
product.
Orders for the net requirement of each item are planned taking into account the lot
sizing rules (with MRP ordering policy is lot for lot rather than at fixed point and
time) which regulate order quantities and also the item lead time so that materials

81
arrive in time for the end product to be completed by the date shown in the master
production schedule.
Purchasing and Right Quantities
EOQ and MRP are not substitute to buyers judgement but tools, if used intelligently, can
assist him in his work. Determination of right quantity is based on three factors viz. demand,
cost and supply. The buyer has often to reconcile the diverse approaches of:
having plenty in stock to avoid production breakdown or stock outs and,
those of finance where stress is placed on the cost of tying up capital in stocks,
which are depended upon following internal and external factors.
Internal Factors
Requirements for a given period as reflected by production estimates based upon the
records of past and projection of future usage.
Pattern of demands i.e. constant, increasing, diminishing, seasonal etc.

a)

Storage facilities available.

b)

Purchasing policies, i.e. where orders placed on one or several suppliers.

c)

Frequency of changes in the design of the end product involving amended

specifications and the possibilities of obsolete stocks.

d)

Cost constraints on the prices that can be paid for materials and components.

e)

The cash flow position of the purchaser.

External Factors
i)

Economical or political factors resulting in gluts or shortages.

ii)

The danger of stock-outs arising from strikes etc.

82
iii)

Lead time (suppliers and transit lead-time).

iv)

The availability of alternative sources of supply.

v)

Quantity discounts, rebate that can be negotiated.

vi)

Whether supplier will act as stockist.

RIGHT SOURCING AND SUPPLIER DEVELOPMENT

In any organization there are two options for sourcing the supplies viz.
a)

Manufacturing the goods and components within the organization.

b)

Purchasing the goods, components and services from external sources.

Although such decisions are taken up keeping in view the Make-or-Buy philosophy, it is
logical to purchase the materials from external sources, if the prime business of the
organization is totally different to the needs of the organization. In purchasing it is said that
half of the battle is won in meeting organizations needs for materials, if the right sources of
supply are identified and maintained.

83
Supplier sourcing and evaluation can be defined as the processes and procedures by which the
buyer seeks, surveys and evaluates suppliers and determined policies relating to those who
can most suitably meet the requirements of his organization.
Although price is an important factor in purchasing yet it is not the only ruling factor-ultimate
aim is to make available quality goods at right time and place and it is possible, when right
sources of supply are identified.
One looks from right supplier:
QUALITY PRODUCTS/SERVIES
Quality means both the quality, which is offered or specified, and the quality, which is
delivered or received. When something specified by the purchaser is bought for the first time,
quality requirements become more important: can the supplier make it to the standards
required? Will the supplier be able to supply quality goods consistently? What in-house
facilities they have for quality assurance? What facilities they may provide for source
inspection by the purchase? And last but not the least how the supplier responds to complaint
of rejection of goods?
DELIVERY
Delivery means both how long the supplier says is required to complete the order and how
reliable is what he says?. Do the supplier agree to phased deliveries to enable the buyer to
keep down investments in inventories? The purchaser always prefers quick and phased
deliveries as this simplifies the forward planning. Often the best suppliers are busiest, a
purchase prefers a little longer delivery period, which can be relied up than a short quoted
delivery period, which is not adhered by the supplier. For regular production items, just-intime delivery system, need absolute reliability from the supplier. A purchaser as such expects
from a reliable source of supply not only the adherence to agreed delivery period but also
improving the period when there is a crisis at buyers end without exploiting the situation.

84

SERVICES
Services mean anything, which helps to strengthen relations between buyer and seller and
facilitate smooth flow of goods from one end to the other. Good services may include the
provision of
technical assistance and expert advice, before and after sale, information about new technical
development, and help in improving the quality, cutting the cost of end product. For
equipment and machinery after-sales service are important which may include: -An efficient network to provide after-sales-services.
-Ready availability of quality spares at reasonable cost.
-Training facilities to buyers personal for operating and maintaining the equipment.
Good services also include prompt attention to queries, reliable promises, accurate paper
work, rush orders are rushed, special orders do get special attention and perhaps buyer get
advance words of changes, for example in price, lead time, modifications in equipment (to
enable the purchaser to plan for spares for old equipment)
GENERAL EFFICIENCY

The supplier should not only have sufficient and proper manufacturing capacity but also
related experience in producing the required materials. They should have sufficient and
experienced manpower and maintaining good labour relations so that there is no interruption
in production due to strikes or labour unrest. Financial position of supplier obviously affects
their capability to respond to buyers need. They should have economic and financial
infrastructure to execute the order in time. Last but not the least; the supplier should have
reliable and fast communication system.
Ideally purchaser wishes to create a long lasting relationship with his suppliers and set up a
network of such suppliers to meet all his requirements. This relationship, however, need to be
on reciprocal basis.

85
A reliable supplier expects continued and long lasting business dealing with the
purchaser in return for a reasonable profit. This relationship cannot be developed on
lowest price consideration alone.
The purchaser shall be fair, prompt and courteous to suppliers representative.
The purchase shall ensure prompt payments to the suppliers. If payments are unduly
delayed, their profit margin shall be eaten away by way of extra interest burden and
cost of expediting payments. At time there may be genuine reasons for price increase
and purchaser shall try to suitably compensate supplier so that they do not suffer any
financial losses.
The purchaser shall treat the supplier as business partner and develop mutual
understanding and recognition of each others requirements.
Single Source or Multiple Sources
Traditionally a purchaser likes to have several sources of supply where several suppliers
compete with each other to ensure one gets best deal or business is shared or rotated between
them.
Consideration for Multiples Sources
For critical items purchaser would like to bifurcate orders so that failure of one
supplier do not stop operations of his organization.
Force the suppliers to maintain high level of performance of timely supply of
quality goods at competitive rates.
In Government departments purchasing where tendering system is followed,
development of multiple sources is essential.
Japanese philosophy, using Just-In-Time system, is different. They believe that one should
look for a best supplier and develop this one source of supply. This implies that one does
not pit supplier against each other, rather develop a perfect relationship with a single
source. There may also be cost advantages in giving all business to one supplier including
reduction in administrative cost. Progressing and quality control is simpler when there is

86
only one supplier. Materials planning also become easier. This also helps supplier to do
more long term planning and specialize in meeting the purchasers needs.
Apart from above, following are some of the considerations for single sourcing.
The volume of business is sufficient for not more than one source.
The supplier has patents or processes that places him in a monopoly position.
The suppliers reputation makes it desirable to use his products.
The cost of more than one set of tooling dies etc. would be prohibitive.
SUPPLIER DEVEOPMENT
Supplier development programmers are aimed to develop potential suppliers to meet the
organizations materials needs and is considered as one of the basic object of purchasing
functions.
The process of development is to extend the resources of large purchasing organization to
smaller suppliers who demonstrate willingness and capability to meet their requirement. Such
support may take several forms:
Placing small trial order to assess their performance on execution part and quality
requirements.
Financial i.e. loan for purchase of equipment or special payment arrangements. This
may also include equity investment to pay for new tooling or equipment.
Management support i.e. advice on production control.
Shared facilities i.e. inspection equipment.
Commercial assistance by way of placing the purchasing facilities of the buyers at the
disposal of suppliers.
Such developed suppliers are expected to produce the things that purchaser wants, to the
purchasers quality standards, in the quantities and the delivery schedule required.
The basic idea of supplier development is to treat supply market not as given but as something
to be shaped. Suppliers themselves are regarded as capable of improvements.

87
LOCAL SUPPLIERS

Local suppliers, close to business units, are preferred if they can supply acceptable quality
materials at competitive price.
Factors that strongly favour suppliers in the local area are: Closer co-operation is facilitated between buyer and supplier on personal relationship,
which may include better communication by personal visit or local phone calls.
Social responsibility is shown by Supporting local industries and thus contributing to
the prosperity of area. This may be a short-term investment with long-term benefit and
not a permanent subsidy.
Quick and more reliable deliveries at reduced transport costs.
Improved availability in emergency due to closeness of suppliers.

The development of subsidiary industries situated close to main industry and catering
for its needs is encouraged.
SMALL OR LARGE SUPPLIER
Advantages claimed by small suppliers include:
Closure attention to buyers requirements. A big supplier may afford to rest on its
laurels to keep the order they got and win the ones they have not.
Low process and faster deliveries
Relationships especially at executive level, are more personal
Response to request for special assistance from the buyer can be more rapid than
with large organization.
Advantages claimed by large suppliers include:
Reserve capacity to undertake extra work and cope with emergencies is usually
greater.

88
Special facilities and in-depth support in research and development can be made
available to the buyer.
Improved quality of product due to greater facilities and system of quality assurance.
Source quality control can be relied upon.
There is less danger of the suppliers becoming too reliant on the buyers business.
Relationship of buyer and seller is more congenial on codes and ethics of
professionalism on either side.
RECIPROCAL BUYING
Another aspect of selecting suppliers is whether to give preference to potential suppliers who
are also actual customers.
Reciprocal trading or reciprocity is the practice of linking sales to an organization, with
purchase from the organization, and making one conditional on the other.
Reciprocity is influenced by the factors:
The Economic Climate: pressures for reciprocal agreement increases in time of
depression.
The Type of Product: Reciprocal dealing is greater where both supplier and buyer are
producing standard and highly competitive products. It does not arise where buyer has
no alternative but to buy from a given supplier.
Advantages of Reciprocity
Both buyer and seller may benefit from exchange of orders.
Both buyer and seller may attain a greater understanding of mutual problem thus
increasing goodwill.
More direct communication between buyer and seller may eliminate or reduce the
need for intermediaries and the cost of marketing or procurement operations.
DISADVANTAGES OF RECIPROCITY

89
Cost may increase due to reduced competitive position of the buyer without
compensating benefits.
Sales must increase substantially to provide an equivalent saving on purchases.
Selling through order book forces purchasing to perform marketing functions. Credit
may go to marketing for increased sales but the performance of purchasing may be
adversely affected due to limitations imposed. Morale of purchasing staff may also be
affected.
Dispute may arise where respective values of purchases and sales not matching
substantially.
Marketing efforts may become slack if reciprocal trading is substantial.
The opportunity of cheaper, better quality alternatives are denied to the buyer as other
reliable sources of supply are deprived of business.
Difficulties may arise in finding alternatives in cases of emergencies.
In practice, it is often difficult to terminate reciprocal agreements without frictions.
SOURCE INFORMATON
Other organizations in same and similar industry.
Professional consultants
Suppliers catalogues, Trade directories.
Trade Journal and Trade Exhibitions.
Information provided by the prospective suppliers.
International trade sources.
Exchange of information between buyers of various organization.
Press advertisement for enlisting vendors or formal (NIT) tendering.
The above sources of information may help buyer to identity potential sources of supply for
various types of goods.
FACTORS IN DECIDING WHERE TO BUY
The extensive market research into this topic identified the under mentioned factors:
External Environmental factors

90
General business conditions (buyer market or seller market)
Availability of foreign exchange
.Emergency conditions i.e. prolonged strike
Policies of competitors.
Marketing activities of suppliers.
Internal organization factor
The structure of purchasing department.
The status and autonomy of buyer within the organizations structure.
Whether purchasing is recognized as a profit centre in its own right.
Product Factor
The tendency on the part of buyer to undertake a very limited explicit search for
prospective suppliers.
Purchasing is confined to brands available in the market or the specifications drawn
around particular brands for materials to meet the needs.
Material needs are based on likes and dislikes of users for particular product based
upon their individual experience.
Risk Factor
Preference given to well known suppliers
Preference given to suppliers whose advertisement provides most information.
More quotations to be obtained.
Personal Factors
Majority of professional buyer tends to be conformists rather than innovators.
Job experience of the buyer.
The formal qualifications of buyer
The individual life style of buyer

91

Vendor Enlistment
In purchasing, it is said that half of the battle is won in meeting the organizations needs for
materials, if the right sources of supply are identified and maintained. The objective behind
proper identification of sources of supply, their registration with Organization and evaluation
of their performance is to obviate the need for searching suppliers every time demand for
materials arises. Supplier identification and evaluation are the processes and procedures by
which purchaser seeks, surveys and evaluates suppliers and determine policies relating to
those who can most suitably meet the requirement of organization. Although price is an
important factor in purchasing, yet it is not the only ruling factor- ultimate aim is to make
available quality goods at right time and place and it is possible, only when right sources of
supply are identified. An exhaustive directory of reliable vendors for different categories of
materials shall be developed in for prompt initiation of purchase action and also to ensure fair
and healthy competition. It shall further be emphasized that directory of vendors so developed
is periodically updated by exploring new vendors and by sharing such information between all
the business units. In process of evaluation, the suppliers whose performance had not been
found up to the mark, and do not come up to required standard, inspite of repeated warnings,
are to be de-empanelled.
Source Selection:
In addition to the reliable sources of supplies, who have already established their credential,
possibilities shall further be explored on continuous basis to identify efficient and reliable
vendors in the market. Such information can be obtained through:
(a)

Various power stations/projects

(b)

Other organization in power sector

(c)

Suppliers catalogues, Trade Directories.

(d)

Trade Journals and Trade Exhibitions.

(e)

Information provided by prospective suppliers (Introductory letters, sometime

along with technical literature)

(f)

Professional Consultants.

(g)

Information provided by various user/indenting departments.

(h)

Central Purchase Organization of Government of India (DGS&D)

92
(i)

Response received against Open Tender Enquiries (Notices for Inviting

Tenders)

(j)

Press advertisement for enlisting of vendors for various categories of materials

While selecting right sources of supplies, we should look for:

a)

Quality Product/Services

b)

Delivery:

c)

Services:

d)

General Efficiency:

Source selection shall be done as per the following categorization:

a) Vendors for items falling under A class, as far as possible shall be enlisted
individual item-wise
b) Vendors for items falling under B and C class shall be enlisted trade
group-wise (List of trade groups shall be prepared after clubbing together a
number of Main Groups from Organizations Materials Codification
Scheme). For example- enlistment of vendors for Welding materials.
Electrodes and accessories or Electrical lamps, Indicating lamps, fittings
and installation materials.
c) Registration shall further be in two groups of monetary value i.e. i)
purchase value up to Rupees 5,00,000 and ii) purchase value upto Rupees
15,00,000
Vendors Registration
For the purpose of vendor registration an advertisement in newspapers may be published,
inviting application as per the prescribed application form. In order to ensure satisfactory
response, a copy of press advertisement shall be sent to reputed manufacturers/their sole
distributor or dealers inviting them to get themselves registered vendor of the Organizations.
Such information may also

93
be sent to NSIC and State Industry Department inviting their registered parties to apply for
registration. The fee for registration can be decided under following heads
(a)

Fee for application form

(b)

Registration fee (Non-refundable) for business upto Rs. 15 lakhs

(c)

Registration fee (Non-refundable) for business upto Rs. 5 lakhs

The above fees are for each category of items. If a vendor is interested for registration in more
than one category, they must apply for each additional category separately
Vendors exempted from registration fee or formal application for registration:
a) NSIC and SSI registered parties shall be exempted from submitting above
fees. Application form shall be provided upon request for enlistment.
b) No formal application for registration is necessary from the vendors
already registered with DGS&D/ other power utilities/public Sector
Undertaking like BHEL. NHPC. PGCIL etc. provided they produce
documentary evidence for such registration including category of items.
The satisfactory performance report of the vendors claiming to have been
registered with that organization of repute may be obtained from the
concerned organization.
c) No formal application may be insisted upon for registration from Central
and State Public Sector Undertaking.
The vendors who had met qualifying requirements including evaluation of their credential
against earlier Open Tender Advertisement (NIT) for procurement of specific items may also
be recommended for registration. In this regard a specific clause shall be provided in NIT like
Those vendors who meet qualifying requirements and respond against this tender may also
be considered for enlistment as approved vendors, which shall be valid for a period not
exceeding three years.

94
The credential of vendors seeking registration need to be verified to ascertain their credibility
with regard to financial standing i.e. annual accounts, capacity, reliability bonafides (Income
Tax Clearance Certificate, Sales Tax Clearance Solvency Certificate from bank), past
performance, quality assurance system, testing facilities and managerial capabilities. For this
a committee consisting of representative from Materials, Finance, Quality Assurance and
user/indenting department shall be constituted and approved by Head of station/Division. The
minimum level of committee members shall be Manager or its equivalent and its tenure shall
be one financial year.

Screening of applications:
(a)

Preliminary screening of application would be taken by Material Management

Department with reference to information provided in the prescribed formats. All
applications shall be grouped in the following:
i)

Manufacturers:
-Leading Public Sector Manufacturers:
-Manufacturers other than PSU
-Small Scale Industrial Units

ii)

Suppliers:
-Authorized Distributor/ Dealers
-Traders/local suppliers

(b)

Vendor assessment/ appraisal sheet designed for the purpose shall be filled up after
review of each application by Vendor Registration Committee and put up
recommendations for approval of competent authority.

For certain critical materials and spares, committee may visit works of potential
vendors for verification of their manufacturing capacity, adequacy and care of
production equipment, in-house quality assurance system, testing facilities available,
technical know-how of supervisory personnel, competence of management etc.

95
(d)

Similarly details of sources identified but exempted from formal application shall be
reviewed by the Vendor Registration Committee and recommendation shall be put up
for approval of competent authority.

Approval for Registration:

Head of Station/ Project/ Division shall accord approval for registration
Security Deposited:
The vendors approved for one or more categories of materials shall be required to remit
refundable security deposit for each category for an appropriate amount through Demand
Draft (category-wise that business upto 5 lakhs and business upto 15 lakhs- each tender
enquiry
Vendors registered with NSIC, SSI and DGS&D shall be exempted from security deposit
Similarly Central/State PSU shall also be exempted from security deposit.
Registration Certificate:
The vendors approved for registration for one and more categories of materials and having
remitted requisite security deposit shall be allotted a Registration Number and shall be issued
a Registration Certificate which shall be valid for a period of three years from the date of
approval of competent authority.
In case a vendor is already registered with a business unit of Organization and wants to get
registered with other business unit for the same items, registration will be done for same
monetary limit and period up to which its registration with initial business unit is valid. This
shall, however, be subject to remittance of requisite security deposit.
A register for allotment of registration shall be maintained by the business units, which shall
include name of the vendor category and group details (monetary limits). The list shall be
updated from time to time, preferably on-line for easy reference and retrieval of details for the
purpose of tendering.

96

Renewal of Registration:
Renewal of registration shall be done for a further period of three years based upon the
performance of vendors during the last three years. Vendors seeking renewal shall submit a
fresh application form, three months prior to expiration of the validity of registration, duly
filled in, along with necessary documents like current ITCC, sales tax clearance, balance sheet
etc. Renewal fee of prescribed amount for respective group of monetary limit shall be
remitted in the form of Demand Draft.
Consideration of fresh applications:
Fresh application shall be considered against a fresh advertisement to be published 6 months
from the date of expiry of validity period of the last registration.
Pre-mature Termination of Registration:
Premature termination of registration of vendor may be done with the approval of competent
authority, if the vendor is non-responsive against tender enquiries or on account of its
performance or disabilities as detailed below:
a) The performance of vendor is rated below the minimum acceptable level during
the evaluation process and no improvement is observed in spite of a notice to this
affect.
b) Vendor fails to respond to three consecutive tender enquiries within the range of
product for which it is registered.
c) Vendor fails to execute the order.
d) Vendor no longer has the technical staff or equipment considered necessary for
production of requisite materials.
e) Vendor is declared bankrupt or insolvent or its financial position has become
unsound and in case of public limited company, it is wound up or taken into
liquidation.
f) Vendor fails to furnish Income Tax Clearance Certificate or any other document
when called for.

97
g) Registration of vendor is cancelled by any business unit of Organization or by
another PSU or Government department.
h) The integrity of vendor is suspected.
Banning of vendors for future business dealing:
This shall be done in case unethical business practice is established or furnishing wrong
information, false/ manipulated documents or the vendor is charged by CBI for an offence
against Government regulation and subsequently prosecuted in the court of law. Banning
orders shall also indicate names of all partners, director etc of the company and its allied
/sister concerns, if any.
Revocation of Pre-mature Termination of Registration:
Pre-mature termination can be reviewed and revoked by competent authority, if it is of the
opinion that disability already suffered is adequate in the circumstances of case. Such review
may be carried out on specific representation from the vendor with categorical assurance of
not repeating the circumstances under which registration was terminated.

Application for Registration of Vendors:

1.

General Information

1.1.

Name of the vendor:

1.2.

Full Postal Address:

Telephone Numbers
Fax Number
E-mail
i) Registered office:
ii) Branch office:

1.3.

a) In case of Pvt. Ltd or Ltd. company,

Date, place of registration and certified
Copies of Memorandum of Association

Enclosed
Name

Status
And Article of Association to be furnished: 1.
2.

of

Yes/No
the

Director/Partners

98
Name, Address and particular of all the

3.

Directors should be furnished.

4.
5

In case of partnership firm, the names of

6.

All the partners and their address are to

Be furnished. Certified copies of partnership deed to be furnished,
a) In case of individual, his full name, address,
place and nature of business, to be furnished.
1.4.

Name and address of associate/sister

Concern, if any.

1.5.

Whether Registered with any other

Department/

Registration

Govt./Semi Govt. Organization

Organization Number

Products

(Preferably with Power utilities)

(Attested copies of Registration
Certificate to be attached)
1.6

Whether already registered or applied for

Registration with any other unit of NTPC,
In any other name either in individual capacity
Or partnership

1.7

a) A solvency certificate granted by a First

a)

Enclosed

Yes/No

b)

Enclosed

Yes/No

Class Magistrate or a certificate from the

Banker about turnover of transactions and
Financial capacity,
b) Balance sheet of previous financial year
Of the vendor duly attested by a Chartered
Accountant
1.8.

Income Tax. Sales Tax Registration

No. (Both SST and CST), if any, and Income
Tax Clearance Certificate.

Income Tax Regn. No.

State Sales Tax Regn No.
CST Regn No.
ITCC Enclosed:

Yes/No

99
1.9

Brief History of labour relations in

The organization in last one year
(Specify strikes, lockouts, and tool down if any)

1.10

Total Number of regular employees on the role

1.11

a) Managerial
b) Executives
c) Supervisors
d) Workman
Expansion plans if any

1.12

Details of relatives employed NTPC

(Give full details viz. Name, Designation,
Department and unit in which working)

1.13

Any other information in your favour.

2.

Technical information

2.1.

List of machinery available for manufacturing the products (if manufacturer)

Name of the machinery/equipment

Size/specification/make

_____________________________________________________________________
2.2.

Details of testing facilities available

Testing Machine

Specifications

Manufacturer

Year ofNos.
Purchase

2.3.

If approved by reputed Inspection Agencies, please give details

:
Inspection Agency

Material Supplied

Customer Reference

Year

100

Engineers India Ltd.

Lloyds
RITE
3.

Commercial information:

3.1

If already worked as a supplier, give the following information.

Name of Power

Govt. Department

Items supplied

Value

Year
Station

Public Sector
Undertaking
Reputed Pvt. Co.

__________________________________________________________________________
3.2

If stockiest /dealer (distributor)

SL NO

Products

manufacturer

Dealership

references

no.

Dated
1.
2.
3.
Attested copies of dealership to be enclosed
3.3

Facilities/nearest branches from where

After Sales Services to be provided

3.4.

Category of work for which registration is

Sought (Please indicate category as per NIT

3.5.

Indicate monetary limited for

i) up to Rs. 5 lakhs

Registration

ii) up to Rs. 15 lakhs

3.6.

Mention any other relevant details.

