Table of content

1.1 Introduction
1.2 Purchasing Management
1.3 Important of Purchase Management
1.4 Purchasing Activities
1.5 Types of Purchase
1.6 Purchasing Cycle
1.7 Characteristics of a Purchasing Manger
1.8 Materials Management
1.9 Classification of manufacturing materials
1.10 Objectives of Materials Management Department
1.11 Relationship between Materials Management Department and other Departments
1.12 Risks to be Considered by Purchase Material Manager
1.13 References/Suggested readings

1.1 Introduction

Purchasing
Purchasing describes the process of buying. It is the learning of the requirement, identifying and
selecting a supplier, negotiation price. Purchasing is an element of the wider function of procurement
and it includes many activities such as ordering, expediting, receipt and payment. Purchasing is
responsible for obtaining the materials, parts, supplies and services needed to produce of a product or
provide a service. (Joyce, 2006) Purchasing can be divided into two broad categories, large and small
purchases, based on seven characteristics of purchased product – volume, specificity, technological
complexity, essentiality, fragility, variability, and economic value. (Parikh, 2005)

Bulk Purchase
In case of bulk purchases there are high volume items, large amount, and more frequent utilization with
more specific use. Bulk purchases are handled in large organisations and multinational organisations
with the standardized purchasing process, where as some other organizations use separate purchasing
process. There are frequent misuse and lack of control in purchasing process in those organizations in
which same standardized process is used for both bulk and small purchasing. Large purchases are
typically non-urgent in nature. Large-volume, continuous-usage items can be covered by blanket
purchase orders, which often involve annual negotiation of prices. Small Purchase In case of small
purchase there are low volume items, small amount, less frequency of utilization, high variety and low
technical complexity. Mainly small purchases include machine parts, auto parts, machine repairs, in
frequent sullies of offices and miscellaneous goods. Small purchases are urgent in nature.
There are two basic types of purchasing in the business world: purchasing for resale or purchasing for
consumption or conversion. (Dobler, 1984) Purchasing for resale or resale purchasing is mainly
performed by retailers and wholesalers (called merchants). Purchasing for internal consumption or
conversion is called industrial buying. The industrial buyers generally face different and complex
problems with comparisons of merchandise buyers or resellers. For instance, the industrial buyers have
to spend time to anticipate in determining what products should be produced or manufactured and
what product should be purchased from outside or suppliers. They also correlate their purchasing 4 with
sale forecasts and production schedules. In some books, you will find the terms like purchasing,
procurement, supply chain, materials management, supply material and logistics interchangeably. But
there is a hair-line difference in all these terms.
Important Terms
Purchasing
Purchasing describes the process of buying. It covers the knowledge of the requirements, identifying
and selecting a supplier and negotiating price.
Procurement
It is a broader term. It includes purchasing products required for production, stores, traffic, receiving,
inspection and salvage.
Materials Management
It includes planning, organising, communicating, directing and controlling of all those activities mainly
concerned with the flow of materials into an organisation. Material management views material flows as
a system.
Logistics Management
It is the planning and controlling of the flow of raw material in a cost effective manner from the
suppliers or point of origin to the manufacturing and then flow of finished goods for consumption in the
customers’ hands.

1.2 Purchasing Management

Purchasing management is concerned with the planning and controlling of the acquisition of suppliers'
goods and resources, to fulfill the administrative and strategic objectives of the organization. In practice,
purchasing managers have to deal with both customers internal as well as external. He/she has to
respond creatively to internal customers' need on the one hand and to maintain a mutually profitable
relationship with suppliers on the other. This dual-role perspective of purchasing management has, in
recent years, been increasingly recognized as comprising complex tasks in the integration of
internal/external and upstream/downstream supply chain management activities. (Fung, 1999) The part
of supply chain management that focuses on the management of inbound goods and services into a
firm.

