METHODS OF BUYING

Presented By : Sneha Patil 1261 Shweta Kawde - 1118

INTRODUCTION
Buying means Purchasing goods of right quality, in right quantities, at the right time and at the right place The buying department is responsible to provide goods and services required by the company at the least cost. Request to procure may be received either from stores department or any other functional deartments

FACTORS INFLUENCING SELECTION OF BUYING METHODS

Nature of Item Regularity of its Demand Quantities required Susceptibility to price variations

BUYING METHODS 1. Hand To Mouth Buying

Also called buying according to the requirements Frequent purchases in small quantities Purchases made only when demand arises To cover immediate requirements The purchase manager does not keep a buffer.

2. FORWARD BUYING
Also called Market Purchasing Refers to procurement of sufficient quantity of an item in advance of its needs, and when prices are low Purchases made to cover production requirements for a considerable period Quantity purchased is large

3. SPECULATIVE BUYING
Refers to buying large requirements of an item when its price is low with the intension to sell bulk of it at higher price for speculative profit Purchases are not related to companys production programme Does not base decisions on quantity. Its single aim is to make speculative profits Company is adversely affected if price does not rise according to expectations.

4. Reciprocal Buying
It means purchasing from ones customer in preference to other.

5. Concentrated Buying
Purchases are made from very limited sources or even from a single source.

6. Diversified Buying
The buyer purchases goods from a large number of sellers

PURCHASING UNDER DIFFERENT CIRCUMSTANCES

The Buying decisions can take place under the following conditions : o Buying under certainty o Buying under risk o Buying under uncertainty. Decision making (of buying) under such circumstances follow the route as below: o identification of several decision alternatives, called strategic ranking of strategic accounting to desirability, based on the pay-off of each strategy. o Selection of the optional strategy

Buying Under Certainty

Concerns items which are required regularly and therefore need to be stocked

Cont..
The salient features of the decision process of buying are : o Items have definite consumption pattern. o Procurement lead time is fairly constant( it may vary within a limited range) o Lead time and rate of usage of items called consumption per period can be ascertained from past historical data

Cont..
Typical examples of materials being purchased under this category: o Buying of routine items (i.e. regular consumption items) o Purchase of capital equipment

Cont..
Techniques used: o EOQ o Safety Stock o Replenishment Systems

EOQ
The quantity to be purchased should neither be small nor big because costs of buying and carrying materials are very high. EOQ is the size of the Lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs. Generally , EOQ is the point at which inventory carrying costs are equal to order costs. In determining EOQ cost of managing Inventory is made up of two parts i.e. ordering costs & carrying costs.

Cont..
A)Ordering Costs:
These are the costs which are associated with the purchasing or ordering of materials. These costs include:
Expenses incurred on transportation of goods purchased. Inspection costs of incoming materials. Cost of stationery , typing , postage ,telephone charges.etc.

Cont..
B)Carrying Costs:
These are the costs for holding the inventories. These costs include:
The cost of capital invested in inventories. An interest will be paid on the amount of capital locked-up in inventories. Cost of storage which could have been used for other purposes. The loss of materials due to deterioration and obsolescence.

Cont..
EOQ =
Where,
A = Annual Demand Or Usage O = Ordering Cost C = Carrying Cost

2AO c

Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated Usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed & in such a situation the firm can face a problem of stock-out. In order to Protect against the stockout arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks.

Replenishment Systems
Replenishment System is a means to decide when to order? and how much to order? Two Main Systems
Fixed Order Quantity System Fixed Order Interval System

Buying Under Risk

Purchase situations whos demands are not known with certainty No single value of demand can be forecasted o o o The salient features are : The buying decision has more than one alternative. All possible outcomes of each decision alternative are known Each outcome can be assigned a definite probability by the decision maker, from past historical, or, market research date. o The decision criteria for selecting the best alternative is based on EMV (Expected Monetary Value)

Cont..
Typical examples : o Determining the requirements of safety stock of an item. o Determining the quantity to be purchased of the item involving one time purchase decision, e.g., Christmas Trees, Umbrella, crackers etc. o Determining the order quantity of the parts

Cont..
Techniques used :
o Expected Monetary Value (EMV) Method a) Set up a payoff matrix, b) Determine EMV c) Selection of optimum alternative based on EMV

 Decide the optimal stock policy for the following:

Sales price per unit = Rs. 200 Purchase cost per unit = Rs. 100 Salvage value on unsold item = Rs. 50 No penalty for unsatisfied demand. Demand Analysis :
Demand Probability 10 0.2 20 0.3 30 0.3 40 0.1 50 0.1

Solution :
Profit : Rs. 100 Loss : Rs. 50 Draw Payoff Matrix :
Demand 10 20 Prob 0.2 0.3 10 1000 1000 20 500 2000 30 0 1500 40 -500 1000 50 -1000 500

30
40 50

0.3
0.1 0.1 EMV

1000
1000 1000 1000

2000
2000 2000 1700

3000
3000 3000 1950

2500
4000 4000 1750

2000
3500 5000 1400

 Optimal EMV = 1950 Therefore, Optimal Stock Level = 30 units

Buying Under Uncertainty

This category encompasses these buying decision where even the probabilities of the different event cannot be estimated. Such a situation occurs when there is no past experience, or, historical data to enable competition of probability of the events. The salient features are : o The buying decision has more than one alternative o All possible outcomes of each alternative are known but occurrences of the outcomes are uncertain o There are different decision criteria for deciding which decision alternative is the best

 Techniques :
o Maximum (gain) criteria, or, minimax (loss) criteria. o Maximum (gain) criteria, or, minimum (low) Criteria. o Hurwicz Alpha Criterion. o Laplace Criteria o Regret Criteria

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