3.6

MUST ENCLOSE TWO COPIES OF CATALOGUES/SPECIFICATION

SHEETS/PAMPHLETS

OF

PRODUCTS

MANUFACTUREED

OR

MARKETED________________________________________________________
Product details

Catalogues details

101
_____________________________________________________________________
_____________________________________________________________________
I certify that all the information and data furnished as above form are true and
complete to the best of my knowledge.
Signature of applicant/or his
Authorized person (Seal)N.B.
a) Wherever necessary separate sheets may be attached if space is less in any column
b) List of enclosure:
1.
Bankers Certificate
2.
Income Tax Clearance Certificate
3.
Sales Tax Clearance Certificate
4.
Performance Certificate from important customers
5.
List of important customers
6.
Central Sales Tax Registration Certificate
7.
State Sales Tax Registration Certificate

Yes/No
Yes/No
Yes/No
Yes/No
Yes/No
Yes/No
Yes/No

c) No correspondence on the subject from vendor shall be entertained. They shall be

informed, in due course, as soon as registration is finalized.
d) Incomplete applications shall not be considered
FOR OFFICE USE:
Information called from vendor (To be supplied before_________________)
1.
2.
3.
Manager (Materials/ Contracts)

ASSESSMENT REPORT
Committee Members (Finance)

(Materials)

(User)

(Quality

Assurance)
RECOMMENDATIONS
APPROVED

102
__________________________________________________________________________
Information

to

the

party

sent

vide

letter

No.__________________________

dated_____________
Manager
(Materials &/Contract

SUPPLIERS EVALUTION
The systematic evaluation of supplier is known as supplier appraisal if done before an order
and supplier rating if done in numerical terms after an order.
Supplier rating is the measurement of actual performance whereas supplier appraisal is the
assessment of potential performance.
Supplier evaluation includes both appraisal and rating
Supplier Appraisal
When a supplier wishes to be enlisted as an approved vendor to buyer, the need for appraisal
is felt. At time, during negotiations, a buyer may wish to assure himself that supplier can meet
to his requirement reliably; he may resort to the process of appraisal
Supplier appraisal can be undertaken by a combination of
Desk Research:
Using published or unpublished data already in existence i.e. company reports, balance sheets,
financial journal, Trade journals, and labour journal. The desk research may also include
checking of credential of a prospective supplier by references. Desk research is particularly
applicable when assessing the financial position of potential supplier.
Field research:

103
The purpose of field research is to obtain further data regarding manufacturing
facilities/capacity, quality control system, testing facilities and managerial capabilities of
prospective supplier.
Field research is best undertaken by a team of buyers organization comprising of people from
Purchasing, Production, Quality Assurance, Design and Engineering, Finance etc. This is
essential to appraise the prospective suppliers from specialist viewpoint.
They are required to do the proper homework to determine various parameters to appraise the
potential supplier. In some organizations a standard Supplier Appraisal Form is used for the
visit of such team. This ensures that no important points are left over and such records can be
used for support of decisions taken by the team after visits.
CHECK LIST FOR SUPPLIER VISIST
A sub-committee of Institute of Purchasing and Supply had prepared following checklist for
visit to suppliers premises, which can be very useful in determining the contents of standard
supplier appraisal form
Personal attitudes
An observant visitor can sense the attitudes of the suppliers employees towards their work
and this provides an indication of the likely quality of their output and service dependability.
The state of morale will be evident from:
An atmosphere of harmony or dissatisfaction among the production workers
The degree of interest in customer services on the part of supervisory staff.
The degree of energy displayed and the interest in getting things done.
The use of manpower- whether economical with everyone usefully busy or
extravagant and costly with excess peoples doing little or nothing.
Adequacy and care of production equipment
Close observation of the equipment in a plant will indicate whether it is:

104

Modern or antiquated.
Accurately maintained or obviously worn.
Well cared for by operators or dirty and neglected.
Of proper size or type to produce the buyers requirements.
Of sufficient capacity to produce the quantities desired. The presence or absence of
ingenious self-developed mechanical devices for performing unusual operations will
be indicative of the plants manufacturing and engineering expertise.
Technological know-how of supervisory personnel
Conversations with foreman, shop superintendents and others will indicate their technical
knowledge and their ability to control and improve the operations or processes under their
supervision
Means of controlling quality
Observation of the inspection methods will indicate their adequacy to ensure the specified
quality of product. Attention should be given to:
Whether the materials received are chemically analyzed and physically checked.
Frequency of inspection during the production cycle.
Employment of such techniques as statistical quality control.
Housekeeping
A plant, which is orderly and clean in the general appearance, indicates careful planning and
control by management. Such a plant inspires confidence i.e. products will be produced with
the
same care and pride in their quality. The dangers of breakdown, fire or other disasters will
also be minimized with a consequent increased assurance of continuity of supply.

105
Competence of technical staff
Conversation with design, research or laboratory staffs indicate their knowledge of the latest
materials, tools and processes relating to their products and on anticipated developments in
their industry.
Competence of management
All the above areas, are, in essence, a reflection of management and therefore indicate its
quality. Particularly in the case of a new supplier, an accurate appraisal of executive personnel
is of paramount importance.
SUPPLIER RATING FORMS
Keeping in view the above factors, as stated earlier, rating form may be devised to assess the
overall competency of a potential supplier. Questionnaires pertaining to one aspect i.e. quality
assurance may be as under (questionnaires for other aspects may also be devised accordingly.
SUPPLIER QUALITY ASSURANCE REPORT
Incoming Material
Is incoming material inspected
If Yes, by whom?

Max
Yes /No

C1
C1

12
12

Are materials identified and stored

adequately?

Yes / No

C2

Are accurate records kept of

stock etc.?

Yes /No

C2

Does department possess its own

measuring equipment?

Yes /No

Rejection procedure for

Unacceptable material is
In place

C1

12

C3

In Process Inspection / Testing

Are supplies of latest drawings
readily available?

Yes /No

C1 12

Awarded

106
Where possible, is inspection/
testing carried out at each
operation?
Is equipment adequate for
tolerances/tests called for by
Suppliers drawings?
If not, Why not?
Typical in- process inspection/
testing is
Is any other inspection carried
out?

Yes/No

C2

Yes/No

C1

12

C2

Yes /No

C3

Are finished products fully

inspected to suppliers latest
drawings?

Yes/No

C1

12

Are finished products fully

tested as called for on suppliers
drawings?

Yes/No

Is equipment adequate for

requirements?

Yes/No

C1

Are inspection test procedures

satisfactory?

Yes/No

C1 12

Final inspection/test procedures

Amount of inspection/testing
Carried out is it sufficient
If sampling plan is used give
Details
When called for, is correct
suppliers part number
marked on finished products?

Yes/No

General
To whom are inspectors
responsible?
Do inspection/QC/QA have
authority to halt production?
Do inspectors appear

Yes/No

C1 12
12

C2

C2

C1

12

C1

12

C1

12

107
knowledgeable and
experienced with type of
products being produced?
Remarks
Points for page

Yes/No
Max 212

C1

12

Actual

Signature ..
Date .
Supplier rating may be by impression marking i.e. Good, fair, unsatisfactory or, as in
the above example, on a quantitative basis, involving weighting reflecting the importance of
each factor assessed. Thus points can be allocated in three classes:
a)

Class C1 (12 points maximum); items considered essential/ major.

b)

Class C2 (8 points maximum); items considered desirable and additional

to class 1 items.

c)

Class C3 (4 points maximum); any other items/procedures, etc, which are

in use and considered beneficial to quality.

Certain answers to questions not shown above call for an opinion i.e. good/Reasonable/Poor.
In this case, points will be scaled accordingly forms the class maximum downwards. Where
all questions are not relevant, ratings will be based on a percentage of the marks applicable to
the questions answered. The overall ratings are:
a) Over 85% (Rating AA); satisfies all requirement
b) 65% to 85% (Rating A); satisfactory; stated improvements will attain top A
rating
c) 40% to 65% (Rating BB); satisfies some requirements; propose employment
be discounted if agreed improvements are not introduced within six months.
d) Below 40% (Rating B) unsatisfactory, not recommended.
SUPPLIER PERFORMACE RATING
Supplier rating summarizes the actual performance, which includes attributes like price,
quality, delivery service etc. The aim of performance rating is

108
a)

To provide the purchaser with objective information on which judgement relating to

source selection is based.

b)

Enables the purchaser to provide information to the suppliers pertaining to their

performance. This helps them to improve their performance, if required.

Based upon performance rating buyer may discontinue business dealings with some of the
suppliers if they are not performing to his satisfaction inspite of feed back to them from
time to time.
Suppliers performance rating may be subjective or quantitative.
SUBJECTIVE RATING
As a normal practice, all buyers make subjective appraisal of performance of suppliers.
Such appraisal rating may be good for low value, routine items, although it has following
deficiencies:
a) Such appraisal is in the head of an individual buyer and is last, should he
leave he organization.
b) Such appraisal is subject to basis in favour/ against a supplier by some quite
irrelevant impression or estimate.
QUANTITATIVE RATING
This rating is based upon data with reference to various attributes.
This rating system has two problems i.e. what attributes to include and how to assign
weightage to each one.
Price is sometime included as one of the attributes because of its obvious importance. But this
may also not be treated as an attribute because direct comparison of price is possible between
various suppliers. Suppliers performance on delivery, quality, service etc. cannot be
compared unless records are kept and translated into scores. It is however, essential to

109
determine weightage of each attribute, which may depend upon individual buyer policies i.e.,
is delivery performance as
important as quality performance, or twice as important or half as important. Similar
weightage may also be decided for services in relation to other attributes.
The aim of vendor raining is not to make theoretically perfect numerical evaluation of merits
of rival supplier but is to get the supplier to do better, highlighting to them as to how their
performance compares with targets or how their performance is in comparison to last year or
in comparison to their rivals. As stated earlier, this also helps in selecting and retaining good
suppliers, provided there are several suppliers, supplying the same item.
WHAT ATTRIBUTES TO INCLUDE
As stated earlier, price may or may not be an attribute obvious to the reasons that it can
simply be comparable.
Quality and delivery are the attributes, which are invariably, be included. Quality rating is
usually the percentage of inspected items, which have been accepted. This may also include
suppliers response to rejection of goods. Some good suppliers not only immediately settle
such issues but also take prompt corrective action to ensure that such instances are not
repeated in future. Delivery rating is percentage of deliveries that are executed in time. This
may also include the attitude of suppliers to improve upon agreed schedule in case of any
exigencies of buyer. Other attributes may be like packaging, technical services (including
after sales and availability of quality spares at reasonable price), adherence to agreed terms
and conditions including fixed price, submission of test certificates, following the dispatch
and invoicing instructions, informing in advance regarding delays in supply, sale policies and
ethics, assistance to buyers in product improvement, keeping abreast regarding market
conditions, development of cheaper substitute etc.

110
WEITHING OF ATTRIBUTES
Each attributes, once determined, is given a mark or score depending upon how important is
the attribute to buyer, out of assignment of total 100 score for all put together. This exercise
has to be done very carefully. This can be made clear with the example of one firm which was
trying very hard to get its supplier to keep ready stock for immediate delivery and allocated a
high score to this attribute. The result was that supplier with excellent performance on quality,
on time delivery and services got poor score if they were not willing to carry stock for
immediate delivery.
Since the quality and right time delivery are two most important attributes for purchasing,
these are normally given high and equal weightage. Under these conditions supplier rating, for
example may be as under:
___________________________________________________________________________
ATTRIBUTE
MAXIMUM SCORE
___________________________________________________________________________
A.
Quality performance
25
B.

Right time delivery performance

25

C.

Staggered deliveries made when

required by purchaser

05

D.

After sales services

05

E.

Execution of order on firm (agreed) price

05

F.

G.

H.

I.

Adherence of terms of purchase

(submission of test certificates,
following invoicing and shipping
Instructions, submission of
guarantee / warranty certificates etc

05

Ability to promptly respond to any

queries from buyer including response
to tender enquiries)

05

Delivery follow- up (informing

purchaser in advance of expected delays
in shipment

05

Sales policies and sales ethic

111
J.

Performance of the salesman

K.

Ability to assist the customer in

reducing cost (value analysis, product
improvements. Cheaper substitute
TOTAL

05

10
---------100
----------

Measurement of supplier performance on these indexes is useful

i)

In comparing the performance of supplier with reference to given factors from one
year to another.

ii)

When the orders are divided between two or more supplier and purchaser wishes
to monitor the performance of each for the purpose of comparison.

BUYER/SELLER RELATIONS
Good buyer seller relations are another important aspect of efficient and effective buying.
Smooth running of industry needs this cordial relationship. Buyer and seller must understand
that their growth depends on goodwill and relationship between the two.
This relationship is on peak when supplier supplies quality goods, in the right quantity, at the
right price and at the right time and place and values business ethics and buyer appreciate
problems of suppler, make timely payments and ensure supplier organization makes a
reasonable profit and attain growth.
Essentials of relationship

Strong and healthy relationship is important for the growth of their respective firms to
both buyer and seller. This aspect has to be recognized by both

112

Both must further realize that their respective organization can be benefited from each
others progress.

Mutual trust, cooperation and understanding can be developed by respecting of buying

and selling which ultimately replace suspicion and aggressiveness.

Both parties shall have full appreciation of each others problems.

Each party shall take effective and honest steps and strive hard to discharge their
respective obligations laid-down as per contractual provisions.

Under shelter of contractual provisions they shall not be rigid, rather try to go beyond
theses provisions to satisfy needs of other.

Expectation of buyer from a reliable source of supply

In purchasing there is a proverb that
Half of the battle in purchasing is won if you are able to locate a right
source of supplies
A right source of supplies shall meet the following aspiration of the buyer
On Reliability Front
Supplies materials at competitive rates with consistently good quality.
Supplier shall be reputed, stable and financial strong.
Not only supplies good quality materials but have suitable testing facilities for
satisfaction of buyer.
Integrity of supplier shall be above board.

Not only supplies consistently good quality materials but strive very hard for product
improvement- enhance the utility of product to buyer.
Furnishes various certificates (test certificate , interchangeability certificate

guarantee certificate etc) if stipulated in order, alongwith supplies.

Strictly follows invoicing, packaging and dispatching instruction contained in
Purchase Order.

113
On Technical Front
Provides assistance on application engineering.
Provides assistance in design.
Handle special needs and contributes to improve product efficiency.
On Availability Front
Supplies the material within assured delivery period without constant follow up.
Strives very hard to improve upon delivery period when there is crisis at buyers end
without exploiting the situation.
Advance communication in case of expected delays in deliveries.
Also maintains stock locally to meet requirements at a short notice.
Offers off the shelf deliveries of fast moving spares.
Plans the supplies in such a way to reduce inventory of buyer.
Dependable supplier for steady flow of materials-ultimate aim being JIT (Just in
Time).
CONVENIENCE FRONT
Enters into an agreement of commercial terms and conditions for long-term
association and faster finalization of orders, without any references and crossreferences.
Attends promptly to the problems of buyer related to inspection, replacement of
rejection and rectification of damages at reasonable terms.
Faster communication through personnel visits, phones, telex-fax, E- mail etc.
Keeps the buyer informed about market development.
Adherence to commercial terms and conditions.
AFTER SALES SERVICE FRONT:
Has an efficient network to provide after-sales service.
Prompt availability of quality spares at competitive rates.
Training facilities to buyer personnel.
OTHER FRONT:

114
Building up a mutual market (recommending buyers product to other buyers)
Developing mutual understanding- a sense of partnership for each other and
appreciating each others limitations.
Transparency in relationship- buyer shall have easy excess to data of suppliers input
cost etc etc.
SELLERS EXPECTATIONS FROM A BUYER
A reliable supplier expects continuity of business dealing with buyer in return for
reasonable profit. This relationship can not be developed on lowest price consideration
alone.
In case of price increase due to sudden change in the market conditions it is expected
that buyer will suitably compensate and not allow supplier to suffer losses.
Supplier expects from a good buyer payment of invoices promptly. If payments are
unduly delayed, his profit margin shall be eaten away by way of interest burden and
efforts in expending payment.
Prompt inspection, if PDI (Pre-despatch Inspection) is required otherwise sellers
working capital shall be blocked in inventory of finished goods.
Also expects from a buyer that-Orders placed contain correct specification in unambiguous terms.
-Purchase terms are clear and not very stringent
Non cancellation of Purchase Orders.
Timely clarifications to any of suppliers queries.
Avoidance of unnecessary rejections.
Respectful treatment to sellers representation when they visit buyers place.
Mutual understanding and recognition of each others requirements.

115

Negotiation- An Effective Tool of Professional Purchasing

NEGOTIATION
Negotiation is any form of verbal communication in which the participant seeks to
exploit the relative strengths of their respective bargaining positions to achieve explicit
or implicit objectives within the overall purpose of seeking to resolve the identified areas
of disagreement.
Negotiation as such can be defined as The process by which we search for terms to obtain
what we want from somebody who wants something from us The definition points up a
key factor that negotiation implies some mutuality of wants, resolved by exchange.
Negotiation is sometimes regarded as synonymous with bargaining defined by oxford
Dictionary as haggling over terms of give and take. Bargaining is a process of incremental
conveyance in which parties gradually move towards each other from initial position to
opposite ends of a continuum. While bargaining is always part of negotiation, it is a more
restricted term since negotiation includes debating aspects such as posturing, persuasive,
appeals and coercive behaviour e.g. warnings, threats, ultimatums etc.
It is generally accepted that a key competence in a purchasing executive is an ability to
negotiate. Negotiations may involve dealing with a single issue or many. They may be
conducted on a one- to- one basis or between teams of negotiators representing different
interests, and may be conducted over the phone in a matter of minutes, or take many months
to complete.
Negotiations as means of source selection and price determination:
Pre-requisites of Competitive Bidding:
Rupee value of specific purchase must be sufficient to justify the expenses both to
buyer and sellers that accompanies this method of source selection and purchasing.
Specification of item or the services to be purchased must be explicitly clear to
both the buyer and sellers.

116
Market must consist of adequate number of sellers.
The sellers that make the market must be technically qualified and actively want
the contract and therefore be willing to quote competitively.
The time available must be sufficient
Following are the condition, which shall not be present when employing competitive
bidding as means of source selection.
Situation in which it is impossible to estimate costs with a high degree of certainty.
Such situations frequently are present with high technology requirements, with
items requiring a long time to develop and produce, and under conditions of
economic uncertainty
Situation in which price is not the only important variable. For example, quality
schedule and service may well be negotiable variable of equal importance.
Situation in which the purchasing organization anticipate a need to make changes
in the specifications or some other aspect of the purchase contract, when
unscrupulous suppliers anticipate changes, they may buy in with the expectations
of getting well (and even wealthy) on the resulting changes.
Situation in which special tooling or set up costs is major factors. The allocation of
such costs and title to the special tooling are issue best resolved through
negotiation
When all these pre-requisites to the use of competitive biding are not satisfied, the negotiation
process should be employed to select sources and to arrive at a price.
Several progressive purchasing and supply management professionals favour use of
negotiations over competitive bidding for critical procurements due to following reasons:
The negotiation process is far more likely to lead to a complete understanding of all
issues of procurement. This improved understanding greatly reduces subsequent
quality and schedule problems.

117
Competitive bidding tend to put greater pressure on suppliers to reduce their costs in
order to be able to bid a low (but profitable) price. This cot pressure may result in
sacrifices in product quality, development efforts and other vital services.
This method is, however, good for private sector buyers and may not be feasible for
Government/Public Sector Undertaking buyers due to limitation of public accountability and
strict adherence to systems and procedures which are competitive bidding oriented.
Negotiation in PSU and govt. Departments
Avoidance of Negotiation:
In order to ensure that competing bidder offer low prices, orders shall be placed on lowest
qualified bidder after bid are opened and there being sufficient response. If the organization
gains the reputation of negotiating with lowest bidder after bids are opened and evaluated then
in future bidder will tend not to offer their best prices initially, believing they may be bettered
in any subsequent negotiation. They will adopt the strategy of submitting a bid low enough to
allow them to be in any negotiation. But their initial bid may not be as low as when they are
confident that award will be made to lowest bidder without any negotiation. In view of this, a
prudent buyer shall never opt for negotiation after opening of the bids until there are
compelling and valid reasons for this.
In view of above and the instructions issued by Central vigilance Commissioner from time to
time, negotiation after competitive bidding shall be avoided. No price negotiation shall be
undertaken where three, techno- commercially accepted, offers are available. Order shall be
processed on L1 acceptable bidder after establishing the price reasonability.
Exceptional cases of Negotiation with L1 Bidder
However, in exceptional cases of high value contracts for plant and machinery or other critical
materials, negotiation with evaluated L1 bidder in following situation can be undertaken on
recommendations by Tender Committee and with prior approval of award approving authority

118
c)

Only two acceptable offers have been received against a tender and rates of
evaluated L1 bidder are quite high as compared to cost estimate or the last
purchase price, if available.

d)

The bidder have formed a cartel and rates of L1 bidder are considered
substantially higher than cost estimate or last purchase price, if available.

Negotiation with Bidder other than evaluated L1

When the material being procured is one of the critical inputs of plant and buyer may feel to
enter into parallel contracts with two or more parties. In these cases NIT and bidding
documents shall specifically stipulate this requirement so that bidders are aware before hand
the requirement of awarding parallel contract. Under these circumstances negotiation with
prior approval of competent authority shall be conducted with L2 bidder to match their prices
and conditions with evaluated L1 bidder. If the negotiations succeed, a parallel contract (s) is/
are awarded. However if negotiation fail, further negotiation can be held with all bidders to
match their prices with evaluated L1 bidder.
Elements of Negotiation
Negotiation involves communication, i.e. exchange of information.
Negotiation takes place within a context of factors that influence the relative strengths
of participants e.g. whether a buyers or sellers market prevails.
Each participant has implicit objectives e.g. a supplier will wish to obtain the best
price but implicitly will be anxious to keep his plant and work force employed.
The purpose of negotiation is joint action to resolve identified disagreements (price,
terms, delivery, specifications etc.)
The disagreement may be resolved by:
An imposed solution
An integrative solution in which all the participants are satisfied by the outcome.
When to Negotiate
Contracts for capital items.

119
Where the final price cannot be determined with certainty due to cost arising due to
uncertain contingencies
Where an item is designed and manufactured to purchasers specifications.
Where learning element is involved.
Where purchaser contributes expertise, materials plant equipment etc.
Where the contract is essentially for capacity as in the make or buy or subcontracting.
Long term contracts where changes in specifications and price are likely.
Where standard terms and conditions of either buyer or seller is inappropriate or
unacceptable.
Where either party wishes to negotiate specific rewards, punishments or concessions
e.g. bonus payment for early completion, penalty for late delivery or interim or
deferred payment.
Where the buyer feels that the price quoted by the supplier is unreasonably high.
Where the buyer feels that available few suppliers have formed a ring. (cartel)
Topics for Negotiation in Purchasing
Please refer Annexure listing out some of the topics/issues, which could be negotiated in
purchasing process.
Factors for Negotiation
Negotiator as Representative
It is important for buyer/seller to know the extent of their authority to commit the
responsibilities for outcome of the negotiation.
The degree of authority may range from that of an emissary to represent without
variation, a position determined by his superior to that of a free agent.
Personal Characteristics of the Negotiator

120
The fewer constraints imposed on a negotiator, the greater will be the scope for his
personal characteristics such as knowledge, experience and personality to
influence negotiation process.
The buyers negotiating position
The buyer will be in a strong positioning where: Demand is not urgent and can be postponed.
Suppliers are anxious to obtain business.
There are many potential suppliers.
The buyer is in a monopsonistic or semi-monopsonistic position i.e. the
only or one of few firms requiring a particular item.
Alternative or substitute can meet demand.
Make or buy alternatives are available.
The buyer has reputation of fair dealing and prompt payments.
The buyer is well briefed of suppliers order book, financial situation,
manufacturing process and other relevant intelligence.
The Suppliers Negotiating Position
The supplier will be a strong position where: Demand is urgent.
Suppliers are indifferent about accepting the business.
The supplier is in a monopolistic or semi-monopolistic position.
Buyers wish to deal with the supplier due to his reputation for quality,
reliability etc.
The supplier owns the necessary jigs, tools or specialized machinery.
The supplier is well briefed regarding the buyers negotiating position.
The Importance of Time
Time is possibly the most important factor in negotiation. Production and stores personal
should understand that necessity never made a good buyer and requisition materials

121
sufficiently in advance of requirement so that buyer have adequate procurement lead-time and
negotiate without constraint of urgency.
Some Practical Hints for conducting Negotiation
Do give plenty of thought to the other partys probable objectives, tactics and
attitudes.
Dont waste time scoring debating points, proving your opponent wrong or
otherwise showing off.
Dont let emotional reactions such as range or pride cloud your thinking?
Dont do all the talking, ask questions, and listen to answers.
Dont keep your eyes on the paper, watch your opponents body language: his
eyes, physical attitudes and facial expressions. Most people signal their feelings
and attitudes quite clearly even while saying something rather different.
The interpretation of some of the postures
Posture

Possible meaning

Leaning forward when making a point

Interested; wants to emphasize a point

Avoiding eye contract

May be embarrassed; not telling the

Arms folded, Body turned away from you

truth
Defensive;

no

compromise.

interested
Body turned towards you leaning forward

Interested; warming towards

your comments

Looking away at watch or at window

Wants to leave or avoid any

Hands supporting head and leaning back

further discussions
Confidence

In chair
Stroking nose regularly with a fingerAvoiding eye contact

May be lying

Not

122
Interested in what you are saying
Good eye contact. Finger stroking face
One should, of course, be very careful in interpreting body language. You can it
wrong. Experienced negotiators, however, over a period of time get to understand
the body language of the other side, which can contribute to increased
effectiveness. A good negotiator must also be attuned to the way people answer
and ask questions. From the other sides tone you can quickly pick up signals such
as anger, impatience, annoyance and agreement.
Be ready to modify your approach. If you seem to reach an impasse on one point
and you do not seem to be getting anywhere, switch to another point, say lets
leave that one for the moment. How about? When the less controversial point
has been settled, the sticky one may look less sticky. Or else suggest a break for
coffee, conference, referring back.
Have a list of points at issue and work through systematically, ticking off points, as
they are dealt with and recapping periodically.
If you have gained something important think of some concession you can
concede in turn. If on the other hand, you have to yield on some major point, use
this as a lever to gain some quid pro quo.
The alternatives are not winning or lose. The creative negotiator is where there are
no wars, no strikes, and no lockouts.
The old clichs of the playing field, I win, you lose, survival of the fittest, winner
takes all, dont apply to commercial negotiations in an advanced cultural system.
How to negotiate
Negotiation falls into three distinct phases: 1. Pre- negotiation
2. Actual Negotiation
3. Post Negotiation

123
Pre-Negotiation
The outcome of negotiation often depends upon the preceding research and planning on the
part of the buyer. The matters to be determined are: a)

Who is to negotiate- Individual approach or team approach

b)

The venue

c)

Gathering intelligence:
(ii)

Ascertaining he strengths and weaknesses of respective negotiating

positions.