1.3 Importance of Purchase Management

For Cost Effective Production
Purchasing is responsible for learning of the internal requirements, locating and selecting suppliers,
obtaining the materials, parts, supplies and services needed to produce a product or provide a service. A
purchase manager is responsible for negotiation of price with suppliers too. You can get some idea of
the importance of purchasing when you consider that in manufacturing industry more than 60 percent
of the cost of finished goods comes from purchased parts and materials. Furthermore, the percentages
for purchased inventories are even higher for retail and wholesale companies, sometimes exceeding 90
percent. 6 Nonetheless, the importance of purchasing is more than just the cost of goods purchased;
other important factors include the quality of goods and services and the timing of deliveries of goods or
services, both of which can have a significant impact on operations. (Joyce, 2006) The industries like
construction, petroleum refineries, sugar, automobile have more than 75 percentages of materials cost
as an input percent cost.
For Strategic Purpose
Purchasing is a strategic issue. The manufacturers have to procure capital items like plant and machinery
for manufacturing facilities. It requires heavy investment. So, purchasing is an important function. But in
some organisations, especially small scale, purchasing is considered as a clerical activity. They assign this
job to the persons simply who are loyal to the organisation. But it is a wrong way. In purchasing, the
executives must by dynamic, innovative, creative and must have analytical decision making. The
emergence of the supply chain management concept has enlightened managers about the strategic role
played by purchasing. Purchasing helps to determine a firm's cost structure through negotiations with
suppliers. If the executives are efficient in bargaining then they can save for the organisations and this
will help the organisations to cut costs and helpful in getting competitive advantage in the market.
Purchasing initiatives can lead to reducing inventory and improving the quality of incoming parts and
components through vendor selection and supplier development. Purchasing also supports new product
development by encouraging supplier involvement in product development. 7 Organization can realize
major benefits from their focus on purchasing management as mentioned below:
From a Top Management Perspective: There are five rights that every management expects from their
purchasing executives:
Right Quantity
 Right Quantity
 Right quality
 Right Time
 Right Supplier
 Right Cost
 From Functional Perspective:
Uninterrupted flow of materials and services
 Buying at competitive prices
 Avoiding under inventory and over-inventory To have good relationship with other departments
In nutshell, purchase management has the following benefits:
 Cost reduction or improvement (required utmost to be competitive in market)
 Improved material delivery (required for smooth flow of production)
 8 Shorter cycle time, including product development cycle times (helpful in fast production)
Quality improvement (required to satisfy or win the hearts of the customers ultimately)
What car/automobile companies buy: Tires, Brakes leathers, Clutches, Wires, Steel plates, Glasses,
Paint, Fabric, Aluminum sheets, Electronic components, Carpets etc.
What soft-drink producers buy: Bottles, Sweetner, Carbonation, Flavouring substances, Caps,
Cardboards, Plastic Containers, etc.
What software companies buy: Computers, Hardware, Chairs, Tables, Wires, Data Cables, etc.
What hotels/restaurants buy: Vegetables, Utensils, Air conditioners, Gas Stoves, Carpets, etc.
So, we see that different industries require different types of materials according to their requirements.

1.4 Purchasing Activities

There are two major forms of purchasing activities that take place in an organization:
i. Tactical purchasing
ii. ii. Strategic sourcing

(i) Tactical Purchasing

The organisations require some materials for the smooth flow of production. The day to day
management of materials flow is called tactical purchasing. These activities generally ensure
that products and services are delivered to the right internal people at the right time but are
often not carried out using a long term horizon. (Monczka, 2002)
(ii) Strategic Sourcing
The purchasing which affects the long-term profitability is called strategic purchasing. Strategic
sourcing is a part of purchasing activities but in a border sense. In the strategic sourcing process
there may includes members from other than purchasing department like from engineering,
quality, design, manufacturing, marketing and accounting department for managing,
developing and integrating with supplier capabilities to achieve competitive advantages like
cost reduction, technology development, quality improvement and cycle time reduction.

