HCM 343 Procurement & Supply Management

Course Code HCM 343
Course Title Procurement & Supply Management
Course Developer/ Writer
Course Editor
Programme Leader
Course Coordinator
NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria
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website: www.nouedu.net
Published by
National Open University of Nigeria
Printed 2012
ISBN: 978-058-125-1
All Rights Reserved
ii
CONTENTS PAGE
MODULE 1………………………………………….. 1
Unit 1 The Conceptual Framework and Objectives of

Procurement and Supply Function…………… 1
Unit 2 Procurement Cycle and the Internal
Organisational Relationship…………………. 10
Unit 3 Purchasing Organisation and Concept of
Centralisation and Decentalisation of
Purchasing Authority………………………… 21
Unit 4 Quality Assurance Activities………………… 35
Unit 5 Supplier’s Selection Activities………………. 53
MODULE 2…………………………………………… 69
Unit 1 Pricing Procedures in Procurement

and Supply Function…………………………. 69
Unit 2 Managing Procurement Activities…………… 81
Unit 3 Procurement Practice and Methods………….. 99
Unit 4 Management of Inventory……………………. 124
Unit 5 ABC Analysis: The 80-20 Concept………….. 139
MODULE 3…………………………………………… 147
Unit 1 Government Purchasing……………………... 147

Unit 2 Competitive Bidding Procurement………….. 157
Unit 3 Negotiated Procurements…………………… 166
Unit 4 Expediting or Follow-Up of Order………….. 178
Unit 5 Buying Internationally………………………. 185
Unit 6 Just –In- Time Inventory……………………. 196
iii
HCM 343 MODULE 1
MODULE 1
Unit 1 The Conceptual Framework and Objectives of

Procurement and Supply Function
Unit 2 Procurement Cycle and the Internal Organisational
Relationship
Unit 3 Purchasing Organisation and the Concept of Centralisation
and Decentalisation of Purchasing Authority
Unit 4 Quality Assurance Activities
Unit 5 Supplier’s Selection Activities
UNIT 1 THE CONCEPTUAL FRAMEWORK AND

OBJECTIVES OF PROCUREMENT AND
SUPPLY FUNCTION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main content
3.1 The Concept of Procurement and Supply
3.2 The Key Variables of Procurement and Supply
3.3 Functions of Purchasing Department
3.4 Objectives of Purchasing
3.5 Advantages of Effective Procurement
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading
1.0 INTRODUCTION
There are only two fundamental inputs in which management, be it in

the private or public sector of an economy, is primarily interested:(i)
Men and (ii) Materials. Management is equally interested in other
resources. However, from management point of view, materials
management offers greater promise as a cost-reducing device. The
reason(s) are not far fetched. The basic goal of a business activity is the
development and manufacturing of products that can be marketed at a
profit. This goal is accomplished by the appropriate blending of what
management authorities historically have called the five M’s: Machines,
Manpower, Materials, Money, and Management. Materials today are the
lifeblood in the industry. Materials of the appropriate quality must be
available at the right time, in the right quality, at the needed location and
an acceptable total cost.
1
HCM 343 PROCUREMENT & SUPPLY MANAGEMENT
Failure to fulfill any of these responsibilities concerning materials adds

to company costs and decreases company profit just as would do
outmoded production methods, inefficient personnel, and ineffective
marketing activities.
Procurement is an important phase in the control of the flow of materials

into the manufacturing plant from the vendor or supplier. Basically, no
inventories are created until either raw materials or purchased
components are bought. The classes of inventory thus controlled are
purchased parts or raw materials. It has therefore been suggested that
two of the most important control areas for all businesses, regardless of
size, are purchasing and inventory. As a business function, and in term
of naira spent, purchasing is by far the biggest spending department of
any manufacturing company. Purchased materials consume over half of
a manufacturing firm’s sales revenue. Consequently, the profit potential
of effective management of the purchasing activities is enormous
compared with other practical management alternatives.
You can spend wisely and pay less for what you buy. It is generally
agreed that it is easier to buy well than it is to sell well. Wise purchasing
can reduce operational costs appreciably and also improve profitability.
The effect of five percent saving on materials and parts is illustrated in
figure 1 below.
AFTER
N10 PROFIT 10% PROFIT 12.2
N12.2
N30 OVERHEAD 30% (22% increase)
N16 DIRECT OVERHEAD 30%
N30
LABOUR 16% 5% SAVING DIRECT
MATERIALS LABOUR 16%
N16
N44 AND PARTS 44% MATERIALS
N100 SAVINGS 5% AND PARTS 41.8%
N41.8
N100
(Naira in Thousand)
Fig: 1.1 Effect of reduction – A 5 per cent saving on materials and parts
can increase profit by 22 per cent
2.0 OBJECTIVES
At the end of this unit, you should be able to:
2
HCM 343 MODULE 1
• Define and give meaning to the terms-procurement and supply

• Identify the key procurement variables
• Comment effectively on the functions performed by a typical
purchasing department.
• List the objectives of the purchasing function
• Highlight the advantages of effective purchasing to an
organisation
3.0 MAIN CONTENT
3.1 The Concept of Procurement
Procurement or better still, Purchasing (The two terms shall be used

interchangeably in this book), is one of the basic functions common to
all types of business enterprises. These functions are so basic because no
business can operate without them. By its very nature, purchasing is a
“service” function, orientated towards catering for the supply
requirements of various departments by making purchases of materials,
requirements, supplies or services, etc. which they need. Carter (1989)
thus described purchasing as:
The department, which is

concerned with the process of
ascertaining the
organization’s material and
service needs, selecting
suppliers, agreeing on terms,
placing orders and receiving
gods and services.
Most English dictionaries have stated that procurement means buying,

while supply is stated to mean the art of providing articles or materials.’
Viewing purchasing broadly, Siropolis (1977) conceptualized

purchasing in terms of the essential activities or task associated with the
acquisition of the materials, services and equipment used in the
operation of an organisation. According to him, the purchasing function
involves:
1) pinpointing the need for materials and services

2) searching out and selecting suppliers
3) settling with suppliers such matters as price and payment terms
4) signing the contract or order
5) following through to make sure suppliers live up to their end \
side of the agreement.
3
In summary therefore, Siropolis (1977) defined purchasing as a business

function this way:
It is the entrepreneur’s responsibility

to buy materials and services of the
right quality, in the right quantity, at
the right time, from the right
supplier, at the right price.
Lysons, K. (2000, p.1) in answer to a question, which he posed as “what

is purchasing” defined purchasing as:
The function responsible for

obtaining by purchase, lease or other
legal means, equipment, materials,
components, supplies and services
required by an undertaking for use
in production or resale
Production as a concept broadly means the process of coordinating men

and materials (i.e. human and physical resources) to create from raw
materials, physical goods and services that will satisfy human wants and
needs. In other words, production is an input –output relationship.
Lysons (2000) further observed that:
…in this definition, the term

production is used in the economic
sense of creating utilities, i.e., goods
and services that satisfy wants. It is
not, therefore, confined to
manufacturing output but also applies
to servicing, distribution, etc.
By this last explanation, it could be argued that any persons or

organisations who take part in getting to the final consumer are part and
parcel of the production process. Therefore, the so called middlemen
who engage in buying and selling which is another name for purchasing
in the distributary trade are part of the productive agents-purchasing,
storage, and distribution – and are not parasites as it is traditionally
believed.
The foregoing definitions demonstrate that purchasing plays an

important role in production activities. Today, purchasing is not the
same as the buying of yester-years.
4
HCM 343 MODULE 1
Menon (1993) argued that BUYING is merely the act of procuring an

item of materials at a price. This is what is done at a bazaar service. It is
a static concept. Menon’s definition however makes PROCUREMENT
a very strategic activity in a company, as is marketing. The primary aim
of the purchasing function is the improvement of profits, by actively
searching out and implementing new ideas for improving the company’s
products in order to achieve these objectives:
1) Reducing costs of materials,
2) Finding out substitute materials that are more economical, and
3) By eliminating elements of costs in purchasing which do not add
to value.
Procurement is thus a much broader concept than buying and covers a

wide range of managerial functions right from participation in corporate
planning and policy activities to product improvement, working capital
management and profit improvement.
There is however a fundamental distinction between purchasing as a

function and the purchasing department. Dobler et al (1996) suggested
they are not necessarily the same. As a function, purchasing is common
to all types of business operations. The purchasing department, however,
is an organisational unit of a firm whose duties may include
responsibility for part or all of the purchasing – and perhaps additional
activities as well. In any case, the purchasing functions usually
performed most effectively and efficiently be a central unit made up of
buying specialist, who at times may work in conjunction with a more
comprehensive cross-functional team of specialists.
3.2 The Key Procurement Variables
Needle, David (1992) identified the key Procurement variables as

source, quantity, quality, time and price. These variables are examined
each in turn in the following discussion:
1. Source Management: This is faced with a number of decisions

concerning the source of the firm’s raw materials and
components. The obvious strategy is one, which maximizes the
other four variables, obtaining supplies in the quantity and quality
required, when they are needed, and an acceptable price. In
achieving these aims, managements must decide whether to
produce their own materials and components or buy them from
other manufacturer; and if the latter, whether to opt for a single
supplier or buy from a number of different suppliers.
2. Quantity: The major purchasing decision here is how much to
order at any a time. This is a function of cost, storage capacity,
and the nature of the production system.
5
3. Quality: The quality of incoming raw materials as components is

a vital ingredient in the quality control function. The purchasing
department or the materials manager is usually responsible for the
acceptance sampling and inspection and inspection of incoming
materials.
4. Time and Price: The timing of a purchase is, like order quantity,
a function of the needs of the production system, storage capacity
and price.
3.3 The Function of Purchasing Department
Apart from purchasing per se, a purchase department would have several
complementary activities. Menon (1993) stated some of the important
ones to include:
1) Market research for new materials and development of new

source of supply.
2) Follow-up with suppliers to ensure proper delivery.
3) Quality assurance in respect of supplies made by vendors, (this
includes supplier education, visiting the vendor’s factor to ensure
in-process quality assurance).
4) Inspection of materials for quality in order to that the
specifications are complied with.
5) Development of proper and streamlined systems and procedures
relating to the purchasing function to ensure that work is carried
out efficiently and at the lowest reasonable operating cost.
6) Co-ordination with in other functions with the materials
department like transportation, receiving, store-keeping,
inventory control, accounting etc.
7) Co-ordination with the production, sales and finance departments
regarding alteration in production schedules or delivery rates, or
changes in materials, product or packaging specification.
3.4 Objective of Purchasing
According to Dobler et al (1996), the objectives of purchasing can be

viewed from three levels.
i) A very general managerial level,

ii) A more specific functional or operational level, and
iii) A detailed levels at which precise strategic buying plans are
formulated.
• From a top managerial perspective, the general objectives have

traditionally been expressed as the five rights that management
expects the department to achieve i.e. the acquisition of materials:
6
HCM 343 MODULE 1
of the right quality, from the right price. In practice, however, the
department can rarely fulfill all these equally, because in some
buying situations, conflicts inherently exist between some of the
objectives. So usually, some trade-offs must be made. From a
practical point of view, supply personnel seek a reasonable
balance among these elements of the purchasing mix.
• From an operating or functional perspective, an objective broadly

becomes a developed set of statements that provide practical and
useful targets for decision-making purposes. In these cases, the
following broad statement of objectives is suggested:
1) To support company operations with an uninterrupted flow

of materials and services. This is the most fundamental of
all the purchasing and supply objectives. In a logical
sense, this is a key reason for the existence of the
department.
2) To buy competitively and wisely. Buying competitively
keeps the buyers on the edge of the companies’ activities.
Buyers should know what’s going on in the outside world.
They must keep abreast of the forces of demand and
supply that regulate price and material availability. They
must be aware of the best practices and the latest
developments and ultimately buying to the company’s best
advantage.
3) To keep inventory investment and inventory losses at a
practical minimum. The purchasing job is to achieve a
reasonable balance between the required level of inventory
to support operations and the cost of carrying the
inventory.
4) To develop effective and reliable sources of supply.
5) To develop good relationships with the supplier’s
community and continuing relationships with active
suppliers.
Good relationship with suppliers is imperative, and good
relationships with potential suppliers are invaluable. The
achievement of the objective number 4 above, on a
continuing basis, is virtually impossible if mutually
satisfactory continuing relationships are not maintained.
6) To maintain sound co-operative relationships with other
departments, providing information and advice as
necessary to ensure the effective operation of the
organisation as a whole.
7) To develop staff, policies, procedures and organisation to
ensure the achievement of the foregoing objectives.
7
It is a truism, however, that the objective of the purchasing

department will vary a great deal, depending upon the
organisation’s policy, complexity, size, operations, etc.
• The third level focuses on the detailed objectives that are

developed when precise buying plans are made (usually annually)
for each major category of materials the firm uses in its
operations. These precise set of objectives for each material
typically varies because the usage requirements, the operating
conditions, and the markets in which each material is purchased
usually are different.
3.5 Advantages of Effective Procurement
Deriving from the above objectives, we might identify the

following as being the principal benefits to be gained from the
effective management of the procurement process:
(1) Lower prices of materials and items used

(2) Faster inventory turnover
(3) Continuity of supply
(4) Reduced replenishment lead times
(5) Reduced transportation cost
(6) Reduced materials obsolescence
(7) Improved vendor relationships
(8) Better control of quality
(9) Effective administration and immunisation of organisation
effort
(10) Maintenance of adequate records and provision of
information for the operations managers.
SELF ASSESSMENT EXCERCISE
What operational or functional level objective should Purchasing seek

to achieve as a business function?
4.0 CONCLUSION
Clearly, the procurement or purchase of items and material has

relevance in all types of organisation or operating system, since in all
such systems there will be some dependence upon the use of physical
items. Whilst the principles and objectives of purchasing might also be
applied in the acquisition of labour, capital, etc. the purchasing process
is concerned primarily with obtaining physical items for use in, and
conversion through, the operating system. Most operating system
requires such items. Hospitals for example require a regular reliable
8
HCM 343 MODULE 1
supply of consumable items such as medicines, sterile equipment, etc.

Transport operations are dependent upon adequate supply of
consumable materials such as fuel, tyres, etc. Supply organisations
naturally are dependent upon an adequate, reliable and efficient supply
of those items which are to be passed to customers, whilst
manufacturing organisations are entirely dependent upon the supply of
consumable and non-consumable materials and items.
5.0 SUMMARY
Procurement is one of the basic functions common to all types of

business enterprises. These functions are so basic because no business
can operate without them. As a business function and in terms of naira
spent, purchasing is far the biggest spending department of any
manufacturing company. Purchased materials consume over half of a
manufacturing firm’s sales revenue. It is however generally agreed that
it is easer to buy well than it is to sell well. Wise purchasing can reduce
operational costs appreciably and also improve profitability
6.0 TUTOR-MARKED ASSIGNMENT
What sense, do you make of the statement, “no purchasing, no

organisation”
7.0 REFERENCES/FURTHER READING
Carter, R.J (1989). “Stores Management and Related Operations”.

The M & E Hand book Series, Second Edition.
Dabler, W.D and Burt, N.D (2000). Purchasing and Supply

Management: Text and Cases. Tata McGraw-Hill Publishing
Company Limited; New Delhi, Sixth Edition.
Lysons, K. (2000). Purchasing and Supply Claim Management. Fifth

Edition. Printed in Great Britain: Herry Ling limited, Dorchester,
Dorset (Prentice Hall).
Menon, K.S. (1993). .Purchasing and Inventory Control. Wheeler

Publishing: India, Third edition.
9
UNIT 2 PROCUREMENT CYCLE AND THE

INTERNAL ORGANISATIONAL
RELATIONSHIP
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Procurement Procedure or Cycle
3.2 Purchasing Department and Organisational Relationship
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Every business concern acting as a merchant middleman has a set of

operating procedures to effect purchases from suitable sources of
supplies. A procedure may be defined as a series of steps to be taken in
doing a task. It is a detailed guide of action for the personnel doing a
specific work. Procedures set out definite tasks with their time sequence
to be undertaken by assigned employees within the limits laid down by
the policy. It is therefore necessary to develop operating procedures to
implement purchasing policies. In developing operating procedures, one
has to keep in mind the basic factors in management, i.e. efficiency and
economy. Procedures should therefore:
1) Be simple and result, oriented and not cumbersome and

unnecessarily complicated.
2) Facilitate a proper co-ordination between various departments
and people and:
3) Make for quick, easy and accurate communication. Paper work,
for example, should be reduced to the minimum but must be
consistent with the basic requirements in respect of audit and
managerial control. Proper forms should be designed to ease
clerical work and reduce human error to the minimum.
2.0 OBJECTIVES
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HCM 343 MODULE 1
By the time you have read through this unit, you should be able to:
• explain the nature and basic features of the term procedure

• list and comment on each step of the purchasing cycle
• describe the nature of interrelationships between the purchasing
department and other organizational unit or departments
3.0 MAIN CONTENT
3.1 Procurement Procedure or Cycle
The usual steps in the procurement procedure (or more technically, the
purchasing cycle) are:
1) Receipt and Analysis of the Procurement Requisition: A

properly signed and approved purchase requisition authorizes the
purchase department to order the materials, specifies what kind is
desired, how much and when as well as where it is to be
delivered in the plant. The requisition form usually gives full
particular of stocks demanded such as quality, description, stock
on hand, average consumption, probable price, etc.
2) Selection of Potential Sources of Supply: A procurement group

must constantly keep itself informed as to the best places to buy
all items of materials required. This is no small task. Effective
procurement cannot be accomplished on a status-quo basis. If the
purchase requisition is for a new item, then from the list of
potential sources, a selection should be made for inquiry by the
use of the request for quotation.
3) Issuance of Request for Quotations: The title of this form is

self-explanatory (see figure 1.2 below) it is sent by the
purchasing group to all the selected possible source of supply. It
should be as complete as a purchase order except for the
statement of the price to be paid. It is up to the vendor to submit
his price, this is his quotation. Because this form is so much like
the purchase order form, it is a common practice to print in bold
type across the form this statement: THIS IS NOT AN ORDER.
11
QUOTATION REQUEST
·
·
·
·
·
·
IMPORTANT
·· THIS IS NOT AN ORDER
· OUR PURCHASE ORDERS ARE SUBJECT TO CONDITIONS
AND INSTRUCTIONS ON THE REVERSE SIDE HERE WITH
DATE REFERENCE NO
QUOTATION REQUEST NAME AND ADDRESS OF