(iii)

Assembling relevant data relating to cost, production, sales etc.

(iv)

Preparing data, which is intended to present at the negotiation in the

form of graphs, charts, tables etc., so that it can be quickly
assimilated.

d)

Determine Objectives.
The buyer should be clear as to what the negotiations are expected to
achieve. A model by Atkinson, (Effective negotiator) of bargaining in an
industrial relation context can be applied to purchasing as follows: FBP

RS

IS
90
_________
Price to pay Rs.)
A_____50______60_____70____80______80____100____110_____120____130______B
(Price to ask Rs.)
IS
RS

FBP

124
Assuming that matter under negotiation is price: i) A-B represents the positions, the negotiators may take.
ii)

IS below A-B represents the buyers Ideal Settlement i.e. most favourable
price that can, with realism, be achieved in negotiation i.e. Rs. 50

iii) IS above A-B represents the vendors Ideal Settlement i.e. Rs. 130
NOTE: In most cases is will represent the starting position of each negotiators
subject to the point that if there is to be negotiation at all the initial demands must
not be too far apart to preclude bargaining.
iv) RS below A-B is the buyers realistic settlement i.e. Rs. 80
v) RS above the line is vendors realistic settlement i.e. Rs. 100
vi) FBP below A-B is buyers fall- back positions i.e. Rs. 100 or the price beyond
which he will not go, may think of alternative means.
vii) FBP above A-B is the vendors fall- back position i.e. Rs. 8
viii) The rectangular portion represents the area of settlement.
This model is based upon the convention that each side normally is prepared to
move from original position. The negotiated price will be between Rs. 80 to
Rs. 100 depending upon negotiating skill of negotiators.
Before commencing negotiations, buyer should have a clear mandate from his
superiors to settle at any point not exceeding an agreed fall back position
(e)

Tactics and strategy.

A tactic is a position, maneuver or attitude to be taken or adopted at an
appropriate point in the negotiation process. Strategy comprises the overall
tactics designed to achieve, as nearly as possible, the objective of the
negotiation.

125
Among the tactics to be decided are: i)

The order in which the issues to be negotiated shall be dealt with.

ii) Whether to adopt a hard or conciliatory attitude.

iii) Whether to speak first or allow the opponent to open the negotiation.
iv) What concession to make, should the need arise.
v) The timing of concessions
vi) What issues can be linked i.e. price and improved quality?
vii) What tactics the opponent is likely to adept and how these can be
countered
viii) The dummy run- Before an important negotiation, it is advisable to
subject all arguments, tactics and overall strategies to a critical
scrutiny.
The Actual Negotiation
a)

Karrass has identified the following five steps in the actual negotiation
process:
The negotiation of an agenda and rules of order.
The identification of problem and issues and establishment of settlement range.
Range modification and problem solving.
Hard bargaining.
Closure and agreement

b)

Negotiating techniques include:

i)

In framing an agenda, the more difficult issues should appear later thus
enabling some agreement on less controversial matters to be reached early in
the negotiation.

Ii)

Questions are both means of eliciting information and keeping pressure on

opponent. Question can also be used to control pattern and progress of
negotiation.

126
iii)

Concessions are a means of securing movement when negotiations are

deadlocked. Research findings show that losers tend to make concessions and
that each concession tends to raise aspiration level of opponent. Buyers should
avoid a pattern of concessions in which through inadequate preparation, they
are forced to concede more and more. Although flexibility is essential, there is
no compulsion to make counter concessions. Convention, however, is that
concessions shall be reciprocated. The outcome tends to be more favourable
when the concessions made are small rather than large.

b)

Negotiations are between people

i)

It is, therefore, essential to weight up personalities of ones opponents and the

drives that motivate them e.g. achievement, fear etc.

ii)

The tactics for obtaining closure include inducement i.e. a minor concession
for an immediate settlement, doing a deal i.e. splitting the difference and the
doorknob approach in which one negotiator threatens to withdraw unless
agreement is reached. The later tactic should be used with extreme care.

Post Negotiation
At the conclusion of negotiation, the agreements reached, shall be recorded in writing and
signed by both parties.
Agreement shall also be made for follow-up action of agreements reached and monitoring
progress and implementation.
Successful negotiators work to ensure that agreements are implemented. Less successful
negotiator pay insufficient attention to this. It might be said that no negotiation is
complete until what has been agreed is in-acted.
Typically, skilled negotiators confirm with the other party what has been agreed. They
also specify who is to what, and when not only as between them and the other party, but
also in their own organization. Failure to perform will always have an adverse effect on
relationship between the parties.

127

The prescriptive guidelines for the post negotiation phase include:

i)

Produce the first draft agreement. Despite the fact that you are reporting, honestly,
what you believe to have been agreed, it will be your version, developed from your
viewpoint. In addition the other party will be freed from doing the initial draft- a
fact which will be appreciated by most people. Clearly the draft shall be sent to the
other party with the request for his comments and agreement. A sound piece of
work can do much for ongoing relationships.

ii)

Ensure the commitment of people in your organization to making the agreement

work.

iii)

Prepare the official contracts in line with the agreements

iv)

Remember no negotiation is successful until what has been negotiated is done.

v)

Find time to evaluate performance, first, in negotiation, and secondly, in

enactment.

Learning Curves:
Learning curves are used in negotiation for determining the right price for complicated
products, manufactured to buyers specific requirements, in relatively small quantities.
The technique is based upon the facts that people learn by experience. The second unit of
a product will be manufactured in less time than the first unit, when the units manufacture
are further increased, say if we reach to 20 th unit, the time taken should be much less then
the first or subsequent units manufactured. If the quantity if further increased from 20
units, more reduction in manufacturing time may be achieved, although at a reducing rate,
until a point is reached and no further improvement is possible and the performance level
is optimum.
Graphic representation of learning may be
100

128
80
Direct
60
Man-hours
per unit
40
(in % unit of Rs.)
20
0

20

40

60

89

100

Cumulative units produced.

a)

In industry cost reduction arising from learning may be combination of

following factors:
Less time required by the operative to weigh up the job.

b)

Improved speed and proficiency in performing actual operations repeatedly

c)

Reduction is rejection and consequent rectification.

d)

Reduction is wastage of materials and scrap arising.

e)

Improved operational sequence.

f)

Application of value engineering and analysis.

g)

Large lot sizes with reduced setting up cost.

In view of the above factors, learning can be defined as The overall process of
acquiring skill, improving methods, tooling and performance and eliminating
waste and inefficiency.
The practical Application of learning curves
The greatest potential for saving in purchase price, through analysis of learning curves lies in
high cost items, items with high direct labour costs contents and the items which lie at the
beginning of the curve:
a)

Price determination

129
The learning curves approach indicates the area in which to concentrate on a price
analysis in order to obtain the greatest saving especially to re-negotiate for a repeat
order.
b)

Make or buy decisions

In comparing the cost of making and buying, the effect of learning on each
production run should be determined and taken into consideration as well as quantity
required

c)

Delivery Time
As stated earlier, the manufacturing time for the subsequent quantities has to be
reduced until optimum level of performance is reached. The supplier shall reduce the
delivery lead-time for repeat order.

When not to use the Learning Curves:

When the product is standard product and manufactured in optimum batch
quantity to meet requirement of various customers.
a)

Where the direct labour cost content of the product is small.

b)

Where the cost/volume does not justify the high expense of periodic time study or
job costing required obtaining data from which cost curve is constructed?

c)

When learning is not constant i.e. where a straight line cannot be fitted to the data
reasonably accurately.

Annexure
Topics for Negotiation in Purchasing
Modification of quoted or existing price:
Most of the time, negotiations are centred on price, although these may include other issues.
The price quoted by the supplier may be abnormally high as compared to price data of last
purchases available with buyer or currently being quoted by other supplier. At time, the
quoted price may be substantially higher when compared with the cost data of cost-analysis
done by experts of buyers organization. Many a time buyer may prefer to negotiate existing
price for long delivery orders or blanket/period contracts due to changing market/economic
conditions or improved availability.

130

Type of pricing agreements and price variation formula

A prudent buyer, most of the time, prefers a fixed price agreement i.e. price remains fixed
until completion of order. Such prices provide greater certainty and the buyer knows from the
very start as to what he is likely to pay. This also assures that the supplier will execute the
order promptly, well within agreed delivery period to avoid any financial loss due to increase
in prices.
As a normal purchase practice, buyers incorporate a standard clause while inviting tenders,
advising the prospective suppliers to quote firm price, which shall be valid for a period
ranging between 60 to 120 days (This is the time within which buyers expect to
adjudicate/evaluate the tenders and place the order. Once the order is finalized within this
validity period, a buyer expects the supplier to execute supplies on firm price quoted by them)
as this makes it convenient for the buyer to compare the price quoted by different suppliers
and take a decision on buying, keeping in view other requirements of suitability, delivery etc.
A supplier, however, prefers a price agreement, which is subject to adjustment i.e. variation,
depending upon prevailing market conditions or cost of production at the time of supply. In
this type of price agreement, all financial risk accrues to buyer.
If a supplier has quoted a price subject to variation or price ruling at the time of dispatch,
buyer may like to negotiate the issue so as to make supplier agreed for fixed price. If a
supplier, especially, for long term contract or long delivery period order, insists price
variation, the buyer may like to negotiate attributes (like escalation in cost of labour,
overheads and materials) which may affect price increase and price formula. Such agreements
are important to avoid future complications.
Quantity, cash and Trade Discounts
Keeping in view the value of purchase, buyer may like to negotiate various discounts.
Quantity discounts are offered on large orders. The suppliers benefit from big orders by way
of saving in direct and indirect costs. They may pass on some of these benefits to buyers who
place big orders. Before availing a quantity discount, a buyer, however, needs to weigh the
advantage of lower purchase cost against additional stock holding cost.

131
Many a time supplier may insist prompt payments i.e. advance payment through bank in
exchange of despatch documents i.e. pending receipt of materials or payment against delivery.
The buyer may negotiate with the supplier to accept his standard payment term but if the
supplier is reluctant, may negotiate to obtain cash/settlement discounts. Such discounts may
be between 0.5% to 2.5%.
Another discount i.e. trade discount is traditionally given to tradesman (distribution channel
used by the manufacturer). This discount is also offered to some major customer as such sale
helps supplier to reduce his marketing expenses.
A prudent buyer, while negotiating the price also avail the opportunity to explore possibilities
of obtaining these discounts to maximum extent.
Terms of payment i.e. Extended credit
A buyer normally insists for payment to the supplier as per his standard payment term.
Usually within 30 days from the date of receipt and acceptance of goods. The supplier due to
their own liquidity problems desire to get payment as promptly as possible and quote payment
terms, which are most favourable to them (such payment shall be part with order and/or part
of full through letter of credit and a small part after receipt of materials by the buying
organization). They may also demand immediate payment after delivery without any extended
credit. In view of these circumstances, it is observed that most of the time; standard payment
term offered by the buyer and quoted by the supplier is different.
A buyer , may negotiate payment arrangements with supplier to meet requirement of extended
payment which also ensures that payments are made for only those goods which are accepted
by buying organization after inspection and acceptance. If supplier insists for payment as per
his terms, buyer negotiates to obtain some kind of cash settlement discount in lieu of extended
credit payment terms.

132
Transportation and Handing Charges
Sometimes, the supplier may quote separate transportation and handling charges in addition to
quoted price for the goods. If these charges are substantial, buyer may like to negotiate with
supplier so that such expenses are either absorbed by supplier (i.e. quoted price inclusive of
such expenses) or reduction in such charges.
Mode/Method of Transportation
Sometimes, supplier may quote CIF price-shipment by sea transport or FOR buyers placeshipment by rail or road. Due to urgency of requirement or nature of goods, buyer may need
faster or safe mode of transportation i.e. by air for overseas supplies or by road transport in
place or rail or air transport in place of road. Buyer may negotiate with supplier the change of
mode of transportation without asking for higher price for such changes.
Phased or Staggered Deliveries
Normally, a supplier insists on delivery of goods ordered in one lot unless the nature and
quantity of good demand part shipment over a period of time. The buyer may, however, insists
that ordered goods are delivered in phased deliveries on firm price basis so as to bring down
investments in stock and recurring stock-holding cost. The buyer negotiates such phased
delivery programs with the supplier. This is in fact the first step in the process of JIT (Just inTime) inventories.
Stock-less Buying
A buyer, if his requirements for certain items are substantial and regular, may negotiate with
suppliers the arrangements of stock-less or consignment buying. Under this buying system the
purchasing organization has no financial liability for inventory of goods purchased. The
stocks are owned by the supplier which may be located at the buyers place or suppliers place
(if supplier is very near-by). The buyer makes weekly or monthly payments to the extent the
goods have been drawn for the consumption. To make the stockless buying a success, both
buyer and seller have to work very closely to monitor demands and stock holding and
negotiate before hand such arrangements including payment system. A buyer may gain
substantial saving of holding cost, apart from assurance of continuity of supply, although at

133
times, he may have to pay a slightly higher price. Supplier may also agree to such business
over a period of time. Normally, the stock-less buying agreements cover standard off the
shelves items required by several industries and prices among suppliers remain relatively
constant.
Delivery to Prescribed Sites
In case of national contracts, buyer of central purchasing of multi-plant organizations may
negotiate delivery of goods at prescribed sites without any additional financial burden. By
resorting to direct deliveries to different units, buyers may achieve substantial savings in
transportation and handling cost. Since the volume of national contracts shall be higher, if
these arrangements are negotiated with the supplier, they may agree without any financial
compensation.
Change/Amendment to Specifications
A purchase contract is binding to both buyer and supplier for supply of specified goods at an
agreed price and commercial terms and conditions. Possibilities of changes in specifications
and scope of supplies cannot be ruled out after placement of order due to compelling reasons,
noticed later on. Such changes can be made only with a written consent of suppliers for any
change in purchase price and other conditions of the contract, which can be finalized amicably
by negotiating with the suppliers.
Changes/Amendments to Quantities
Changes in consumption pattern, sometimes, warrant changes in ordered quantities. The order
quantities may be either required to be reduced and increased and a supplier may demand
price adjustment in both cases. If the quantity is increased and market conditions are stable,
buyer may also demand some quantity discount. All these issues can be decided based upon
market conditions and may need negotiation to reach an agreement.
Change in Delivery Schedule before Placement of Order or Amendment to Ordered
Schedule
Sometimes, if may be noticed that delivery schedule of lowest technically acceptable offer
may not be suitable to the buyer due to urgency of his requirements. It is therefore prudent on

134
his part to negotiate delivery schedule before making up his mind to go to next higher supplier
whose delivery period is suitable to him. Sometimes, it becomes necessary even to reschedule the agreed delivery period in view of changes in consumption. If the items are
extremely critical such rescheduling can amicably be resolved by negotiation with the
supplier who may also have to revise his production program and in extreme cases, divert the
supplies meant for other customers. Sometimes, the supplier may have to engage his labour
force on overtime and he may demand additional compensation for such supplies. All such
issues can be sorted out during the process of negotiation.
Packaging Requirements Including Palletization
In order to ensure safe movement in transit and also efficient handling at buyers works,
special requirements of packing including containerization/ Palletisation without any
additional expenditure or at reasonable expenditure, is also one of the issues which can be
negotiated with supplier. Sometimes, critical spares may be required to be stored for a longer
period; requirement of packaging in such cases may include protective coatings/treatments.
Special type of packing in metal crates, special marking on the packages may also be one of
the issues, negotiated with suppliers.
Supply and Ownership of Jigs, Moulds, Pattern and Special Tools
In certain cases, especially, when the items are manufactured to the specific requirements of
the buyer, the cost of jigs, moulds, pattern or special tooling etc, may be substantial, The
supplier may insists to back-charge these investment to the buyer, if requirements of products
are too small and irregular. A buyer may negotiate with supplier the ownership of such special
tooling including depreciated cost, once the process is completed.
Allowance for learning factor
Learning curves are used in negotiation about the price for complicated products made in
relatively small quantities. It is based upon the fact that people develop expertise by
experience. The second unit of product may be produced in lesser time compared to first unit.
If the quantity is more, subsequent units may take still lesser time, although in reducing rate.
Thus with increasing quantity or repetitive orders, the manufacturing cost has to come down,

135
part of which needs to be passed on to the buyer. Thus a buyer can negotiate the price by
using this analysis.
Submission of Samples, Pending Bulk Supplies
If the items are non-standard and manufactured to specifications/drawings/blue-prints
provided by the buyer, it is important that first sample supplies are manufactured and bulk
supplies are arranged only when the samples are approved by the buying organization.
Sometimes, buying organization may even put the goods on actual trial and watch their
performance before communicating their acceptance for bulk production. Such arrangements
may be negotiated before placement of order. If the samples are found unsuitable, the buyer
may resort to cancel the order without any financial liabilities.
Inspection plans (quality parameters and place of inspection)
If the items are of critical nature and vital to the overall performance of end product of the
buyer, it is important that suitable quality Assurance plans and quality Tests are negotiated and
worked out. There may be instances, where inspection may be required at various stages of
manufacture. It is therefore important that quality plan including parameters on which
inspection shall be based and place of inspection shall be negotiated. As a normal practice,
requirements are linked with payment arrangements. If the source quality control is accepted,
it is important to negotiate details of tests to be carried out by manufacturer at various stages
of production and tests of final product. Copies of such test certificates need to be furnished to
buyer whose technical experts may scrutinize such certificate before acceptance of goods.
Method of Determining Labour, Material, Overhead element in Variable Costs or cost
plus Contracts
In case of variable price, the supplier needs to furnish the cost break-up i.e. cost of labour,
materials, overheads, and reasonable profit margin. In case of high value contracts, buyer may
also seek the help of a qualified estimator or cost analyst to analyze such data. Based upon
such analysis, final price is negotiated somewhere between the price quoted by the supplier
and the price worked out by the buyers analysts. In the case of variable price, it is important

136
that attributes and their weighted impact on the end product due to variation are thoroughly
discussed and agreed so as to avoid any complication at later date.
Charges for use of patent owned by supplier
Sometimes procurement of materials/ equipments may also include transfer of technology
and agreement of supplier to use the patent when identical items are manufactured by buyers
organization. Such charges may be substantial in case of international transaction and may be
in the form of one time payment, annual fee or may be percentage/per piece of goods
manufactured, Not only these charges are negotiated but also arrangements for upgradation of
technology or mechanism of incorporating technological changes are determined.
Sharing of Saving Due to Improved Design or Production Factors
In case of re-determinable fixed price, firm price is determined in the light of actual
experience of product cost. Such type of prices is applicable where development and
production proceed concurrently such as import substitutions which are initially higher to
compensate and motivate suppliers. Once product is fully developed, the manufacturing cost
may come down due to improved facilities and expertise. Such savings in manufacturing cost
need to be shared between buyer and seller and price has to be renegotiated. Even for regular
products, the manufacturer may reduce manufacturing cost due to improved design and R &
D effort. Buyer may negotiate with supplier to share reduction in manufacturing cost.
Compensation for Cancelled Orders or Liquidated Damages for Delayed Supplies
Due to changes in requirement of an item in buyers organization due to various reasons
including changes in technology, standardization or value analysis, there may be a need to
cancel the order for unexecuted supplies. The supplier in such cases may demand some
compensation for the arrangements already made by them for manufacturing and supply.
Delivery in time is also an essence of contract. If supplies are not made as per agreed
schedule, buyers organization may suffer liquidated damages by way of production losses. In
view of this, the buying organization normally insists for provision of liquidated damages
clause in the contract which may be a certain percentage per week of unexecuted value of
order with suitable maximum limits (Normally 0.5% per week or part thereof subject to

137
maximum of 5%). These details can be negotiated. No liquidated damages for delayed
supplies are imposed on the suppliers if losses quantifiable in financial term are not suffered
by the buying organization due to non-availability of goods ordered and not delivered within
agreed schedule of deliveries. If the reasons for delay in delivery are genuine and beyond
suppliers control, buyer may suitably extend delivery period without any liquidated damages.
Sometimes, the buyer may even negotiate to buy the materials from other sources, if supplier
fails to adhere to delivery schedule, at their risk and cost, i.e. any additional expenses incurred
in buying the goods from other sources are borne by the supplier.
Buyers Remedies in Respect of Rejection of Supplies
Many a time, goods after receipt are found unacceptable owing to reason viz. wrong supplies,
poor quality/sub-standard goods or damages in transit due to various transit hazards or
because of poor packing. Some suppliers immediately respond and furnish replacement
supplies promptly. There are, however, occasions when some suppliers dont settle such
rejections to the satisfaction of the buyer. Based upon past experience with the supplier,
modalities of replacement of rejections can be negotiated with the supplier. One way is to link
payment with receipt and acceptance of supplies or resort to inspection before dispatch of
goods. This, however, depends on value and critical nature of item; otherwise it shall become
uneconomical. Source inspection can solve the problem of wrong supplies or sub-standard
goods, but problems of rejection due to transit handling still remain which can be further
negotiated
Contact performance Guarantees
This guarantee is normally in the form of bank guarantee for an amount of 5% to 10% of the
value of contract. This guarantee is obtained to assure that the supplier executes the order as
per agreed terms and conditions and in the case of any default, pending other recourses, bank
guarantee is encashed. Contract performance guarantee is different from Bid Bond/Earnest
Money. The prospective suppliers along with tender/quotation furnish bid Bond/Earnest
Money and the purpose of this money as security is that suppliers do not withdraw their
offer/tender within validity period and in case of withdrawal, this amount is forfeited.

138
Equipment Performance Guarantee
Equipment performance guarantee is obtained to ensure that equipment after installation and
commissioning performs to the satisfaction of buying organization, keeping in view the
operative parameters and functions. This guarantee is furnished in the form of bank guarantee
for 10% to 20% of contract value which is normally valid for a period of 18 months from the
date of supply of equipment or 12 months from the date of installation/commissioning, which
ever expires earlier. In case equipment is found unsatisfactory and the supplier could not
remove defects, such bank guarantees are encashed, pending other actions against supplier as
per provision of contract.
Because of financial implication, suppliers may be reluctant to provide above guarantees but
negotiations may help determine the amount, validity and form of such guarantee.
After Sale Services, Pricing and Availability of Quality spares
While buying the equipment, it is imperative to negotiate with supplier, arrangements to
provide prompt and effective after-sale-services, pricing and availability of quality spares.
These issues need to be settled down before awarding the contract so that buying organization
may not face any operating problems. Such negotiation may also include requirement of
training of buying organizations operating and maintenance personnel. On the availability of
spares from supplier, a buyer can also negotiate as to which of maintenance spares are
manufactured by the supplier and what spares they are buying from the market (bought out
items for original equipment manufacturer). A shrewd buyer may even negotiate with
suppliers, the sources of their bought out spares so that such spares can be purchased from
manufacturer at lower price and shorter lead-time.
Passing of Properties in Goods:
This may also be an aspect, which may have a far-reaching impact on overall landed cost of
materials at buyers works. By negotiating this issue, most suitable terms can be obtained by
the buyer.
Extension of Validity of Offers:

139
For high value major equipment when prolonged negotiations are held, it may not sometimes
be possible for the buyer to finalize the order/ contract within the validity of offer/ tenders and
during the process suitable extension on validity of offer also need to be negotiated.
THE RIGHT QUALITY
Dictionary meaning of quality is merit, excellence, superiority, worth etc.
In the industrial purchasing quality has different meaning. Here quality is related with
functional suitability and cost of product and just not the intrinsic excellence. Quality is the
degree or grade of excellence appropriate for a particular purpose and cost.
Obtaining the right quality that meets the intended use and conforming to specifications is
fundamentally important in purchasing. Quality in purchasing means both specifications
quality and conformance quality.
Conformation quality is set of features and characteristics of a product or a service, which are
specified by purchaser and thus required to be met by suppliers.
Conformance quality is the extent to which the supplier complies with specifications and thus
conforms to requirements.
Both these aspects of quality are equally important as a good specification is no good if
supplier fails to comply with it, nor will the customer be satisfied if the goods received
comply in full with specification that is not appropriate to requirement.
Who Defines Quality:
Design or user departments define quality of goods. The buyer has right to request
reconsideration of technical decision on valid economical reasons such as market availability
and cheaper substitutes. Buyer can also question specifications written around a particular
brand as this restricts competition among suppliers.
The Contribution of Buyer to the Quality
Apart from the right to challenge purchase requisitions, buyer can contribute to right quality
in several ways.