1.5 Types of Purchase

There are mainly two types of purchases; the individual purchase and the organizational purchase.
Individual Purchase
Individual or personal purchase includes those types of items or products which are purchased for
personal or family consumption.
Factors influencing individual purchase behavior:
In general mainly there are four types of influence factors:
Cultural Factors
 Social Factors
 Personal Factors
 Psychological Factors
 Organizational Purchase
A purchase will be considered to be organizational if it is made in the name of a company or
organization, regardless of size, from a medium sized company up to a multinational or state company.
Organization consists of business, industries, retailers, wholesaler, government and non- government
organizations.
Business and industries purchase materials for business use or as a raw material to
 produce other product.
.Wholesalers/Retailers/traders buy product for resell at profit
. Government organisations purchase products for use in offices or provide services to people.
Non-government organizations purchase products to provide services to their client.
 Consumer Purchasing / Decision making Industrial Purchasing / Decisionmaking Less risky More risky
Emotional decision-making Rational / Analytical decision-making Personal purchasing is sometimes
unplanned or on the spot or abrupt buying influenced by promotional activities Scientific purchasing as
whole organization’s profitability affects

1.6 Purchasing Cycle

The purchasing cycle begins with a request from within the organization to purchase material,
equipment, supplies, or other items from outside the organization, and the cycle ends when the
purchasing department is notified that a shipment has been received in satisfactory condition, and
managerial accounting is actively involved in each step. (Joyce, 2006) The main steps in the cycle are as
under:
 Recognition of need
 Description of need
 Selection of suppliers
 Determination of prices
 12 Preparation of purchase order
 Placing the order with a selected supplier
 Monitoring and follow up the order
 Receiving the ordered materials
 Checking and approving for payment to supplier

1.7 Characteristics of a Purchasing Manager

The following pre-requisite traits are required for a purchase manager:

Interpersonal skills: The purchase manger must have good communication skills. There are many
aspects of interpersonal communication such as handling suppliers, respect of other opinion and so on.
He or she must be efficient in the same.

Analytical Decision Making: Purchase manager may face many problems in his or her job like placing
order, selection of best supplier, to maintain healthy relationship with supplier, and purchase right
materials in right quantity at right time and so on. So, a good purchase manager must have analytical
decision making.

Loyal to the Organization: The purchasing manager is involved in large activities of purchasing materials
consistently involving very large financial deals. So, he has to be loyal to the organisation and he has to
prove his loyalty from time to time.

Computer Literacy: The purchase manager must be well skilled in computer as he requires use of
computer in many activities. If he is computer literate, then he can work efficiently.

Technical skills: Now-a-days, in production a very highly sophisticated technology is used. Purchase
manager must have technical understanding of the business. The purchase manager has enough
technical background to understand the production process, the supplier’s processes and scheduling
system in order to making improvement.

Ability to Make Decision: The purchasing manager has to take quick decisions in line with procurement
strategy of organization vis-à-vis liaison with other departments. He or she has to take decisions with
quality, market, economic, social and political environment and issues taken into account.
Innovative: Innovation is very necessary for survive in the market in present competitive market
condition. So, a purchase manager should take innovative decisions related to purchase 14 techniques,
maintaining quality, inventory stock, inventory control, re-ordering level and order processing.
Bargaining Power: It must be the prime motive of the purchase manager that organization can purchase
more and best materials with less cost. For this a purchase manager should have good bargaining
power.

1.8 Materials Management

Material management is defined as the planning, acquiring, storing, moving and controlling of materials
as per the requirement of the organization. Materials management is basically related with the smooth
flow of materials. The major activities covered under materials management are the anticipation of the
materials required in the organization from time-to time. It involves ordering and obtaining materials
from the suppliers, introducing the materials to the organization and monitoring the status of materials.
It helps to optimize the usage of facilities, personnel and funds and to provide service to the user in the
line with the organizational aims. Materials management is the coordination and control of the various
material activities. The key material activities are:

 Purchasing Activities
It involves mainly identification of materials needs, market research, maintaining materials records etc.
It involves material specifications, materials studies, receiving materials etc.

Inventory Management It involves planning and controlling of materials handling, storing materials and
managing material supplies etc.

Supply Management It involves monitoring in-plant material handling, strategic planning of materials
etc.

1.9 Classification of Manufacturing Materials The manufacturing

materials can be classified into following categories:

Raw Materials: It is the materials that the company is required to transform into finished goods. It is
very important. The shortage of halts can stop the production and can cause high losses. It is different
for different industries. As for example, for textile industry the cotton is main input. For automobile
industry, the spare parts are very important.

Manufactured Parts: These parts are the output of the organizations. These are the finished materials
built by the company.

Work in Process: these are semi-finished products found at various stages in the production process.

Packaged Materials: These are materials that are packaged together to prevent damage during
transportation and deterioration when they are stored.

