Handout MBA FT 202C

UNIT II

By Varun Keshari
Purchasing
Purchasing in ordinary sense, purchasing means procurement of materials, machines, tools and
equipments. But now days, purchasing has acquired a new dimension and it has become a specific
function. It is a process which includes all the functions involved from the requirement to the receipt
of material and its final acceptance.
In the words of Alford & Beaty: Purchasing is the procuring of materials, supplies, machine tools
& services required for the equipment, maintenance & operation of a manufacturing plant
IMPORTANCE OF PURCHASING:
The purchasing is important function in all type of business organisations whether it is small, medium
or large. Without purchasing, no business can be operated. In todays World, purchasing plays a
significant role in shaping the business decisions. The role of purchasing in business management has
become very important.
Few important reasons:
Higher cost of goods & services: - As we known nearly 60% or more money in any organisation
blocked in raw materials. Therefore the profitability depends to a great extent on the efficient
purchasing.
Escalating cost of stock outs: - Lack of continuity in the availability of materials seriously affects all
major Companies. Financial loss due to stock outs of materials in mass/flow production units.
Higher present day cost of Capital: - Unnecessary Capital lock-up can be avoided if purchasing is
made efficient.
Purchasing is not mere act of buying: - Purchasing is not mere act of buying. It is in fact a much a
much broader concept. Purchasing in todays context includes- market research, vendor rating,
standardisation & variety reduction, codification, surplus disposal, purchase budget etc.
Professionalization of materials function:- Like other branches of industry, purchase to has
experienced development of many concepts such as:-ABC analysis, economic lot size, codification,
vendor rating etc.
Changing Concepts of buyer-seller-relations:-Retention of good suppliers, with increasing
competition, is becoming difficult and hence the buying functioning is becoming challenging day by
day.
OBJECTIVES:
1. To maintain regular flow of materials, so that there will be continuity of operations.
2. To procure at a competitive price the needed materials at the right quality, the right time.
3. To suggest better substitutes to materials which are currently being used with a view to lower
cost & maintain quality of the product
4. To integrate the requirements of all departments of all departments of the organisation in
order to take the advantage of economy of scale wherever possible and to also avoid
duplications of purchases resulting in wastes and obsolescence.
5. To create goodwill for the organisation through healthy buyer supplier relationship.

Notes By Prof Varun Keshari

FUNCTION OF PURCHASE DEPARTMENT:

1. Locating selecting & developing qualified source of supply.
2. Scrutinising purchase indents and deciding suitable method buying.
3. Floating enquires, processing quotations, conducting negotiation and releasing purchase
orders.
4. Pre delivery follow up & shortage chasing.
5. Co-ordination with inward inspection, including timely return of defective materials back to
supplier.
6. Endorsing suppliers invoice for payment.
7. Processing suppliers requests for price increases including price renegotiations.
8. Attending to suppliers representatives and travelling sales men.
9. Arranging discussion meetings between suppliers representatives and Companys officials.
10. Disposal of Surplus, obsolete & scrap material.
11. Advising management as regards to new materials, new products, forward buying etc.
12. Acting as a link between Companys finance department and suppliers for timely
payments/settlement of suppliers bills
13. Attending to periodical activities like applying for important licence, quota etc.
14. Maintaining Companys image among suppliers.
PURCHASING PRINCIPLES:
Right Quality: - Right quality does not mean the best quality. Any quality that is suitable for the
purpose is known as right quality.
Right Quantity: - Purchase organisation is also responsible to maintain regular flow of materials for
production activity. For this right quantity of materials is to be purchased. Excess purchase should be
avoided because Capital is unnecessarily blocked.
Right Time Right time means the minimum level. This level indicates the stock has reached to
minimum and now the order must be placed. At this level, purchase department will not delay in
placing order. If the goods are arranged earlier than the required time, it will cause over-stock and
blocking of money. On the other hand, delay in delivery means loss of production.
Right Source: - The right source is that supplier who can supply the material of the right quality, in
the right quantity, at the right time and at the agreed or right price. The supplier should have sufficient
financial resources and manpower to handle the order. Right source aspects require decisions as to
what items should be purchased directly from the manufacturers, which items from dealers & which
items from open market. As far as possible, the firm should be located near the buyers plant. This
will avoid delivery delay and high transportation cost.
Right Price: - Right price does not mean the lowest price but the price which minimise the overall
cost.
Purchase procedure
The procedure describes the sequence of steps leading to the completion of an identified specific task.
Thus purchasing procedure describes the sequence of steps by which a purchase function is carried
through from its inception to its completion. The purchasing procedure starts with the realization that
something is required, the need is then spelt out either in the form of requisition or in a bill of
materials, then attempts are made to identify their sources, the appropriate supplier is selected on the
basis of some scientific analysis, the purchase order is placed with the selected supplier, it is checked
to ensure that the delivery is made as per the agreed terms, the invoice of the vendor is checked and
paid out and finally all relevant records are filed and maintained. Generally the professionally