140
i)

As a member of committee concerned with specifications and standardization by

a)

Advising cost, especially alternatives.

b)

Advising availability of materials to the specified quality

c)

Advising on suitability of requisitioned materials for a particular

purpose.

ii)

Ensuring that suppliers can meet quality requirements, this is achieved through:
a)

Seeing that appropriate references to quality are made in tender

enquiries, purchase orders and conditions of purchase.

b)

Vendor appraisal with regard to quality.

d)

Implementing a program of quality assurance.

e)

Enlisting vendors assistance in connection with quality.

f)

Relations with suppliers in connection with rejected and unsatisfactory

goods.

Specifications:
A specification is a statement providing a description or list of characteristics or requirements
laid down for materials, components, processes or services.
Specifications have two functions:
They communicate to the supplier as to what buyer wishes to have supplied to him in
terms of goods and services.
They provide criterion against which the goods and services actually supplied can be
compared.
Specifications outline, size, dimensions, performance characteristics (Colour, texture, form),
quality, chemical analysis, functions etc.
Standardization:
Standardization aims at reducing number of very similar items held in stock thereby reducing
the overall stock holding of the organization.
A standard is a specification intended for recurrent use. A standard differs from a specification
in that while every standard is a specification but not every specification is standard.
Purchasing and Standardization:

141
Removal of uncertainty as to what is required on the part of both buyer and seller.
Saving of time and money by eliminating the need to prepare company specifications
and reducing need for explanation.
Accurate comparison of quotations since all prospective suppliers shall be quoting for
the same thing.
Reduction of post ordering conflicts with the suppliers.
Saving of inventory and cost through variety reduction.
Reduced investments in spares for capital equipments.
Reduced cost of materials handling when standardization is applied to packaging e.g.
Pallets.
Eliminate need to purchase costly brand names.
Irregular purchases of non-standard equipment and supplies are highlighted.
Quality Assurance/ Quality Control:
Quality Control
Quality control is the process of setting standards of acceptability, for the goods purchased
and produced by the organization and basing the acceptance and rejection of materials upon
those standards.
Quality Assurance:
Quality assurance has been defined by BSI (BS 4778) as all activities and functions
concerned with the attainment of quality.
Quality Assurance is Synonymous with quality control in the sense that both are concerned
with establishment and maintenance of quality standards.
The distinction between the two activities is that while quality control is a system for
regulating a supply, process or product in order to maintain required quality, quality assurance
is the provision of evidence or proof that the requirements of quality can or have been met.
Role of Purchasing in Quality Control:

142
Vendor appraisal and rating for quality
Ensuring that information regarding quality requirements, parameters and procedure
for quality control are communicated to the suppliers at the time of soliciting bids and
clearly spelled out in purchase orders/contracts.
Procedure for replacement of defective supplies.
Approval of samples prior to bulk supplies. Clear cut provisions in the contract
regarding inspection which my be carried out at vendors works before dispatch of
materials or at buyers works after receipt of materials or reliance on quality control
process and issue of test certificate by vendors.
Role of Stores in Quality Control:
Inspection is carried out of all materials delivered to stores. This inspection must be
made against the pre-determined level of acceptability.
Supply of samples to control quality so that regular checks and tests can be made of
each delivery, thus maintaining consistency of supply quality.
Notification of rejection shall be made promptly by stores to relevant departments i.e.
Purchasing, Accounts & Production Planning etc. Supplier has also to be informed
immediately of rejection so that replacement supplies are arranged. This can be done
directly by stores or through purchase as per policy of the organization.
Holding of rejected stock in one area set-aside for this purpose till matter is resolved
with the suppliers. This shall ensure that the rejected materials are not consumed.
Correct storage of materials to ensure that materials delivered to the company, which
were accepted, should remain so and not deteriorated or damaged in the process of
storage.
Quality Control Department:
Many organizations have their own quality control department who monitor the standards and
quality of goods used and produced by the organization. The modern trend is to employ
professional quality control staff to ensure consistency of quality and output.

143
Aims and Objectives of Quality Control:
To set and monitor standards of quality for all items handled by the organization.
To eliminate possibilities of faulty production becoming distributed and sold to the
customers which might damage the goodwill of the organization
To ensure the quality and performance of all items delivered into stores from suppliers
and production sources.
Rejections:
If the goods are found to be below the specification standards set by the organization, they
shall not be accepted into the stores. This is called rejection of supplies.
Inspection:
A buyer is concerned with the three aspects of inspection:
a) Incoming Inspection:
Items are inspected at buyers works on delivery according to specifications contained in the
order and specified Accepted Quality Level (AOL). Items that pass inspection shall be
received into the stores. Rejected items shall be dealt with, in one of the following ways:
Returned to suppliers for rectification or replacement.
Items may be corrected by the purchaser and supplier charged with the cost.
The rejected items are usable although not strictly in accordance with the
specifications. The buyer may negotiate a price reduction.
One major disadvantage of incoming inspection is that a tendency may emerge for some
suppliers to rely on purchasers inspection. Another disadvantage of inspection after receipt is
the payment
of freight charges, if rejected goods are sent back to suppliers, especially in case of
heavy/bulky materials or the items where transportation cot is one of major component of
total cost of the
goods, there may be a dispute as to who shall bear the to and fro cost of transportation (items
like bulk industrial chemicals, heavy machinery and equipments etc)

144

b) Source Inspection (Inspection at suppliers works also known as Pre-dispatch

Inspection)
Such inspection is carried out at suppliers works, which may be final product or may be stage
inspection for vital components and equipments.
The purchaser may arrange inspection either through resident inspector at suppliers plant or
arrange to depute an inspection engineer after getting a call from the suppliers. The buyers
may also consider third party inspection and engage some specialized agency for inspection,
if in- house expertise not available.
After having carried out the inspection a report is issued by the inspector and if the goods are
found out acceptable, clearance is given for dispatch. If the source inspection is carried out,
incoming inspection at site shall only be visual to trace out, damages if any, in transit.
Advantages:
Reduction in the time period of rejection, return. Reworking and re-delivery.
Suppliers specialized inspection and test equipments can be utilized which may not be
available with the buyer. Such inspections become more meaningful in context of
quality assurance.
If payments are made against dispatches, buyers funds are not locked up in rejected
goods.
By conducting stage- by- stage inspection in process of manufacturing, quality
assurance is enhanced.
For bulk materials where cost of transportation is a major component of cost, disputes
for bearing to and fro fright charges are avoided.
Disadvantages
Source inspection is more costly than incoming inspections
Suppliers responsibility for meeting quality requirement may be reduced i.e.
responsibility is transferred to purchaser rather than retained by the supplier.

145
If buyers inspector is not posted at suppliers works, such inspection is delayed which
effects timely availability of goods. For any delay in inspection, supplier also suffers
because his funds are blocked and he cannot claim payment, until goods are inspected,
accepted and dispatched.
c) Source Control (Quality Control by Suppliers)
The supplier is made wholly responsible for supplying a product in accordance with a given
specifications and reporting test results to purchaser by furnishing test certificate or in such a
way that reliance can be placed on suppliers assurance of conformity of quality standards.
Ford Motor Company Limited introduced a Supplier Quality Assurance Program with the
following primary objectives:
To establish recognition that each supplier is fully responsible for quality of his
product.
To establish a quality system which incorporates corrective action at the point of
manufacturing.
To assist suppliers in attaining self- sufficiency in fulfilling this responsibility.
A suppliers quality assurance record is kept in respect of each supplier and those who are
found unsatisfactory, disciplinary action such as down grading, removal from approved
suppliers, list is considered.
Under this scheme of inspection, the test certificates provided by the supplier are scrutinized
and visual incoming inspection is carried out to detect damages, if any, in transit.
Independent Quality Assurance:
Independent quality assurance and certification is of great benefit to both buyers and sellers.
One example of independent assurance is the scheme operated by Quality Assurance
Department of BSI using KITEMARK as approved symbol which is an assurance that
products on which it appears have been manufactured under a scheme of control approved by

146
BSI (same as ISI marked products in India). This can eliminate much of the inward inspection
and quality control procedure since a buyer can be confident that independent inspection,
testing and approval has already taken place. In case of any depute BSI/BIS can be referred to
and their independent opinion obtained.

SPECIFICATIONS
Specification is a description of the item, its dimension, analysis, performance and other
relevant characteristics in sufficient details to ensure that it will be suitable in all respect for
the purpose for which, it is intended for.
ISO has defined it as under:
A specification is a concise statement of a set of requirements to be satisfied by a
product, a material or a process indicating wherever appropriate, the procedure by
means of which it may be determined whether the requirements given are satisfied.
Note
l. A specification may be a standard, a part of standard or independent of standard.
2. As far as practical, it is desirable that the requirements are expressed numerically in
term of appropriate unit together with their limits
(Resolution No. 34150 Council 1963)
Types of specifications:
Dimensional and material specifications.
Performance specifications
Blue prints.
Development of balance specifications:

147
Design consideration of function
Sales consideration of consumer acceptance
Manufacturing consideration of economical production
Procurement consideration of market, materials availability and price.
Points to be taken into consideration while preparing specifications:
Over specification should be avoided. Ask for quality, performance, which is essential
for the job. It becomes very difficult to purchase materials if specifications are too
rigorous.
Specifications should not be written around a particular product. This limits the
competition.
As far as possible, pay attention to convenience in handling and storage.
For inspection of materials, specifications ought to indicate what tests are to be
carried.
If any special marking or packing is needed, include instructions in the specifications
Specifications should be clear and complete to avoid references first between
Materials Department and indentors and subsequently between Materials Department
and suppliers. Help to reduce lead-time and inventory level.
Specifications should be revised as conditions change.
Balanced specifications satisfy following needs of Materials Management Functions:
Purchasing & manufacturing requirements of availability and workability of materials.
Inspection responsibility to test the materials for compliance with the specifications.
Stores ability to receive, store and issue of materials.
Purchase ability to procure materials without difficulties and with adequate
competition from reliable sources of supplies.
Production and purchase ability to substitute materials when such actions are required.
Organizations requirement of suitable quality materials at lowest overall cost.

148
Advantages of specifications:
Drawing up specifications needs careful review, which at times results in
simplification and variety reduction and often reveals opportunity of using less costly
items. Both results in economies.
Facilitate procurement by inviting bids:
-

Vendors properly understand requirements.

Generate competition for bidding lowest rates

Quality of goods is maintained

Buying decision on price basis or other consideration become easy.

Specifications ensure that commodities specified will be suitable for intended purpose
when put to use.
Materials are of a consistent quality at all times.
Facilitate purchases of identical materials from more than one source.
Purchasing to specifications gives the buyers inspection department an exact standard
against which to measure the incoming materials.
Specification buying is a necessary step towards industry-wise standardization, which
promises substantial savings.
Some of the disadvantages of specification buying:
Add to responsibility of purchaser to precisely state what he wants and suppliers
obligations extend only to complying those conditions. If the products do not meet
intended use, the liability rests with the buyer. This however, does not apply to
performance specifications.
Cost of inspection is greater than purchasing items by brand name.

149
Tendency of becoming over refined in preparing specifications and consequently
paying more than necessary for items.
Characteristics of the item are permanently set unless specifications are reviewed
periodically; chances are to miss product improvements.

Just in Time Purchasing and Inventory Management

The JIT Philosophy:
IBM describes JIT as Continuous flow production. Hewlett Packard calls it Zero
inventory production. General Electric describes the philosophy as Management by
sight.
There is measure of confusion about what the JIT concept really involves, because it covers a
wide range of applications. For instance, JIT is dependent on reliable suppliers, total
preventive maintenance, under- capacity scheduling and total quality control. By integrating
all the various descriptions of the philosophy the following definition of JIT could be
considered as appropriate and adequate:
The disciplined and continuous problem solving approach which eliminates all forms of
wastage by employees, suppliers, product design and process design in order to deliver
all forms of goods and services at the right place and time since the whole business takes

150
part creatively in the progressive elimination of all non- value adding activities and
through the application of sound operations management principles and guidelines for
total quality control. The JIT philosophy is based on two pillars, namely respect for
people and elimination of waste.
The core of this Japanese approach to inventory control is its Just- in- Time Characteristics. A
close examination reveals that it is much more than merely an inventory management system,
but is a management philosophy that has an influence over various areas of management. The
philosophy is very simple and extremely effective. In short JIT means following:
Delivering a product or service to the internal or external customer at the specific time
that it is required. JIT can therefore be regarded as customer need. It is important to
note that the next process of manufacture as a customer. Satisfying customer,
therefore, begins internally at the factory.
Producing and delivering finished products just in time for sale.

Producing/ purchasing and delivering sub-assemblies and parts just in time for
incorporation into the finished products.
Acquiring (ordering) purchased materials just in time for conversion into
manufacturing products.
JIT co-ordinates purchasing with manufacturing and manufacturing with customer demand. In
this way inventory of raw materials and parts, semi-finished products and finished product is
eliminated.
JIT Purchasing:
In the traditional flow of materials, incoming material is delayed at receiving for bulkbreaking, counting and checking and incoming inspection by user or independent Quality
Assurance Department. Work- in- progress material is delayed at numerous work- stations and
finished goods are delayed at stores awaiting dispatches to distributing centers and customer

151
as per advice of marketing department. JIT purchasing is directed towards reduction of waste
that is present at receiving and incoming inspection; it also reduces excess inventory, poor
quality and delay. This waste is present in virtually all production processes and procurement
is critical function in removing the waste and making JIT work. Every movement material is
held, should add value and every movement of material should add value.
Characteristics of JIT Purchasing:
Market conditions:
There is no scarcity of requisite goods and buyer market prevails i.e. there are many
suppliers for particular goods.
Prices of requisite goods are stable in the market.
Goods are indigenously available or there are no restrictions on imports and foreign
currency.
Suppliers:
Few reliably developed suppliers.
Suppliers are nearby.
Cluster of remote suppliers who strictly follow delivery schedule.
Vigorous evaluation of vendors performance and active use of analysis to enable
desired suppliers become/stay price competitive.
Repeat business with same supplier who has no reason for complaint.
Competitive biddings mostly limited to new materials including minimal/rare use of
informal bidding (open tender/Press tender)
Communication between buyer and suppliers has to be optimized. Computer
communication is not unrealistic concept.
Supplier encouraged extending JIT buying to their suppliers.

152
Quantities:
Steady output rate a desirable pre-requisite
Frequent deliveries in small quantities.
Maximum use of stockless/ consignment buying.
Long-term contract agreement.
Minimal call-off release order paper work.
Call-off release quantities variable from release to release but fixed for whole contract
term.
Little or no permissible overage or underage of receipts.
Suppliers encouraged to package in exact quantity in durable- returnable containers to
eliminate material cluster, reduce damages, provide easy stacking and simplify loading
and unloading.
Suppliers are encouraged to reduce their production lot size (or store unreleased
materials)
Quality:
Minimal product specifications imposed on supplier.
Use of standard items encouraged.
Help supplier to meet quality requirements.
Close relationship between buy and sellers quality assurance people.
Suppliers encouraged using process control charts instead of sampling inspection.
Zero defects mandatory due to zero inventory concepts.
Transportation/Shipping:
Scheduling of inbound freights:

153
Gain control by use of company owned or contract shipping, contract warehousing,
and trailers for freight consolidation/storage where possible- instead of using common
carriers.
Goals of JIT Purchasing:
1.

Eliminate unnecessary activities:

For instance, receiving and inspection activities are unnecessary under JIT. If the
purchasing had been effective in selecting and developing the suppliers, the purchased
items can be received without formal counting, inspection and testing procedures. To
do the job well, the purchasing staff requires full support from other sections i.e.
production can contribute by providing accurate, stable schedule, adequate lead time
for engineering changes to be implemented and time to develop reliable suppliers.

2.

Eliminate in-plant inventories:

Virtually no raw material inventory is necessary if materials of requisite quality
standards are delivered where and when they are required. Raw material inventories
are necessary only if availability and suppliers are undependable. Similarly, parts or
components for processing at some intermediate stage should be delivered in small
lots to the user department as needed. Reduction or elimination of inventory allows
with other aspect of production process to be observed and corrected. Inventories tend
to hide problems.

1.

Eliminate in-transit inventories:

In-transit inventory reduction can be done by encouraging suppliers and prospective
suppliers to locate near the buyers plant. The shorter the flow of materials in pipeline, the less inventory. Another way to reduce in-transit inventory is to encourage
stockless/ consignment buying. Under these arrangements supplier maintains title of
the inventories and

154
buying organization has no financial liabilities for inventory of goods being
purchased. The goods are located at buyers place or suppliers place (if supplier is
very nearby). For instance an assembly plant may find a hardware supplier who is
willing to locate its warehouse where the user currently has its stock- room. In this
manner, when hardware is needed, it is as near as stock room. The supplier raises the
periodical invoice for the quantity drawn for use. From such stocks, suppliers may
even meet requirements of other smaller customers.
2.

Quality and reliability improvements

This is done by reducing the number of suppliers and increasing long- term
commitment to the supplier i.e. treats them as a business partners. To obtain improved
quality and reliability, suppliers and purchasers must have mutual understanding and
trust. To achieve deliveries only when needed, in the exact quantities, also requires
perfect quality or as it is known as zero defects and of course, both the supplier and
delivery system must of excellent.

Suppliers concern:
Purchasing works with production personnel and suppliers to build an organization conducive
of JIT philosophy and overcomes concerns that a supplier may have about it. A successful
implementation of JIT purchasing requires that these concerns be overcome, which are as
under:
Desire for diversification
Many suppliers wish to diversify the range of their customers and do not want them to
be tied up with one customer on a long- term contract. The suppliers perception is that
their marketing risk is reduced if they have a variety of customers.
Poor customer scheduling:
Many suppliers have little faith in purchasers ability to convert the orders to a smooth
coordinated schedule. The requirements of long term contracts are found to be

155
inflated, request for releases are not matching with these figures and as a result of this
they are burdened with high inventory of goods, apart from other problems.
Engineering changes:
Frequent engineering changes with inadequate lead- time for suppliers to implement
tooling and process changes play havoc with JIT. Purchasing personnel must find
ways to insulate their prospective JIT suppliers from these changes.
Quality assurance:
Many suppliers do not consider production with zero defects realistic.
Small lot size:
Suppliers often have processes that are designed for large lot size and they see
frequent delivery in small lot as a way to transferring holding cost to the supplier.
Proximity:
Depending upon the customers location, frequent deliveries in small lots may be seen
as economically prohibitive.
Purchasing may have to solicit the help of its own production personnel to assist suppliers in
overcoming many of the above objections, but there is no doubt that those firms that do not
develop JIT suppliers will soon be at a distinct disadvantage both domestically and
internationally. For those who remain skeptical of the use of JIT, it may be pointed that
virtually every restaurant in the world practices JIT, and with minimal staff support.
JIT Inventory Management:
The Japanese believe that if the underlying reasons for keeping inventory can be eliminated,
keeping inventory can also be eliminated to a large extent. The reason for keeping inventory is
due to the fact that there are uncertainties in production process. Instead of being one
smoothly flowing and integrated process, the factory creates free- landing sub- system that
delivers components at various rates. The parts and raw materials do not arrive at the
assembly department at reliable and predictable times, because the suppliers are not always

156
reliable. Machinery and tools fail at awkward times and a lack of competent trained
employees also contributes to uncertainties in production process.

Because of above reasons, inventories in production and distribution system often exist just
in case something goes wrong i.e. just in case some variation from production plan occurs. In
such a concept, inventory management system does not mean just in time but just in case.
JIT inventory is the minimum necessary inventory to keep a perfect system running. In JIT
inventory management system, the exact amount of goods arrives at the movement they are
needed, not a minute before or after the units are required.
To achieve JIT inventory, we must reduce variability caused both internal and external factors.
If the inventory exists because of variability in the process, which is the case most of time, we
must eliminate variability. Inventory hides variability- a polite word for problems. If we can
get rid of variability, there is need for very little inventory.
Following are some of the reasons for variability:
Employee, machine and suppliers produce unit that do not conform to standards, or
late or not the proper quality or
Engineering drawings and specifications are inaccurate or
Production personnel try to produce before drawings or specifications are complete or
Customer demands are unknown.
The variability described above may warrant the organization hold various types of
inventories in the form of raw materials, work-in-progress, MRO (Maintenance, repair and
operation supplies) and finished goods.
Raw material inventories are used to de-couple supplies from the production process.
However, the preferred approach is to eliminate suppliers variability in quality and quantity
or delivery time and make available materials of quality standards where and when they are
needed.

157
Some work- in- process inventory may exist because of cycle time of manufacturing a
product. However, reducing cycle time helps in reducing work-in-process inventories. Often it
is not difficult.
Figure below shows, most of the time a product is being made it is in fact sitting idle. Actual
work time or run time is small portion of the materials flow time.

OTHERS

INPUT

WAITING
TIME
QUEUE

SETUP
TIME

MOVE
TIME

RUN
TIME

TIME

OUTPUT

LEGITIMATE LEAD TIME CATEGORIES

CYCLE TIME
MRO inventories exist because need and timing for some maintenance and repair of
equipment is unpredictable. While the demand for some MRO inventories is a function of
maintenance schedule, over MRO demands must be forecasted. Similarly some finished
goods inventories may be kept as customer demand for a given period may not be known or
may be fluctuating.
For the above reasons, inventories do exist. The Just-in- case approach to inventory
management deals variability by de-coupling the various stages of process. De-coupling is
accomplished by increasing inventories, until they are adequate to allow for all types of
variability. If variability is large, we end up with huge amount of inventories.
Another and better way is to get of variability and problems. Figure as below shows a stream
full of rocks. The water in the stream represents inventory flow and the rocks represent
problems such as late deliveries, machine break- down, and poor employee performance. The
water level in the stream hides variability and problems. Because problems are hidden by
inventories, they are sometimes hard to find:

158

Inventory covers the problems;

Problems damp up inventory

Quality Variability
In- transit delays
Machine break- down
Long set ups
Large lot sizes
Inaccurate engineering drawings
Employees attendance variable

MATERIAL FLOW

(A)
SMOOTH MATERIAL FLOW

(B)
Therefore, to achieve just in time inventories, management must begin by reducing them.
Reducing the inventory uncovers the rocks that represent the variability and problems
currently tolerated. With

159
reduced inventory, management chips away at the exposed problems until the stream is clear
and than make additional cuts in inventory, chipping away at the next level of exposed
problems. Ultimately there will be no inventory and no problems (variability).
Perhaps the manager who said, Inventory is the root of operation management evils was not
far from the truth. If inventory is not evil, it tends to hide the evil at great cost.
Just- in- Time Production:
JIT production has come to mean elimination of waste, synchronized manufacture and a very
small inventory. The key of JIT production is small lot sizes to standards. Reducing the size of
batch can be a major help in reducing inventory and holding cost thereof. When the inventory
usage is constant average inventory is sum of maximum inventory plus minimum inventory
divided by two as under:
Average Inventory

Maximum Inventory = Minimum Inventory

2

Maximum inventory is linked with re- order quantity and if this quantity is dropped, average
shall also reduce.
The smaller the lot size, the fewer problems are hidden and when these problems are
identified and solved, the organization becomes more efficient. We shall therefore decrease
total inventory and attendant lot sizes. One way to achieve small lot size is to move inventory
through the shop only as needed rather than pushing it on to the next work- station, whether
they are ready for it or not. When the inventory moved only as needed, it is referred to a pull
system and ideal lot size is one. The Japanese call this system KANBAN. The goal of both
KANBAN and MRP are the same i.e. improved customer services, inventory turn- over and
productivity. Unlike MRP, KANBAN is not computerized, it is rather manual. MRP tends to
be forward looking whereas KANBAN is backward looking i.e. replenishing materials when
it is needed.