Loose Materials: these are materials that are partially fabricated and that should be handled
individually.
1.10 Objectives of Materials Management Department
The primary objectives of Materials Management department are:

 Low Procurement price

High inventory turnover

Low cost of acquisition and possession

Continuity of supply

Consistent quality

Low payroll costs

Favorable supplier relationship

Maintenance of goods records

The secondary objectives of Materials Management are :

 New materials, processes and products Economic make or buy decisions Standardization Product
improvement.

Relationship between Materials Management Department and other Departments

Materials Management Department plays a very important role in an organization and it must have
good relationship with other departments. The departments that are mostly involved are: Production,
engineering design, Quality control and Finance Department.

Materials Management Department and Production Department

The materials management department must have good relationship with production department.
Materials Management is responsible for the purchase of all materials required by the production
department. If the needed materials are not supplied at right time then the production process can halt
and generate huge losses. So, for the smooth functioning of the production department, the materials
department must be vigilant about the latest requirements.

Materials Management and Engineering Design Department

If both materials management and engineering design department work together then the much
required innovative strategies can be formulated and implemented.
Both departments can work together for standardization of materials. The suggestions of the materials
management are very important for engineering department.

Materials Management and Quality Control Department

The selection and rejection of the materials purchased depends upon the parameters set by the quality
control department. So, if both the departments have cooperation and cordial relationship then the
delay in the purchasing of raw materials can be avoided.

Materials Management and Finance department usually, finance department release fund to materials
department for the materials purchased. It is the responsibility of the both departments to clear
payments to the suppliers smoothly, without much delay unnecessarily.

1.11 Risks to be considered by Purchase And Material

Manager
The purchase and materials manager must avoid the following consequences:

 Receiving materials before they are required, causing more inventory cost and chance of
deterioration in quality;
Not receiving materials at the time of requirement, causing loss of productivity;
 Incorrect materials take off from drawing and design document;
 Subsequent design changes;
 Damage/loss of items;
 Failure on installation;
 Selection of type of contract for specific material procurement;
 Vender evaluation criteria;
 Pilling up of the inventory and controlling of the same;
 Management of surplus materials;

The smooth functioning of the production department depends upon a large extent on the right type of
materials purchased at right time at right quality and at right cost. The right cost of materials leads to
good saving. It is possible through efficient buying. The purchase manager must be technically skilled,
innovative, intelligent, vigilant and efficient in bargaining. Heavy competition has generated the
importance of efficient purchasing. For any industrial project, the purchasing is main function that
contributes in the timely execution and delivery. The corporate policy indicates the guidance map for
purchasing. It includes the purchasing strategies, plans, programmes and goals. The purchasing
department must have good coordination with other departments like finance, engineering, production,
quality department, etc. The purchasing department is responsible for avoiding any type of over-
inventory or under-inventory. The purchasing department helps in the clearance of all the bills of
external parties like suppliers, etc. Every organization must adopt scientific and analytical way of
identifying the need and type of materials, right supplier and smooth flow of materials.

References

Fortune , A. T. (1994). The Auto Industry Meets the New Economy.

Dey, P. K. (2001). Re-engineering Materials Management: A case study on an Indian refinery. Business
Process Management Journal
Fung, P. (1999). Managing Purchasing in a Supply Chain Context – Evolution and Resolution. Logistics
Information Management
Joyce, W. B. (2006). Accounting, Purchasing and Supply Chain Management. Supply Chain Management:
An International Journal
Monczka, R. M., Trent, R. J., & Handifield, R. B. (2002). Purchasing and Supply chain management
Thomson Asia Pte Ltd. Parikh, M. A., & Joshi, K. (2005). Purchasing Process Transformation:
Restructuring for Small Purchases. International Journal of Operations & Production Management

Referred / Suggested Books

Benton, W. C., Purchasing and Supply Chain Management, 3rd ed., 2013 Tata McGraw Hill, New Delhi
Dobler D.W., Lee L., Burt D.N., Purchasing and Materials Management – Text and Cases, 4 th edition

Websites
www.academicjournals.org
www.sipm.com
www.ijcrar.com
www.onlinelibrary.wiley.com
www.tandfonline.com
www.fortune.com