ISSUING DEPT
INSTRUCTION TO VENDOR
PLEASE SUMIT TO YOUR QUOTAT5ION ON THIS SHEETY FOR MATERIALS LISTED BELLOW
TO BE DELIEVERED F.O.S …………….IF YOU’RE UNABLE TO FURNISH THEM IN
ACCORDANCE, PLS GIVE DETAIL OF YOUR OR OF SUBSTITUTES.
DATE QUOTATION REQ. DATE DELIVERY REQUIRED BUYER’S SIGNATURE
QUANTITY DESCRIPTION UNIT DISCOUNT TOTAL UNIT
PRICE PRICE
NOTE: EXCISE TAX MUST BE SHOWN WHEN

APPLICABLE. IF EXEMPTED, PLEASE INDICATE
CASH DISCOUNT TERMS SIGNATURE OF VENDORS REPRESENTATIVE DATE
BUYER’S FILE COPY
Fig 2-1 A typical request for quotation
4) Receipt and Analysis of Quotations: The most important

consideration receipt of quotation is checking to ensure that they
conform to the actual requirements of the company. This should
not only be in line with the enquiry but also in tune with the
initial request from within the company. When quotation has
been verified, the buyer must then prepare for their comparison
by whosoever is to make the selection decision.
5) Selection of the Right Source: A comprehensive discussion of

all the many factors that enter into the selection decision is in
chapter five. Briefly, the purchasing group is interested in the
reliability of the prospective source of supply. Questions such as
12
HCM 343 MODULE 1
these might well be posed: will quality be maintained and

delivery made on schedule? Does the vendor have adequate tools
and equipment, trained personnel, and finance to handle the
contract? What is the location of the vendor’s plant in relation to
the purchaser’s plant? What means of transportation are available
between these points? And so on. Obviously another major
consideration is the price quoted. However, the lowest price or
bid may not be from the best source in light of the factors
mentioned above.
6) Determination of the Right Price: This is a major responsibility

of the purchasing group and it involves settling with suppliers
such matter as price and payment terms. Many factors influence
what is a right price, but in a broad sense, the right price is one
that is right for all concerned reasonable to the purchaser, fair to
the vendor, the buyer’s customer, and the public. Obviously, the
purchaser must be able to buy materials at a price that makes it
possible to sell the product at a profit but profits are also essential
to the vendor. In addition, the buyer must consider the reliability
of the vendor and in some instances be willing to pay a little more
for better service in quality and delivery. The final agreed price
may or may not be the quoted price; in some instances when all
factors are considered it is conceivable that it may be higher. In
any event, when the price is agreed upon the purchase order is
issued.
7) Placing of orders: On the basis of most favourable quotations,

purchase orders will be sent to the selected supplier. A purchase
order, once accepted by the vendor, constitutes a contract for the
delivery of the goods in accordance with the terms of the
purchase agreement. This constitutes a legal document, and it
usually contains many other terms of agreement in addition to the
quantity, quality, delivery and price. Purchase order must be
made in four copies. As figure 2.2 below shows, a purchase order
gives the following information:
(1) Serial number and date of order.

(2) Name, address etc. of the seller,
(3) Full particulars of goods – quality, quantity, description
etc.
(4) Price and terms of discount.
(5) Manner, mode and date of delivery.
(6) Special instruction relating to billing, packaging, labeling,
marketing, insurance and mode of transport.
The order must be duly dated and signed by a responsible person.
13
PROCUREMENT ORDERS
PURCHASE B 130702
ORDERS NO
SHOW ABOVE NUMBER
ON YOUR INVOICE
TO . . DELIVERY
. .
. .
. .
. .
PLS ENTER OUR ORDER FOR THE FOLLOWING
DATE REQUISITIONED TERM FOR TRANSPORTED
BY
BY
QUANTITY OUR PART NO DESCRIPTION PRICE
GFHHF
FORM 13/07/02
TERMS AND CONDITION
1. PLS ACKNOWLEDGE RECEIPT OF THIS ODER BY
2. ADVICE SHIPPING DATE IF OTHER INDICATED
3. MAIL INVIOCES AND B/L ON DATE OF SHIPMENT
4. IDENTIFY BY OUYR PART NO (IF ANY) ITEMS SHIPPED
5. ONLY INVOICES COVERED BY A SIGNED PURCHASE ORDER WILL BE PROCESSED
Figure 2-2 typical procurement order (form)
One copy of the order is sent to the seller, second to the

production or the sales department; third to accounts department
and the last copy to be retained by the purchasing department for
future reference.
8) Follow-up to Ensure Scheduled Delivery: The plan for the flow

of material into a manufacturing plant is established by the
purchasing procedure. Determination of the actual performance
and comparison and evaluation of this performance can only be
accomplished by effective follow-up of purchased orders.
The actual production and transportation of the purchased

materials and component parts are of course, the responsibility of
the vendor. It is in turn the responsibility of the procurement
group to make sure that the vendor fulfill these responsibilities.
This assurance must be received far enough in advance of the
actual specified delivery dates so that corrective action can be
taken when necessary to get materials into the plant as originally
planned. This is usually accomplished by period follow-up of all
14
HCM 343 MODULE 1
purchase orders requesting the vendor to reconfirm his ability to

transport the goods on schedule. Other ways in which a
purchasing group can take corrective action include transferring
some of the orders to other source of supply and assisting the
vendor in his production problems.
9) Comparison of Invoice and Goods Received with the Order:

Careful inspection of all incoming materials and parts is essential
for effective material control. The purchase order is the basic
source of reference. The receiving report is a record of what is
actually received; by comparing it to the purchase order,
variations in quantity can be determined. If the consignment is
short, it simply means that the reorder point will be reached
sooner. Over shipment, delays placing of the next order with the
vendor.
Inspection report may be a component part of the receiving

report, or they may supplement it. In any event, a report on the
quality of the purchased goods is necessary. Discrepancies either
in quantity or quality should be promptly notified the vendor.
This is normally a function of the purchasing group, but it may be
a joint activity of the purchasing and inspection. It is an important
function of purchasing because, in addition to providing
purchasing with a valid measure of vendor capabilities; it insures
that proper shipments are received. Control is effective only if
quantity and quality of incoming goods are maintained.
10) Analysis and approval of vendor’s invoice for payment:

Invoices received from vendors for goods delivered should
receive the approval of the purchasing group. This is the final
control step in the purchasing procedure. Invoices should be
checked. It ensures that quantities billed conform with the
quantities accepted by the receiving and inspection departments.
It is also a good practice to check the unit prices on the invoice
and the extension of these prices to the total bill. Finally, all
accounts and other terms of the original purchase contract should
be checked against the invoice. By this final control step,
payment is made only for the value of goods received.
It must be pointed out that though above description of the

purchasing procedure is not exhaustive; all steps are still not
followed in every purchasing situation. However, purchasing
procedures should be reviewed often to ensure that the correct
steps are being included.
15
The above steps for all practical purposes are what is regarded as the
complete purchasing cycle. Effective procurement consists of a series of
steps which forms a cycle. The steps in the cycle are those described in
the foregoing discussion.
In summary, procurement cycle specifically concerns decision on:
(1) How to determine the firm’s purchasing needs;

(2) Finding a supplier who will best satisfy purchasing needs;
(3) Negotiating and making the purchase;
(4) Communicating the purchase decision to the supplier and to
relevant personnel within your firm, and
(5) A follow-up procedure for evaluating your procurement
decisions.
3.2 Purchasing Department and Organisational

Relationships
To discharge its responsibilities adequately, the purchasing department

must actively cooperate with other departments not only to procure
materials, supplies and services for the company but to give and receive
information so that purchase department could make a very significant
contribution to company’s profit improvement and operational cost
reduction. Purchasing cannot be done in isolation of other functions. All
management functions work as a whole system. It is therefore always
better to conceptualize purchasing from systems point of view.
Systems composed of sub-systems, or expressed in commercial terms,

organisations consist of departments and sections, and these parts
interact and are independent. Accordingly it is necessary to consider
these inter-relationships otherwise the system or organisation as a whole
will not function efficiently and will be slower to adapt to changing
conditions, which is a primary requisite for survival. A purchase
department, by the very nature of its functions has to have continuing
and close relationships with several other departments in the company as
well as with the suppliers. And by virtue of these duties and
responsibilities, the purchasing or supply executive finds himself in a
strategic position to interact with heads of other functions and key
individuals within an organisation. Since he constantly works with
others department, his tasks are easily and largely determined by those
departments.
Some specific areas which must be closely watched for maintenance of

good relationship and elimination of conflicting tendencies include:
16
HCM 343 MODULE 1
1) Relationship with Design/Engineering Department.
In many industrial concerns, it is usually the initial responsibility of the

design or engineering to prepare the technical specifications for a
company’s products and the materials that go into them. To exercise this
responsibility effectively, engineering must have the constant help of the
purchasing function. It is the responsibility of the purchasing department
to scrutinize the cost elements in order to ensure that the quality of the
needed item fulfils the function for which it is required at the lowest
possible cost. The purchase department can also help the engineering
department by conducting market surveys and searching for new and
better materials and equipment. The engineering department, in turn, can
render assistance to the purchase department in deciding specifications,
i.e. what should be the right quality of the various materials procured by
the company.
2) Purchasing and Production
The production department is the main materials, or suppliers,

‘customer’ and it is therefore of primary importance that the services to
production are satisfactory in all respects. The closest cooperation is
essential not only on the provision of materials, but also on the stock
levels to be manufactured in accordance with the policy for inventory
control. The production-purchasing relationship begins when the user
department transmits its manufacturing schedule or materials requisition
to the purchasing department. Purchasing subsequently translates these
documents into a procurement schedule.
Hence, while the production department has the responsibility for

producing high quantity products in sufficient quantities by meeting
customer’s needs, the purchasing department assists production to meet
targets by making available raw materials and suppliers of the right
quantity at the right place and time. This required the production
department to keep purchasing department constantly informed of its
production requirements. By having the opportunity to study production
plans well ahead of requirements, the purchasing executive is placed in a
position to detect any error of assumption, in the delivery schedule and
to take necessary corrective measures.
3) Relationship with Marketing
In a typical merchandising company, the marketing or sales department

has the responsibility of making sales forecasts, providing market
information, boosting sales, increasing market shares etc. the developed
sales forecast cost only served as the basis of all the activities:
production, financial and personnel projections of an organization, but
17
also the basis of purchasing plans and forecast based on the expected
volume of production. One vital area in which purchasing function
continuities immensely to the marketing function is in the area of
efficient buying and assurance of continuous availabilities of materials
to meet sales target.
4) Purchasing and finance
The relationship between purchasing and finance covers several very

important areas. Indeed, the interaction between these two departments
takes place almost on a day-to-day basis, since the purchase department
spends the bulk of the income of the company.
The accounts department and the purchase department must work in

close harmony in several identifiable areas bordering on provision of
data for budgeting and planning, provision of costing information,
settlement of supplier’ bills, adherence to company’s polices, rules and
regulations relating to purchase transaction, etc.
5) Purchasing and Store
The links between the stores and purchasing in terms of their activities
have always been very close and largely interdependent, and any
inefficiency or lack of cooperation on either side is soon reflected in the
order. Purchasing is responsible for buying all the goods and services
needed by the organisation. Purchasing relies on stores for a wide
variety of supportive activities. Purchasing need stores to keep it
informed about the levels of stocks at any given time and it is up to store
to keep purchasing up-to-date as to the total stock situation. This will
enable purchasing to ensure that stocks are produced and that a balance
and economic flow of goods and services is provided. Hence, a close
relationship between purchasing and store is necessary in order to ensure
that materials are ordered strictly in term of actual requirements and in
the overall interest of economy.
6) Purchasing and Personnel
It is necessary for the purchasing department to be manned by the right

personnel and therefore, the staffing function becomes very significant.
It is not only necessary to recruit the right type of personnel with the
right knowledge, skills and attitudes, but these people should be
continuously developed to take care of the increasing requirements
connected with their jobs. The efficient functioning of the purchasing
department will depend upon the efficiency of the personnel department
to carry out the functions in respect of staffing.
18
HCM 343 MODULE 1
7) Relationship with the maintenance department
The purchasing department in this case has added responsibility

equipment materials and machinery spare parts and of being in a
position to issue them as and when required. To ensure that the
materials, tools, spare parts and equipment needed by the maintenance
department (this is the department responsible for the upkeep of all the
equipment and machinery in every company), are in stock, the
purchasing department must be aware of all long-and short-term
maintenance plans as produced by the maintenance department.
Similarly the maintenance department will have to advise on the initial
quantities of spare parts to be provided when any major new plant or
machinery is installed.
SELF ASSESSMENT EXERCISE
Enumerate the basic decision areas of the procurement cycle.
4.0 CONCLUSON
It must be pointed out that though above description of the purchasing

procedure is not exhaustive; all steps are still not followed in every
purchasing situation. However, purchasing procedures should be
reviewed often to ensure that the correct steps are being included. To
discharge its responsibilities adequately, the purchasing department
must actively cooperate with other departments not only to procure
materials, supplies and services for the company but to give and receive
information so that purchase department could make a very significant
contribution to company’s profit improvement and operational cost
reduction. Purchasing cannot be done in isolation of other functions. All
management functions work as a whole system. It is therefore always
better to conceptualize purchasing from systems point of view.
5.0 SUMMARY
Every business concern regardless of size has a set of operating

procedures to effect purchases from suitable sources of supplies. The
development of such procedures must however keep in mind the basic
factors in management, i.e. efficiency and economy.
Again, a purchasing department by the very nature of its functions has to

have a continuing and close relationship with several other departments
in the company as well as with suppliers. This is because purchasing can
not be done in isolation of other function.
19
6.0 TUTOR-MARKETD ASSIGNMENT
Comment to justify the state that “all steps which form a procurement
cycle are not followed in every purchasing situation.”
Carter, R.J (1989). “Stores Management and Related Operations”. The

M & E Hand book Series. Second Edition
Dabler, W.D and Burt, N.D (2000). Purchasing and Supply

Management: Text and Cases. New Delhi: Tata McGraw-Hill
Publishing Company Limited, Sixth Edition.
Lyson, K. J. (2000), Purchasing and Supply Claim Management. Fifth

Edition. Printed in Great Britain–Herry Ling Limited,
Dorchester, Dorset (Prentice Hall).
Menon, K.S. (1993), Purchasing and Inventory Control. India: Wheeler

Publishing, Third edition.
20
HCM 343 MODULE 1
UNIT 3 PURCHASING ORGANIZATION AND

CONCEPT OF CENTRALISATION AND
DECENTALISATION OF PURCHASING
AUTHORITY
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Purchasing Organisation
3.1.1 Purchasing Department in the Organisation
Structure
3.1.2 The Internal Organisation of a Purchasing
Department
3.2 Single Versus Multi-Plant Purchasing Organisation
3.2.1 Centralization of Purchasing Authority
3.2.2 Decentralisation of Purchasing Authority
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The purchasing function comprises the essential activities associated

with the acquisition of the materials, services, and equipment used in the
operation of an organisation. During the early years, the purchasing
function used to be handled in a reactive, staff support manner.
Subsequently, it was conducted more professionally with a managerial
emphasis. Management is said to involve getting a job done through
people and central to the discussion of management are the managerial
functions of planning, organising, directing and controlling. These
functions are relevant regardless of the type of organisation or the level
of management with which one is concerned. This unit shall focus on
the organising element of managerial functions.
The net result of organising as a management function is the

organisation structure, and often, much of the success of a business firm
depends on its internal organisation structure. Business organisations,
with the exception of sole proprietorship are a collection of individuals
and groups interacting on a relatively continuous basis and in a complex
dynamic state. Organisational issues are many and varied and
necessitate careful consideration when planning a new structure. This
chapter therefore has the objective of examining the management of
purchasing activities in relation to
21
2.0 OBJECTIVES
• locate the position of purchasing function in different

organisations
• sketch out the various forms of organisational structure that the

purchasing function can assume
• state and comment on reason for the different status given to the
purchasing function and its personnel in different organisation
• explain what single plant and multi-plant firms are all about
• discuss the ideas of centralisation and decentralisation of
purchasing authority.
3.0 MAIN CONTENT
3.1 Purchasing Organisation
The purchasing profession is a young one. It did not come into existence
until industry grew so large and complex that the owners or plant
managers no longer could supervise buying personally (through that is
still done in small businesses). Today, there is a growing realization of
the specialised nature of the purchasing function. No longer is
purchasing like the buying of the olden days. Purchasing has developed
into a science and has its own rules, conventions and practices and uses
all the processes of management that make it contribute effectively to
the company’s profits. The question of organisation of the purchasing
department is equally of paramount importance. The first assumption is
that purchasing is a specialized activity. If this is accepted, then it
follows that all purchasing activities in the company should be
concentrated in this specialist department.
In many companies, one finds that several departments are involved in

purchasing, for example engineering department (equipment),
administration department (furniture and fixtures or stationery),
transport department (vehicle spares), etc. They choose the suppliers,
contact them directly, negotiate with them for price and other terms of
supply and carry out all the other functions of purchasing. Most often
than not, clerical staff are assigned responsibilities with regard to
purchasing tasks. It is obvious that such as clerical staff performing
purchasing role will not attract the ability to perform the function to a
higher level. Indeed the specialization of the clerical (low level) staff
would be below average and their efforts are likely to be wasteful. The
question that has therefore been frequently asked is, where should
purchasing be in the organization structure?
22
HCM 343 MODULE 1
3.1.1 Purchasing Department in the Organisational Structure
There has been no simple answer to one of the major questions in

purchasing as to where should the function be located in organisational
structure? Once upon a time when materials contributed very little to the
overall cost of a product, purchasing was considered one of the
unimportant and routine functions of the company. The purchaser was
literally an errand boy who would go to the market and buy the materials
needed at his master’s wishes. Even when its importance grew,
purchasing was given a very subordinate position in management and
the purchasing department functioned under production, engineering or
marketing, and quite often under finance. As companies grew in size and
complexity, and as the science of management came to be appreciated
better, it became clear that the purchasing department could make a very
significant contribution to the profits of a company. In many companies,
therefore, this realization has resulted in the purchase manager being
given a higher status and being included in the management team.
Inegbenebor A.U. et al (1995:133) argued that the location of

purchasing function varies from one organisation to another, and hence,
could take any of the following three forms:
(i) Top or senior management function