160
KANBAN
KANBAN is a Japanese word for card In their efforts to reduce inventory, the Japanese use
system that pull inventory through the shop. Often a card is used to signal the need for more
materials, hence the name KANBAN.
The need for next batch of materials may signal the need for movements of existing inventory
from the work- station to the next or the need to produce parts, sub-assemblies or assemblies.
The card is the authorization for next batch. The system has been modified in many facilities
so that even though it is called KANBAN, the card does not exist. In some cases an empty
position on the floor is indicated that the next lot is needed. In another case, some sort of
signal, such as flag or rag is used to signify that it is time for the next batch.
The batches are typically very small, usually a matter of few hours worth of production, such
a system requires tight schedules and frequent set ups of machines. Small quantities of every
thing must be produced several times a day. Such a system must run smoothly because any
shortage has an immediate impact on the entire system. KANBAN places added emphasis on
meeting schedules and reducing the time and cost required by set up.
Whether it is called KANBAN or not, the advantages of small inventory are significant. Small
batches allow a very limited amount of faulty materials. Numerous aspects of inventory are
bad, and only one aspect i.e. availability is good. The bad aspects are obsolescence,
deterioration, occupied space, committed assets, increased insurance, increased material
handling and increased accidents etc. The sum of these costs is known as inventory holding or
carrying costs.

161
Professional Ethics of Purchasing:
With the opening of economy, the market conditions have become very competitive and result
oriented. There is pressure for sales; pressure to compromise, pressure to succeed in an
environment of both internal and external competition. The pressure which the market place
exerts on purchasing department and an individual buyer make it essential that top
management, purchasing and supply managers, buyers and all other members of the
procurement system recognize and understand both the professional and ethical standards
required in performance of their duties.
In the context of ethics Mahatma Gandhi, Father of our Nation, mentioned the seven ills of
the society which should be avoided: (a) Politics without Principles, (b) Wealth without Work,
(c) Pleasure without Conscious, (d) Knowledge without Character (e) Science without
Humanity, (f) Commerce without Morality and (g) Worship without Sacrifices.
This is particularly true in context of purchasing, which is largest spending department of an
organization and purchasing people are exposed to temptations and allurements. How to avoid
these temptations is a difficult question to answer. Professional ethics can help to shape the
moral character to its best. In the relentless pursuit of accumulation of wealth, one hopes that
Oliver Goldsmiths words ill fares the land, to hastening ills a prey, where wealth
accumulates and men decay does not come true.
Ethics are the guidelines or rules of conduct by which we aim to live. Organizations, like
individuals, have their own ethical standards and frequently, ethics codes (Such ethics code
may be in the form of written document or may be conventional known to its members). Its
action and action of its employees reflect the ethical standards of an organization, not by
pious statement of intent put out in its name. The character of an organization is a matter of
importance to its employees and managers, to those who do business with it as customers or
suppliers, and to those who are considering joining it in any of these capacities.
Ethics is a science of conduct. Conduct in this context means conscious and purposeful action
or actions directed to an end. Purchasing ethics consider the principle on which people

162
habitually act and, in business may be considered as an extension of commercial practices and
rules which the majority of business recognize as essential to good, continuing relationship.
Ethics represent the eternal and prevalent moral standards, personal values, corporate codes of
conduct and are generally part of the cultural traditions of the country.
Ethics is a philosophy of life and based on the principle, do unto others as you would like
others to unto you. Ethics try to set standards in absolute terms, as ethical behavior gets a
man respect, social recognition, moral strength and internal satisfactions. The personal
characteristics of the buyer will largely determine, what other people think of him. The
personal ethics are derived from well-set moral standards and must be on higher plane than
business ethics, if there is to be improvement and must be pulled up but not pushed up. The
purchasing people have not only to build their reputation, but also must appreciate that the
reputation of their organization depends on their thoughts, actions and deeds.
People who buy on behalf of an organization cannot afford anyone to believe that their buying
behavior is not completely ethical. Buying people are exposed to many temptations and they
have to be honest and follow sound ethical practice. A buyer can purchase everything but he
cannot buy reputation or honesty or integrity, which have to be built by professional ethics,
moral character, wisdom, reliability etc.
The importance of ethics in purchasing
A business organization has two main windows to the outside world- its purchase department
and its marketing department. The activities of these two departments are extremely visible
and very important in shaping the perceptions of outsiders and building its reputation. Here
we are concerned with the activities and with the behaviour of organizations materials
personnel. The activities must be above board.
A research study conducted by an author showed clearly that purchasing people do indeed live
in glass houses The author concluded that the examples set by the purchasing management
personnel is critical in determining how ethical behaviour will be defined, implemented, and
handled in the organization when problems arise. The points to remember are:

163

The buyer is the representative of his organization in its dealing with the suppliers.
Sound ethical conduct in dealing with suppliers is essential to the creation of supplier
s goodwill.
The buyer himself is probably more subject to temptations to act unethically than most
other executives.
Ethical practices help the buyer in taking impartial decisions in the best interest of his
profession and the organization.
Ethics also help to develop a good environment in buying department of the
organization. If bad examples are there, those too are followed by many, as a poet
rightly says Wronged shall he live, insulted and oppressed who dares be less a
villain than the rest:
Factors in Ethical Conduct:
Ethics are fundamentally personal i.e. concerned with the behavior of individual which,
however, is influenced by the norms of environment and peer groups to which a person
belongs.
As per an American study, the ranking of factors, which contribute most to the ethical and
unethical behaviors are as under:
Factors determining Ethical Decisions:
Factors
The individuals personal code of behavior
The behavior of persons superior in the company
Ethical Climate in the industry
Formal Company Policy
Behavior of persons equals in the company

Av. Rank
1.5
2.8
2.9
3.8
4.0

Factors determining Unethical Decisions:

Factors
The behavior of companys superiors in the company
Ethical climate in the industry
The behavior of persons equals in the company

Av. Rank
1.9
2.6
3.1

164
Lack of company policy
Personal financial needs

3.3
4.1

From the above, it is clear that an important deterrent of both ethical and unethical conduct is
the behavior of individuals superiors. While this cannot be used in defense of unethical
behavior, it is yet important for a manager to recognize that his conduct will influence that of
his subordinates.

Written Code:
In many organizations, written codes in the form of policy statement, rules or guide-lines are
issued to assist the purchasing personnel to decide how to action a given situation e.g. receipt
of gifts and acceptance of hospitality. Many professional institutions/associations have also
issued code of conduct for their members. These codes help in creating a climate conducive to
ethical functioning. They remind the buyer that he should take care to be scrupulously ethical
and also the standards to attain. Research has shown clearly that written policies dealing with
ethical issues have a strong positive influence on the behavior of firms purchasing
professionals.
Studies have further indicated that companies, which adhere to a set of ethical standards, are
healthier in the long run
.
Ethic Training & Professional Training
Professionals in Materials Management and other related areas should periodically undergo
training with respect to the organizations ethical and professional standards. Such training
programs could be imparted with assistance of top management and expert resource persons.
Although such training cannot address all issues but can certainly increase the
sensitivity of those attending. All personnel in the purchasing system shall respect their
roles as representatives of their employer and must represent the best interest of their
organization.

165
Materials Managers shall also ensure that their personnel receive training on current thinking
and techniques in the area of materials requirement planning, source selection (tendering),
pricing, cost analysis, negotiation, buyer-seller relations as well as ethical and professional
standards.
The area of professional training become more critical and important as a substantial number
of buyers are being asked to perform tasks for which they have received little current training
including training in the area of ethical and professional conduct.
Business Gifts:
Three most common policies with regard to business gifts from supplier are:
Buyers are forbidden to accept gifts of any kind and those received must be returned.
Buyers may retain gifts that are clearly of an advertising nature i.e. calendars, diaries,
pens
Buyers are allowed to decide for themselves whether a proffered gift is an appreciation
of cordial business relationship or an attempt at commercial bribery.
The last policy regards purchasing staff, as individual capable of distinguishing a gift from a
bribe- where the buyers are given some discretion as above, they should consider:
a)

The value of the gift.

b)

The motive of the donor i.e. whether the gift is token of appreciation or a bribe

c)

The manner in which it is offered i.e. openly or surreptitiously

d)

Whether any strings attached.

e)

What impression will the receipt of the gift make on subordinate and colleagues,
bearing in mind the human propensity to think the worst

f)

What would be the employers reaction if the receipt for the gifts were brought to
his notice?

g)

Weather the buyer can satisfy himself that the gift will not influence his
objectivity in dealing with suppliers.

Where there is an element of doubt on any of the above points the buyer will be wise to refuse
acceptance.

166
Gifts, which are intended to influence buying decisions, have no place in professionally
managed Material Management Department. In most countries commercial bribery is a
criminal offence.

Business Meals
Sometime during the course of business, it may be appropriate to conduct business
during meals

Such meals shall be for a specific business purpose.

Frequent meals with the same supplier shall be avoided

The purchasing professionals shall be in a position to pay for the meals as

frequently as the supplier. Purchasing professionals are provided budget for
this business activity. His permits buyer to reciprocate with marketing
executives of suppliers, thus eliminating any suspicion of undue influence.

Meals with marketing people customarily are not considered gifts for the purpose of
influencing decisions. Traditionally they are considered to be a means of providing more time
for the buyer and seller to discuss business problems. Beyond this point, the issue of undue
influence may be raised. It is for this reason that management in many organizations prohibits
their purchase executives from accepting any gift other than a simple meal.
Treatment to the suppliers
It is one of the objectives of purchasing executive to promote mutually acceptable business
relationship with all suppliers. Affording all supplier representatives the same courtesy and
impartiality in all phases of business transaction shall enhance the reputation and good
standing of the employer, the purchasing profession and the individual. Indication of
rudeness, discourtesy, or disrespect in the treatment of a supplier will result in barrier to free
and open communication between buyer and seller, and ultimately in a breakdown of the
business relationship.
In addition to courtesy, a purchasing professional should extend the same fairness and
impartiality to all legitimate business concerns that wish to compete for orders natural and

167
even desirable to build long-term relationships with suppliers based upon a history of trust
and respect. However, such relationship should not cause a purchasing executive to ignore the
potential to establish similar working relationship with new or previously untested supplier.

Ethical Code of Conduct of Indian Institute of Materials Management

a)

To consider first the total interest of ones organization in all transactions without
impairing the responsibilities and dignity to ones office

b)

To buy without prejudice, seeking to obtain the maximum ultimate value for each
rupee of expenditure.

c)

To subscribe and work for honesty and truth in buying and selling, to denounce all
forms and manifestations of commercial bribery and to eschew anti-social
practices.

d)

To accord a prompt and courteous reception, so far as conditions will permit, to all
who call up on legitimate business missions, and

e)

To respect ones obligations and those of ones organization consistent with good
business practices.

The Ethical Code of Institute of Purchasing & Supply, UK:

Introduction:
1. In applying to join the institute, members undertake to abide by Constitution,
Memorandum and Articles of Association, Rules and By-laws of the Institute. The
code set out below was approved by the Institutes Council on 26 th Feb. 1977 and is
binding on members.
2. The cases of members reported to have breached the code shall be investigated by a
Disciplinary Committee appointed by the Council, where a case is proven, a member
may, depending on the circumstance and gravity of the charges, be admonished,
reprimanded, suspended from membership or removed from the list of members.

168
Details of cases in which members are found in breach of code will be notified in the
publication of the Institute.

Precepts:
3. Member shall never use their authority or office for personal gains and shall seek to
uphold and enhance the standing of the Purchasing and Supply profession and the
Institute by:
(a)

Maintaining an unimpeachable standard of integrity in all their business

relationship both inside and outside the organization in which they are
employed

(b) Fostering the highest possible standards of professional competence amongst those
for whom they are responsible.

Optimizes the use of resources for which they are responsible to provide the
maximum benefit to their employing organization.

(d)

Complying both with the letter and spirit of:

i)

The law of the country in which they practice.

ii)

Such guidance on professional practices as may be issued by the

Institute from time to time.

(iii)
(e)
Guidance:

Contractual Obligations

Rejecting any business practice which might reasonably be deemed improper

169
4.

In applying these precepts, members shall follow the guidance set out below:
a) Declaration of Interest: Any personal interest, which may impinge or
might reasonably be deemed by other to impinge on a members
impartiality in any matter relevant to his or her duties should be declared.

(c) Confidentiality and accuracy of information The confidentiality of information

received in the course duty should be respected and should never used for personal
gains, information given in the course of duty should be true and fair and never
design to mislead.
c) Competition: While bearing in mind the advantages to the members
employing organization of maintaining continuing relationship with a supplier,
any arrangement that might, in the long term, prevent the effective operation of
fair competition, should be avoided.
d) Business Gifts: Business gifts, other than items of very small intrinsic value
such as business diaries or calendars should not be accepted.

e) Hospitality: Modest hospitality is an accepted courtesy of business

relationship. However, the recipient should not allow him or herself to reach a
position whereby he or she might be or might be deemed by others to have
been influenced in making a business decision as a consequence of accepting
such hospitality, the frequency and scale of hospitality accepted should not be
significantly greater than the recipients employer would be likely to provide in
return.
f) When it is not easy to decide between what is and is not acceptable in terms of
gifts or hospitality, the offer should be declined or advice sought from the
members superior.

170
4. Advice on any aspect of the precept and guidance set out above may be obtained on
written request to the Institute.

Principles and Standards of Purchasing practices:

The following principles are advocated by the National Association of Purchasing Agents
of America:
LOYALTY TO HIS COMPANY
JUSTICE TO THOSE WITH WHOM HE DEALS
FAITH IN HIS PROFESSION
From these principles are derived the NAPA standard of purchasing practices:
1.

To consider, first, the interest of his company in all transactions and to

carry out and believe in its established policies

2.

To be receptive to competent counsel from his colleagues and to be

guided by such counsel without impairing the dignity and responsibility
of his office.

3.

To buy without prejudice, seeking to obtain maximum ultimate value for

each dollars expenditure.

4.

To strive consistently for knowledge of materials and processes of

5.

To subscribe to and work for honesty and truth in buying and selling, and
to denounce all forms of manifestations of commercial bribery

6.

To accord a prompt and courteous reception, so far as conditions will

permit, to all who call on a legitimate business mission.

171
7.

To respect his obligations and to require that obligations to him and to his
concern be respected, consistent with god business practice.

8.

To avoid sharp practices

To counsel and assist fellow purchasing agents in the performance of

their duties, whenever occasion permits.

10.

To co-operate with all organizations and individuals engaged in activities

designed to enhance the development and standing of purchasing.

The following code of Ethics of National Institute of Government Purchasing (NIGP,

USA) is very relevant to Government and Public Sector purchasing:
The Institute believes and it is a condition of membership that the following ethical principles
should govern the conduct of every person employed by any public sector procurement or
materials management organization.
1.

Seeks or accepts a position as head or employee only when fully in accord with the
professional principles applicable thereto, and when confident of possessing the
qualifications to serve under those principles to the advantage of the employing
organization.

Believes in the dignity and worth of the services rendered by the organization and the
societal responsibilities assumed as a trusted public servant.

3.

Is governed by the highest ideals of honor and integrity in all public and personal
relationships in order to merit the respect and inspire the confidence of the
organization and the public being served.

4.

Believes that personal aggrandizement or personal profit obtained through misuse of

public or personal relationships is dishonest.

5.

Identifies and eliminates participation of any individual in operational situations where

a conflict of interest may be involved.

6.

Believes that members of the Institute and its staff should at no time or under any
circumstances, accept directly or indirectly, gifts, gratuities or other things of value
from suppliers which might influence of appear or appear to influence purchasing
decisions.

172
7.

Keeps the governmental organization, through appropriate channels, on problems and

progress of applicable operations by emphasizing the importance of the facts.

8.

Resists encroachment on control of personnel in order to preserve integrity as a

Professional manager. Handles all personal matter on the merit basis. Politics, religion,
ethnicity, gender and age carry no weight in personnel administration in the agency
being directed or served.

9.

Seeks or dispenses no

personal favor. Handles each administrative problem

objectively and empathetically without discrimination.

10.

Subscribes to and supports the professional aims and objectives of the National
Institute of Government Purchasing.

Best Practices and Ethics Sources of Preventive Vigilance in Purchasing

Avoid sharp practices:
The term sharp practice is illustrated as evasion and indirect misrepresentation, just short of
actual fraud. These unscrupulous practices focus on short- term gain and ignore the long- term
implications for a business relationship. Some examples of sharp practices are:
A buyer talks in terms of large quantities to encourage a price quote on that basis.
However, the forthcoming order is smaller than the amount on which the price was
based. Smaller order does not legitimately deserve the low price thus quoted.
Alluring one or more suppliers to have information about their competitors quotation
and allowing such suppliers to re-quote.
Lying to or grossly misleading a salesperson in a negotiation
An attempt is made to influence a seller by leaving copies of bids or other confidential
correspondence, where suppliers can see them.
Competitive Bidding:
Purchasing professional shall respect and maintain integrity of the competitive bidding
process:
Invite only firms to whom you are willing to award a contract to submit bids.

173
If there are qualifying requirements- those shall be formulated in such a way that
sufficient suppliers fulfill.
Allow workable period to bidders to make request for tender documents and
subsequently to send the offers.
Normally award a contract to the lowest responsive, responsible bidder. If the buyer
anticipate the possibility of awarding to other than the lowest bidder, then he or she
must notify to the prospective bidders that other factor will be considered (ideally,
these factors will be listed)
Keep competitive price information confidential.
Treat all the bidders alike; clarifying information is given to all potential bidders.
Do not accept bids after the announced bid closing time and date until they are delayed
due to postal deliveries.
Do not take advantage of apparent mistake in the suppliers bid.
Avoid re-tendering as far as possible.
Avoid frequent negotiation- Negotiation shall be resorted under exceptional conditions
The buyers shall always remember the following two important policies of competitive
bidding:
1.

Buyers be willing to do business with every supplier from whom they

solicited a bid. The resultant policy states that supplier requested to bid must
be determined in advance as qualified supplier.

2.

Whenever lowest bidder does not receive the contract buyer is obliged to
explain reason.

In order to take decisions to the best interest of his organization, a buyer must satisfy
himself that the following conditions of competitive bidding must be fulfilled:

174
At least two qualified sources (preferably three in Govt. buying) have responded to the
solicitation.
Proposals are responsive to the buying firms requirements.
Suppliers competed independently for the award.
The supplier submitting the lowest offer, doe not have an unfair advantage over its
competitors.
The lowest evaluated price is reasonable.
Also remember the following Pre-requisites of Competitive Bidding:
Rupee value of specific purchase must be sufficient to justify the expenses both to
buyer and sellers that accompanies this method of source selection and purchasing.
Specification of item or the services to be purchased must be explicitly clear to
both the buyer and sellers.
Market must consist of adequate number of sellers.
The sellers that make the market must be technically qualified and actively want
the contract and therefore be willing to quote competitively.
The time available must be sufficient
The following are some of the tips that may help in strengthening ethical buying policies.

Adhere to corporate/departmental code.

Do not get suppliers consent under duress and trust them.
Give fair treatment to all suppliers. Show consideration to their difficulties. Do not
exploit sellers weaknesses. When the supplier or their representative call up for
business, accord a prompt and courteous reception and avoid as far as possible
keeping them waiting for long.

Avoid

personal or for other employees of the organization, purchases from the

supplier.

Avoid switching off quantity changes, postponed, cancel order with adequate notice.

175

Fix a ceiling on gifts, hospitality, parties and festival presents.

Avoid

sharing of discussions with one vendor, with other vendors and maintain

confidentiality of information.

Avoid creating cleavage between suppliers.

Discourage revision of offers after receipt of tenders.
Keep

specifications complete, clear and fair with drawings, documents etc.

Specifications written around a particular product limit competition.

Avoid rejections on petty grounds by converting the situation into, give or take one.
Have

buying policies consistent with companys selling policies, without giving

corporate secrets.

Observe strict truthfulness and transparency in all transactions with suppliers in every
respect.

Keep free from any obligation

to the suppliers and avoid vendors of an unethical

nature.

Answer letters from suppliers courteously and promptly and enhance corporate image.
Expedite

pre-despatch inspection, testing, sampling or inspection at site to ensure

faster payment to the supplier.

Rely on commonsense approach to problems rather then a legalistic frame.

Settle dispute on the basis of facts and fairness.
Place the orders on bidders within the validity of offer. In case validity is expired, do
not move a proposal for finalizing order, until validity is suitably extended (atleast by
the vendor (s) who are evaluated L1.

176
Do not enter into a parallel contract with two or more bidders until this requirement
was notified to prospective bidders through NIT. Also ensure that in such situation the
initially evaluated L1 bidder is in advantageous position.
Always ensure that Qualifying Requirement are not worked out to the advantage of
particular supplier (s), thus restricting competition.
Do not consider relaxation in Qualifying Requirements after release of NIT/bid
opening. If al all it becomes necessary to revise QRs, re-tendering shall be done after
approval of revised QR by competent authority and issue of fresh NIT.
Avoid seeking post bid opening clarification from the bidders. If any clarification
having impact on price is received from supplier after BOD, those shall not be
considered.

Issue amendments to purchase orders, if required to avoid delay in execution.

Expedite

return of bid money (Earnest Money) to unsuccessful bidders, security

deposit/performance bank guarantee etc to the suppliers.

Ensure payment for supplies as per provision of contract/purchase order.

Ensure prompt contract closing.
Negotiation in PSU and govt. Departments
Avoidance of Negotiation:
In order to ensure that competing bidder offer low prices, orders shall be placed on lowest
qualified bidder after bid are opened and there being sufficient response. If the organization
gains the reputation of negotiating with lowest bidder after bids are opened and evaluated then
in future bidder will tend not to offer their best prices initially, believing they may be bettered
in any subsequent negotiation. They will adopt the strategy of submitting a bid low enough to
allow them to be in any negotiation. But their initial bid may not be as low as when they are
confident that award will be made to lowest bidder without any negotiation. In view of this, a
prudent buyer shall never opt for negotiation after opening of the bids until there are
compelling and valid reasons for this.

177

In view of above and the instructions issued by Central vigilance Commissioner from time to
time, negotiation after competitive bidding shall be avoided. No price negotiation shall be
undertaken where three, techno- commercially accepted, offers are available. Order shall be
processed on L1 acceptable bidder after establishing the price reasonability.
Exceptional cases of Negotiation with L1 Bidder
However, in exceptional cases of high value contracts for plant and machinery or other critical
materials, negotiation with evaluated L1 bidder in following situation can be undertaken on
recommendations by Tender Committee and with prior approval of award approving authority
e)

Only two acceptable offers have been received against a tender and rates of
evaluated L1 bidder are quite high as compared to cost estimate or the last
purchase price, if available.

f)

The bidder have formed a cartel and rates of L1 bidder are considered
substantially higher than cost estimate or last purchase price, if available.

Negotiation with Bidder other than evaluated L1

When the material being procured is one of the critical inputs of plant and buyer may feel to
enter into parallel contracts with two or more parties. In these cases NIT and bidding
documents shall specifically stipulate this requirement so that bidders are aware before hand
the requirement of awarding parallel contract. Under these circumstances negotiation with
prior approval of competent authority shall be conducted with L2 bidder to match their prices
and conditions with evaluated L1 bidder. If the negotiation succeeds, parallel contract (s) is/ is
awarded. However if negotiation fail, further negotiation can be held with all bidders to match
their prices with evaluated L1 bidder.

178

BUDGETARY CONTROL IN PURCHASING

Budgets are one of the traditional controls of business and are in organization of all type.
Budgets are plans of action quantified in money terms for some future period of time. The
basic concept of budget is to balance expenditure with income, which need to be an on-going
process and not a yearly exercise.
Budget as such can be defined as a financial and/or quantitative statement, prepared prior to a
period of time of the policy to be pursued during that period for the purpose of attaining a
given objective.
Budgetary control implies, using budget as a basis of control for activities of an organization
and an exercise to watch closely and carefully to provide a feed-back to check operating
efficiency and to reach pre-determined targets. The institute of Cost and Management
Accountants has defined budgetary control as under:Budgetary control is the establishment of budgets relating the responsibilities of executives to
the requirements of a policy and the continuous comparison of actual with budgeted results
either to secure by individual action the objective of that policy or to provide a basis for its
revision.
A budget is derived from the plan, which have been formulated and should allow for
subsequent comparison, evaluation and control of efforts made to meet the objectives set out
in the plan. An organization budget known as master budget is comprised of subsidiary
budgets such as capital budget, financial budget, production budget, sale budget etc. A capital
budget considers the long-range requirement of building and capital equipment necessary to
make possible current operations going, keeping in view future requirement of expansion,
consistent with production needs. Financial budget provides plan of action necessary for
raising working capital and long-term financing.