Notes By Prof Varun Keshari

managed organizations prepare their own Purchase Manual which details out the purchase
procedure. It is not desirable to prescribe any standard purchasing procedure due to the existence of
wide range of variations that exist among industries, companies, products, personnel etc. Generally
organizations should devise their own procedure on the basis of their specific needs. However, the
following basic steps are considered while prescribing the full proof purchasing procedure.
Steps of purchasing procedure: The purchasing generally comprises the following steps:
1) Recognition of the need
2) Selection of the supplier
3) Placing the purchase order
4) Follow up of the order
5) Receiving and inspection of the materials
6) Payment of the invoice
7) Maintenance of the records
8) Maintenance of the vendor relations.
Purchasing is a continuous and recurring phenomenon. The prescription of procedure simplifies and
expedites the operation. Similarly various types of forms are designed to simplify the purchasing
procedure. The popular forms which are used in the purchasing procedure are: Purchase Requisition,
Purchase Order, Purchase Contract Form, Follow up Form, Receiving slip, Inspection Report, Test
Certificate, Rejection Form etc. These are all now computerized and the concerned Purchase and
Stores personnel can review the same online.
Buyer Supplier Relationship
The relationship between a supplier and buyer can be a complex one. Each party wants to maximize
its time, resources, and cash investment; these may be competing priorities that can strain the
relationship. For such a partnership to succeed, it is paramount there exists a mutual business
understanding underscored with respect and a sincere wish for each party to prosper. Creating this
balance does not mean driving for the lowest possible price with no regard for the true expense
incurred, but rather recognizing that the success of one partner helps the success of the other.
1.

Compliance with local and international regulations;

2.

Conduct that breeds honesty, respect and open dialogue; and

3.

Strategic financing that benefits both parties.

What is the difference between negotiation and bargaining?

Good negotiation actually either gets you to the point where you can bargain or better yet get you to
the point where you dont need to bargain at all. Bargaining is what people typically think of as
haggling, point counterpoint or pushing back and forth in what many people look at as a zero sum
game. Most people look at point counter point as being all that negotiation involves. What I want,
what Im unwilling to give up and what Im willing to trade in order to get what I want.
Negotiation is a broader communication between two people that involves what influences the other
side and what drives them. Its asking open ended questions about what their motivations and goals
are, the entire communication process around bargaining. Bargaining is a small subset of negotiation.
Negotiation is a much broader idea. A negotiation is really any communication between two parties
where you need or want the other party to do something.

Notes By Prof Varun Keshari

You might communicate with them in a way that gets them to do something and because its not a
request, they wont have any idea that you influenced their decision. Negotiation is the process of
influentially communicating in a way that prompts the other side to react. Its communication thats
designed to provoke or create a response.
Negotiation is synonymous with navigation. We say the most dangerous negotiation is the one you
dont know youre in. So if people dont understand the difference between negotiating and
bargaining someone could be negotiating with them in a way that influences their mindset.
Why Negotiate?
Perhaps you havent realized it, but youve been playing the negotiating game all your life. You were
doing it even before you entered the real world of business-to-business negotiations. It was part of
your reality before negotiating business-to-consumer to buy a car or digital TV or satellite TV
service. In todays world, you negotiate consumer-to-consumer for things you buy or sell on
Craigslist and eBay.
This may seem far away from the kind of negotiating you did when you were a child, trading
baseball cards or swapping lunches at school. However, tapping into the core skills you developed
during all those scrimmages is easy once you learn where your innate desire to swap originated.
While those days may have long faded into history, the practice and promise of negotiating has
most likely stayed with youand most likely has become more important than ever in the real life
you lead today.
Bartering Back Through Time
So where, how, when, and why did negotiation become a part of civilized society? It really started as
barterthe direct exchange of goods or services without money involved.
No one really knows when the first barter took place, but we do know that bartering has been
around for much longer than buying and selling. It grew up as a system of give-and-take that
accommodated anyone who chose to participate. Whether it was to acquire a piece of lamb in
exchange for some pottery or to obtain jewelry for a hand-painted headpiece, people found ways to
fulfill their needs.