(ii) Middle management function
(iii) Routine clerical job
PURCHASING AS A TOP MANAGEMENT FUNCTION
The system of locating the purchasing function within the top or senior
management hierarchy basically implies that the head of purchasing
enjoys a parallel status of a caliber consistent with other key or principal
managers; who should make a significant contribution to the
development of the enterprise. In addition, he or she should set
objectives for his or her functions, and the scope of his or her activity
should exhibit accountability as well as authority. Figure 3.1 below
shows purchasing function as a top management function.
23
Board of Director
Managing Director
Finance Production Purchasing Marketing Engineering

Manager Manager Manager Manager Manager
Figure 3-1 purchasing function located at a top management level.
This type of system is likely to occur in a manufacturing organization

that has not adopted materials management philosophy. The modern
approach is to have an integrated materials department headed by a
materials manager, with the purchasing department under him. The other
function under the materials department would be stores, inventory
control, transportation, production planning, etc. However, where there
is no separate materials department, it’s just ideal to place the
purchasing manager directly under the chief executive.
Yet again, in an organisation where the purchasing function is perceived

or regarded as strategically important to both its short and long-term
health and survival, purchasing will tend to enjoy a senior management
level status. This will be the case whenever the organisation concerned
spends a significant proportion of its income on purchasing goods and
service to allow it to do business. Similarly, the characteristic profit
centre of the purchasing function will confer this top management
positional placement on purchasing.
PURCHASING AS A MIDDLE-LEVEL MANAGEMENT

FUNCTION
There are organizations where the purchasing function is subordinated,

most often to production. This is a traditional approach to organisation
and may indeed be a reflection of the quality of staff that performs the
purchasing activities. Modern management theory does not support this
organisational structure. The current practice in industrialised countries,
where materials management is in vogue is to locate purchasing under
materials management department as figure 3.2 below demonstrates.
24
HCM 343 MODULE 1
Managing Director
Finance Production Materials Marketing Personnel

Stores Logistics Purchasing

Manager Manager Manager
Figure 3-2 Outline of the Purchasing Manager as a Middle level

Manager.
In this particular type of structure, the materials manager has been

upgraded to the rank of production, marketing, finance manager.
Purchasing therefore becomes an intermediate function.
PURCHASING AS A CLERICAL FUNCTION
This is a common feature in small-scale business establishment where

the items purchased are small and standardized. In these types of
establishment purchasing is usually centralised and the functions carried
out at the head quarters. This type of organisation dampens the morale
of the purchasing clerk because the level of aspiration is quite low. As
Lysons (1989: 27) observed, “Where purchasing is routine, those
responsible for the function may report directly to the owner, the work’s
manager, or the accountant who will often decide what, when and how
much and the source of supply”. The level at which purchasing operates
in organisation is therefore determined by the nature of organisation;
(1) Non-programmed decisions, and

(2) Programmed decisions.
According to Gopalakrishan et al (1986:27), non-programmed decisions

are novel, unstructured, consequential and involving questions of
strategy consisting of major policies and plants. While on the other
hand, programmed decisions are repetitive and routine to the extent that
definite procedures have been worked out for handling them so that they
don’t have to be treated as a new task each time they occur. In other
words, non-programmed purchasing decisions are challenging and
require original thinking which a clerk may not be able to handle while
25
programmed decisions can be handled by anybody including purchasing

clerks in organisation.
3.2.1 The Internal Organisation of a Purchasing Department
The organisation of the purchasing department itself will depend upon

the requirements and the kind of activities involved. More specifically,
the following are among the factors, which will affect the organization
structure decision:
(1) The number of people employed

(2) The volume and variety of goods and services purchased
(3) The ability and authority of the departmental head
(4) The capabilities of the people employed in the department and
(5) The importance of the purchasing function to the operation of the
enterprise.
Within a purchasing department, three or four strata of authority are the

norm. The head calls himself purchasing director, or manager of
purchase. Under him is a group of agents and/ or buyers (if the
department consists of more than one person). In large, sophisticated
departments, purchasing analysts, expediters, and traffic experts
complement the buying staff. The implication is that the internal
structure of a purchasing department may vary from that of a small
company, medium-sized company to a large-sized company. A simple
form in a small department is often with the exclusion of some
purchasing related functions such as purchasing analysis; stock-control
etc. from the buyer’s responsibilities, this pattern is reasonably typical of
a small departmental structure as shown in figure 3.3
Purchasing
Manager
Assistant Purchasing
Manager
Expediting Quantity Secretary Inventory

Clerk inspector inventory Control Clerk
Figure 3-3 Organisational structure of a small purchasing

department.
26
HCM 343 MODULE 1
The division of responsibilities in figure 3.3 is quite straightforward.

The purchasing manager assumes responsibility for the more important
purchases, and his assistant deals with more routine matters.
The allocation of responsibilities in figure 3.4 is more complex

Generally speaking the purchasing manager in this case will be
responsible for policy making as well as the efficient management of the
department as an element in the company organization. He usually
retains responsibility, too for the most important contracts and
purchasing decisions. In this type of structure, a decision has to be taken
as to how best to group the purchasing activities so as to be most
effective. One common approach is to do this by commodity or material
grouping, where each purchase officer deals with a particular range of
items; for example, one purchasing officer may be responsible for raw
materials another for mechanical component, a third, for electrical /
electronic items etc.
27
CEO
Engineering Production Purchasing Finance Marketing

………... Secretary
Staff Deputy Administration Inventory control

Group Purchasing manager manager
manager
Price Purchase
Order System and
Analysis group 1 accounting
preparation
group Stock
New Purchase Control
Product group 2 Supplier’s group 1
files Expediting
Purchase group 1
Supply
Market group 3
Library and
Research Expediting Stock
records
Purchase group 2 Control
group 4 group 1
Expediting
Purchase group 3
group 5
Purchase
group 6
Figure 3-4: Organisational structure of a large –sized company’s

purchasing department
This type of complex internal organisational structure of a purchasing

department offers a number of advantages.
The first is the advantage of specialization in a particular range of

goods.
Secondly, this helps to avoid duplication of market research and
negotiation effort at the plant level.
Third, this structure facilitates data collection and communication
inside the department and with other departments of the company as a
whole.
28
HCM 343 MODULE 1
Fourth, the arrangements can strengthen the purchasing manager’s

negotiation position through consolidation of total requirements and can
reduce time spent in negotiation.
Fifth, liasion with suppliers is often improved by adopting this system.
However, if this approach of work is followed, it is important to bear in

mind that provision should be made whereby a colleague can take over
responsibility for a particular group of materials in the absence of the
purchase officer who is normally responsible for that group.
Purchase specialisations based on commodity or materials groups, may

often be the best way to subdivide the work of a purchase department,
but it is not always the case. In the construction industry, for instance,
individual purchasing officers or purchasing sections are responsible for
all purchases for particular contracts. Often these contracts amount to
huge sums and the construction site may be many kilometers from
where the responsible purchasing officer is located. In such
circumstance, a single contact facilitates liaison, even though there may
be advantages on concentrating purchases for negotiation. A
combination approach is frequently favoured, where buyers assigned to
particular contracts place orders against contracts negotiated on a
commodity basis for the company as a whole.
3.2 Single Versus Multi-Plant Purchasing Organisation
Single Plant refers to organisation whose major production activities are

located in a particular place; that is, the company’s head office. This
type of company may have branches located within the geographical
area, but these branches can be designated as depots or mere sales
outlets. In this case, functions such as purchasing, finance, production,
administration, etc. will be located at the head office. Organisational set-
up in multi-plant companies is however of a different arrangement.
Multi-Plant firm here refers to companies having there production

plants located in different parts of the area. Examples are coca-cola
bottling company plc.With production plants in virtually every state
capital in Nigeria. Also, West African Portland Cement Plc with
production plants at Ewekoro and Shagamu; while Mr. Biggs has
production facilities in over twenty state capitals in Nigeria. Large
companies like these are commonly confronted with one particular
organisational question that does not concern most single-plant
companies: the question of to what extent should purchasing and
supply management activity be centralized at the corporate level? In
practice virtually every firm answers this question differently. Some
firms centralise the purchasing activity almost completely, doing the
buying for all sites at a central headquarters office. Others decentralize
29
the function entirely, giving each site full authority to conduct all of its
purchasing activities.
The majority of other firms develop an organisation somewhere between

these two extremes. These two concepts are discussed next.
3.2.1 Centralization of Purchasing Authority
A business organization that adopts a policy of placing all major

decision-making authority and control in the hands of top-level
executives is said to adopt a centralised management organisational
structure. Hence, if authority is not delegated, it is centralised.
Consequently, the subordinate executives will only be making relatively
little important decision, as only little authority can be exercised outside
the top-level managers. Centralization of purchasing is therefore, solely
concerned with the placement of purchasing authority. It has nothing to
do with the location of buying personnel. Hence in purchasing,
centralization exists when the entire purchasing function is made the
responsibility of a single person. This person is held accountable by top
management for proper performance of purchasing activities.
A major issue in this context is the degree to which purchasing, as a

function should be centralized. In recent years, there has been a trend
towards the establishment of centralized purchasing function. This trend
has been particularly noticeable in health services, in local and central
government supply, as well as in manufacturing. The principal benefits
thought to be associated with central purchasing are summarized below:
(1) The possibility of standardizing specifications and establishing

common needs, as regards quantity, specification, etc.
(2) The possibility of more economic purchase through, for example,
larger batch quantities.
(3) The reduction in administrative costs through the purchase of
larger quantities on few occasions, possibly from fewer sources.
(4) The possibility of purchase staff specialisation and thus increased
knowledge of source and supplies.
(5) The possibility of the use of more effective, detailed, and
accurate purchase information and records.
(6) The possibility of more detailed accurate and budgetary and
financial control procedures.
(7) Centralisation develops purchasing specialists whose primary
concern is purchasing. With training, specialists inevitably buy
more efficiently than less skilled individuals who view
purchasing as a secondary responsibility.
30
HCM 343 MODULE 1
The principal advantages derive from the possibility of increased

purchase volumes, from standardization, and from specialization.
Disadvantage of centralized purchasing, however, might include:
(1) Difficulties of communication within the organisation, deriving

perhaps from geographical separation
(2) Slow response to new or unusual supply needs from the
organisation
(3) Possible increased volume and from standardisation thus the
merits of centralised purchasing will depend upon the possible
financial saving through volume and variety considerations as
against possibility of reduced response times and flexibility.
3.2.2 Decentralisation Of Purchasing Authority
Despite the several advantages of centralization, complete centralized

purchasing is neither always possible nor always desirable, as Dobler D.
W. and David N. Burt (196:46) argued that fourth types of situations
justify some decent ration. Decentralization takes place in different
companies at different levels, and for different reason. In the
organizational sense, decentralization refers to the dispersal of authority
to the parts of the organisations and not the dispersal of an
organisation’s physical locations. Accordingly, a decentralization is one
where authority to commit resources (e.g. personnel, materials, money)
and to take meaningful decisions is spread throughout the various levels
of the organization as compared with centralized organization where
authority is exercised only by top management.
Decentralization of purchasing occurs when personnel from other

functional areas - production, engineering, marketing, finance, and so
on, decide unilaterally on sources of supply or negotiate with suppliers
directly for major purchases. According to Dobler et al;
The first of the four situations that justifies some decentralization is

found in companies that process singles natural raw materials. In these
industries, the raw materials are product of nature that are purchased in
unstable markets whose price fluctuate widely. Buying typically takes
place at auctions conducted in small local warehouse. Many firms
therefore separate the purchase of the key raw materials from the
purchase of other materials. Firms in the textile and leather industries
are good examples.
A second situation justifying some decentralization of purchasing

authority exists in technically oriented firms that are heavily involved in
research. In these firms some exceptions to complete decentralisation
31
are always desirable. In the research situation, scientists often do not

know exactly what they want. Consequently, the design engineer
concerned with developing a prototype must frequently talk with the
supplier at the completion of each developmental step. These
circumstances dictate giving engineers and scientists flexibility and a
small portion of the firm’s purchasing authority.
The third situation justifying a different type of decentralization is found

in the operation of multi-sided institutional and manufacturing
organisations. A situation that allows full autonomy in each of the units
or sites to commit company resources in the local performance of the
purchasing function.
Finally, the purchase of non-technical odds and ends also often calls for
a partial decentralization of purchasing. Credit card and petty cash fund
purchases of less than twenty five thousand naira are a good example.
For many small purchases, the cost of the paper work exceeds the cost
of the item purchased. Hence, decentralizing through the use of these
approaches can be a money saver.
The advantages of Decentralisation are:
(1) The local buyer will have a better knowledge of the needs of his
or her particular factory or unit, of local suppliers, and of
transport and storage facilities.
(2) He or she will be able to respond more quickly to emergency

requirements, partly because of shorter lines of communication
and partly because he or she will have a greater awareness of
local circumstances than someone sitting many miles away.
(3) The local buyer’s direct responsibility to his or her immediate

management will produce better liaison and tighter control by
local top management particularly where they operate as a profit
centre.
(4) It prevents top-management overload, as central management is

relieved of much lower level and routine decision-making and
thus able to concentrate on strategic considerations.
(5) It increases motivation of divisional management by enabling

junior management to get a taste to responsibility and the use of
initiative.
32
HCM 343 MODULE 1
Problems Associated with Decentralisation:
(1) Possible sub-optimal decision making where local management

takes decision which only benefit the department or division as
against the general company-wide interest. This therefore calls
for adequate control and communication system if major errors of
judgment are to be avoided.
(2) More problems of coordination. Top management must ensure
the parts of the organisation work together.
(3) Decentralization places extra demand upon junior management so
that there is a continuing need to recruit, train and develop well-
motivated and intelligent personnel.
Generally speaking, the advantages of centralisation are the

disadvantages of decentralisation, thus a combination of both is often
used to obtain the benefit from the best characteristics of each, while
avoiding the disadvantages of both approaches. Overall, whilst there are
undeniably more advantages than disadvantages of decentralisation, it is
as well recalled from Peter Drucker’s remark that decentralisation is
excellent, when it fits.
SELF ASSESSMENT QUESTION
It is common to argue that the location of purchasing function varies

from one organization to another and therefore could also take different
forms. State the various forms in this context.
4.0 CONCLUSION
There is a growing realisation of the specialised nature of the purchasing

function. No longer is purchasing like the buying of the olden days.
Purchasing has developed into a science and has its own rules,
conventions and practices and uses all the processes of management
that make it contribute effectively to the company’s profits the question
of organisational importance. The first assumption is that purchasing is a
specialized activity. If this is accepted, then it follows that all purchasing
activities in the company should be concentrated in this specialist
department.
5.0 SUMMARY
This unit has examined the management of purchasing activities in

relation to organisational concepts. The pertinent question of where
should purchasing as a business function be located in the organisational
structure was answered. The various factors which affect the
organisation structure deacons were highlighted and the question of to
33
what extent should purchasing and supply management activity be

centralised or decentralised was answered while also bringing to the fore
the relevant advantages and disadvantages of these purchasing authority
concept were discussed.
The question of to what extent should purchasing and supply

management activity be centralised at the corporate is virtually answered
by every firm differently. You are required to comment on the different
perspective of answers and make recommendation on which you think is
best advisable.
Bosler W. Robert (1970), “Storekeeping and Warehouse Management.”