179
Normally the sale budget is the starting point. Based upon sales forecast, marketing
department works out the details of estimate of sale which can be achieved during the relevant
period, broken down to products or product group.
Following the sale budget, production will review plant and manufacturing resources. The
production budget will estimate raw materials, component costs, wages and overheads in
relation to desired production level.
PURCHASE BUDGET
The purchase budget is based upon sales and production budgets. Supply function derive
materials requirement from production budget, projects prices and orders materials, phasing
deliveries in accordance with production schedule (attempting to get the materials Just-InTime). The actual sale, however, may differ from projections. The difference may not only in
total volume but also product or product range, and this could disrupt material call-off. The
longer is the budget period; more difficult it becomes to operate. In view of this, controlled
flexibility is necessary for successfully budgeting.
The purchase budget as such need to be formulated and presented in such a manner that it
allows fast consideration of the effect of changes.
Timing of purchase is important in view of cash-flow management, which needs to control the
amount of cash required during each period. Financial Management should be taken into
confidence if major deviation are made from budget either to take advantage of unusual
supply opportunity (buying higher quantities due to attractive quantity discounts from supplier
or anticipating substantial price increase shortly) or change which reduce expected
expenditure substantial (arrangements for stockless buying/ consignment buying which reduce
inventory holding). It is important that budget to performance comparisons are made promptly
to allow management to act quickly. Computers can provide comparative data on an on going
basis with benefits in control terms.

180
While formulating the preliminary program of purchase, one shall take into
consideration:
Current availability of material/components in stock
Orders placed but unexecuted for relevant production materials
Agreed stock levels, keeping in view the length of lead time, expected/past consumption
pattern and criticality of each materials
The production schedule for the period in question
The possibility of obsolesce and shelf life of materials
Seasonal availability of critical raw materials
Price trends of key materials and components in the long term
Unit price in the short term and;
Make of buy options
The task of estimating prices and price trends requires consideration of following
aspects:
Domestic or international political and economic factors which may affect prices
Labour relations and availability of labour to major suppliers.
Comparative exchange rate and level of inflation in pertinent countries
Possible changes in import duties, transit and insurance charges, dock charges etc. as they
affect goods from overseas.
Indirect effect of component price due to fluctuations of prices of raw materials to
suppliers.
The position of long term contracts as regards fixed price or price variation clauses.
The supply and demand position of materials and components.
Existence of buyer or seller market
Suppliers lead time and potential effect of having from more expensive alternative sources
in the event of a failure.

181
The supplies Manager may not be able to forecast exact requirements at the beginning of
budget period nor may his price forecast be extremely accurate. However, a regular survey of
supply market may prove helpful and performance improving through practice. This can
contribute to efficient purchasing and lower costs.
THE PURCHASING DEPARTMENT OPERATING BUDGET
Apart from material budget as above, departmental operating cost budget is also a mean to
control the direct cost to an organization of a procurement department. The purchasing
manager who compiles such budget, makes an estimate of the following costs which will be
incurred during the budget period:
total departmental salary bill
total expenses during the period
total cost of departmental supplies
capital expenditure
More detailed budget break down to second and third point into item such as electricity
charges, rent for the area or depreciation, postage, telex, fax, telephone charges travel and
entertainment expenses, cost of stationery and other supplies, rental of office equipment if any
etc. The major part of the operating expenses of procurement department will be salaries of
the personnel
The both purchase budget systems have basic advantages-Manager is forced to forecast future
changes, plan to attain the objectives, monitor progress and initiate timely action as and when
needed. The budget may be as good as estimates upon which it is based and since business
involves so many variables, forecast may not prove correct. However, a good budget system
shall be flexible enough to accommodate such changes. Apart from changes in external
environment, the budget can signal deficiencies within the organization. Variations from
budget, both inside and outside the organization will only be signaled by budget system. The
responsibility for adopting and correcting still lies firmly with the manger.

182

EVALUATION OF PURCHASING PERFORMANCE

Every management function needs to be measured in terms of its contribution to the basic
objectives of the organization. The evaluation proves consists of developing measurement
criteria and then measuring performance against these criteria. The task of evaluation
becomes difficult as few functions can be accurately and completely measured in quantitative
and objective terms.
Some functions are more amenable than others of objective measurement. For example
performance of production department can be evaluated with reasonable accuracy in terms of
unit of production, man hours of labour, unit of power consumed, rate of rejection etc.
However in evaluating functions that deal with people and ideas, rather than things, the
problem is more complicated because we do not know how to measure psychological factors
accurately. The purchase function is difficult to evaluate because much of its effective work
for the organization is in the area of interpersonal relations. Another problem in measuring
purchasing performance is that it is difficult to isolate responsibility. Quality failure may be
due to improper specification or the poor tooling provided by the buying organization as
much as poor source selection, delivery failure may result from late requisitioning of
materials or production control changing schedules frequently or poor suppliers performance.
Poor supplier performance may be due to delay in payments to the supplier or lack of
systematic evaluation of suppliers performance on various attributes. The point is that many
functions are involved in one way or another with purchasing functions. They may influence
supplier performance in variety of ways by their action, yet the complex inter- relationship
makes it difficult to segregate the effect of that influence. The above difficulties are not to
suggest that the purchasing function should not be evaluated, but rather that evaluation should

183
be done will full recognition of the inherent problems that exist. This shall not only help to
determine proper criteria for measurement but also interpret the results of evaluation with
caution.
OBJECTIVES OF EVALUATION
RECONGNITION OF PURCHASING FUNCTION
The inability to measure purchasing performance had hindered management recognition of
the function. If the chief executive or head of the unit has no means of measuring the effect of
function
to his or her overall performance, he or she is unlikely to regard it as of great importance. If
only crude methods of evaluation are available, these may be used in absence of more
sophisticated means. Crude performance measures of purchasing performance tend to be
negative, indicator of failure rather than success (e.g. when production supplies fail to arrive
or fail to pass inspection)
IMPROVE PERFORMACE
Perhaps the most fundamental reason for evaluating any function is a desire to improve its
performance. The same applies to purchasing. In order to determine improvements in
purchasing, it is important to ascertain the current level of performance on certain attributes.
After the current performance is determined, it is possible to discern the areas, which need
improvement. This process helps in establishing a goal of expected attainment. The improved
performance ought to be encouraged by report of actual performance measured against some
kind of parameters/attributes.
PROVIDE EVALUTION DATA
Evaluation provides an established and acceptable basis on which to judge the abilities and
capacities of personnel assigned to the purchasing functions. Such judgment process is
necessary and inevitable; hence it is extremely important that those who must make formal

184
judgment about purchasing personnel must be given best data available about their
performance. Such data becomes ground rule for establishing policies for recruitment,
training, pay and promotion. Many staff reporting schemes are built around this basic concept,
that there must be something to measure and some means of measuring.
IMPROVE MORALE OF PURCHASING PERSONNEL
The evaluation of purchasing function improves the morale and increases efficiency and
effectiveness of purchasing personnel. It is believed that employee do better work and take
greater interest in their jobs when they know that their efforts will come to the attention of the
superior
and recognized by management. Thus they are better to be motivated with consequent
improved morale.
AID ORGANISATION
Evaluation may be used by management as an aid in internal reorganization and assignment
of functions among departments within the organization. Based upon policies and
organization structure, there is substantial variation in activities assigned to purchasing
department. Through the process of evaluation, it is possible for the management to determine
how effectively a given activity is performed, whether it might be advisable to reassign the
activity or related activities should be assigned to purchasing department.
FACILITATES CO-ORDINATION
A multi-unit organization, which has some degree of decentralization of purchasing to several
units, shall find evaluation an effective tool for controlling and coordinating purchasing
functions throughout the organization. By means of uniform evaluation techniques, it is
possible to compare the performance of purchasing in various units. Moreover evaluation
shall provide a flow of information from several units through which improved methods and
techniques in one unit can be transferred to others.
HIGHLIGHING PROCEDURAL BOTTLENCKS AND IMPROVING THE SYSTEM
THEREOF

185
When the performance of purchasing is evaluated, weakness, if any are highlighted.
Sometimes it may be found that certain activities are not performed as efficiently as desired
due to certain procedural bottlenecks. Such procedural problems are reviewed by management
thus improving the system/procedures.
PERFORMANCE EVALUATION CRITERI
The table below shows the likely measurement criteria as purchasing and supply function
develops.
POSITION OF
PURCHASING
Fragmented purchasing
carried out by
functional areas, small
clerical
purchasing
function
Purchasing function
established, mainly
clerical, functional
areas still involved in
buying
Purchasing function
Commercial

Purchasing function
Commercial, but
element of
strategic involvement

STATUS

Low

Low but
Improving
Reporting via
other function
to
top
management
Recognized
Function with
purchasing
Manager
reporting
to
functional head
say
finance
Director
All purchasing
Carried out by
Purchasing dept
Reporting
directly
to
chief
Executive,
Purchasing
Manager

PURCHASING
PERFORMANCE
MEASUREMENT
Very few, staying
Within
agreed
budgets

FOCUS ON

Mainly measuring
Clerical efficiency of
the function i.e.
orders
and
requisitions
outstanding

Clerical
efficiency

Clerical
efficiency
savings,
reduction,
negotiating
efficiency.

Clerical
buying
efficiency

buying
i.e.
cost

As above, plus
Suppliers
development
and
intra- organizational
Interface
development

Getting in the
goods

As above plus
beginning to
measure
overall
effectiveness on
a
longer
term

186
Purchasing is a
strategic
business
function

Reporting to
chief
executive/boar
d, purchasing
director heads
function

As
above,
but
concerned
with
strategic
development JIT etc,
measurement of total
Cost of supply

basis
Strategic
effectiveness

The table reveals that with the change of focus of purchasing activities, the methods used to
evaluate the performance also change. Initially measurement is clerically oriented and as the
function develops, measurement criteria become more tactically and strategically based and
the range increases.
This framework of criteria is based on work undertaken by Van Wheel and allows for five
stages of development.
Where purchasing is essentially reactive and fragmented, performance criteria are few or even
non-existent. The main objective for the activity is to convert purchase requisitions to orders
and get the supplies in.
As function develops, it is likely to be given the responsibility for handling the paper work
involved in purchase system. At this point, clerical efficiency is probably the main criteria in
determining the functions contribution.
In the third stage of development, the role is being viewed more in respect of its commercial
usefulness to the organization. At this stage a chief buyer or purchasing manager might be
appointed. While clerical and systems efficiency are being measured, the function would also
be expected to begin to show saving against budgets or costs. At this stage savings or cost
reductions are likely to be measured.
At the next important stage of development, purchasing is seen as more of strategic
importance. At this point, concern and hence measurement criteria are established to assess
key suppliers development through vendor rating schemes. As the purchasing profile

187
becomes higher, the interfacing with other functions become significant and this may also be
measured. At this stage purchasing manager reports to chief executive. Almost certainly,
concern will be shown for total acquisition cost and there will be less emphasis on lowest
price.
Finally at fifth stage, purchasing is recognized as being of strategic importance with head of
purchasing, probably at director level. Here measurement is centred on strategic effectiveness.
Purchasings ability to make world class concepts work would be measured and thus there
will be considerable interest in the following matter.
Moves towards co-makership and strategic supplier alliances.
Education of supply base.
Improving the strategic profile of suppliers
Improvements is supply and chain and
Each suppliers adoption of EDI (Electronic Data interchange), JIT (Just-in-time).
TQM (Total Quality Management), and zero defect philosophies.
Measurement criteria are dynamic and must develop as the organization develops; clerical
efficiency gives way to cost effectiveness and eventually strategic effectiveness.
MEASUREMENT AREAS
Common areas of measurement are:
1.

OPERATIONAL PURCHASING

a)

QUALLITY
Quality achievement may be measured in terms of percentage of rejections of
incoming goods and percentage of defect discovered during the production process.
Responsibility of defective goods must be assumed by purchasing as it selects the
suppliers. Even if a supplier is designated by production or engineering department,
the purchasing department must share responsibility for poor quality because it is

188
expected to analyze supplier thoroughly enough and warn these departments when
they suggest poor sources.
b)

QUANTITY
Quantity performance can be measured in different ways. One criterion is downtime
(Production loss) caused due to shortage of materials. Another criteria may be the
amount of rescheduling of production due to non-availability of requisite materials.
The number of emergency and rush orders may also be a measure of the efficiency of
purchasing with which department in procuring right quantity. The extent of forward
buying to cover production needs and cost of such coverage can also be considered in
evaluating purchasing performance.
Another quantity factor is the relationship between stock holding and usage, which is
known as inventory turn over ratio. This can be calculated by dividing the stockholding value at the end of the year by consumption value during the year. Another
related measure is the inventor losses due to deterioration and obsolescence. If such
losses are low, it reflects of purchasing efficiency. Yet another quantity measurement is
the percentage of number and value of items which have not moved over a specified
period.
On quantity parameters purchasing can be measured if it has a role in inventory
management.

c)

TIME
Many of the attributes, which evaluate quantity performance, may equally apply in
measuring performance with respect to time. The additional criteria may be suppliers
actual delivery performance against promised and of its amount of follow up required.
Another criteria is the length of lead time i.e. period that lapses after receipt of
requisition by purchasing till the goods are received and ready for issue to users. With
the computerized data processing, average lead-time can be worked out for emergent
purchase, purchases through normal open and limited tendering. If the lead-time is
longer, it reflects the poor purchasing performance and procedural bottlenecks.

189

d)

PRICE
Price performance can be measured by determining how close purchasing function is
coming to securing the right price. The long-term relationship between the price paid
for purchased goods and price secured for companys finished goods is an important
bench- marking. Over the period of time, the organization will find that a reasonably
constant proportion of its sale dollar is spent for purchased goods. Short term
performance than be compared with long term standard. Another way to measure
price criteria is to compare price paid with standard price index. A comparison of
market price at the time of use with the price actually paid while acquiring the goods
can also be used to measure as how well purchasing is anticipating price changes. Yet
another criteria is the price paid against budget.

e)

OPERATIONAL COST
i)

Cost Purchase Comparison

This common measurement criteria relates to dollar volume of purchases to the
dollar cost of operating purchase functions i.e. to work out how much it costs
to spend a dollar in purchasing. It is determined by dividing the annual cost of
operating purchase department by volume of annual purchases. This ratio has
significance of evaluating a single department over a time, provided that its
responsibilities have remained fairly constant. Its greatest limitation is that it
represents a measure of total departmental performance and does not reveal
areas of strength or weakness within the department. Cost-purchase
comparison between purchasing department of different organization are not
likely to be revealing since different companies have different responsibilities
to their purchasing department as this influences the cost of operating the
department.

ii.

Cost per order

Another criteria for evaluating purchase function is cost of each order placed.
This cost can be worked out by dividing total purchasing department cost by

190
Number of orders placed over a period. This criterion has limitation of
manipulation by those who are evaluated. They could greatly improve their
showing by ordering smaller quantities very often. This may further become
less useful because many organizations are beginning to operate period/ openend contracts, stockless buying, national contract etc. Under such contracts,
materials releases, sometime on automatic basis, replace formal orders for
individual shipments.
Although this practice decreases the paper work and overall buying, it raises
the cost per order. In such cases, higher cost her order denotes increased rather
than decreased efficiency. The extent of open and limited tendering also greatly
effects these measurement criteria. Inspite of these limitations, cost per order
criteria is still considered an important tool in evaluating purchase functions.
2. CO-ORDINATION WITH OTHER FUNCATIONS
Although co-ordination with order function is an important measurement criterion
of purchasing function, it is apparently difficult to measure. The measures, which
can be included: the number of complaint received from other functional manager
regarding performance of purchase, no. of rush/panic purchases. These are difficult
to come in term with meaningful measures. We may alternatively use i) periodical
attitude survey across departments and ii) a sampling method relating to key
operational meetings and contents of the minutes.
3. PURCHASING ORGAINSATION AND SYSTEM
The system and procedures involved in purchasing might reveal lack of control
within the department or between departments; they could highlight either staff or
system inefficiency and may be indicative of poor management or poor liaison.
The openness of the organization to its environment and suitability of staff who
work within it are also important.
5. CREATIVE PERFORMACE

191
Creative performance is also difficult to evaluate. However the question, which
might be asked, includes: what has been achieved through value analysis? What
sources for spares have been developed, other than original equipment suppliers?
Which items are being purchased indigenously instead of imports (import
substitution)? No of contracts finalized for stockless buying/consignment buying?
What achievements have been made in supplier price/cost analysis? Has the
department been successful in locating alternative economical sources, particularly
where there was previously a monopoly supplier? Has the department, in
conjunction with its suppliers, contributed to productivity and efficiency on the
companys production line? What additional services are available to user
departments as a result of purchasing initiative, which will contribute to their
efficiency?
6. POLICY DEVELOPMENT
This is yet another important area, which does not lend itself to quantitative
measurement; surprisingly few organizations have thought through their policies.
Examples of purchasing policy area, which might repay study, are:
Make or buy
The degree of centralization
Reciprocity
Inter-company trading ( in group)
Single or multiple sourcing
Working with suppliers towards JIT and
Co-makership arrangements.
The criteria which might be used in judging the quality of departments efforts
include: is there a clear statement of policy? Is that policy understood and applied
by the relevant personnel? Have policies been updated as condition change?
6. PLANNING AND FORECASTING
Planning and forecasting is becoming as increasingly important aspect of
purchasing. The question being asked is the function involved with long term and
short term planning within the organization at all? If it is, to what extent, what is

192
the quality of input and what the time horizon? How good are the forecasts that
underpin the planning input? Perfection in forecasting is not expected but a
reasonable improvement both in forecast accuracy and the quality of
accompanying comments should be achieved over a time. Forecasts may be
related to industrial relations environment, demand and supply, prices,
technological development, legal and social change which may affect supply
market.
7. BUDGET PERFORMANCE
Purchasing performance can also be evaluated against budgeted goals. At the
beginning of the budget period, purchasing objectives are established, in view of
organizations total objectives. The purchasing objectives are so derived that they
contribute to the profit objectives of the organization and are capable of objective
measurement. Two general types of budgets are used for purchasing activities viz.
materials budgets and department operation budget. The material budget is an
estimate of the amount of materials, parts and supplies to be purchased and is
derived from production schedules. The department operation budget deals with
the estimated costs of operating the purchase department.. These budgets help in
lying down the standard of performance and actual performance is accordingly
evaluated.
OTHER MEASUREMENT CRITERIA
One such criterion is the total number of purchase orders issued, which is an indication of
workload of department. These orders can be further split into, orders against open and
limited tendering, indigenous and foreign orders, small orders and large orders, rush orders
and regular orders, single item order or multiple items orders to make the assessment more
meaningful.
Another area may be the time involved in clearing the invoices for payment and amount of
discounts lost because of delay in clearing invoices are significant measure of purchasing
performance where invoice checking is the responsibility of purchasing.

193
Some organizations use still another approach in measuring purchasing performance. They
evaluate the department in terms of the performance of the head of department. One such
listing of performance standards for head of purchases may be as under:Adequate performance consists of:
1.

Successful planning, which results in establishment and achievement of

management approach goals and programmer which (a) produce profit for
the organization, (b) improve purchasing operations within budget limits, or
(c) increase the ability of the division to meet new and emergency situations
expeditiously.

2.

Materials, equipment and supplies being purchased at prices resulting in

lowest ultimate cost consistent with required quality, delivery and
established policies; late deliveries and rejection for quality do not exceed
agreed upon levels.

3.

Competition among suppliers being encouraged and buying is competitive

whenever possible. Whenever competition is not possible or practical,
careful negotiation is practiced and adequate precautions are taken to ensure
that best interests of the organization are served.

4.

Management being adequately informed of purchasing activities, significant

market and economic conditions and the trends effecting organizations
operations. Recommendations for action are promptly made.

5.

An active personnel training programs in force, a periodic assessment of

ability and performance of purchasing personnel being made, and counseling
results in a satisfactory rate of development towards higher responsibilities,
making available adequately trained replacements to fill vacancies.

6.

Co-ordination of purchasing activities with purchasing division and other

organization activities carried out effectively; resulting in smooth integration
of all functions related to purchasing activity consolidated purchasing of
items used at various locations and uniformity of interpretation of purchasing
policies and procedures.

194

7.

Purchasing policies, which are established and maintained, which are fair to
all suppliers, assure the ability of the organization to make the best purchase
contracts as well as other organizations divisions.

8.

Written procedures (Purchasing manual) which are established and revised to

ensure a standard and efficient handling of purchasing operations.

9.

Working relations with those divisions served resulting in mutual cooperation and understanding, confidence in purchasing ability to provide
services required and effective communication.

10.

Supplier relations based on mutual co-operation, confidence and respect,

which are established and maintained resulting in continuing efforts of
suppliers to provide high level of quality, service and technical formation and
earlier offering of new product development.

11.

Undertake supplier development to meet organizations needs. Such efforts

are directed to treat the supply market not as given but as something to be
shaped. Supplier themselves are regarded as capable of improvements.

12.

Systematic evaluation of suppliers performance including both supplier

appraisal for assessing potential supplier and supplier rating of actual
performance. Such
efforts shall not only be based upon proper attributes but also used as a
feed back to supplier either to compliment them for their performance or
improve in certain areas. Business dealings to continue only with those
suppliers who perform quite satisfactorily.

13.

Developing JIT purchasing and co-makership with suppliers, treating them

partners of business philosophy.

14.

Finalize blanket order or period contracts for the item regularly used to
reduce cost of buying, economy in purchasing and improving the availability.

15.

Whenever feasible, enter into stockless buying contracts to reduce inventory

holding.

195
16.

Systematic efforts towards import substitution to reduce dependence on

foreign sources, improve availability of materials and save scare foreign
exchange.

17.

Reduce dependency on original equipment suppliers for procurement of

spares by developing alternate sources.

18.

Delegation of power at suitable level to reduce the lead-time of procurement.

19.

Ensure high level of professional ethic of purchasing followed in the

division.

20.

When required surplus, obsolete and salvage materials are disposed off
promptly and at most favourable price.

21.

Active participation in purchasing and industry associations.

EVALUAION METHODS
After having determined various criteria of evaluation of purchasing functions the next logical
step in the process is to work out various methods of evaluation. As per the result of a
research study of
evaluation of purchasing performance, published by American Management Association, the
following eight methods have been found most favoured out of many methods reported.
1.

INTERNAL AUDIT
Many organizations conduct internal audit of their purchase department, as they do of
other, to measure conformity to establish procedure and accepted business practice.
Evaluation in true sense is not involved as internal auditors are not concerned as to
how well purchasing is functioning but only with whether it is doing the things as
procedures indicate. The internal auditors are usually assigned to accounting functions
and they can also be assigned the job of evaluating purchasing function which has to
be limited by the extent to which management has established purchasing objectives
and standards of performance on which they measure the facts. Auditors find.

196
2.

PURCHASING DEPARTMENT SAVINGS

Savings arising out of efficiency of purchasing are fairly used as a means of evaluating
the performance. These savings are concerned with costs of materials and services
being purchased. Some organization may refer to this a cost reduction and others a
profit improvement.
There are problems in determining actual saving in cost. If a buyer, through
negotiation, secures a lower cost then originally quoted, should this be considered as a
saving? Is a quantity discount a saving? How does one measure saving on changes of
materials or design when the purchasing department had only little or no influence on
these changes.
Notwithstanding these questions, there are savings which can clearly be attributed to
the purchasing department and used to evaluate its performance and this technique is
gaining popularity.

3.

VARIANCE FROM STANDARD COST OF MATERIALS

Some organizations work out standard cost of some of the important and high value
materials from the historical records of price paid, market trends and conditions.
Evaluation of purchasing performance than consists of comparing the actual cost with
standard cost for the period under review. This method of evaluation is commonly
found in organizations employing standard costing as a control over manufacturing
operations.
This method of evaluation is valid only if there is reasonable stability in the market
price for the commodities being reviewed. It should further be ensured that buyer can
influence the price. When standards have been equitably set, when the market is
relatively stable, and when efforts of purchasing have an appreciable influence on
price, then the purchasing people are prone to accept standard cost approach and
regard it as fair.

4.