The Negotiating Game

A good negotiation draws on the skills used for marketplace bartering and on the focused
determination required of bargaining. Negotiating encompasses a wide range of core principles and
becomes a series of tactics and strategies that you must know how and when to use throughout the
entire game. In addition to remaining focused and forging strong relationships, youll need to be
informed, be prepared, know who your challengers are, and have other alternatives.
Types of Negotiation
Although several forms of negotiation will be discussed in this book, the two most common
are positional negotiating and win-win negotiating. Particularly in todays fast-paced and heavily
interconnected world, you should be aware of both types of negotiation and should embrace win-win
negotiation as the more favourable approach.
Positional Negotiation
Positional negotiating occurs when neither side moves from its original position because both are so
focused on their own needs that they cannot even begin to comprehend those of the other party. A
power struggle ensues and they never really discuss goals and objects. The result is hours of trying to
produce agreements that everyone is satisfied with; long-term relationships are jeopardized because

Notes By Prof Varun Keshari

theres too much negativity being exhibited. Time is wasted, because in todays environment an hour
is forever. In positional negotiating, everyone is out for himself, and thats that.
When They Dont Want to Play
Since negotiations require two or more, what do you do if the person you want to negotiate with
refuses your offer? First, find out why. There may be a simple explanation. Maybe the person doesnt
have the time to take you up on your offer just yet but would be willing to work with you at a later
date.
If you cant find out why, find out what or how. What can you put forth in order to make your
proposal more attractive? What can you put forth to make the negotiation quicker or easier? If the
coworker you carpool with decides she likes the freedom of having her own car every day, remind her
of the benefits that carpooling provides. You could even offer to let her take your car to lunch or to
run errands. By switching the focus on how the deal gives her an advantage, and by giving her
something in return for the freedom shed be giving up, shes more likely to agree to the terms. And if
you dont have time to work out the details, simply offer to drive the first weekyoull have plenty of
time in the car to flesh out the deal.
The five main negotiation strategies are:
Competitive
Accommodating
Compromising
Collaborating and
Avoidance
Competitive strategy involves an I win, you lose attitude. Accommodation is I will let you win
in exchange for some other benefit I hope to gain now or later. Compromising is I dont care
who wins, I just want to get this over with quickly. Collaboration is We can both win by
expanding the pie before we cut it. And avoidance is I dont really want to play at all.
The Competitive Strategy
The Competitive Strategy of I win, you lose is the one most often used in settlement
negotiations. It involves the use of intimidation, distraction, and diversion tactics to gain leverage.
You can choose a Competitive Strategy regardless of your bargaining position. If you have greater
leverage, you can use competitive tactics to realize your advantage. But if your case is weaker,
competitive tactics can they create value.
Most negotiations of every type begin with a Competitive Strategy. The parties need to test each
others wills before they begin bargaining seriously. The parties then continue their competitive
bargaining or shift their approach to one of the four other strategies.
Following are examples of some competitive tactics:
Alternatives to Settlement
Emphasize you have better choices than
settlement. The side that cares more about
settling is weaker. If you have the better
BATNA (Best Alternative to a Negotiated
Agreement), you have more chips. Make
that clear to your adversary.

One example is the threat to beat your

adversary in the marketplace. This
threatens the lawful use of market power to
make a legal victory Pyrrhic. Properly
used, this tactic is effective.
Anything But That