Maynard, H.B. [ed] Handbook of business administrator. New
York :McGraw-Hill Book Company, pp. 686-699.
David, J and Alex, M. (1994). Storage and supply Materials, Pitman

Publishing. Sixth edition.
Dobler, W.D. and Burt, N.D. (2000). Purchasing and Supply

Publishing Company Limited. Sixth edition
Inegbenebor, A.U and Agbadudu, A. B (1995). Introduction to

Business: A Functional Approach. Uri Publishing Limited. Pp. 121-138.
34
HCM 343 MODULE 1
UNIT 4 QUALITY ASSURANCE ACTIVITIES
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Right Quality Definition
3.1.1 How Quality is Determined
3.2 Specification of Quality
3.2.1 The Value of Specification
3.2.2 The Do and Don’t of Specifications Preparation
3.2.3 The Roles of Supplier and Buyer in Quality
Specification
3.3 Standardisation
3.3.1 Factory that Increase Variety
3.3.2 Standardisation Process
3.3.3 Benefits and Drawback of Standardisation
3.4 Value Analysis (V.A) in Purchasing
3.4.1 Value Analysis Approaches
3.5 Inspection of Purchased Materials and Parts
3.5.1 Types of Inspection
3.5.2 Inspection Responsibility and Practices
3.6 How Quality is Described
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
A significant percentage of the raw materials and parts or a component

used to manufacture any product is purchased from supplier (vendors).
The quality and reliability of the finished product is therefore influenced
by the quality of the materials and parts that make up the finished
product. In purchasing therefore, quality assurance refers to the
establishment and maintenance of acceptable quality standards in the
purchased items. In other words, it is a way of ensuring that the quality
level of a potential supplier is commensurate with the buyer’s quality
requirement. The process normally starts from the initial purchase
planning stage, when the desired quality level in the required items must
be carefully described or fully defined, in order to ensure that the
supplier has an accurate idea of what is needed.
35
2.0 OBJECTIVES
• define the term “quality” and the “right quality”

• discuss issues involved in the specification of quality for
materials
• explain the meaning and process of standardisation.
• describe value analysis approaches
• highlight and discuss different types of inspection and its
responsibility and practices
• comment on how quality is described.
3.0 MAIN CONTENT
3.1 The Right Quality Definition
The first task as regards to the purchases the right quality of materials is
to define the right quality for a particular job. Frequently, confusion
arises in the use of the term quality because it is used
indiscriminately to refer to three things, namely;
1) Quality of design
2) Quality of conformity with specifications; and
3) Quality of performance.
As a rule, high quality of design results in high cost of manufacturing

and usually results in high performance value. This explains why the
manufacturer usually thinks of the quality of the product in a different
sense from the layman view. The manufacturer is concerned with how
the product meets the customer’s specifications and how it compares
with the competitor’s in the same price class. To the manufacturer
therefore, quality is not absolute but is relative to other factors such as
the selling price of the item, the used of which is intended, and the
conformity to measurable quality standards.
Quality has many definitions but for the purpose of this book the
term may be defined as:
Quality is the conformity to specifications that result in a product,

which meets customer’ expectations, not the number of features or
degree of sophistication of the product.
Quality has no meaning in purchasing except it is related to function and

ultimate cost. The best quality is, then, that which can be purchased at
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HCM 343 MODULE 1
the lowest cost to fulfill the need or satisfy the intended function for
which the material is being purchased.
Purchasing executive is in excellent position to contribute to that portion
of their company’s profits that originates in the area of quality. Why?
Because they can bring to bear three important types of knowledge;
(1) their knowledge of the materials they buy,

(2) their knowledge of markets and economic trends, and
(3) their knowledge of reliable sources of supply.
With this background, they can analyse the designer’s materials

requirements. They can report the market availability of those materials,
their price, their possible substitutes, and the reliable vendors who can
supply the required materials when needed at competitive prices. If a
firm does not conduct such an analysis, it sacrifices profit by falling to
utilize full purchasing potentials and capability to assist in determining
the optimum quality. Three major considerations are involved in
assuring a purchase of the right quality:
(1) How to determine it.

(2) How to define it.
(3) How to control it.
3.1.1 How Quality is Determined
Quality is determined by balancing two major considerations;
(1) The technical consideration of suitability and,

(2) The economic consideration of price and availability.
In a manufacturing industry, the design-engineering department has the

basic responsibility for determining the technical quality of materials to
be used in production. Engineering works closely with production and
sales in this determination. The user department is normally responsible
for the suitability determination of materials not used in production. The
office manager, for example, is responsible for determining the quality
of typewriters, calculators, and other office machines. The maintenance
engineer is responsible for determining the quality of the tools, greases
and oils to be used in maintaining the plant.
The purchasing department is responsible for the second major

consideration in quality determination-the economic consideration of
quality. After the technical decision of quality has been made,
purchasing must determine whether the materials selected can actually
be purchased on a continuing and competitive basis. In the area of
quality, most progressive companies give the purchasing department a
37
major management responsibility along with its economic

responsibility; thus management responsibility is the right to challenge
the quality requirements on all requisitions received in the purchasing
department. The right to challenge is not the right to change
specifications. Rather, to challenge means to request reconsideration of
the technical decisions for economic reasons. The fact that purchasing
has the responsibility to challenge quality tends to keep all departments
alert to their responsibilities in determining the “right quality”.
3.2 Specifications of Quality
Quality has earlier been defined as how well a product does what is
supposed to do-how closely and reliably it satisfies the specifications to
which it is built. The modern concept of quality is a philosophy, which
aims continually to satisfy customer requirements. Specifications are the
most detailed method of describing such requirements. Indeed, quality is
usually described by the quality specifications. The quality requirements
of an item must first be determined and specified. Ambiguity in defining
quality is one of the major problems in purchasing. Care has to be taken
in regard of specifications especially in ensuring that suppliers really
understand the quality requirements. If the supplier has not understood
them correctly, he will supply the wrong kind of materials and this can
cause considerable difficulties, like production stoppages, rejections of
finished product by quality control, reworking, excessive scrap etc.
amounting to wasteful expenditure.
A specification for an item is a detailed description of the item: its size,

dimensions, performance, function, chemical analysis and other relevant
characteristic (colour, texture, form), in sufficient detail to ensure that it
will be suitable in all respects for the purpose for which it is intended.
In practice, some specifications give dimensions only, analysis only, or

performance only, but it is common to find some element of all three of
these requirements and some other characteristic also specified. In each
case however, it is necessary to specify tolerance on each desired
characteristic. Tolerance is defined as the permissible variation in
important characteristics such as size, weight, without causing the
product to become unacceptable. Once the specification has been drawn
up, all needed items will have to meet the requirements of the
specification, otherwise they will be rejected. Simply put therefore, a
specification is a detailed description of the requirements to which
products must conform.
It is however important to ensure, in stating tolerances, that the

tolerances specified are those which are actually required and indeed
worked to. It is at this stage that design or engineering, procurement and
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HCM 343 MODULE 1
production staff can realise significant cost saving. Too close or tight
tolerances increase costs of inspection and of parts. Tolerances which
are not too tight enable a purchase department to buy parts more cheaply
from a widely range of suppliers. Typical example is a furniture
manufacturing where out-of-square components give poor joints and
unsatisfactory appearance. Tolerances should however not be over-
simplified so as not to adversely affect the overall design quality of the
product.
In manufacturing industries, the responsibility for laying down the

specifications of quality usually rests with the production, design or
engineering departments. In distributive industries, which sell the
merchandise they buy rather than products made by them, the selection
of supplier-specified goods and the development of specifications for
purchaser – specified goods is of central importance in buying and
oftentimes, reflects the organisation’s policy on merchandising. In
buying supplier-specified goods, retailer picks a brand or buys a sample.
Menon (1993) highlighted five various ways in which specification can

be described, namely:
(1) Established specifications of the buyer

(2) Established specifications of the vendor, and brand or trade
names.
(3) Blueprints, drawings or dimension sheets
(4) Description of chemical or physical properties
(5) By references to international, national or industry standard
specifications.
It is important that the buyer knows exactly what he needs and is able to
clearly communicate to the vendor precisely what he expects. As listed
above, a common and convenient method of buying is by brand or
names. This has the merit assuring an effective and dependable standard
of standard of quality. Its demerit lies in limiting buyer to a single
source for a product thereby destroying the competitive element in
sound procurement. When specifications are difficult to spell out, or
when desired relevant characteristics can not be reduced to figure such
as in taste or smell, or colour, it is usual to provide a sample of the
material or product to the vendor for duplication. This is buying by
sample. Sometimes a combination of two or more methods may be used
especially when specifications cannot be expressed solely in term of any
of the methods. Specifying the quality of materials is of utmost
significance in buying.
Once the quality specifications have been spelt out in detail, the
purchase department should develop and maintain contact only with
39
firms who have the necessary facilities and which demonstrate the
ability to consistently deliver the material of the right quality which
conforms to the specification standards laid down.
3.2.1 The Benefits of Specification
The preparation of specification is a value-laden activity. Specifications

will ensure that:
(1) All commodities specified will be suitable for their intended

purpose when put to use.
(2) Considerable savings of time and money can be achieved because
such items are often quickly available at lower cost and with
quality acceptance, than products, which are tailor-made for
distinct purpose.
(3) Materials of a consistent quality at all times. This is the most
desirable, not only from the point of view of production processes
but also for the satisfaction of the consumer who buys the
finished product.
(4) The inspection or testing to be applied to goods purchased is
notified in advance to the inspection department and to suppliers.
(5) In respect of the purchase of specified items, all suppliers will
have the same data on which to base their quotations.
3.2.2 The Dos and Don’ts of Specifications’ Preparation
(1) Over-specification is to be avoided; i.e. it is only necessary to ask

for a quality, performance, etc. which is essential for the job. If
the design is too complicated or the required dimensions, analysis
or performance are too rigorous, the goods will be more
expensive and in extreme cases, it may even be difficult to find a
manufacturer willing to quote.
2) As far as practicable, pay attention to convenience in handling
and storage of materials.
(3) If there is to be inspection after delivery, the specification should
state what tests are to be applied
(4) If any special include the relevant instructions in the
specifications.
3.2.3 The Roles of Supplier and Buyer in Quality

Specifications
The purchasing department is the focal of the company’s quality control

programme. Though the design or engineering department or the user
department lays down the specifications for materials; the purchasing
department has the responsibility of not only to coordinate work in this
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HCM 343 MODULE 1
regard but also to ensure adherence to lay down specification standards.

The responsibility, according to Menon (1993) can broadly be divided
into parts:
(1) The purchasing department must know precisely what is wanted
and transmit the required information to the vendors
(2) The purchasing department must ensure that the vendor supplies
the materials in strict compliance with the prescribed specification
(3) The department must take necessary steps to protect its company
against financial loss from materials or parts, which do not meet
the quality specifications.
The buyer may have to seek the necessary assistance of other outside
companies to accomplish the above responsibilities. It is also important
to refrain from kick-starting negotiations or invite quotations for an item
of purchase without having ready the exact quality specification which
will enable the supplier to make a realistic and intelligent bid.
As for the Vendor:
(1) He must know precisely the quality that the buyer wants; and
(2) He must know exactly how to meet the quality specifications
prescribed.
The buyer will however need to satisfy himself with the vendors
selected. It is necessary to choose a supplier with the necessary
experience, facilities and knowledge to fulfill the purchase order in
accordance with the buyer’s quality specifications.
3.3 Standardisation
In a narrow and somewhat technical sense, standardisation refers to the

setting up of exact specification or precise measurements. It has to do
with the development of uniform specifications for tools, materials,
equipment and practices. In business practice, there are two distinct
aspects of standardisation, namely; managerial standardisation and
industrial standardisation. The former deals with the managerial aspects
of business such as standardising operating practices, procedure and
systems. The latter on the other hand, which is the real focus of this
book, is concerned with standardisation of things-their size, shape,
colour, physical and chemical properties or performance characteristics
of materials or products.
Companies like to standardise on certain parts that are used in their

products. A standard is anything we use to measure. Any specification
intended for repeated use becomes a standard. Hence, the systematic
formulation and adoption of standard is referred to as standardisation.
41
However for the purpose of this book, the term standardisation shall be
used to mean:
“…the reduction in the numbers of very similar items to be
purchased or held in stock, thereby reducing the overall
stockholding of the organization.”
Standardisation is usually accompanied by variety reduction; a reduction

in the range of items used, stocked, bought or made.
3.3.1 Factors that Increase Variety
Materials or stock variety can increase over a period of time, and,

without investigation, may long remain undetected. The following are
some of the factors that lead to duplication of procured items.
(1) Staff turnover in both the purchasing and stores departments

often leads to stock line being duplicated because of an initial
resistance to change on the part of new purchasing staff.
(2) Personal preferences of the user. Many heads of departments
have their own preferences and may demand that stocks of
certain items must be purchased and stored.
(3) One-off demand for a certain variety of items that may only be
needed for one occasion is unwittingly maintained in stock
thereafter.
(4) Change in availability at certain times may encourage
organisations to hold more than one variety of an item to
safeguard against a nil-stock situation.
The use of standardisation however permits a firm to purchase fewer

items in large quantities, and at lower prices. Thus, fewer items are
processed and stocked. This reduces purchasing, receiving, inspection,
and payment costs.
3.3.2 Standardisation Process
Standardization involves the following procedures:
(1) Identification of stock duplication: This is often achieved when

stores coding has been completed. The nature of item or item or
materials coding is to give similar items code references. When
these code references are compared and investigated it can then
be established whether or not the items involved are basically the
same and if so, whether standardization can effectively take
place.
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HCM 343 MODULE 1
(2) Selection of standard item: Once duplication has been

discovered, the next stage it to select the best of the range in
relation to useage, price, performance etc. It must be able to meet
all the needs of the present stock variety. In these instances, the
so-called universal or all-purpose type of item tends to be
selected in an effort meet all the requirements placed upon the
item involved.
(3) Calculation of total stock requirements: The next stage is to

establish the revised level of stock for the item involved or select
bead. This can be obtained by reference to the stock record
system. Stock records are formal set of clerical records that
contains information about the stock held within the store system.
No standardisation programmed; where possible, user can
however succeed unless users of the materials or parts are
convinced that it is worthwhile. It needs to be marketed from the
outset, and it is important to involve the user in the variety
reduction process. Where possible, users themselves should
decide which version would best suit their needs. Simply issuing
a management edict that all standards must be rigidly adhered to
does not work well.
There are three basic kinds of materials standards:
1) Industry standards,
2) National or international standards and,
3) Company standards
It is therefore desirable for the purchasing department to keep abreast of

standards and to purchase and maintain publications, relating to
standards of all materials, parts, equipment, etc., with which they are
concerned. However, the use of company, national or international
standards has its drawbacks and hence some elements of risks. There
may be a tendency to place absolute reliance on standards as if they
were the embodiment of perfection, instead of permitting objectivity in
dealing with specific problem concerned.
3.3.3 Benefits and Drawback of Standardisation
There are a number of ways in which a purchasing department stands to

gain as a result of standardisation. The benefits as follows:
1) Reduction in the varieties of items kept in stock

2) Lesser number of varieties will reduce the unit purchasing cost
due to the large purchase of one standard item. This is possible
through obtainable quantity discounts
43
3) Wider choice of supplier and increased scope for negotiation.

4) Simplification of some orders, requisitions and other documents
as requirement for long drawn out explanation and descriptions
for every item purchased is eliminated.
5) It increases the scope of competition; the purchaser does not have
the compulsion to purchase only from one specialist supplier.
6) It helps to reduce some aspects of purchasing activities to a
simple routine.
There are certain disadvantages arising from standardization of stock.

The will be more involved in some organisations than in others
depending on the operation and needs of the companies.
1) Reduced Flexibility: Once the varieties have been standardised,

sudden shortages of that particular line may cause supply
problems.
2) Reduced choice for the user: It may be felt that the variety that
was previously used was best for the job.
3) Collusion to Raise Prices: Manufacturers making the standard
product may be get together and raise their prices so that the
benefit originally gained is nullified. Buyers have to beware of
this possibility.
3.4 Value Analysis (V.A) in Purchasing
The value analysis function is commonly thought of as part of the

purchasing activity. The basic idea of value analysis is simply that of a
cost reduction technique, and as such it might logically be treated as a
part of methods in engineering and of purchasing simplification. Often
the title value engineering is used synonymously with value analysis.
Value engineering is however more normally used in relation to the
design/creation of new products and value analysis in relating to existing
products.
Lawrence D. Miles of the American General Electric Company around

1947 originated value analysis. He was engaged upon cost reduction
exercises on a number of the company’s products, and developed a
series of tests or questions, which could be used to establish the value of
any product or part. This set of techniques later became known as value
analysis. Value analysis is a comprehensive, orderly and creative
method to increase the value of item. This item can be a product, a
system, a process, a procedure, a plan, a machine, equipment, tool, a
service or a method of working.
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HCM 343 MODULE 1
Broadly speaking, value analysis is systematic, creative approach to

ensure that the essential function of a product, process, or administrative
procedure is provided at a minimum overall cost.
For emphasis, the following elements of value engineering are listed:
1) It is an organised, creative approach to cost reduction

2) It places emphasis on function rather than method
3) It identifies area of excessive or unnecessary costs.
4) It improves the value of the product
5) It provides the same or better performance at a lower cost.
6) It reduces neither quality nor reliability.
The value of an item is how the item does its function divided by the
cost of the item: i.e. value of an item = performance of its function /
cost.
pf
Symbolically, v = where
c
v = value,
pf = performance of its function
c = cost
Value is maximized when the cost associated with achieving the
necessary function is minimized. The function is that which makes a
product work or sell. An item that does its function better than another,
has more value. Between two items that perform their function equally
well, the one that costs less is more valuable. The “performance of its
function” could include that it is beautiful (where needed), value
analysis involves the evaluation of an item’s function and relates its
effect on the end product. The purpose of it is to attempt to ensure that
every element of cost contributes proportionally to the function of the
item.
3.4.1 Value Analysis Approaches
A number of approaches have been suggested and used to facilitate the

development of value analysis and many of these approaches have been
used for years. Although, several methods of conducting value analysis
are available, it is usually found that the team approach is the most
appropriate and successful.
To make a value analysis, a study group of 4 to 6 is formed. Preferably,

each with different knowledge, with different backgrounds and
accounting departments. They meet in a room free of interruption.
45
Next, the item to be studied is selected. The item should be one that
gives the impression that its cost is too high for its value. Or one that
does not do its function well.
Generally, four fundamental steps are involved in a V.A investigation.

The first step involves the collection of information about costs, function
and customer requirement, the history and possible future development
of the product design the manufacturing methods, and so on.
For a pencil, for instance; value analysis asks some key questions;
What is it? (A pencil)
What is it for? (To make permanent marks)
What is the main function? (To make marks, write lines)
What is the method, material or procedure that was used to realise the
main function? (A graphite stick and wood)
What are the corresponding secondary functions? (Transfer graphite to

paper” and facilities holding the graphite)
What does the item cost and how can we distribute the cost of realising
these costs to an item of a similar function, how much should each
function and the total cost?
This example, center the attention of the value analysis group on the
main function, because, during the analysis, the secondary function may
change. The group may choose different secondary functions to realise
the main function.
The second stage covers the development of alternative design, i.e.

alternative methods of achieving the required function.
The third stages involved the evaluation of alternatives. Fourth stage is

recommendation. Recommendation should have all the information
needed so that a person does not know this subject can understand it and
do it.
The value analysis group should not itself implement the idea, if this is
outside its normal area of work.
The final stages involve implementation and follow up.
3.5 Inspection Of Purchased Materials And Parts
Another stage in quality assurance is inspection. Inspection is the

component of the quality control programme that is concerned with
checking on the conformity of the item to the specifications set for it. It
may be likened to the policing action necessary to force compliance with
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HCM 343 MODULE 1
our laws. In the same way that communities need policemen, companies
also need inspectors.
Hence as a concept, inspection has been defined as:
The process of measuring and evaluating the qualities or attributes of a

product or service on the basis of prescribed specification standards.
The inspection function commonly fulfills or achieves four primary

responsibilities or purposes:
1) It checks the quality of incoming materials.