OUTSIDE AUDIT

197
Outside audit is another method of evaluating purchasing functions, which is carried
by an outside, may be by a consultant or external audit firms. Such agencies usually
start with the purchasing or policy manual and measure of adherence to these guides.
They attempt to ascertain the extent of which the purchasing department in operating
under common accepted sound management methods. Such agencies can also be
involved in procedure/system review.
5.

VARIANCE FROM OPERATING BUDGET

Some organizations use operating budget as against material budget in evaluating
purchasing functions. If the operating budget has been realistically prepared, if head of
purchasing has had a significance voice in its preparation and if he has been given the
resources to do what management expects his department to do then judging the
department in terms of compliance with operating budget is fair and reasonable.

6.

SUPPLIER PERFORMANCE
Evaluating purchase performance in terms of performance of suppliers with whom it
deals is another method. The purchasing department directly,

if not completely,

responsible in
selection of suppliers. If it succeeds is selecting good sources, it shows up good
suppliers performance. Suppliers can be evaluated on many attributes such as quality,
delivery, price services etc. But in many organizations, supplier evaluation is very
informal. It is conducted at the time a purchase is made and no permanent data bank
of information is maintained, nor are suppliers of all commodities evaluated. There
may be variation in the importance of each of the attributes for most purchases, few
companies have attempted to develop supplier performance rating with proper
weightage of each attributes. In most cases it may be unsound to employ standard
formulas, for each company must develop its own criteria for evaluating suppliers.
7.

APPRASIAL OF PERSONNEL
Many organizations have developed job evaluation and merit rating system for their
personnel, which apply to purchasing peoples. Although such evaluation be sound for

198
individuals in purchasing function, it may not be adequate in evaluation of entire
purchasing department.
8.

INVENTORY PERFORMANCE
Performance in terms of inventory levels and turnover may be used to evaluate
purchasing performance. In many organization inventory holding norms are fixed for
various categories of materials and actual inventory holding in relation to these norms
is reviewed periodically. This method of evaluation of purchasing is useful only when
this department has major responsibility for determining inventory level and working
out the quantities to be purchased. But many organizations do not give such blanket
responsibility to purchasing department.

In determining criteria and methods of evaluation of purchasing function, terms purchasing

policies and purchasing manual, have frequently been used, this write up will not be complete
until this issue is also discussed.

VALUE ANAYSIS/ENGINEERING
Introduction:
This technique was developed during Second World War. It was difficult, at that time, to
obtain critical materials and components and therefore many manufacturers were required to
specify numerous substitutes in their design and production activities. Harry Erlicher, the then
Vice-President of Purchasing for General Electric Company, USA observed that many of the
required substitution during the period not only resulted in reduced costs but also in functional
product improvements. He, therefore, assigned to Lawrence D. Miles (author of the book
Techniques of Value Analysis and Engineering and known as father of this technique) the task
of developing a systematic approach to the investigations of the function/cost aspect of
existing material specifications. Mr. Miles not only met this challenge successfully but also
subsequently pioneered the scientific procurement concept, GEC called Value Analysis
In 1954, The Navy Bureau of Ships, USA adopted a modified version of GECs Value
Analysis concept in an attempt to reduce the cot of the ships and related equipments. The

199
Navy concentrated its efforts on cost avoidance during the initial engineering design stage and
called it Value Engineering, even though it embodied the same concepts and techniques as
GECs Value Analysis programs.
The technique of Value Analysis; a potential powerful set of tools, which can be used by the
management in controlling materials costs. It can help to maximize the conservation and
utilization of our material resources, to substitute indigenous materials for imported ones
without sacrificing quality and performance and to reduce cost substantially.
Lawrence D Miles had defined the value Analysis as
An organized creative approach which has for its purpose the efficient identification of
unnecessary cost i.e. cost which provides neither quality, nor use, nor life, nor
appearance, nor customer features.
He further defines the technique as:
The study of relationship of design, functions and cost of any product, material, or
service with the object of reducing its cost through modification of design or material
specification, manufacture by a more efficient process, change in source of supply or
possible elimination or incorporation into a related item.
Both the above definitions explain that the aim of value analysis is cost reduction, mainly
examining and deciding whether a particular item is unnecessary, or at least it has some
features, which are unnecessary and can be eliminated or can be substituted by another item
which is cheaper and at the same time can do the same job.
What is Value?
Value Analysis is a process of analyzing value of any particular item, which is required in
functioning of an industry. Value Analysis should not be confused with price analysis or cost
analysis. Value is measured in terms of function or purpose of an item, primarily that of
quality, although at times the appearance of the item and its prestige value are also taken into
account. For instance the price of a Litre of paint may be Rs. 200.00 but the function it
performs is to coat the surface and prevent corrosion or rusting of a metal surface.

200

One way of defining the value of an item is its worth to us and the price we pay and can be
expressed in the ratio:

Value

Worth of item
Price of item

Worth of an item purely depends upon the functional utility or at times upon its artistic or
prestige value. As indicated in the above ratio, value of an item can be increased either by
reducing the price for the same worth or increasing the worth by keeping same price, or both
by reducing the price and increasing worth. Value analysis thus aims at assessing the value of
an item and then enhancing it systematically.
Generally speaking these are two types of values i.e. esthetic value and functional value.
Hence a buyer must first determine which value is more important in the item he is
purchasing. In industry
the vast majority of materials and components are purchased for their functional value. For
example, a user has little concern for the esthetic (esteem) value of internal parts of the
machine that are hidden from view. Industrial value analysis thus focuses on functions. In
industrial application, value as such mean combination of various things. Value
represents that combination of quality, service and price, which ensure the greatest
ultimate economy or satisfaction to buyer and value analysis is the technique, which
systematically helps to determine this combination. Value analysis aims at the greatest
value in return for the money spent. It involves a continuous supervision of value at all stagesdesign, purchase, manufacture, packing, transportation and sales.
How to proceed with value analysis technique:
It starts with the enquiry and critical examination of functional utility or end use of purpose of
an item. If an item is made of several components, each one is also subjected to similar
intensive scrutiny. An answer to the following question is to be is to be found out (set of 10
questionnaire advocated by L.D. Miles)

201

1.

Does it contribute value?

2.

Is its cost proportionate to its usefulness?

3.

Does it need all its features?

4.

Is there anything better for the intended use?

5.

Can a usable part be made by a lower cost method?

6.

Can a standard product be found which will be usable?

7.

Is it made on proper tooling, considering the quantities used?

8.

Do materials, reasonable labour, overhead and profit total its cost?

9.

Will another dependable supplier provide for less?

10.

Is any one buying it for less?

What can and should be value analyzed:

Value analysis can be applied universally i.e. everything materials, methods, services etc.
where it is intended to bring about economies. If economy is the aim than one must start with
those where maximum economy can be achieved. This needs application of ABC analysis in
applying value analysis i.e. A items or those, which are scarce, should be first value analyzed
and so on and so forth.
A list of groups or categories is given below which can be value analyzed:
Raw and semi- processed materials.
Parts, components and sub-assemblies.
Sub-contracted parts, components, sub-assemblies.
Finished- items e.g. paints, oils, and varnishes.
Packing materials, packaging.
Maintenance, operation and repair items.
Transportation and material handling costs.
Printing and stationary items.
Miscellaneous items of regular consumption.
Capital goods/ plant, machinery, equipment, tools and appliances.

202
There are various other application of Value Analysis:
Value analysis of end products.
Value analysis before commencement of production or undertaking a project.
Pre-design value analysis.
Value analysis before tendering.
Pre-purchase value analysis.
Post purchase value analysis
Organization of Value Analysis:
Before establishing a value analysis program, it is to be decided as to (i) who should be
responsible for developing, leading and controlling the program (ii) what device should be
used to facilitate communication and coordination among the various departments involved in
the efforts of value analysis.
There are three basic organizational approaches in conducting Value Analysis Programs.
Specialized Staff Approach: In this, value analysis staff function is like any other, for
instance Industrial Engineering staffs function. Trained Value Analysts function in
staff capacity reporting to General Management Executive or to a top level
Engineering Design Manager. There are instances where the value staff is attached to
Purchasing Department. In any case it is desirable that the value analysis staff should
be under a very senior manager because analysis concerns all departments and analyst
must have access to them and their records. Depending upon size of undertaking and
extent of program, there can be a Central Value Analysis Cell to co-ordinate the
activities of individual analyst attached to design, engineering, production and
materials departments.
The Committee Approach: This approach is prevailing pre-dominantly in smaller
organizations.
Member from the various departments viz. Production, Engineering, Purchasing,
Sales and General Management constitutes value analysis committee. A senior
functional representative should head committee, frequently, from Purchasing or
General Manager staff.

203
Suggestion for projects to be value analyzed come from the various departments and
committee reviews them and select the promising one for detailed analysis.
Use of committee approach does not prohibit the use of specialized value analyst.
Many firms use committee approach, however because they consider it to be an ideal
way to develop a team approach to value analysis. Consequently, they often prefer to
involve as many operating personnel as possible in detailed analytical work. Thus a
committee acts as an authority and coordinating medium for total value analysis
programs
Staff Training Approach: The philosophy underlying the staff training approach to
value analysis grows out of the same idea that leads some companies to involve
operating personnel in detailed value analysis working. It is believed that value
analysis yields maximum benefit only when all professional operating personnel
practice it. Consequently this approach is aimed at developing an understanding of the
concept and working knowledge among the professional personnel who are
responsible for specifying, buying and using production materials.
Value analysis organization consists of small staff group who reports to General
Management and conduct analysis-training programs.
Essence of Value Analysis:
Mr. A. R. Palit, a pioneer in the field of Materials Management in the country, has
summarized essence of value analysis into words easy to remember EKCHANGE & MISS.
E

Stands for elimination of the item i.e. can we do without the item?

Stands for keep. If the item cannot be eliminated, it has to be kept, but one must try to
reduce the cost by changes i.e. MISS.

Stands for modification in design, specifications, size, shape, methods of

manufacturing or anything else, which may result in reduced cost.

Stands for Incorporation: combining two operations or parts can reduce the cost of an
item.

Stands for substitution: complete substitution can be done by brining down the cost.

204
S

Stands for sub-division: An item too difficult and costly to make can be manufactured
in components and then assembled together.

DARSIRI Approach to Value Analysis:

The DARSIRI method is a technique concerned with solving value problems of industrial
design and development, both before and during production. It is designed to follow a stepby-step logic involving investments or resources to reduce direct costs of materials,
machinery, labour and overheads whilst retaining the basic utility of product.
The basic objectives of this method of analysis are:
To reduce cost without hampering reliability.
To identify and define the quality required.
To consider ways of achieving this quality.
To recount improvements that give better value.
To assist in the implementation of these improvements.
DARSIRI method has seven steps each denoted by its initial letter from the word DARSIRI.
1.

Data Collection:
Gathering of information relevant to the selected products. These information are
related to drawing, materials specifications, annual requirements, cost details
manufacturing methods, sources etc.

2.

Analysis:
Developing new ideas for performing its functions. The product under study is
analyzed as per its function, it is supposed to perform. As per their nature and
importance, their functions can be both primary and secondary. Primary functions are
those, which are indispensable whereas secondary functions are needed in another
form of low importance. In a Matrix of functional analysis, these functions are
weighed in paired comparison to establish their relative importance. Cost equivalent is
than attributed to each/those primary and secondary functions. Finally the ratio of

205
cost/value is arrived at. This function under analysis needs modification. Generally al
functions having cost/value ratio more than 1 need attention for improvement.
3.

Record of Ideas:
Having decided upon which functions to attack for improvement, various alternative
ideas are to be floated. Normally this is to be done in brain storming session where
all sorts of ideas pertinent or otherwise are noted down. Some times even wild ideas
could be answer.

4.

Speculations:
In speculation stage all idea are thoroughly examined and re-examined from all angles.
This is the most decisive step of DARSIRI method, as final decisions for the ultimate
change will depend on how efficiently the ideas have been evaluated.
1. Investigation:
The ideas, which are screened thoroughly during speculation, are then put to test for
its ultimate implementation. This testing can be done both in cost front or assess
whether there is any saving through technical experimentation for its functional
reliability.

6.

Recommendations:
A final decision is taken for the idea, which gives the best value and is then
recommended for its implementation.

7.

Implementation:
This last phase is the implementation of recommended idea by the management.

PERT and its Roll in Materials Management:

PERT stands for Program Evaluation & Review Techniques designed to make planning more
effective. This technique was developed by US Navy, the Booz. Allen & Hamilton Consulting
firm and Lockheed Aircraft Corporation as a scheduling technique design to reduce the
development time for the Polaris Ballistic Missile Program in 1958.
What is PERT?
PERT is one of the techniques of scientific management used in planning a project with
minimum possible use of resources. In case of uncertainties it provides a set of principles and

206
techniques to assist the manager. PERT pinpoints critical areas where the completion of a job
on time is threatened and reallocation of resources so as to accomplish the desired goal.
PERT involves the construction of net- work of activities connecting necessary events of a
system in a flow plan consisting of the activities and events that must be completed to reach
the goal of the program together with their inter dependencies and inter- relationships. Thus it
shows orderly steps- by- step series of activities carried out in a logical sequence to reach the
goal.
To further understand the technique some of the terms used are defined under.
Net-work:
A net- work is a graphic representation of all tasks that must be completed to complete a
project showing interdependencies. The components that make the net- work are Activities
and Events.
Activity:
An activity is performed of work between any two events. It is a time and resources
consuming element in a net- work plan. It is represented by means of an arrow
(

), the tail indicates the start and heads the finish. In the PERT Net- work there

may be Dummy activities, which neither consumes time nor resources and are represented by
Broken Arrow (---------- )
Their functions are two folds

Help to maintain logic of the net- work by keeping the inter- dependencies in perfect
order.
Help to maintain the number system unique in the net- work diagram.
Event:

207
An event is a specific definable accomplishment in a project plan, recognizing at a particular
instant of time. It consumes neither time nor resources. It is a point in time and not a passage
of time, commencement or completion of task are events. Various symbols for representing
events are:

Ground Rules for Developing a Net- work:

An event cannot occur until all the activities leading to it are completed.
An activity cannot start until the preceding even has occurred.
An event once having occurred
Time flows from left to right, arrow from left to right
Before developing a net- work, apart from above ground rules, the following three questions
must be answered.
What activities should be completed before the activity being drawn?
What activities should follow immediately after the activity being drawn?
What activities can be performed concurrently?
After the net- work plan is fully developed, the next step is to estimate the time that is
required to complete the project and identify critical path.
The Advantages of PERT Techniques:
It provides a mean for more careful planning by specifying all the variables involved.
It provides a clear understanding of inter-relationship involved in projects.

208
It helps in identifying potential critical spots, early so that resources can be diverted to
avoid accumulative delays.
Scheduling the resources in a most efficient way.
It makes possible to predict the completion time of project with reasonable accuracy.
Use of PERT Technique in Purchasing Research:
One of the most important problems of todays materials manager is to plan the material
requirements, procurement and availability in such a way so as to ensure that there is no holdup in various stages of work for want of materials. PERT is a practical tool, which can be used
for the purpose of materials planning and control. It is although basically scheduling and cost
control device, but can be used in purchasing where complex relationships are involved.
PERT represents a significant step toward an integrated management system comprising
variables of time, resources, technical performance and other utilities.
PERT pin- points critical area where the completion of job in time is threatened and thus helps
materials manager to take timely action. Thus an account of critical materials is maintained
whose
delay may hinder production/construction schedule. Having known the requirements of
materials event- by- event, procurement is planned in such a way that materials arrive as and
when needed
so that to reduce the inventory carrying cost and also avoid costly stock- outs on the other
hand. Without PERT, purchasing department may loose contact with total project schedule
and only be supplied with specific delivery dates that must be met. But when purchasing
department is supplied with PERT net- work analysis, the most economical procurement is
possible. While evaluating the bids the purchasing department may come across a situation
where a supplier may quote higher rates for ex- stock delivery whereas for the same material
another supplier may quote lower price but with longer delivery period. Knowing from the
PERT net- work how much latitude is available on delivery date of this particular item,

209
purchasing can select supplier accordingly. PERT also helps purchasing to exercise control on
expediting which may be in many form i.e. by
sending reminder in normal case, in emergency sending regular fax messages and even
deputing the personnel to personally visit the suppliers and to prevail upon them for
immediate supplies. In certain construction organization that buyer helps the supplier to the
extent of procuring scarce materials, tooling and expertise for timely manufacture of required
items.
Freight economy is another area of purchasing research where PERT has useful role to play.
For instance, if the materials are required after a pretty long time, the purchase may well
choose the transportation by rail and move goods at a lesser cost. As against this if the items
are to be made available in the very near future, it may choose transportation by road or even
by air to ensure timely availability and be ready to incur higher cost. So the traffic decisions at
times may result in economy and at some time, some extra payment for faster deliveries,
which in the real sense are nothing if compared to over all benefit in timely completion of
project. Traffic economies can as such be obtained if the PERT net- work is made available to
purchasing.
PERT also helps materials department to divert resources from non- critical areas to critical
one. Without knowing the PERT net- work it is seen that at time, materials purchased for a
particular event, which presently is not critical is kept reserved whereas critical areas suffer
for want of same materials, This situation can be avoided if PERT net- work is available with
purchasing.

MAKE OR BUY DECISIONS

In the process of manufacturing a product a number of components and materials are required,
which are either produced internally or bought out. It is extremely difficult to make every
component internally. It is therefore imperative for an organization to take make or buy
decision while formulating manufacturing strategies.

210

Make-or buy decisions may be macro or micro.

Macro decisions involve long term planning and capital expenditure relating usually to
product and materials as in question of vertical integration requiring determination of policy
by top management e.g. the decision by a power utility to acquire coal mines.
Micro decision which normally concern buyers, relate usually to:
New parts, should these be made or bought out.
Existing parts i.e. whether those now bought out should be made or vice-versa.
Special situations e.g. depression, boom, emergencies etc
The following are some of the reasons in favour of making or buying an item.
REASONS FOR MAKING
Lower production cost i.e. making is cheaper than buying.
Unsatisfactory performance by the suppliers.
Assure adequate supply (quantity and delivery)- delivery time from outside
suppliers too long.
To utilize surplus labour and make marginal contribution
Obtain desired quality.
To utilize spare production capacity
To maintain secrecy i.e. protects proprietary design and quality.
To utilize scrap arising
Maintain organizational talent and protect personnel from a lay off.
Increase or maintain size of the company ( management preference)
REASONS FOR BUYING
Lower acquisition cost i.e. buying is cheaper than making.
Quantities required are too small for economic production.

211
Obtain technical or management ability without owning it i.e. to avoid

cost of

specialist plant and labour

Inadequate capacity to meet requirements internally.
Reduce investment in inventories.
Ensure flexibility and alternative source of supply.
Transfer of risk to vendors
Product improvement may be difficult because it is a side line business additional
design or process resources required for R and D.
Reciprocity agreements.
Item is protected by patent or trade secret.
Services (catering, security etc) contracting eliminate a support activity and frees
management to deal with its primary business.
Some of these factors are briefly discussed as under:
Tactical and Strategic
Every organization has a definite policy about what it makes and what it buys which is
approved by the top management. Make-or-buy decisions routinely taken at departmental
levels are those which apply the existing policy. It is only when there are compelling reasons
to change the policy; it is decided at higher level keeping in view the strategy to be followed.
The existing policy relates to facilities actually available for making goods and to buy those,
which cannot be made. However, these routine decisions are not so simple. Comparing make
cost with buy cost is quite complex; since company customers, prejudice, costing conventions
and other partly arbitrary considerations are involved. Changes in policy, such as extension of
plant and facilities, or divesting existing manufacturing facilities are also equally complex
decisions.

ROUTINE MAKE OR BUY DECISIONS

212
In order to take rational make-or-buy decision, in bigger organization, make-or-buy
committee is set up with members from Production, Design Quality Assurance, Costing and
Purchase departments. Decisions to make which part economically on available plant and
facilities are of course simpler than deciding whether or not to invest in new plant. The
economics of particular cases can be complicated, especially when the capacity is underemployed. Another difficult situation arises when capacity is fully employed and the question
is which part to sub-contract. With the introduction of new supplier or new process, the makeor-buy cost balances may alter.
The following are two reasons why a factory buys component which it is equipped to
make:
Often buy is cheaper then it can make.
It may not be able to make all the needs.
The question arises as to why buying is cheaper than making. The short answer is through
specialization. This enables specialist supplier to get long runs and use special tackle. Any
machine shop can turn black bars into bright bars but it is less expensive to buy bright in the
first place if that is what is wanted.
As regards not able to make all the need is concerned, it may result from rush orders or
increased sale or I may result from deliberate sub-contracting exceptionally high out put in
order to run the factory a stable base load. In buying, we not only buy the components but
also the specialization attained by the suppliers and their R and D efforts in the field.
In General, therefore, most factories concentrate their research facilities, talent and
development on main products and buy from, rather than compete with, suppliers who have
specialized in accessories and subsidiary (common use) components, they require. But there
are plenty of exceptions to this rule. Make or buy decisions are based on factors which may
change, when buyer and other concerned should request a reappraisal in light of such changes
both in their own plant and outside.

213
MAKE-OR-BUY DECISION INVOLVING CAPITAL INVESTMENT
When a buyer comes across serious problems of quality, delivery or price in guaranteeing
continuity of supply, he recommends that investment in creating new manufacturing facilities
may be considered in order to switch over from purchases to production. Such
recommendations are made very reluctantly and as a last resort because it could be construed
as an easy way out of purchasing problems.
Delivery problems, in the seller market, have prompted many organizations to take over their
suppliers in order to ensure continuity of supply of requisite quantities.
Threatening the supplier to make the part internally rather than buying sometimes solves the
problems related to price. The buyer insists the supplier to furnish price break-up and then
compare with his own estimated cost to negotiate the price. For such tactic to be effective, the
purchaser must be ready to manufacturing.
Before making recommendations to solve problems in quality, price or continuity by
embarking on substantial capital expenditure to manufacture the item, it would be prudent to
ask some searching questions, for instance:
What has already been done to solve the problems?
What else could be tried before resorting to make the item?
Is it really a permanent problem or a temporary phase?
What would be the cost effect of proposal to create new facilities i.e. capital
investment?
What short of problems will be involved in such proposals?
Could we absorb all the output ourselves?
If proposal is viable only when part output sold in the market, is this the sort of
business we want to go into?
Are we aiming to make whole of our requirement, or making part and buying part?
Would this harm or help our relations with the suppliers.

214
Capital investments in creating new facilities for making items rather than buying shall be
taken after thoroughly deliberating these issues.