Notes By Prof Varun Keshari

Claim your adversarys offer is not enough,

even when it is. Pick up other concessions
before he wrenches your agreement from
you.
Bluffing
Bluffing is at negotiations core because
each side has limited information. A good
bluff uses your adversarys uncertainty to
create even more doubt. And doubt
translates into risk, and risk into money.
Look for signs of uncertainty on her face or
in her body language. But a bluff is not a
lie never expressly mislead.
A standard bluff is take it or leave it.
Meet this bluff (and most others) by calling
it. You wont know your adversarys limit
unless you push for it.
Bringing in the Media
Threaten to report some action or behavior
to the media to induce concessions.
Plaintiffs will use this tactic in mediasensitive industries,
such as
the
entertainment industry. Recognize that
parties in such industries have fair
resistance to this tactic and will combat
your disclosure through press releases of
their own.
Creating Deadlock
Create deadlock to force your adversary
into concessions to move the negotiations
along. But distinguish this tactic, as a
tactic, from a legitimate impasse. Even
reasonable people can disagree.
Diversion/Distraction
If you feel you are losing an important
issue, shift the discussions to a different
issue before you concede. Even change the
subject altogether or use some other
technique to distract your adversary from
completing the current discussion.
Done Deal: Take some unilateral action
and present it to other side as a done
deal. Your adversary is thus forced to
acquiesce or walk out. An example is when
a co-party shows up at the negotiation only
to discover that the other co-party has
already settled.
Good Cop/Bad Cop

Notes By Prof Varun Keshari

Team an aggressive negotiator with a

friendly negotiator to win concessions. The
aggressive negotiator uses competitive
tactics to anger and distract your adversary.
The friendly negotiator steps in to smooth
things over. The friendly negotiator
becomes the mediator between your
adversary and the aggressive negotiator,
and you can strike a deal on the friendly
negotiators terms.
Irrational Behavior
Sometimes act irrationally, not only to
distract and unnerve, but also to undermine
your adversarys confidence. Lawyers tend
toward rational argument. The irrational
can throw off even an experienced
negotiator.
Limited Authority
Claim to lack authority to settle at some
amount and ask your adversary to reduce
the offer to your authority limits. To
prevent your adversary from using this
tactic, determine her authority in advance.
If she lacks full authority, do not proceed.
Limited Time
Constrain the time limits of the negotiation.
Counter this tactic by clarifying time
constraints in advance.
Poor Me
Act like you have no background or
training in negotiation and ask your
adversarys help. He may sympathize with
you and be more reasonable than he
intended. This tactic can be especially
effective for younger advocates.
Silence
Very few people can endure silence.
Silence can impel your adversary to give
you more information or concede more
than he intended.
If your adversarys silence discomforts
you, say something like, I see you are
thinking about my offer. Im going to leave
the room for a bit. Please let me know
when you are ready to respond. And begin
to leave. The silence will end before you
reach the door.

Straw Man
Demand agreement on Issue 1, which your
adversary cares about most. Create
deadlock and then reluctantly concede
Issue 1 to gain agreement on Issue 2 (the
one you care about most) and maybe
Issues 3 and 4 as well.
Turnabout
After you have conceded an issue or
otherwise acted defensively, gain space
by coming out strong on the next issue. But

choose that issue wisely. It must be

important, and you must win it.
Use of Power
Threaten to use your power and sometimes
actually use it. But heed this chess axiom:
The threat is more powerful than its
execution. The threat creates doubt and,
hence, concessions; but once implemented,
you limit your adversarys choices, and she
will do what she must to respond.

The Accommodation Strategy

An Accommodating party will sublimate its concerns to satisfy the other partys, at least for the
present. You choose an Accommodation Strategy if you have done wrong and want to get the
matter over with quickly and less expensively (airplane crashes and oil spills are two examples
where quick settlements will save money). And there are less dramatic examples where a desire to
limit personal or business disruption will encourage you to end the matter quickly. Or maybe you
wish to gain some goodwill or other benefit now or later through a quick resolution.
Some accommodating tactics:
Face-Saving
Prioritize the other sides dignity. Use
every opportunity to give face and
respect to the other side. Allow the other
side to make tactful retreats to avoid
embarrassment.
Identification
Align your interests with your adversarys,
see the facts from her perspective, and
agree with her arguments. But dont
concede unnecessary issues.

Take the Lead Oar

Move the negotiation forward regardless of
who created the difficulty. Suggest
solutions, offer to prepare the documents,
and be flexible about timing.
Take Reasonable Actions
Always be the party of reason, whether
setting realistic deadlines or other
conditions of the negotiation. Rarely if ever
use a competitive tactic to move the other
side.