2) It checks on all finished goods by ensuring that only acceptable
products reach the customer.
3) Inspection can locate oversize or undersize parts or any such
flaws in materials in the manufacturing process so that our
assembly operation or manufacturing process need not have
troubles at subsequent operations.
3.5.1 Types of Inspection
Inspection generally includes all types of activities, such as testing,

gagging, and so forth that are required to determine whether the product
meets the prescribed standards. The following types of inspection have
been identified:
(1) Process Inspection: This is the first piece of inspection.

It may point out the need for adjustment in the machine.
(2) Pilot Piece Inspection: It is an extension of first piece
inspection. It can indicate adjustments in the various pieces of
equipment before the entire lot is run. This will prevent spoilage.
(3) A Test or Trial Run: Trial run inspection is to test the
performance of the product.
(4) Key Point Inspection: is a preventive inspection at key points of
manufacture. It can prevent unwanted expenditure on poor parts.
(5) Final –Point Inspection or Testing of a product: may deal with
many aspects: e.g. appearance, performance, endurance power
(tire test). It may be done on a random sample of the products.
3.5.2 Inspection Responsibility and Practices
To carry out its responsibilities, the inspection department will need to

establish a number of policies and procedures. It must decide what to
inspect, where to inspect, how to inspect, and many other pertinent
matters. The section that follows examines some of these matters.
47
What to Inspect?
As pointed out previously, one may generally say that purchased

materials, good in process and finished products should be inspected.
Purchased materials should be inspected at the time they are received
and before they are stocked or sent to assembly. Similarly, because of
the many variables that enter into every phase of manufacturing, it is
essential that in-process materials be given an optimum amount of
inspection. Optimum because over or under inspection can prove to be
very costly. Also, qualified inspectors should make finished goods
inspection. The items should be checked by measurements, operating
tests, or other means to ensure compliance with the specifications.
Failure to provide a through check at this point may allow a faulty
product to be sent to the customer.
Location for Inspection.
In most cases, operators will inspect their work as they perform it.
However this informal inspection is not sufficient. Even if they are
conscientiously done, their check will not be infallible (error free) and
may allow faulty parts to be forwarded to next operations. It therefore
becomes necessary to provide an additional check by inspectors.
Inspection points should be planned carefully and should be located

where they will produce the most economical end-results. In locating the
inspection points, consideration must be given to whether the materials
are to be inspected at a machine or work station or checked at a
centralised inspection point. If the inspection is made at work station, it
is called floor inspection. Inspectors of parts produced do some floor
inspection. In contrast to floor inspection is centralized inspection. This
type of inspection takes place in a centralised place and necessitates
taking the items to be inspected to the inspection station.
Floor inspection has the advantages of:
(1) Allowing only minimum materials handling,

(2) Reduced storage and delay of material in process,
(3) Close contact between the inspectors and work station and;
(4) Prompt communications and correction of processing difficulties.
The disadvantages however include;
1) under utilisation of the inspector’s time and

2) the fact that some items require special inspection devices that
may be available only in a central inspection or test station.
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HCM 343 MODULE 1
3) improved supervision of inspectors and their adherence to

standard inspection procedures.
Amount to Inspect
One of the important phases of any quality control programmed is the

determination of the frequency of inspection and of the percentage of
items to inspect. It is neither practical nor economical to expect that
every item should be inspected, for every specification be determined
and that maximum concentration be placed upon adherence to these
standards. We should never lose sight of the fact that inspections cost
money and that the amount of inspection should be reduced to the
minimum required to maintain the degree of desired control.
Reference is frequently made to 100 per cent inspection or to sampling

inspection. In 100 percent inspection, all of the items are checked for the
characteristic being measured. Sampling inspection, on the other hand,
does not involve a check for each item. It is based upon the statistical
probability that the characteristic of a sample will be the same as those
of all items in the lot. It should not be assumed that 100 percent
inspection is necessarily absolute than sampling inspection. It does not
guarantee that all faulty items will be detected.
Many factors will influence the decision on the amount of inspection to

be used. For example,
1) The type of production being made,

2) The variability of the manufacturing process, and;
3) The variability of the materials
Rejection
The inspection department possesses the authority to reject those items

that fail to meet the specification standards. Where items are rejected,
the inspection department representative either signs the appropriate
space on the goods received note as rejected, or alternatively indicates
the reason for rejection on the inspection certificate or prepares a
separate reject report document, or causes the computer record of the
transaction to be amended. The accounts payable section is informed,
and the goods are held pending negotiation or ultimate return to the
supplier, in accordance with instructions to be issued in due course by
the purchasing office.
Prompt notification to supplier and to the purchasing department is

however important when goods are rejected. Delay in notification could
affect the buyer’s legal position. P. Baily & D. Farmer (1981) listed a
49
number of alternatives opened to the buyer when sampling inspection is

used on a batch of goods rejected as defective.
It may be possible to:
1) Refuse to accept the batch

2) Return the batch for replacement;
3) Return the batch for credit;
4) Arrange for supplier to make a 100 percent inspection at
purchaser’s establishment to sort defective parts from good parts;
and
5) Make the 100 percent inspection using purchaser’s inspection.
Following the 100 percent inspection, there are three further

alternatives:
1) To return defective parts for credit or replacement

2) To correct or re-work defective parts
3) To use the defective parts, but with special care or for special
applications.
3.6 How Quality is Described
After the right quality has been determined, it must be described in such
a way that the seller can understand and supply it. This is not as easy to
accomplish as might be assumed. In industrial purchasing, purchases are
regularly made from thousands of miles away. These distant suppliers
must determine buyer’s wishes from piece of paper the purchase order,
personal discussion and references to floor samples are missing. Under
this circumstance, quality description is much more difficult. Also the
description must be precisely understandable to all competing sellers,
not just one seller.
Quality descriptions perform three main purposes:
1) They make it possible to describe items on purchase orders.

2) They let the vendor know exactly what the buyer wants and
3) They permit inspection by specified measurement of test, which
can verify that the materials received conform to the materials
described on the purchase order.
Quality usually described on purchase orders by the following methods:
1 Market grades
2 Brand or trade names
3 Commercial standards
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HCM 343 MODULE 1
4 Chemical or Physical specification

5 Performance specifications.
SELF ASSESSMENT EXCERCISE
What factors support the argument that the purchasing executive is in

excellent position to contribute to that portion of their company profits
that originates in the area of quality?
4.0 CONCLUSION
Control of the quality of procured materials and subcontracted work is

of such an importance that every system of quality control should place
high priority and emphasis on assurance of quality in procured materials.
Before a purchase is made, it is necessary to determine and define the
quality that is wanted. Once this is done, it is the purchasing
department’s task to ensure that the quality of the material purchased
conforms strictly to the quality specified. The process normally starts
from initial purchase planning stage, when the desired quality level in
the required items must be carefully described or fully defined, in order
to ensure that the supplier has an accurate idea of what is needed.
It is one of the most important responsibilities of a purchaser to ensure

that he/she buys the right quality. There is obviously no meaning in
wasting time and effort on procuring the kind of materials that does not
conform with quality specification. The purchasing department do not
only places the purchase order but must also ensure that the goods in
their required quality have been obtained. In other words, the purchasing
department must ensure that the best value for money has been obtained.
In this regard, the purchasing department has a joint responsibility with
other departments in deciding on the quality that should be purchased.
5.0 SUMMARY
Quality has earlier been defined as how well a product does what it is
supposed to do -how closely and reliably it satisfies the specifications to
which it is built. The modern concept of quality is a philosophy, which
aims continually to satisfy customer requirements. Specification is the
most detailed method of describing such requirements.
Companies like to standardise on certain parts that are used in their

products. A standard is anything we use to measure. Any specification
intended for repeated use becomes a standard. Hence, the systematic
formulation and adoption of standards is referred to as standardisation.
51
The value analysis functions are commonly thought of as part of the

purchasing activity. The basic idea of value analysis is simply that of a
cost reduction technique, and as such it might logically be treated as a
part of methods in engineering and of purchase simplification. Often the
title “value engineering” is used synonymously with value analysis. To
carry out its responsibilities, the inspection department will need to
establish a number of policies and procedures. It must decide what to
inspect, where to inspect, how to inspect, and many other pertinent
matters. The section that follows examines some of these matters.
The basic idea of value analysis is simply that of a cost reduction

technique with purchasing and supply functions. How does this
technique bring about real cost reduction of purchased materials and
parts?
Bosler, W. Robert (1970). ‘Storekeeping and Warehouse Management’.

Maynard, H.B[ed]. Handbook of Business Administration. New-
York: McGraw-Hill Book Company, pp. 686-699
Dobler, W.D and Burt, N.D (2000), Purchasing and Supply

Publishing Company Limited, Sixth Edition
Ishola, T. Oladele (2002). Contemporary Purchasing and Materials

Management. First edition. Wadston Dusme Int. Limited,
Mushin Lagos.
Lysons Kenneth. (2000). Purchasing and Supply Chain Management.

Fifth Edition. Great Britain: Herry Ling limited, Dorchester,
Dorset (Prentice Hall).
Menon, K.S. (1993). Purchasing and Inventory Control. Wheeler

Publishing, India, Third edition.
52
HCM 343 MODULE 1
UNIT 5 SUPPLIER’S SELECTION ACTIVITIES
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Issues Involved in Sourcing Function
3.2 Factors in Supplier Selection
3.2.1 Attribut3es of a Good Supplier
3.3 Source of Supplier Information
3.4 Supplier Evaluation
3.4.1 Pre-Supplier Selection Evaluation
3.4.2 Post Selection Evaluation of Supplier
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Suppliers are major resources for manufacturers and traders alike. It

would not be possible operate to without them. An adequate supplier
base is essential to the economic wellbeing of a firm. Perhaps, it would
be reasonable to argue that the most important purchasing decisions are
concerned with selecting the right source of supplier; that is, if the
correct source decision is made in a particular instance, then the buying
company would receive the right goods in the right condition, in the
right quality, at the right time and at the right price.
Selection and management of the right supplier is the key to obtaining

the desired level of quality, on time and at the right price to meet up
with the company’s purchasing objectives and policies. The
management of the supply market however requires advance planning,
forethought and the quality to make some decisions. Sourcing in
purchasing has gone beyond simply picking a supplier for each order in
isolation.
1) It involves continuing relationships, both with preferred source

which are actually supplying goods and services, and with
potential source which may have been passed over for the present
but are still in the running.
2) It involves decisions about how to allocate the available business,
and what terms to do business on.
53
2.0 OBJECTIVES
• State and discuss factors in Supplier selection

• Highlight and comment on the sources of supplier’s information
• State and describe and/or calculate both qualitative and
quantitative processes of supplier Evaluation (i.e. Pre- and Post -
selection evaluation)
3.0 MAIN CONTENT
3.1 Issues Involved in Sourcing Function
D. Dobler and D.N. Burt (1996) argued that buyers must take six
important supplier-oriented actions in order to satisfy the performance of
sourcing function in purchasing. It is argued that the buyers must:
1) Develop and maintain a viable supplier base or source

2) Address the appropriate strategic and tactical issues
3) Ensure that potential suppliers are carefully evaluated and they
have the potential to be satisfactory partners.
4) Decide whether to use competitive bidding or negotiation as the
basis of source selection
5) Select the appropriate source
6) Manage the selected supplier to ensure timely delivery of the
required quality at the right price.
Peter Baily et al (1996) further argued that for its proper performance,
sourcing requires supply market research. This is a normal part of
buying work, undertaken informally by buyers when they talk to
representatives or salesmen, visit exhibitions, read trade journals, and
investigates the market before placing orders. It may additionally be
undertaken as staff or support function to buyers by full-time purchasing
research staff within a purchasing services section of company. The
objectives for this supply market research include:
1) The identification of the set of actual and potential sources, which

constitute a supply.
2) Investigation of the suppliers’ capabilities,
3) Examination of market trend and prospects of long-term supply;
and
4) The general keeping of the buyer’s ears to the ground.
Figure 5-1 outlines the procedure normally involved in selecting

suppliers. The model suggests that:
54
HCM 343 MODULE 1
1) the buyer, once receipt of a purchase requisition, first checks

whether the organization is currently committed to the particular
supplier for the supply of such items and, if not;
2) whether an existing source might satisfy the requirement
Requisition
Is this a Regular NO
purchase?
YES
Make short-list of
YES possible source
It there an annual
contract for it
NO Obtain quotation and

other information
Was Last supplier
Satisfactory?
YES Selection supplier

and agreement price
Is time to one the and items
market yet? YES
NO
Place
Order
Evaluate
Performance
Figure 5.1: Outline of procedures for selecting suppliers. The

broken line indicates steps taken after orders have
been placed.
3) Repeat ordering with an existing source would be normal unless

for some reasons necessitating a review of such an arrangement.
Such reasons might include:
a) recent price increases,
b) recent extensions in supplier supply lead-time
c) failing to meet specifications,
d) decline in vendor rate performance.
55
3.2 Factors in Supplier’s Selection

The primary concern of the purchasing department is to successfully
identify and secure the services of those suppliers that will help realise
both objectives of the purchasing department and the overall company’s
objectives. Hence when selecting a supplier, the buyer is attempting to
find a company or companies which will meet its needs. Those needs
usually include reliability in quality and service terms, while the relevant
pricing is competitive. The benefit of accurate supplier selection can
therefore include such factors as reliability, quality, delivery,
performance, reputation and continuity of supplies.
Great care must be taken over the selection of every supplier: short cuts
in this area will lead to inefficiency and loss of profitability in the long
run. The supplier’s selection decision is based on the following factors,
all of which must be carefully researched and analysed by the
purchasing department.
1) Assurance of Supply
Reliability of supply is becoming increasingly important to both buyers

and suppliers. Hence, supplier’s who suffer recurring shortages
themselves must be used with great care, regardless of their other
desirable capabilities. Suppliers who have assured, long-term source for
their raw materials and component parts should be favoured and
developed.
2) Size of Supplier
Some purchasing authorities theorize that the size of an order should

correlate with the size of supplier – receiving the order.
3) The Number of Suppliers
The number of suppliers to be selected for a particular line of products

or group of items is another important factor that must be given careful
consideration. Selecting one supplier for a particular product, no matter
how reliable the source could be proves unwise in the long run.
Similarly, selecting too many suppliers for an individual material may
result in the buyer’s inability to fully tap the resources of these suppliers.
4) Developing New Source of Supply
In some cases a buyer is not able to select but must create a satisfactory
supplier. If existing suppliers cannot satisfy a company’s needs, a
logical alternative is to create a supplier that can.
56
HCM 343 MODULE 1
Encouragement of this nature may involve setting-up or equipping such

local producer financially and materially up to the level expected by the
buyer.
5) Conflict of Interest
In selecting suppliers, buyers must be aware of conflicts of interest. A

conflict of interest exists when buyers must divide their loyalty between
the firm, which employs them, and another firm.
6) The Policy of the Buying Firm
A company’s policy may for example favour reciprocity, single or

multiple sourcing. In purchasing, suppliers who patronize the buying
company are given priority when it comes to selection of suppliers.
Some companies makes it a matter of policy to reward indirectly, those
customers that buy from them regularly and are found capable of
performing certain jobs for the company.
7) Ethical Consideration
Buyers should keep themselves as free as is humanly possible from

unethical influences in their choices of suppliers. Gift from suppliers
which are intended to influence buying decisions have no place in a
professional purchasing department. In most cases, commercial bribery
is a criminal offense.
8) Dishonest Suppliers.
Dishonest sellers exist in the industrial world just as they do in the

consumer world. Purchasing personnel should be wary of dishonest
suppliers and endeavour to avoid them. Their aim is to swindle the
buying company.
9) Local Sources
It is always desirable to patronize suppliers located within the buyers’

immediate environment. This will help to promote good relationship
between the local community and the company. It is only when
materials in question are not available at the expected quantum that
buying from distant source can be justified.
10) Government Policy
For the purpose of controlling foreign exchanges, government may for

example, impose restrictions on importations of certain goods thereby
57
preventing the sourcing of the goods in foreign supply markets. In such

cases, the buyer’s range of sourcing is limited to the local market.
11) Others
Other factors, which for obvious reasons may be taken into account in
supplier’s selection, can be listed as follows:
1) Relative price of goods and services supplied by the supplier,

compared with his competitors.
2) Delivery dates, methods and cost delivery. In many instances, the
delivery element is more important than price, provided the
prices are within the boundaries of the main competitors.
3) Supplier’s reputation, especially within the industry or trade.
4) History of labour relations at the supplier’s end.
5) Financial solvency of the suppliers;
6) Legal constraint, e.g. patent law.
3.2.1 Attributes of a Good Supplier
Peter Baily et al (1996), suggested a number of attributes which might

be regarded as desirable for a typical relationship.
These include:
1) Delivery on time
2) Provide consistent quality
3) Gives a good price
4) Has a stable background
5) Provides a good service backup
6) Provides a good stock service
7) Does what he/she says they will do
8) Provides technical advice
9) Keeps the buyer informed on progress
3.3 Sources of Supplier Information
The task of obtaining information about sources of supply is a

continuous exercise in purchasing function. Sources of information
about suppliers are plentiful. The following sources should prove helpful
to a buyer in preparing a list of potential suppliers.
58
HCM 343 MODULE 1
1) Supplier Purchasing Information File
File on past and existing suppliers are already source of information

where the purchasing department can always contact to obtain whatever
information they may require about suppliers. Such supplier information
files commonly contain the name of each supplier, a list of materials he
can supply, his delivery history, his quality rejection record, his overall
desirability as a supplier, and general information concerning his plant
and management.
2) Supplier Catalogues
Catalogues are a commonly used source of supplier information. Many