BUYING SERVIES
In the recent past, procurement of many services, which were hitherto owned by the
organization, is gaining more and more importance. Not only the hiring of services from
outside the organization is cost effective, they are prompt and efficient. By sub-contracting the
services, organizations are not only able to control deployment of their own manpower in
other critical and key areas but also substantially reduce this to bare minimum. This also helps
the organization to concentrate more closely on the core business and hence on employment
to specialized skill, which give rise to competitive advantage. Sub-contracting agencies, due
to their specialization and lesser operating cost, provide services at very competitive rates.
The acquisition of services is a specialized part of purchasing and supply work and is gaining
in importance as large number of organizations contract out aspects of their work.
The services which are commonly acquired by the organizations include security, catering,
training, transportation and material handling, stock-taking/accounting, cleaning, computer
time, decorating, freight forwarding, packing, custom clearance, legal services, maintenance
of various equipment, horticulture services, medical services etc.
SOME RELEVANT FACTS ABOUT THE SERVICES
IMPRACTICABILITY OF STORAGE
By their very nature, services cannot be stored. This means that they must be provided, when
exactly needed. It is neither possible for the supplier to hold the stock and provide to the
customers when need, nor for the users to carry inventories to protect against uncertain
demand and supply. Although some services may be time critical, the majority of services are
likely to be the subject of careful planning and programming to ensure that they are provided
at the right time and place, with any failure giving rise to serious consequences.
INSPECTABILITY

215
Tangible materials can be inspected and tested by many means such as by measuring
weighing, gauging, lab. Analysis etc to ensure that they conform to agreed specification. This
is not so with the services, which are generally rather difficult to test for quality. Quality may
be spelled out in terms of conformance but generally performance specifications are
employed.
DO OR BUY
Make-or-buy decisions are taken when dealing with tangible goods. However, in case of
service do-or-buy decision are taken. Such decision involves as to hire the services of external
organization to perform the requisite services or to employ own personnel with necessary
competence to undertake the work. Such decisions are often quite complex in view of
economic consideration, organization policy, frequency at which these services are required
and sometimes even the government policy
CONTRACTUAL AGREEMENT
When the goods are bought, it is usually relatively easy to ascertain when a contract has been
completed, usually on acceptance of goods as per specifications and payment to the supplier.
In supply of services the situation is less clear-cut, Suppose an architect is retained to design a
guest house according to a specification laid down in terms of accommodation required,
within the budget figure determined by the client. The architect supplies proposals, which
meet the criteria but are not to the clients aesthetic taste. The client requires an alternative
design, who pays? Not enough information will be the correct response to this question,
which nevertheless illustrate the type of difficulties, which easily arise in arrangements for the
supply of services.
PROVISION
Many services can be acquired through the physical presence of provider of services or his or
her employees. Horticulture or services of a computer installation require appropriate persons
on site. However, insurance or computer time services can be provided remotely.
COMPLEXITY OF ACQUISITION

216
Whilst it is useful to look at supply of services separately from the supply of goods, and to
deal with such supplies, it is the case that some contracts are purely for supply of goods and,
equally, few are for services alone.
Figure below contains a list of nine different typical organization requirements arranged in
order with an item, which are plainly goods at the top and a clear services at the bottom.
TANGIBLE
HIGH

LOW
Parts made to customers specification
Major sub-assemblies
Capital equipments
Civil works
Supply & maintenance of photocopier
Computer maintenance
Freight forwarding
Research
Consultancy

LOW

INTANGIBLE

HIGH

However, the supply of parts made to customers specification is not entirely a supply of
goods. The part will need to be shipped to the customer and there are other intangible factors
such as inspection and transfer of ownership (as opposed to possession) to take into account.
At the other end of the list, consultancy obviously is a service. It is however, difficult to
envisage any kind of consultancy, where no material of any kind is involved. The consultant
will provide some documents, may be a drawing or a plan. Even if the presentation is made
orally, physical resources to take this must be provided

217
QUALITY MANAGEMENT IN SERVICE PROVISION
As stated earlier, the requirements of services can be expressed either by conformance
specifications or by performance specifications.
Where conformance specifications are provided, they may, even for a straightforward case of
services, be extremely exhaustive. Specifications for cleaning services, or similar activities
may run to very many pages and may need many weeks or preparation time. The task and
arising to be performed must be explained in precise and unambiguous details. The principal
benefit arising out of use of conformance specifications is that it can be ensured that the
contractor has provided the service in the manger as agreed.
There are many occasions, when client is unable to produce conformance specifications, often
because of the reasons that services are acquired from outside as they do not have time, in
house knowledge and skill. When this is the case more attention will be paid to desired
outcome than the manner in which the contract is being performed. A contract for consultancy
services is a good example of a situation in which this is likely to be the case. It may not be
possible to prescribe exactly what that the consultant is expected to do, but is reasonable to
agree to ground rules which govern the aspects of relationship. For example, terms such as
working hours, observation of regulations, ownership of intellectual property arising out of
work, payment terms and so on can be formalized and agreed between the parties. Sometimes
services are provided simply on the basis of an agreement between the parties based upon
presumed joint understanding that a certain outcome is desired by the client and the
contracting agency is competent to undertake the work. The assumptions, often many prove to
be incorrect. The client expects work of sound quality, undertaken in a reasonable time and at
a fair price. The problem is, of course, that few people will agree on the exact meaning of
these expressions. There are many instances of client complaining that providers of services
had been unfair to them and services providers complaining about unrealistic expectations of
their customers.

218

Purchasing Policy and strategies

Purchasing Policy
Defining Policy
Dictionary meaning
a course or principle of action, adopted or proposed by a government,
party, business etc.
In business management
Policy comprises a set of principles- expressed or implied- laid down
to direct an undertaking towards the attainment of its objectives and
guide executives in their decision making
Advantages of systematically and carefully designed policy:
a) Helps to coordinate the activities of executives in their efforts to attain
objectives of organization and their relationship with each other.
b) Guides executives in formulating strategic decisions essential to
implement policy.
c) Ensures that decisions are in line with the organizational objectives
d) Facilitates delegation of power of taking decisions to lower level of
management as decisions have already been lad down by way of policy.
e) Reduces the decision making process on frequently occurring problems to
a routine.
f) Ensures consistency in decisions at different levels in a fairly large
organization.

219

Although formulating policy is the job of top management, those who use and
implement the policy should participate while formulating
- Policy must be written as verbal policy create confusion.
- Exception made to policy must be handled carefully.
- Executive approving the exception must be a level higher than the
authority to whom the decision shall apply in normal course.
-

The policy of an organization can further be sub-divided into

departmental policies viz financial accounting policy, HR policy,
marketing policy and Purchasing policy etc.

Purchasing Policy
In our country most of the organization do not have well debated and
formulated Purchasing policy for functioning of purchase departments
-

The trend is however changing

Organization have started giving more and more importance to this

aspect for effective functions of purchasing.

Since buying policies plays an important role in the functioning of an

organization, these shall be formulated carefully and well debated.

Each organization needs to frame their own purchasing policy.

Policies are never borrowed, rather tailor made to meet the specific
requirements of an organization

NTPC recognized the need for having Procurement & Works Policy and
immediately after its incorporation in 1977 this document was formulated and
released for implementation.
After gaining sufficient experience in putting and operating a number of power
stations and changing economic/ market scenario, revised

Procurement &

Works Policy was released in 2001 (incorporated in DOP-2005) .

220

Purchasing Policies can be placed in two categories viz

1.

Major Policies- which are normally formulated by top management

(Board or equivalent) with the advise of purchase executive heading department.

Examples:
(a)

Centralized/ decentralized purchasing

(b)

Extent of in-house manufacturing/sub-contracting (outsourcing)

2.

Consequential Policies- which are Policies derived from major

policies. They are usually formulated or recommended by purchase executive

heading department.
Examples:
(a)

Items to be purchased at plant level

(b)

Financial limits to be placed on authority of the buyers/purchaser at

different level.
Purchasing strategies
In a very simple term
A strategy is means of accomplishing long term goals
The Harvard Business School defines
Strategy as: the pattern of objectives, purposes and goals stated in such a
way as to define what business the organization is in, or is to be in, and what
kind of organization it is or is to be
Like any management function, Purchasing & Contracting has aspects that are concerned
with
-

Operational activities (day to day functioning)

tactical matters (Medium term, perhaps upto 1 year

strategic issues (longer terms)

Operational level
-

Receiving PRs and floating enquiries

Tender opening bid summaries, techno-commercial evaluation etc

221
-

Acceptance of bids, preparing and placement of Purchase Orders.

Post order expediting. Issue of clarifications, amendment etc

settlement of discrepancies in supplies

Expediting payments to suppliers

Release of security deposit, PBGs and completing activities related to closing

order/contract files,

Tactical level
-

Lead-time analysis- take tactical measures to reduce this time

Developing policies & Procedures

Budgeting

Interface development

Staff Development

Cost reduction techniques

Strategic Level
-

Purchasing & Contracting research

Lead-time analysis-

review of policies & procedures, delegation to ensure

reduction.
-

Long range planning including timely availability of critical inputs spares &
other materials/services aiming at optimization of scarce resources

Developing a competent team of professionals of supply management to meet

the challenges of rapidly changing market conditions

Professional Ethics of Purchasing & Contracting

Policy determination

Developing & maintaining reliable and efficient team of suppliers/ agencies

including enlistment and evaluation. The aim shall be identifying a class of
suppliers/contractors as strategic and seeking in them
Technology leadership
highest product quality level
cost competitiveness

222
Supply/ market responsiveness
efficient administration and
total customer orientation
-

Purchasing & Contracting strategies to be integrated with corporate strategies

and with strategies of other key functions to accomplish organizations Mission
Develop and provide power, related products and services

at

competitive

prices, integrating multiple energy sources with innovative and eco-friendly

technologies and contribute to society

Contracts and Contract Management

Defining Contract
In the common parlances a contract may be define as
A written or oral legally-binding agreement between the parties identified in the agreement to
fulfill the terms and conditions outlined in the agreement
A prerequisite requirement for the enforcement of a contract, amongst other things, is the
condition that the parties to the contract accept the terms of the claimed contract.
Historically, this was most commonly achieved through signature or performance, but in
many jurisdictions - especially with the advance of electronic commerce the forms of
acceptance have expanded to include various forms of electronic signature.
Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts,
partnership agreements, trade agreements, employment Contract and intellectual property
agreements.
Meaning & Definition of Contract as per provision of Indian Contract Act-1872

223
A contract according to Section 2 (4) of the Indian Contract Act, 1872 is an agreement
enforceable by law and agreement according to the Act (Section 2-e) is every
promise and every set of promises forming consideration for each other
Essential requirement of contract based on this definition can be put as under:
A contract is an agreement which requires involvement of atleast two parties
An agreement is made of a proposal and proposal needs acceptance. The person
making proposal is called promisor and the person to whom promise is made
(directed) is called promisee.
The agreement must be capable of being enforced by law The stages in information of
the contract are:
-

Offer

Acceptance

Agreement

Contract

Every contract is an agreement but every agreement cannot be a contract under the
law. From enforceability point of view, an agreement to become a contract must
satisfy the essentials of a valid contract.
As per Section 10 of the Act, All agreements are contract if they are made by the
free consent of the parties, competent to contract, for a lawful consideration and
with a lawful object and not hereby expressly declared to be void
Essentials of valid Contract
1. Mutual assent of the parties

224
To reach an agreement, there must be a meeting of minds. This usually consists of an
offer and an acceptance.
An offer is a proposal made by an offerer (the offerer is the person/party who makes
the proposal) to an offeree (offeree is the person/ party to whom proposal is directed)
to enter into a legally binding agreement

2. Intention to create a legal relationship

Parties to agreement must have serious intent to create legal relations.
An agreement to go to movie is not an agreement to create legal relations & therefore
is not a contract.
However, an agreement to buy and sell goods (purchase transaction) are agreement
intended to create some legal relationship and are, therefore, contract, provided these
agreement satisfy the other essential elements of the contract.
3. Lawful Consideration
Consideration means anything requested by the promisor from the promises as an
agreed exchange for his promise.
Consideration is thus the price for the exchange of promise and it be either
i)

Money or property, or

ii)

A promise to give money or

iii)

A forbearance of a legal right

property, or

Legal rules to the consideration are

-

Consideration must be at desire of the promisor.

225
-

Parties to the agreement are free to determine adequacy of consideration

Consideration must be certain and not illusory

Consideration must be lawful

Promise of promisee to pay money for doing what promisor is already bound to do
does not constitute consideration. Though parties to consideration are free to decide
consideration, yet agreement must have some value to be

legally

binding.

For

example, if items are offered as free sample and keys are found defective, no action
can be taken against its supplier since due to absence of consideration there is no
contract
4.

Capacity of the parties

Parties of contract must have legal capacity of entering into contract. Every person
who is major, who is of sound mind, and is not disqualified from contracting by any
law, is competent to enter into contract

5.

Free consent:
Consent means that the parties to an agreement must agree on the same thing in the
same sense. Consent is said to be free when it is

not obtained by threat, undue

influence, fraud, misrepresentation, or mistake.

6.

Legality of the object

Object of the contract must be lawful. Contract whose object is not lawful are void.
Object of the contract is said to be lawful if: it is not forbidden by law; it would not
defeat the provision of any law it is not fraudulent, it is not injurious to the person or
property of another. It is not immoral. It is not opposed to public policy

7.

Agreement not expressly declared void

Agreement must not have been declared void by any law in force the country.
Agreements expressly declared void as per Indian Contact Act, 1872 are:

226
a.

Agreements in restraints of marriage- Section 26

b.

Agreements in restraint of trade- section 27

An agreement by which a person is restrained

from

pursuing

lawful

business of any kind is void except where goodwill not to carry on a similar
business has been sold within specified limit and provided the law consider it
reasonable
c.

Agreements in restraint of legal proceedings- Section 28

d.

Agreements, meaning of which is not certain or capable of being made certain

Section- 29
e.

Agreements by way of wager Section 30

f.

Agreements to do impossible acts- Section 56

g.

Agreements contingent upon impossible event- Section 36

8.

Compliance with writing, registration and formalities

Agreements can be oral or written. Oral contracts are equally valid contracts
except where writing and/or registration is compulsory under some statute.
In India, agreements relating to lease, gift, sale written agreements.
Registration is compulsory for documents of mortgage deed covering
immovable property.
Purchase contracts relating to movable good can be oral or written. Written
contracts are preferred since terms of oral contract are difficult to prove in the
event of a dispute

Contract management
Contract management is a modern technique of organizing, planning and controlling the
day to day contract operations of an organization. Contract management is a tool which is
progressive in terms of setting the contracts. It is an approach which develops the contracts.

227
The contract management is one of the finest techniques which work on settling terms and
conditions on the agreements, with entire legal compliance assortment.
Whether it is an employee wage settlement or a suppliers invoice billing, the contract
management sorts out all the issues in a very authentic way.
Contract management or contract administration is the management of contracts made
with customers, vendors, partners, or employees.

Contract management includes finalizing/

negotiating terms and conditions in contracts and ensuring compliance with the terms

and

conditions, as well as documenting and agreeing on any changes that may arise during its
implementation or execution.
It can be summarized as the process of systematically and efficiently managing contract
creation, execution, and analysis for the purpose of maximizing financial and operational
performance and minimizing risk.
Contract management can also be defined as the process that enables both parties to a contract
to meet their obligations in order to deliver the objectives required from the contract. It also
involves building a good working relationship between customer and provider. It continues
throughout the life of a contract and involves managing proactively to anticipate future needs
as well as reacting to situations that arise.
The central aim of contract

management is to obtain the services as agreed in the contract

and achieve value for money. This means optimizing the efficiency, effectiveness and
economy of the service or relationship described by the contract, balancing costs against risks
and actively managing the customerprovider relationship.
Contract management may also involve aiming for continuous improvement in performance
over the life of the contract.

Contract management activities can be broadly grouped into three areas.

228

Service delivery management - ensures that the service is being delivered as agreed, to the
required level of performance and quality.
Relationship management - keeps the relationship between the two parties open and
constructive, aiming to resolve or ease tensions and identify problems early.
Contract administration - handles the formal governance of the contract and changes to the
contract documentation.
All three areas must be managed successfully, if the arrangement is to be a success.
In addition, good preparation and the right contract are essential foundations for good contract
management. The arrangement must also be flexible enough to accommodate change.
A key factor is intelligent customer capability: the knowledge of both the customers and the
providers business, the service being provided, and the contract itself.
This capability, which touches all three areas of contract management, forms the interface
between supply and demand; that is, between the business area and the provider.
Service & Delivery Management
Managing service delivery means ensuring that what has been agreed is delivered, to
appropriate quality standards.
The contract should define the service levels and terms under which a service is
provided.
Service level management is about assessing and managing the performance of the
service provider to ensure value for money.

229

Considering service quality against cost leads to an assessment of the value for money
that a contract is providing.
As well as assessments of whether services are delivered to agreed levels or volumes,
the quality of the service must also be assessed. Qualities metrics will have to be
created that allow the quality of service to be assessed, even in areas where it is hard
to quantify.
Relationship Management
As far the contractual and commercial aspects, the relationships between the parties
are vital to making a success of the arrangements.

The approach to this will vary depending on the contract, but it is important that the
specific responsibilities are not neglected, even though there may not be a nominated
individual assigned to the role of relationship manager.
In long term contracts, where interdependency between customer and provider is
inevitable, it is in the mutual interests to make the relationship work.
The three key factors for success are trust, communication, and recognition of mutual
aims.
Contact Administration
Contract administration, the formal governance of the contract, includes such tasks as
contract maintenance and change control, charges and cost monitoring, ordering and
payment procedures, management reporting, and so on. Importance of contract

230
administration to success of contract, and to relationship

between

customer

and

provider, should not be underestimated.

Clear administrative procedures ensure that all parties to the contract understand who
does what, when, and how.
The contract documentation itself must continue to accurately reflect the arrangement,
and changes to it (required by changes to services or procedures) carefully controlled.
Responsibility for authorizing different types of change will often rest with different
people, and documented internal procedures will need to reflect this.
Critical Factors Essential for Success of Contract Management:
Good preparation- An accurate assessment of needs help create a clear outputbased specification. Effective evaluation procedures and selection will ensure that
contract is awarded to right provider.
Right contract- contract is foundation for relationship. It should include aspects
such as allocation of risk, quality of service required, and value for money
mechanisms, as well procedures for communication and dispute resolution.
Single business focus. Each party needs to understand objectives and business of
the other. Customer must have clear business objectives, coupled with a clear
understanding of why the contract will contribute to them; the provider must also
be able to achieve their objectives, including making a reasonable margin.
Service delivery management and contract administration. Effective
governance will ensure that the customer gets what is agreed, to the level of
quality require. The performance under the contract must be monitored to ensure
that the customer continues to get value for money.

231

Relationship management. Mutual trust & understanding, openness, and

excellent communications are as important to the success of an arrangement as the
fulfillment of the formal contract terms and conditions.
Continuous improvement. Improvements in price, quality or service should be
sought and, where possible, built into the contract terms.
People, skills and continuity. There must be people with right interpersonal and
management skills to manage these relationships on a peer-to-peer basis and at
multiple levels in the organization. Clear roles and responsibilities should be
defined, and continuity of key staff should be ensured as far as possible. A contract
manager (or contract management team) should be designated.
Knowledge. Those involved in managing the contract must understand the
business fully and know the contract documentation inside out (intelligent
customer capability). This is essential if they are to understand the implications of
problems (or opportunities) over the life of the contract.
Flexibility. Management of contracts usually requires some flexibility on both
sides and a willingness to adapt the terms of the contract to reflect a rapidly
changing world. Problems are bound to arise that could not be foreseen when the
contract was awarded.
Change management. Contracts should be capable of change (to terms,
requirements and perhaps scope) and the relationship should be strong and flexible
enough to facilitate it.
Proactivity Good contract management is not reactive, but aims to anticipate and
respond to business needs of the future.

232
What can go wrong and why?
If contracts are not well managed from customer side, any or all of following may happen:
The provider is obliged to take control, resulting in unbalanced decisions that do not serve
the customers interests
Decisions are not taken at the right time or not taken at all
New business processes do not integrate with existing processes, and therefore fail
People (in both organizations) fail to understand their obligations and responsibilities
There are misunderstandings, disagreements and under-estimations; too many issues are
escalated inappropriately
Progress is slow or there seems to be an inability to move forward
The intended benefits are not realized
Opportunities to improve value for money and performance are missed.
Ultimately, the contract becomes unworkable.
There are several reasons why organizations fail to manage contracts successfully. Some
possible reasons include:
Poorly drafted contracts
Inadequate resources are assigned to contract management

233
Customer team does not match provider team in terms of either skills or experience (or both)
The wrong people are put in place, leading to personality clashes
The context, complexities and dependencies of the contract are not well understood
There is a failure to check provider assumptions
Authorities or responsibilities relating to commercial decisions are not clear
A lack of performance measurement or benchmarking by the customer
A focus on current arrangements rather than what is possible or the potential for
improvement
A failure to monitor and manage retained risks (statutory, political and commercial).
Contract Management in India
As in many other countries, until recently management of contracts in India was seen as a
largely administrative task.
Large businesses might have a dedicated contract administration deptt; in others, it
was perhaps a duty performed by Sales or Project Management. And for contract
drafting or negotiation support, role would generally fall to lawyers (who interestingly
often report to head of Finance).
Like so many things in modern India,
this picture is changing fast and it is reflected in creation of Indian Association of
Project Contract Administration and Management. This title reflects todays reality

234
& perhaps indicates that professionalization of contracting may follow a slightly
different path in India. However, its connection with International Association for
Contract & Commercial Management (IACCM) will enable it to draw from global
research, best practice and professional networking.
Many Indian members are already active within IACCM and have been contributing
to working groups, the development of training materials and

the

Associations

overall governance at both Advisory Council and Board level. In addition several
hundred of new breed contract managers have embarked on IACCM Professional
Accreditation and training.
So what has caused this rapid change? Mostly it is of course tremendous success that
India is having in penetrating global markets, both through its dynamic domestic
companies and also due to its well-educated and highly motivated workforce. This
emergence onto world stage has been accompanied by need to develop world-class
standards including the ability to negotiate and manage trading relationships and
commitments through robust contracts.

International operations demand more disciplined procedures for defining and

managing business risk and trading relationships and contract management provides
a critical component.
Another reason why contracting competence has become so urgent for India is the fact
that so much of their development is in the area of long-term services. The strength in
outsourcing, contract manufacturing, application development and professional
services must be mirrored in the

ability to craft and then manage reliable

commitments and obligations with their

trading partners.

235
Indian management has already moved on from reactive role of contract
administrators and is advancing professional status and competence of a new breed of
contract managers, who engage in all aspects of the contracting formulation and postaward management. they understand this competence is critical not only to ensure
success in their trading relationships, but also in the delivery of sound bottom-line
performance.

Legality of Purchase Transaction and its importance

Purchasing is a contract and purchase order is a legal document. A purchase/Contracts executive
commits substantial amount of organizations finance when places purchase/work order.
It is therefore, imperative that he understands relevant legal aspects of each transaction. Lack of
knowledge of law can lead to costly blunder while contracting supplies of goods and services
Points to be kept in consideration by buyers are:
Enforceability of the agreement

236
A PO is an agreement between buyer and seller. To enjoy legal protection, agreement must be
enforceable by law. Law does not enforce each and every agreement. Indian Contract Act, 1872
specifies the essentials of a contract
Order acceptance and termination
Purchasing is a contract and is complete only when there is an offer to buy or sell and acceptance of
the offer. For the valid contract, offer and acceptance must fulfill certain criteria. These essentials of
offer and acceptance have been clearly laid down in the Indian Contract Act 1972
Place and time of delivery
Place and time of delivery must be spelled out clearly. If place of delivery is not specified, it is treated
as place where the goods are at the time of manufacture or sale. Similarly, time of delivery must be
clearly worked otherwise delivery is treated as ineffectual. Various rules concerning delivery have
been nicely dealt in the Sales of Goods Act, 1930
Right of Inspection & Rejection of non-conforming Materials
Buyer has right of inspection of the goods on their receipt except under special circumstance. The
Sales of Goods Act, 1930 is quite explicit on the issue
Quantity of goods
Buyer has right to accept or refuse goods if they are delivered in part or in excess which is amply clear
in the Sales of Goods Act, 1930
Buyers Responsibility:
A buyer is personally responsible for the loss that may accrue to the company if he acts outside
authority conferred on him by his employer. The Law of Agency with such and similar issues
Loss of Goods in Custody
A buyer may give goods for repair, servicing, storage etc to be returned on a later date. Such goods
may get damaged when they are in possession of the party. Law concerning rights of both parties and
liabilities to such transaction have been dealt with in the Law of Bailment

237

Carriage of goods
All transaction concerning sales of goods result in carriage of goods from one place to another within
the country or from one country to another
The goods may be carried by land, sea or air.
The law leading to carriage of goods is governed by following important Acts:
i)

The Common Carrier Act, 1865

ii)

The Railways Act, 1890

iii)

The Carriage of Goods by Sea Act, 1925

iv)

The Carriage by Air Act, 1963.

Transit Damage/ Loss of Goods

Insurance cover is taken against a number of contingencies such as fire, theft, damage to goods during
transit, loss of consignment etc.
A purchaser is more concerned with the following
i)

Transit insurance

ii)

Fire insurance

iii)

Miscellaneous insurance

Insurance Act 1938 deals with these requirements

Dishonor of z negotiable instrument
A negotiable instrument means a promissory note, bill of exchange or cheque payable to order or
bearer or despatch documents such as GR/LR. RR/PWB. AWB, B/L (Bill of Lading) etc which a
purchase deptt is almost daily concerned with. Each instrument must fulfill certain requirement to be
valid. Drawer of bills as well drawee have certain rights and obligations under the law (Negotiable
Instrument Act, 1881)
Govt. levies & taxes

238
A substantial portion of price of an item includes variety of taxes levied at different times and different
stage. There is a tax on manufacturing (excise duty), on imports (custom duty), on sales as (sales tax),
for bringing materials from one state to certain states (Entry Tax) and for bringing the goods with
municipal limits (Octrio). A purchaser shall also have fairly good knowledge of tax laws which govern
these taxes so that he can determine as to what portion of taxes can be legitimately reduced without
contravening laws.
Arbitration
Commercial contracts usually contain a clause providing for reference to arbitration in case of dispute.
Law pertaining to arbitration is contained in the Arbitration Act, 1940.
Patent Indemnity
Clause to absolve buyer against any suit of proceedings which may be brought against the buyer by
some other firm for alleged patent infringement by the supplier of goods under the contract.