The Compromising Strategy

Compromisers look for an expedient, partially satisfactory middle ground. Their primary interest is
haste and rough justice. Thus, compromisers are willing to trade concessions, sometimes despite
the merits, simply to make a deal. One example is a dispute involving an ongoing business
relationship. You may choose to give a little to preserve the relationship.
Following are the compromisers tactics.
Bit-by-Bit
Gain your concessions bit-by-bit rather
than all at once. As the direction of the
incremental movement becomes clear,
suggest meeting at the mid-point.
Conditional Proposals

Notes By Prof Varun Keshari

Make a proposal conditioned upon your

adversarys acceptance of issues you need
favorably resolved.
Log-Rolling
Concede on an unimportant issue to you
(but important to your adversary) in

exchange for your adversarys concession

on an issue that does matter to you.
Splitting the Baby
At some point offer to split the difference
with the other side, whether through an
exchange of remaining issues or halving
the dollar amount still in issue.

Tit-for-Tat
Never make a concession without obtaining
one in return. This rule underlies all
bargaining (I wont negotiate against
myself!). But you must adhere to it when
compromising or you will compromise
away all your value simply for
expediencys sake.

The Collaborative Strategy

The Collaborative Strategy (Win-Win) seeks to create value for both sides. Its focus is on each
sides underlying interests and not their positions. You give the other side something it wants in
exchange for something you want. You both gain in the process.
Business negotiators use the Collaborative Strategy. Business negotiations involve many different
components of value and risk allocation, all of which can be traded against one another for an
ultimately satisfactory outcome. The lesser opportunities for value and risk allocation in litigation
settlement talks explain why most litigants begin with a Competitive Strategy.
Following are some collaborative tactics.
Flexibility
Be flexible, the hallmark of a skilled
collaborator. Know when to mount a
tactical retreat and when to press for an
important point. Be willing to re-examine
decided issues, but dont feel obligated to
make further concessions unless you also
gain something.
Focus on Process
Process often translates into improved
substance. Rearrange the mechanical steps
of the negotiation to overcome impasse and
deadlock and enhance problem-solving
prospects. Typical examples: take a break

in the negotiation; change the physical

setting of the negotiation; or return the
negotiation to the fact-finding stage.
Identify with Others in Similar
Circumstances
This tactic might be termed the transitive
rule of negotiation: argue that the other
side has already treated similarly-situated
X in a particular way, and they should treat
you the same way. Defendants in multidefendant suits often use this tactic when
the plaintiff has settled favourably with one
of them.

The Avoidance Strategy

Avoiders try to ignore the entire dispute, or some specific issues, for at least some period of time.
The avoider uses tactics to sidestep or postpone an issue or withdraw altogether from what the
avoider perceives as a threatening situation.
Negotiate Money Issues First
If you prioritize money, insist that money
be negotiated first. By fixing the money
component of the settlement, you avoid
discounts for the cash-worth of any nonmoney concessions.
Negotiate Non-Money Issues First
But if you wish to avoid paying money,
address the non-money issues first. You

Notes By Prof Varun Keshari

can then value your non-monetary

concessions and use those values to reduce
the amount of money you will pay your
adversary.

Refuse to Combine Negotiation of

Related Disputes
If you are litigating multiple related
actions, refuse to negotiate the actions

together if you determine that you are

stronger in one case than another. You can
thus avoid offsetting your strong case with
the other cases weaknesses.

not ripe for discussion, remove that issue

from the negotiation, for at least some
period of time.
Switching Strategies
You may decide to switch strategies if you
feel you are making insufficient progress.
As negotiations move forward and you
want to encourage continued progress, you
may abandon a Competitive Strategy for
one of the cooperative strategies
(Accommodation,
Compromising,
or
Collaborative). Or you may instead move
to a more Competitive Strategy in response
to the other sides competitive behavior.

Walk Out of the Negotiation

If you become engaged in negotiations you
are not ready for, walk out. You may state
dissatisfaction with your adversarys
proposals, but your goal is to defer
discussions to a later time.
Withdraw an Issue
If you are not yet ready to address an issue,
perhaps because it is too painful or simply
Conclusion

The Game of Negotiation requires specific strategies and the right tactics to implement that
strategy. Your case and bargaining position will determine which negotiation strategy will work
best for you: Competitive, when you must have what you want; Accommodation, when you have
done wrong and want to settle quickly; Compromising, when expedience matters most;
Collaborative, when you want to create a bigger pie; and Avoidance, when you are not yet ready to
bargain.
*******

Notes By Prof Varun Keshari