purchasing departments maintain a catalogue room, where users can
examine the catalogues to try locate the materials they need. Some large
companies keep a special library file containing catalogues, price lists
and other literature from potential suppliers.
3) Trade Journal
Trade journals are another excellent source for obtaining information

about possible suppliers. Advertisements in trade journals are often a
buyer’s first contact with vendors and their products. In the field of
purchasing, the magazines, purchasing and purchasing world are
perhaps best known and widely read trade journals.
4) The “Yellow Pages”
Another commonly known directory is the classified ‘yellow page’

section of telephone directories. Though, this source of information is
frequently of limited value to many industrials buyers, yellow pages do,
however, have the virtue of being well indexed. Also they can serve as a
useful starting point if other sources have proved fruitless, and local
sources are desired.
5) The Internet
Understanding the versatility of information technology through the

nerves of computing is perhaps a prerequisite for appreciating the
enormity of advantages of using the internet for business and other
purposes. From the inception of the internet evolution (which originated
as APPANET, a United States Government Research Project), the net
has grown to become an information super highway, linking many
millions of computer systems and digital machines as well as millions of
users around the world. A great majority of these linkages and users are
primarily hooked-up for economic (business) purposes.
59
The internet has become an electronic market place such that a

tremendous amount of activities (e.g. retail activities, selling digital
delivery of services, buying or procurement, etc) takes place as
companies now set-up their customer-service functions on the internet.
The beauty of the internet is that it can make it easier for companies in
developing countries to do business globally. Companies can now set-up
internet facilities and immediately have access to a billion of people and
other business globally as a market. This opens up a wave of
information opportunities to buyers world-wide to expand their
knowledge of new products, new vendors, and new ideas.
6) Sales Personnel
Sales personnel is an excellent source of information for possible

sources of supply. Not only are they usually well informed about the
capabilities and features of their owner products. But they are also
familiar with similar and competitive products as well. By the very
nature of their specialized knowledge, sales people can often suggest
new applications for their products, which will eliminate the search for
new suppliers.
7) Trade Exhibit
Regional and national trade shows are still another way in which buyers
learn about possible source of supply. The use of exhibition as a means
of sales presentation is greatly increasing. They provide an excellent
opportunity for buyers to see various new products and modifications of
old products. They also offer buyers an opportunity to compare similar
products from different manufacturers.
8) Company Personnel
Personnel in other departments within a company is often

knowledgeable about the source of materials relating to their
specialisation. Through their association in professional organisations,
civic associations or social groups, these employees often learn about
outstanding suppliers.
9) Other Purchasing Departments
Purchasing departments in other companies are most helpful sources of

information concerning supplier with whom they deal.
10) Organisations Promoting Trade
Information on suppliers can readily be obtained from trade register and

directories compiled by the umbrella bodies of trade associations such as
the manufacturers Association of Nigeria (MAN), Chambers of
60
HCM 343 MODULE 1
commerce, etc. Such directories contain names of manufacturers, their

addresses and branches as well as their various products.
Similarly, embassies and commercial attaches are usually keen to help

buyers to find sources of supply in the territories they represent.
3.4 Supplier Evaluation
In purchasing, suppliers are regarded as partners in progress to the

buyer’s organisation. This is because supplier’s performance is capable
of influencing the organisation’s success. For this reason, selection of
suppliers as well as evaluation of their performance is an important
responsibility of not only the purchasing department, but the entire
buying company. After a major supplier has been selected and they-
supplier relationship has begun to develop, it is important monitor and
assess the supplier’s overall performance. The purpose is to enhance the
relationship and thereby control performance.
The evaluation of actual and potential source is a continuing process in

purchasing departments. Actual source with which one is dealing
regularly can be evaluated largely on their track record: on the actual
experience of working with them. This is known as vendor rating.
Vendor rating is intended to evaluate the performance of supplier in
terms of prices, quality, delivery and service. The type of evaluation
required to determine suppliers’ capability however varies with:
1) the nature,
2) complexity; and
3) the total value for the purchase to be made.
3.4.1 Pre-Selection Evaluation
This type of evaluation is aimed at obtaining information about the

prospective supplier to determine his suitability to meet the buyer’s
requirement if selected. Potential sources can be evaluated only by
judgment of their capabilities. Pre-selection evaluation may generally
involve the following considerations:
1) Supplier’s Registration Form
As a pre-requisite, most suppliers seeking to do business with another

organisation are expected to pass through a formality by completing a
registration form made available by the buying company. The type of
information usually required from such suppliers are details like name of
company, address, type of business or products, financial capabilities,
61
and a host of other information that will enable the buying company
determine the suitability or otherwise of the potential source.
2) Product Testing
In some cases, special request is made for the samples of the product
advertised or intended to be supplied for preliminary testing. If these
products are used for certain period by the company and are found
suitable for the purpose for which they are needed, the supplier can be
considered.
3) Plant Visits
On-the-spot surveys of facilities and personnel by the technical and

commercial representatives of the purchaser are often carried out to
evaluate potential suppliers-although sometimes it may possible to
eliminate this on the basis of a supplier’s reputation, as obtained from
word – of – mouth and published information.
4) Financial Condition
This is an important factor in evaluating capability of a potential

supplier. This type of evaluation places more emphasis on the solvency
of the supplier over and above other requirements. Financially strong
firms are usually, although not always, managerially strong also, hence
they generally make good suppliers. Analysis of balance sheets and
profit and loss statements can be of immense benefit in the evaluation of
vendor’s financial condition.
5) Management
It becomes necessary at times to have insight of the potential supplier’s

management quality of his organisation, in terms of personnel, plant
maintenance, staff wages and welfare package. This is because, if an
organisation is well managed, cases like high labour turnover rate,
industrial unrest which are capable of affecting supplier’s product
quality, delivery performance and service will be completely eliminated
or reduced to the barest minimum.
3.4.2 Post-Selection Evaluation Of Supplier
When suppliers are finally selected and have been allowed to perform
over a period, it is necessary that their performances are evaluated for
the purpose of determining their respective capability in terms of
quality, price, delivery and service. Donald W. Dobler and David N.
Burt (1996) reviewed three types of evaluation plans that were
62
HCM 343 MODULE 1
investigated by the National Association of Purchasing Management.

These include:
1) Categorical Plan
Under this plan, personnel from various departments of the buying

company maintain informal evaluation records. The individuals
involved traditionally include personnel from purchasing, engineering,
quality, accounting, and receiving. For each major supplier, each
evaluator prepares a list of performance factors, which each supplier is
evaluated against. After the factors are weighted for relative
importance, each supplier is then assigned an overall group evaluation,
usually expressed in simple categorical terms, such as “preferred”,
“adequate”, “unsatisfactory”. This simple qualitative plan is easy to
administer and has been reported by many firms to be very effective.
The categorisation sample of overall scores is shown in Table 5.1
Performance Preferred Adequate Unsatisfactory

Factor
1 Quality 18-20 10-17 0-9
2 Delivery 16-20 8-15 0-7
3 Commercial 18-20 12-6 0-11
4 Technology 18-20 10-16 0-8
5 Management 16-20 10-14 0-8
Target total 86-100 50-85 0.49
Table 5.1 Supplier performance and ranking system categorisation

of overall scores
To achieve Preferred Supplier status, scores in all categories must fall

within the ‘Satisfactory’ and Adequate’ ranges. Any ‘Unsatisfactory’
scores will be followed up and reviewed and, if not improved within
acceptable timescales, may lead to deselection.
A guide to classification based on scores is given with target scores for

preferred suppliers with whom the company intends to place long-term
business identified.
2) The Weighted Point Plan
This plan involves giving weight to every performance factor to be

evaluated and oftentimes, various aspects of quality, service, delivery
and price are given weights. For example in one circumstance, quality
might be weighted 30 percent, service 25, and price 40 percent. In
another, quality could be raised to 45 percent, and price reduced to 20
percent. The weight selected in any specific situation represents the
buyer’s judgments about the relative importance of each factor.
63
After performance factors have been selected and weighted, a specific

procedure performance on each factor must be expressed in qualitative
terms. To determine a supplier’s overall rating, each factor weight is
multiplied by the supplier’s corresponding performance number; the
results (for each factor) are then totalled to get the supplier’s final rating
for the time period in question.
ILLUSTRATION 1
The following hypothetical case illustrates the procedure. Assume that

the purchasing department of Koriope & Sons Ltd. has decided to
weight and measure the three basic performance factors as follows:
Weight Factors Measurement formula
45% Quality performance= 100%-percentage of rejects
25% Service performance= 100%- 5% for each failure
20% Price performance = Lowest Price offered
Price actually paid
Assume further that suppliers anytime performed as follows during the

past month:
Seven percent of his items were rejected for quality reason;

Four unsatisfactory split shipments were received; and vendor Ayim’s
price was 110 per unit. Compare with lowest offer of N80 per unit.
The workings below summarize the total performance evaluation for

supplier Ayim
Factor Weight Actual Performance
Quality 45 7% rejects
Service 25 4 failures
Price 20 N 100
Performance Evaluation
For quality = 45 x (100% - 7%)

45 x (1.00-0.007) = 41.90
For service = 25 x (100% - (5% x 4)
= 25 x (1.00- .05 x 4)
= 25x0.8 = 20
For price = 20 x N80

N100
= 2x 0.8 = 16
Overall Evaluation: 41.90 +16 = 77.9%

This example is not the only method available, nor has it been so
comprehensively dealt with. Some of the more sophisticated
64
HCM 343 MODULE 1
applications can be very complicated. The above can however be used to

evaluate any number of different suppliers whose performance is
particularly important during a given operating period. Example 2
further illustrates this point.
ILLUSTRATION 2
Arijenimondaru Co. Ltd. divides the purchase of Abacha television sets

between Kalu and Naaba. He wishes to compare their performance with
regard to quality and delivery for two years, 2003 and 2004. The year
2003 is taken as the base year.
SOLUTION
• Quality rating
Year Vendor Intake Rejects %Reject

Index
2005 Kalu 2,900 75 2.6
100
2005 Naaba 1,850 45 2.4
100
2006 Kalu 3,400 83 2.4
92
2006 Naaba 2,350 47 2.0
83
Index = For Kalu :- (2006) = 2.4 x 100 = 92
2.6
For Naaba :- (2006) = 2.0 x 100 = 83

2.4
Remarks: In 2006 Kalu recorded an 8% defective materials supplied rate

(i.e. percentage rejects) while Naaba recorded suffered a 17% reject rate
of total materials supplied in the given year.
• Delivery rating
In a similar way to what was done in respect of quality performance, it

is possible to keep delivery records, showing shortage, early or late
arrivals, or any variation on the contracted delivery programme. These
facts can be used to produce a delivery rating, which may be applied
either separately or in conjunction with quality rating. This makes the
whole operation more complicated, and is normally attempted only
65
where delivery is of vital importance and where the quality scheme is

already well established.
Year Vendor Delivery Total Average

Index
Day Late Day Late
2005 Kalu 7 49 7
100
2005 Naaba 15 75 5
100
2006 Kalu 10 60 6
85.7
2006 Naaba 8 24 3 60
Index: for Kalu:- (2006) = 6 x 100 = 85.7
7
For Naaba: - (2006) = 3 x 100 = 60
5
Remark: In 2006 the performance of Kalu showed a 14.3% delivery

failure as against Naaba’s 40% delivery failure rate in the give year.
Overall rating:
Assuming that quality and delivery are weighted 45% and 15%
respectively; the overall rating would be:
Factory Supplier
Kalu Naaba
Delivery 85.7 60
Quality 92 83
Overall index for Kalu = 92 (45) +85.7 (15)
100
= 4140+1285.5
100
= 5425.5 = 54.3%
100
Overall index for Naaba = 83 (45) + 60 (15)
100
= 3735 +900
100
= 4635 = 46.4%
100
66
HCM 343 MODULE 1
Remarks: Vendor Kalu demonstrated superior performance rating in the

year in question.
• The Cost – Ration Plan
This involves the use of management tools or techniques such as

standard cost, average cost, weighted average cost, etc. to determine or
evaluate the performance of each supplier. This type of evaluation is
based mainly on the price and cost of rejects or non-performance by the
supplier.
All the three of the evaluation plans discussed – categorical, weighted-

point, and cost-ration – involve varying degree of subjectivity and
guesswork. The Quantitative (weight-point and cost-ration) remarkably
are deficient in the light of:
1) Wrong impression it gives about its scientific accuracy while in

effect, they are not more accurate than the assumptions on which
the quantitative data are based.
2) The high cost of collecting the data on which the rating are based;
3) Supplier performance is often affected by circumstance outside

the control of the vendor.
In the final analysis, therefore, supplier evaluation must represent

combined appraisal of facts, quantitative computations, and value
judgments. It simply cannot be achieved effectively by mechanical
formula alone.
What objectives should supply market research seek to achieve?
4.0 CONCLUTION
An important function of purchasing is the identification of suitable

sources of supply. The systematic investigation and comparison of
sources, the evaluation and monitoring of performance of supply sources
and the development of appropriate procedures with supplier are
therefore of importance. In purchasing, suppliers are regarded as
partners-in-progress to the buyer’s organisation. This is because
supplier’s performance is capable of influencing the organisation’s
success. For this reason, selection of supplier as well as evaluating their
performance is an important responsibility of not only the purchasing
department, but the entire buying company.
67
5.0 SUMMARY
Selection and management of the right supplier is the key to obtaining

the desired level of quality, on the time and at the right price to meet up
with the company’s purchasing objectives and policies. The
management of the supply may however require advance planning,
forethought and the ability to make some decisions. Sourcing in
purchasing has not only gone beyond simply picking a supplier for each
order in isolation but also as follows:
• It involves continuing relationships, both with preferred source

which are actually supplying goods and services, and with
potential source which may have been passed over for the present
but are still in the running.
• It involves decisions about how to allocate the available business,

and what terms to do business on.
What are the important supplier – oriented actions that buyers must take
in order to satisfy the performance of sourcing function in purchasing?

Baily, P. and Farmer, D. (1981). Purchasing Principles and
Management. Massachusetts: Pitman Books Limited, Fourth
Edition.
Baily, P. Farmer D., Jessop. D. and Jones, D. (1994). Purchasing
Principles and Management. ELBS with Pitman Publishing,
London, Seventh Edition.
Jessop, D. and Morrison, A. (1996). Storage and Supply of Materials.

Sixth Edition. Glasgow, Scotland.
Lamar Lee Jr, and Donald, W.D. (1981). Purchasing and Materials
Management: Text and Cases. New Delhi: TATA Mc Graw-Hills
Publishing Company Limited, Third Edition.
Lysons Kenneth (2000). Purchasing and Supply Chain Management.
Fifth Edition. Britain: Henny Ling Limited, Dorchester, Dorse
(Prentice Hall).
Menon, K. S. (1993). Purchasing and Inventory Control. India: Wheeler

Publishing, Third Edition.
68
HCM 343 MODULE 2
MDOULE 2
Unit 1 Pricing Procedures in Procurement and Supply Function

Unit 2 Managing Procurement Activities
Unit 3 Procurement Practice and Methods.
Unit 4 management of inventory
Unit 5 ABC Analysis: The 80-20 Concept
UNIT 1 PRICING PROCEDURES IN PROCUREMENT

AND SUPPLY FUNCTION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Importance of Obtaining Materials at the Right Price
3.2 The Role of Price in Purchasing
3.3 How Buyers Obtain Prices
3.4 Factors Influencing Price Setting
3.5 Use and Importance of Discounts in Purchasing
3.6 Procurement Timing Policies and Inventory Management
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Price is important both to the seller and the buyer. It is regarded as one
of the elements in the marketing mix. As it is used in purchasing, price
is the mechanism for measuring the value of good and services in
monetary terms.
1) This definition is consistent with one of the main objectives of

purchasing which is to obtain value for money on all occasions.
2) The definition also enables us to appreciate the role of price in
the purchasing and supply functions.
For the purchaser however, price is just one of the elements taken into
account in making a purchasing decision. Non-price factors, which may
be important, include; delivery, service, reliability, product quality,
terms of payment, location and many more. Value for money therefore
depends not only on price, but on what is provided for the price.
69
2.0 OBJECTIVES
• list and explain the importance of obtaining materials at the right

price
• state clearly the role of price in purchasing
• describe how buyers obtain prices
• highlight and discuss the factors influencing price setting
• enumerate the uses and importance of discount in the purchasing
function
• discuss the issues involved in procurement timing policies
3.0 MAIN CONTENT
3.1 Importance of Obtaining Materials at the Right Price
Obtaining materials at the right price is important; it literally can mean

the difference between a firm’s success or failure. With the traditional
approach to purchasing, it is easy for the importance of pricing to be
over-looked. For instance, in traditional purchasing theory:
(1) It is frequently stated that price may be low or high, what matters
most is service and delivery reliability. Or rather,
(2) Price is not the major consideration in making purchases; rather,
the main concern is the continuous flow of materials at all cost.
This traditional attitude is loaded with massive implications, the most

obvious of which are;
1) The danger of collusion to buy goods and services at high or

inflated price;
2) The danger of buyer developing inertia or unwillingness to
investigate new and cheaper sources of supply;
3) The possibility that the cost-saving function of purchasing may
be totally ignored or abdicated.
These implications are all together very detrimental to the corporate

financial position.
Purchasing should ideally aim for the right price; this is a price, which
gives the best value to the organisation, taking quality, delivery and
relative urgency into account. This may not always be the lowest price
available, but the one, which represents the best value over a period of
70
HCM 343 MODULE 2
time. Professional buyers commonly interpret the right price as one that
is fair and reasonable to both the buyer and seller.
3.2 The Role of Price in Purchasing
As a monetary phenomenon, Fajemilua (1997: p.78) listed the following

five roles price plays in the purchasing cycle:
1) It is the basic unit for measuring and assessing other factors
(such as quantity and so on) which influence the purchasing
decision process;
2) It provides the yardstick for comparing supplier’s quotations
and assessing the relative value of their service;
3) It is the basis for costing store issues; evaluating stock
balances damages for losses in a storehouses
4) Price is used for costing, purchasing and supply operations
with a view to evaluating performance.
5) It provides the yardstick for the application of most stock-
control techniques.
3.3 How Buyers Obtain Price
The methods of communicating price will vary according to:
1) The nature and complexity of the purchase; and

2) The manner in which it is being dealt with, that is, either by an
individual consumer or an industrial buyer.
Two broad categories of methods are however discussed in this text.

And these are:
3.3.1 General Methods
Some of the general methods used in price determinations are as

follows:
1) Haggling: This is the traditional method and it is used mainly in

making purchases for private consumptions. The method calls for
bargaining and usually, the selling price is between the range of
prices, which will satisfy both the seller and the buyer.
2) Auctioning: Here, an auctioneer puts an article on sale and calls
for bids. The prospective buyers then make their offers. In the
end, the article goes to the highest bidder. The selling price of the
article will therefore depend on the keenness of the buyers to buy.
3) Fixed Pricing: Many sellers may not want their customers to
haggles on price. Rather, they prefer to fix prices at which they
think they can sell their goods. This is the method used for the
71
purchase of goods in most supermarkets and retail stores.

However, the seller cannot fix price and at the same time
determine the quantity to be sold.
4) Demand and Supply Approach: According to the micro-
economic theory, the buyer on the one hand will always buy
more at a lower price than at a higher price and suppliers on the
other hand will always supply more at a higher price than at a
lower price given that all things are equal. The equilibrium price
of a commodity will be fixed at the point where the forces of
demand equate the forces of supply.
3.3.2 The Industrial Buyer’s Approach
The professional buyers determine the purchase price of goods and

services using a number of methods. The more common methods
include:
1) The Use of Published Price Lists: Price of many industrial

goods and services are frequently published in newspapers, price
catalogues and trade journals. An experienced buyer does his best
to keep abreast of published price lists or gazette price and makes
use of such price information in the procurement of goods and
services for his organization.
2) Contact with Salesmen: The professional buyer is placed in a

unique position to meet and interact with salesmen from different
supplying firms and organisations. Through this discussion with
such salesmen, the buyer becomes conversant with current prices
of industrial goods and services.
3) Quotations: The commonest method used to determine

purchasing prices is by inviting quotations from the prospective
suppliers. The quotation obtained are compared and analysed to
determine the most advantageous offer.
4) Tendering: This can be an open selection depending on the type

of purchase or policy of a particular organisation. Under the open
tendering system, as many suppliers as possible are usually
invited through public advertisement to tender for the required
goods and services. The selective tendering system on the other
hand does not permit open competition. Only a few suppliers
specialising in a particular field are selected and invited to submit
tenders in their area of specialisation. The tenders submitted are
collated and evaluated for the purpose of determining award
prices. The tendering system is very common with government
establishments. Such departments usually set up committee
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HCM 343 MODULE 2
known as Tenders Boards for the purpose of opening tenders,

evaluation and fixing prices.
5) Negotiation: In this case, it must be noted that price is not the

only subject covered by negotiations. Even though price is a
major consideration in all negotiations; other factors such as
quality, quantity, delivery schedule and service are negotiable.
Negotiation is a complex process which requires some strategies
and tactics for its success.
3.3.2 Factors Influencing Price Setting
Many factors influence price and pricing strategy and operate at the
environmental, organisational and strategic levels of any business firm.
Some of those factors as identified by Needle (1992, pp. 230-232) are
dealt with here under the following headings
1) Cost
A useful way to consider costs is according to whether the sum is fixed

or variable.
Fixed cost is the sum total of costs that do not change when
organisational output increases or decreases.
Variable cost is the total of those costs, which change when the
organisational output change i.e. expenses for raw materials.
A business firm wishing to make a profit must use the cost of making a
product or providing a service as an important base point in setting its
prices.
2) Consumer Behaviour
The price of a product may well be related to what a consumer can

afford and what he is prepared to pay. These in turn are related.
a) Income levels;
b) The consumer’s perceptions of quality and value for money; and
c) The consumer’s budget for a particular purchase.
3) Economic Factors
Price is related to the economy in a number of different ways, all of

which have a potential impact on an organisation’s pricing policy. The
affluence of consumers will have an obvious influence on their level of
73
budgeting, and regional variations in consumers’ affluence may produce

differential demand, especially for certain luxury items. The role of the
state in managing the economy may affect both demand and prices.
During the periods of high inflation, the government may well introduce
measures to control prices.
4) Competition
Many business firms price their products by reference to an existing

market, basing their price around that offered by competitors for
products of similar features and quality. When the prevailing market
condition is keenly competitive, the demand for a business firm’s
product is perfectly elastic that is, the firm can sell its products only at or
near the market price.
5) Management Goals
The price of goods is often related to the extent to which management

wishes to optimize profit. The desire of a group of managers for a larger
market share for their products may result in a low price strategy to
build up demand.
6) Organisational Size
The size of an organization may give it market power and the ability to
manipulate market price. This is especially true of few sellers or
Oligopolies (oligos means few in Greek). A major fast food chain such
as Mr. Biggs is able, because of its purchasing power and stock
turnover, to insist on large price discounts from its suppliers.
3.5 The Use and Importance of Discounts in Procurement
Industrial purchases are usually subject to cash, trade, and quality

discounts. Procurement agents and buyers must be thoroughly
acquainted with these discounts as they apply to the purchases that they
are making – and with the legal aspects of same. Technically;
A discount is a percentage variation to the nominal price. It involves the

offer of reductions (differentials) from a base price and must also be
considered when price policy is being determined.
By using a system of discounts, sellers can modify the prices without

having to set new list prices.
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HCM 343 MODULE 2
3.5.1 Types of Discounts
The criteria for supplier discounts are many and it may be an exercise in
futility to attempt to identify and describe all of them. The following are
however the most usual forms:
1) Trade Discount
The trade (also sometimes called functional) discounts are price

reductions given to various classes of buyers and distributors to
compensate them for performing certain marketing functions for the
original seller (the manufacturer) of the product. Ordinarily the amount
of a buyer’s discount depends upon whether he is a wholesaler, an
industrial purchaser, or a retailer. Discounts are lowest for the retailer
and highest for the wholesaler.
2) Quantity Discounts
The quantity discount is offered on the basis of the amount of the

commodity purchased. These are price reductions given to a buyer for
purchasing increasingly larger quantities of materials. Quantity
discounts may be cumulative or non cumulative these are explained as
follows:
Cumulative quantity discounts are based upon purchases made from a

single source during a prescribed period of time, such as six months.
Non-cumulative discounts, which are more common, apply only to a

single purchase.
Quantity discounts, whatever their form, offer definite advantages.

From the manufacturer’s viewpoint, the following advantages are
notable:
1) They encourage purchasers to buy more frequently from a single

vendor,
2) They stimulate larger order, and
3) They result in increased production units, since voluminous
production is made possible by the increased demand.
From the buyer’s viewpoint, quantity discounts are advantageous

because:
1) He is able to buy at lower net prices.

2) The ultimate consumer and the industrials consumers also benefit
from the decreased price level that results.
75
Quantity discount also have disadvantages.
1) Producer: overestimating the savings that may result from

obtaining a large order, may allow too much discount.
2) Moreover: small-scale buyers may resent the fact that lower net
prices are offered to large-scale purchasers.
3) Cash discounts: A cash discount is offered for payment of bills

in advance of the due date. Most business transactions from
manufacturer to different classes of buyers are conducted on
credit terms. The length of time allowed for payment varies
considerably and payment in practice is often delayed beyond the
duration of the officially stated credit terms.
4) Seasonal discounts: Based on the seasonal nature of some

products (primarily consumer products), their producers
commonly offer discounts for purchases made in the off-season.
A seasonal discount is thus offered to stimulate the purchase of
seasonal goods during “off-peak” period. The OBJECTIVES
ARE to;
(a) Move the seasonal produce of the seller out of warehouse

and,
(b) To maintain a move balanced production throughout the
year in order to reduce overhead costs
5) Geographical differentials: These are price variations offered in

relation to distance from supply base e.g. new car delivery.
6) Special discounts: Many discounts fall within this category.

They are special discounts made available by vendors or
suppliers only by exceptional and special or temporary
circumstances.
3.5.2 Use of Discounts
From the foregoing discussion, it may be summarized that discounts are

offered for four main reasons:
(1) To obtain prompt payment

(2) To change prices without reprinting price lists.
(3) To give special terms to special classes of customer
(4) To induce customers to buy large quantities.
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HCM 343 MODULE 2
3.6 Procurement Timing Policies and Inventory

Management
One of the primary roles of purchasing is to ensure adequate supply of

materials and components of acceptable quality in the most cost-
effective manner. The procurement function has since realised the
existence of the numerous problems affecting certain commodities and
the characteristic of such markets. Purchasing therefore, faced this
situation must formulate fundamental policy decisions on either;
• Buying for the purpose meeting immediate needs;
• Buying according to the dictate of the markets.
1) Buying for Immediate Requirements
This type of policy stipulates that materials are brought into the
organisation only when the need arises. This action implies that more
emphasis is placed on inventory levels rather than on prices of materials,
since commodities are subject to price fluctuations or forces of demand
and supply. Buyers take the advantage of lower prices to stock goods in
excess of their immediate requirements.
This policy option therefore, requires that, purchases can only be made
regardless of whatever the selling prices are, at the time of purchase.
2) Buying according to the dictates of the market.
This policy option takes into consideration the market situation affecting
prices of goods such as seasonal fluctuation, or actions of the market.
Buyers that select this option may have chosen between the following
market activities:
(a) Hand-to-mouth buying

(b) Speculative buying
(c) Forward buying.
(a) Hand-to-Mouth Buying

This is the practice whereby buyers engage in buying to satisfy
immediate requirement especially when prices are considered to
be high. It is a policy frequently used in difficult trading periods,
or when a company wants to conserve its financial resources. The
principle is to buy exact need and save money, rather than buying
in excess of immediate needs when prices are high.
(b) Speculative Buying

This practice involves buying in anticipation of future rise in
prices. If the price of certain commodity is known to be capable
77
of unexpected fluctuation or the availability of such commodity is

not certain, speculative purchase of such commodity may be
considered prudent. This type of buying therefore refers to
buying in excess of immediate requirements in order to take the
advantage of lower prices or unforeseen scarcity.
(c) Forward Buying.

This is the practice of buying materials in excess of current
requirement, but not beyond the actual foreseeable requirements.
The objective of forward buying policy is to take care of well-
defined production requirement, especially in a situation where
materials scarcity or price increase is foreseeable in the nearest
future. Some of the advantages of forward buying are:
1) It enables the buyer to know the production cost of an item

before they embark on the production activities;
2) It also reduces the risk of inadequate delivery in a period
of materials shortage or scarcity.
State the general methods used in price determination.
4.0 CONCLUSION
Obtaining materials at the right price is important. It literally can mean

the difference between a firm’s success or failure. This is a major
responsibility of the purchasing group. Many factors influence what is a
right price; even though it is hardly possible to comprehensively discuss
this. But this clarification must be made because of the erroneous idea
that the price level is of little importance in industrial buying decision-
making process. With the traditional approach to purchasing, it is easy
for the importance of price to be over-looked.
Purchasing should ideally aim for the right price; this is a price which
gives the best value to the organisation, taking quality, delivery and
relative urgency into account. This may not always be the lowest price
available, but the one, which represents the best value over a period of
time. Professional buyers commonly interpret the right price as one that
is fair and reasonable to both the buyer and seller. Unfortunately, no
single set of pricing principles or criteria exist for calculating precisely
what constitutes a fair and reasonable price. The right price from one
vendor is not necessarily the right price from all other vendors, at either
the same or at different points in time. To determine the right price, for
any specific purpose, a number of constantly changing variables and
relationships must be evaluated.
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HCM 343 MODULE 2
5.0 SUMMARY
Price is important both to the seller and the buyer, but it is regarded as
only one of the elements in the marketing mix. As it is used in
purchasing, price is the mechanism for measuring the value of goods
and services in monetary terms. As stated earlier, the right price is not
always the lowest price available. The purchasing group may have
occasions to suspect a low quotation particularly where:
(1) It may entail reduction in quality and service levels or;

(2) Where it may lead to right final costs in the end.
Whether a particular price is to be considered the right one or not

depends on the situation.
There are times when a low quotation may result from a deliberate
action of a particular supplier. The buyer must take advantages of such
pricing opportunities after satisfying himself that the low prices are not
designed to reduce quality and service levels. On the other hand,
market condition may justify buying at a high price in order:
(1) to avoid buying at anticipated higher prices later.

(2) similarly, such a high price may reflect the superior quality and
services level of the vendor, which cannot be compromised.
It therefore follows from the above that the buyer must be thoroughly
familiar with market gimmicks.
Summarise the reasons for offering discounts in purchasing.
7.0 REFERENCES/FURHER READING
Amrine, T. Harold et al (1984). Manufacturing, Organisation and

Management. Fourth edition. Prentice Hall of India Pravate
Limited, New Dellin- 110001. pp. 225-245.
Baily, P. Farmer D. Jessop. D. and Jones, D. (1994). Purchasing

Principles and Management, ELBS with Pitman Publishing,
London; Seven Edition.
Banjo, F. (1997). Introduction to Purchasing and Supply Management.

Obafemi Awolowo Press Limited.
79
Iyanda, O. and Bellow, J. A. (1988). Elements of Business in Nigeria.

University of Lagos Press. First Edition, PP, 116-120
Jamieson Laura (1982). Modern Purchasing.
Samuelson, A.P. (1980). Modern Business Organisation and

Management: Systems Approach to the Process of Organisation
and Management of Business. Himalaya Publishing House,
Second Edition, pp. 497-513.
Williamson, R.J. (1985). Business Organisation. Published on behalf of

the Institute of Marketing and the CAM Foundation-Heinemann:
London. First Published 1981 pp. 141-146.
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HCM 343 MODULE 2
UNIT 2 MANAGING PROCUREMENT ACTIVITIES
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Planning Process and Techniques for Materials
Management
3.2 Planning Techniques for Materials Management
3.2.1 Budgeting
3.2.2 Purchasing Research
3.3 Procurement and Record Keeping
3.4 Handling Orders
3.5 A Computerised Materials Management System
3.6 Ethics in Procurement
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Like other key management tasks, procurement has aspects that are
concerned with operational activities (day-to -day), with tactical matters
(medium term-perhaps up to one year), and with strategic issues (long
term). Management is a process or activity, which takes place at all
levels in an organisation. It is not carried out only by people with
‘manager’ in their job title. Departmental heads, supervisors, foremen,
bishops, presidents or even Boy’s scout leader all performs managerial
function; although obviously not all of the same type or of equal
importance. It is the task, which a person performs which is of
importance, not the job title. Hence, managers whoever they may be,
tend to have the same set of functions in an organisation. The task of
managers is to get results through their subordinates. This he does by
planning, organising, directing and controlling. These activities are
called management functions, because they identify broadly what
managers do. These managerial functions are generally considered
central to a discount of management by authors.
2.0 OBJECTIVES
At the end of this Unit, you should be able to:
• Define planning and apply planning steps to your procurement

activities
81
• Discuss and state the implications of budgeting and purchasing

research activities to the purchasing function.
3.0 MAIN CONTENT
3.1 The Planning Process and Techniques for Materials

Management
The purchasing department must have a plan for carrying out its
activities. In fact, managerial efficiency starts with planning. Without a
plan, purchasing will be carried out in a stab-and grab opportunistic
manner, and the department may be very much overloaded during some
months and be relatively without much work for the rest of the year. The
first function of management is therefore, the development of a series of
plans that establishes the framework within which future activities will
be conducted. Every managerial job demands that planning be done
before the other functions of management are executed.
Planning, simply put, is a decision-making process that pertains to the

future. It involves all activities leading to the formulating of objectives
and deciding upon the means of meeting them. A useful working
definition of planning is given by the Chartered institute of
Management Accountant (CIMA) as:
The establishment of objectives and the

formulation, evaluation and selection of the
policies, strategies, tactics and actions
required to achieve these objectives.
Every planning process practically speaking attempt to answer such

questions as;
What action should be taken?

Why should the action be taken?
Who shall take the action? and
How shall the action be taken?
Planning is not an end itself, its primary purpose is to provide the

guidelines necessary for decision and resulting action, throughout the
organisation. Planning is done on both the formal and informal basis and
the planning process uses information from both the internal and
external sources. The plan is the net result of the planning process.
A plan is a predetermined course of action about what has to be done to

achieve an objective.
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HCM 343 MODULE 2
At the beginning of the year, the purchasing department must determine

what to buy and when. It must have time-schedules and a programme for
purchase. In purchasing, time is so essential. A plan can be simple or
complex. It can cover the short-term or the long term.
1) Long-term or Strategic Plans.
These are plans designed by top managers to meet or achieve the

company –wide or corporate objectives. It involves a longer time period
say two –to- five (and in some cases longer) years and relies on more
unreliable long – term forecasts.
2) Short Range or Operational Plans
This shows how strategic plans will be implemented in day-to-day

activities. Operational plans thus cover some functional areas such as
production, marketing, finance etc. and periods of up to a year and such
other situations that are likely to come up monthly, weekly and
sometimes daily.
3.1.1 The Planning Steps
Regardless of its complexity, most planning can be done in a relatively

simple series of steps. Hence, managers would follow essentially, the
same process or step in any thorough planning. Certain of the steps are
however easily accomplished, but in practical terms, the series of steps
are of general application. Koontz et al (2000) presented the steps which
constitute the rational decision – making process to include:
1) Discovering an opportunity to exploit or problem to solve

(2) Establishing (planning) objectives
(3) Determining and, or considering planning premises
(4) Determining alternative courses of action
(5) Evaluating the alternative courses of action
(6) Selecting a course
(7) Implementation
(8) Planning review (control).
3.2 Planning Techniques for Materials Management
In preparation for each new fiscal year, most firms construct a company-
wide annual operation plan. A forecast of the scope and magnitude of
key functional activities is the starting point for development of the plan.
In a manufacturing firm, this is the sales forecast. The sales forecast is
then translated into an aggregate production plan and master schedule,
taking into consideration finished goods inventory levels as well as
83
desired in – i.e. process inventory levels for specific items. All materials
planning subsequently flows from the preliminary master production
schedule. Materials managers apply the basic concepts of planning
techniques, formally and informally, in making a multitude of daily
business decisions. Dobler D.W. (1981) identified and extensively
discussed three widely used techniques in materials planning, namely;
budgeting, purchasing research and network analysis, and planning.
3.2.1 BUDGETING
Budgets are one of the traditional planning and control tools of business
and are used in organisations of all types. A budget may be defined as a
financial plan showing anticipated income and expenditure for a period
of time, for the purpose of attaining a given objective. CIMA
specifically defined a budget as:
A plan quantified in monetary terms, prepared and

approved prior to a defined period of time, usually
showing planned income to be generated and/or
expenditure to be incurred during that period and
the capital to be employed to attain a given
objective.
Budgets are usually prepared for both individual departments and the
business as a whole. The basic concept of the budget is to balance
expenditure with income. The budget should help ensure that
expenditure is not exceeding income on an ongoing basis; it is once – a
year exercise. A well-prepared budget helps management in several
ways. Perhaps its primary functions are to;
(1) Serve as a guide in planning financial operations within the

company.
(2) A second purpose is to establish limits for departmental
expenditures.
(3) A third purpose of budget is to act as a coordinating device
among the various functions of the business.
(4) A fourth purpose of budgets is that of control.
All department heads typically prepare a budget for their area of

responsibility and submit it to the controller. A company budget, thus,
typically composes of numerous sub-budgets, each covering specific
departmental operational activities. This is graphically illustrated in
figure 7.1 below:
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HCM 343 MODULE 2
Sales forecast
Production schedule Finished goods

Inventory policy
Operating budget Capitals equipment Production Capital Production Production tool

for other line and budgets for other material equipment labour and supply
staff departments line and staff expenses budget for expenses expenses
department budgets production budgets budget
department
Figure 7.1: Major constituents of a total company budget.
Materials are however, primarily concerned

Total company budgetwith two budgets the
materials budget and their respective departmental operating budgets.
1) PURCHASE (MATERIALS) BUDGET
The purchase budget is based entirely upon the sales and production
budgets. In theory, the purchasing function extrapolates (i.e. work out)
materials requirements from the production budget projects prices and
thereby phasing deliveries in accordance with production schedules. The
implication is that detailed preparation of annual materials budgets is
therefore realistic only for those products whose sales can be forecasted
with reasonable accuracy or for materials that are used in a variety of
products whose aggregate demand can be forecasted.
When purchasing budget is to be expressed in terms of naira, the

purchasing manager is normally called upon to supply the budget
department with two types of information:
i. Estimates of materials prices during the coming year, and

ii. Plans for the specific timing of purchases.
Timing of purchases is vital in respect of cash management, which

needs to control the amount to cash required during each period. The
task of estimating price trends however requires the consideration of
many things including;
a) Political or economic factors, or domestic, which may affect

price;
85
b) Comparative currency changes and levels of inflation in pertinent

countries;
c) Possible changes in import duties, transit and insurance charges,
etc. as they affect from overseas;
d) The position of long term contracts as regards fixed prices;
e) The supply position of materials and components in relation to
overall demand;
f) Lead times and the potential effects of having to purchase from
more expensive alternative sources in the event of failure.
2) THE DEPARTMENTAL OPERATING BUDGET
This budget is essential for the effective planning and control of

departmental operations. Along with other departmental heads, the
procurement manager makes periods. This is estimate of the costs,
which will be incurred during the budgetary period. This estimate is
usually produced annually and will include;
(1) Total departmental salary bill

(2) Total expenses for the period
(3) Total cost of departmental supplier; and
(4) Capital expenditure.
Without doubt, costs vary widely among firms. However, small business
organisation pay more over every naira value purchase made to operate
their purchasing departments than do large firms, and operating costs
tend to be higher among durable goods producers than among non-
durable goods producers.
3.2.2 Purchasing Research
In the planning stages, most purchasing actions require certain research

investigations. Because he is confronted with numerous unknown facts,
an industrial materials buyer cannot make an enlightened purchasing
decision until these unknown areas are explored. The formal purchasing
research concept recognises the need for generating and analysing a
sizable amount of detailed data when planning procurement operations.
If the required data is available or can be developed effectively in other
existing departments, the job of the purchasing research group is to
obtain such information and organise it for use in purchasing. If the
information is nowhere available with the firm, it is the purchasing
research staff’s job to generate it. Hence as a concept, purchasing
research has been defined as:
The responsibility concerned with the process of

obtaining, organising, and interpreting data,
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HCM 343 MODULE 2
which facilitate procurement planning and hence

improve the total materials management
operation.
A formal purchasing research programme serves as a procurement

planning tool. The general objective of such a programme is to
undertake in-depth investigations, which improve total procurement
performance and increase the function’s contribution to company
profits. Operationally, the purchasing research work can be
accomplished in several ways.
(1) Some company’s purchasing and supply departments include

these activities as parts of a senor buyer’s job.
(2) In a majority of the more progressive firms, however, this
purchasing research work is assigned to a group of staff
specialists who specifically trained in these activities.
Lanner Lee Jr. (1981, p. 388) listed a number of developed

classifications of purchasing research staff functions, which has since
been adopted by numerous firms. This includes;
(1) Procurement planning

(2) Research on purchased materials
(3) Research on the purchasing system
(4) Special projects.
(1) Procurement planning
This involves the study of the company’s short and long- range materials
requirement and a determination of acceptable cost objectives.
(2) Research on purchased materials
This involves both economic and technical investigation. In the

economic area, forecasts of general economic conditions are made, and
studies of the industries and commonly markets are undertaken.
Technical investigations primarily focus on two major programmes,
which are frequently conducted on a company-wide basis –make- or buy
and value analysis.
(3) Research on the purchasing system
This research classification involves studies of administrative problems.

Specific activities include the analysis of such things as policies,
procedures, reports, organisation structures, job specification, wage
payment plans, and so on.
87
(4) Special projects.
This is often a fourth area of informal purchasing research activity. Staff

assistance is frequently needed to study a multitude of special problems
that arises in areas such as inventory management, traffic management,
quality control, and vendor relations, for example.
3.3 Procurement and Record Keeping
The procurement department is obliged to maintain a complete set of

records regarding the operations and activities of the department. Good
record keeping is germane to the achievement of the purchasing and
inventory management objectives, of making available the right product,
in the right quantities, at the right time, in the right place. The file of a
purchasing department thus contains an endless flow of operational data.
The information stored will include details of the following:
(1) Suppliers’ past performance and evaluation of them. Technically

this is a record of closed orders.
(2) Current price of goods and services required by the organisation.
(3) Copies of orders, contracts and current agreements. All buyers
need immediate access to information concerning the status of
their outstanding orders.
(4) Specification and standards as set by the user department.
(5) Supplier Record: To provides quick access to information in a
single record file. A separate card or computer is maintained for
each major supplier. In this record is recorded the address
telephone number, and the name of personnel to contact on
specific matters of inquiry.
(6) Contract Record: Today, most firms are purchasing an increasing
number of items on a long-term contractual basis. In such cases,
it is usually convenient to consolidate all contracts in a separate
file.
(7) Progressing data for outstanding
3.4 Handling Orders
In procurement, various types of orders exist. This depends largely on a

number of factors such as:
(1) The nature of the business;

(2) The characteristic of the various materials needed,
(3) The market structure,
(4) The quantity required of each item as well as the frequency of
need. For this reason, the various types of orders are classified as
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HCM 343 MODULE 2
follows, depending on the circumstances surrounding each

requirement.
(1) Small Orders
Small orders are a perennial problem in every organisation and a serious

problem in some. Recent research evidence has shown that most
companies’ expenditure is on small orders that are hardly more than ten
percent of their annual materials expenditure. The very nature of
business requires the purchase of many low-value items. Small orders
are however not only costly to the buyer but also to the seller. Various
methods are nevertheless in use by managers to minimize the small-
order problem.
(2) Rush Orders
Purchasing basic responsibility is to its internal customer, i.e. the

various departments in an organisation. In serving its customers, the
concern is to develop an orderly and systematic pattern of operation that
efficiently utilizes the resources to that organisation. This situation calls
for approaches to deal with the problem of handling emergency needs
that inevitably arise in any business operation. A clear, special
procedure for processing rush requisition in all organisations. Rush
orders always cost more than if they were handled through the normal
purchasing system. High prices are frequently paid because rush
purchases are not as thoroughly investigated as those handled in the
normal routine. To discourage the incidents of rush orders that arise
because of poor planning, David N. Burt (1996p. 79) presented three
approaches that have proved successful overtime.
(i) The first involves a concerted effort to coordinate the activities of

the user departments and purchasing.
(ii) A second approach is to reduce unjustifiable requests which
require the requisitioner to obtain approval from a general
management executive for all emergency requisitions.
(iii) The final approach assesses the requisitioning department for a
predetermined service charge for each emergency requisition
processed.
(3) Centralised Stores System
A store system is the first approach typically used to reduce the

frequency and volume of small-order-purchasing activity. When
experience shows that the same supply items are ordered in small
89
quantities time after time, the logical solution is to order these items in
larger quantities and place them in a centralised store or inventory for
withdrawal as needed.
(4) Blanket orders
A blanket order system is designed to solve the problem a company’s

inability to carry thousands of items as inventory just like a central
stores system is designed to solve the small order problem only for items
that are used repetitively.
• On the basis of careful analysis of past purchases, the buyer

determines which materials should be handled through blanket
orders.
• After bidding or negotiation, the buyer selects a supplier for each

items, or family of items, and issues a blanket order to each
supplier.
• The blanket order typically states that all requirements are to be

delivered upon a receipt of an order from the buyer or other
authorized person.
• On receiving a requisition for one of the materials, the buyer

merely sends a brief order form to the supplier. On the release or
order form are noted the blanket order number, the item number,
and the quantity to be delivered.
The blanket order system offers a number of advantages:
1) Clear reduction in the issuance of purchase orders and clerical

work in purchasing, accounting and receiving.
2) It releases buyers from routine work, giving them more time to

concentrate on major problems
3) It permits volume pricing by consolidating and grouping

requirements.
4) It develops longer-term and improved buyer-supplier

relationships.
Blanket order system nevertheless requires adequate internal control to

function effectively. Absence of this control element can encourage
petty fraud and poor supplier performance.
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HCM 343 MODULE 2
The elements essential to effective control are:
i. A numbered purchase order

ii. A record of authorised delivery releases.
iii. Bona fide evidence of receipt of the materials.
In spite of the several benefit of this method of handling orders, the

blanket order has not enjoyed popular applications in business
organisations.
5) System Contracting
As the name implies, system contracting involves the development of a

company-wide agreement, often a one to five year requirements
contract, with a supplier to purchase a large group (or family) materials.
It can be viewed as an extension and more sophisticated development of
the blanket order – purchasing concept. Estimate usage is usually
included, along with a fixed price for each item and an agreement by the
supplier to carry an adequate stock of each item to meet the buyer’s
needs. Various types of supplies and commonly operating equipment,
typically purchased from distributors, are the materials most often
covered by these types of agreements.
6) The Telephone Order System
Most companies now use a telephone or fax ordering system to reduce

the paperwork associated with small – order purchasing. Under this
system, when the purchasing department receives a requisition, it does
not prepare a formal purchase order. Instead, the order is placed by
telephone or fax, and the requisition is used in the receiving procedure.
This system goes one step further in the elimination of paperwork; the
firm’s suppliers send no invoice for telephone purchases.
7) Electronics Order System.
A number of electronic communication systems currently are available

to transmit materials purchase requests without writing orders or talking
on the telephone. One particular approach that evolved is the internet
and electronic commerce.
Meaningful studies and research findings have shown that the internet
and e-commerce have become a vivid representative of core business
parameters today around the world. There is now a tremendous amount
of activities as companies begin to set – up their customer service
functions on the internet. The system is particularly applied to the
purchase of repetitively used items whose recurring orders can be placed
91
using the same input source. Clearly, the use of an electronic ordering
system requires a blanket order or similar contractual arrangement with
the supplier.
8) Petty Cash System
Most firms today use a petty cash fund for making small, onetime
purchase. For this purpose, many firms defined small as under N 20,000.
it is often less expensive for an individual user to buy minor items
personally and pay for them a petty cash fund than it is to buy them
through the conventional purchasing system, any inefficiency that may
arise because of lack of buying skills is more than compensated for by
the administrative saving resulting from not placing a purchase order.
3.5 A Computerised Materials Management System
Dobler and Burt (1996) argued that when a system is computerised, the
basic activities of the procurement process remain essentially the same
as when the system was operated manually. The same records that are
maintained in a manual system are stored in disc or tape files that are
readily accessible to the computer Central Processing Unit (CPU).
Although, the specific format and data contents vary among systems, the
records readily available to the computer for display or processing
typically are:
1) Open Order file

2) Order /Parts behind schedule file
3) Supplier Record file
4) Material (commodity) record file
5) Inventory Record file
These computer files usually contain the same detailed data (and
perhaps more). Every company that automates its materials activities
utilises the computer in a slightly different manner. The data inputs vary
from firm to firm, as do the desired data outputs. Generally speaking,
however, the basic materials activities, which can be performed well by
a computer-based system, are the same in all cases. This includes:
1) Maintenance of inventory records

2) Computation of order quantities
3) Preparation of purchase requisition for inventory items
4) Preparation of purchase orders
5) Distribution of accounting charges
6) Automatic preparation of follow – up charge
7) Position of delivery records, by part and by supplier
8) Auditing of invoices and preparation of checks for payment.
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HCM 343 MODULE 2
Three types (and sizes) of hardware (this is a computer terminology for

the machines and equipment that make up a computing centre) are used
today in computer – based purchasing operations.
The first is a large mainframe system that the purchasing department

shares with most other operating units in the organisation.
The second type of system frequently found in purchasing departments

today is built around the use of minicomputer. As its name implies, the
mini is simple, a miniature version of large mainframe units. This type
of system frequently (but not always) is dedicated for use in the
purchasing and materials management activities of the firm.
Operationally, this system functions much like a mainframe system,
usually with better accessibility but with reduced memory and capacity.
Finally purchasing and supply operating system in some firms,

particularly smaller companies, are often handled adequately by a
network of micro-computers (PCs) that constitute purchasing own free
standing system.
In all these systems, authorised personnel communicate directly with the

computer database through the terminal for purposes of entering and
recalling data, as well as performing calculations and other machine
processing activities.
3.5.1 Advantages of a Computerised Purchasing and Materials

Management
There are several advantages of automatic purchasing and materials

management system, all of which would have to be fully utilised if the
cost of operating a computer system were to be justified these are:
1) Increased quality of the information produced, because of the

computer’s ability to update procurement records immediately.
2) Enhanced accuracy and timeliness in handling large volume of

repetitive data. Because of its speed, a computer can supply
virtually instantaneous reports which otherwise might take a
small army of clerks weeks to prepare and update.
3) Purchasing management has been able to improve its planning,

staffing and controlling ability through the effective use of
computer systems.
93
4) Reduction in Labour Costs: A computerised procurement and

materials record system will require less staff than a large manual
system, which would employ dozens of clerks and supervisors
constantly attempting to update the records.
5) With automated materials management system, management has

more time to concern itself with its planning horizon.
3.5.2 Disadvantages of a Computerised System
1) Computer systems can be very expensive, which may prohibit the

smaller companies from adopting this type of system.
2) Computer control systems are only as good as the staff operating
them and the data processed and fed into the computer. Badly
trained staff or faulty documentation will not be solved by
installing a computer.
3) A major breakdown in the computer could cause chaos in the
system and in the company’s operational activities.
3.6 Ethics in Procurement
In many respects, ethics is far more important in today’s procurement

environment than it has ever been in the past. Whereas before there was
adversarial relationship between buyers and suppliers, today there is
partnership. Procurement chain or circle management is the reason
behind this change, and it is a process which requires a high level of
trust in order for the partnership to work to the mutual benefit of both
the buyers and sellers.
Ethics has more significance to purchasing personnel who deals with

many suppliers, evaluate them and award them contracts. Attempts will
naturally be made to seek favour with him and, as such, he is subjected
to temptation day in and day out, it becomes imperative, therefore, that
all public and private sectors’ purchasing personnel be entirely
cognizance of the necessity for ethical behaviour. It takes only slightest
limit of impropriety to cause doubt on behaviour, whether through
perception or an actual event.
As a concept, ethics simply means what is right. Ethics involves

learning what is right or wrong and simply doing it. Many philosophers
consider ethics to “be the science of conduct”. Ethics has therefore been
broadly defined as: “Standards of conduct that distinguish between right
or wrong, good and bad, virtue and vice, justice and injustices.”
Purchasing from the layman’s definition simply means the act of buying
or to acquire. Ethics in purchasing means what is right in the act of
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HCM 343 MODULE 2
purchasing. It implies the various dos and don’ts of the purchasing

profession, which has to do with one’s behaviour, and conducts in
purchasing practice.
More specifically, purchasing ethic has been defined as: ‘Concerning the
rightness or wrongness of actions taken by purchasing professional
while pursuing the business goals of his or her organisation’.
Purchasing ethics primarily concentrates on what is the correct

behaviour of a purchasing professional as he performs his duties dealing
with the acquisition of goods and services in order for his company to
produce a product or provide a service.
3.6.1 Division of Ethics
Ethics in procurement is divided into values, norms and rules conduct.

These are further enumerated below:
a) Value
Value is this context is used to mean moral or professional standard to

behaviours in purchasing, and this includes:
(1) Honesty/Integrity
(2) Responsible management
(3) Serving the public interest
(4) Professionalism
b) Norms of Ethical Behaviour
In procurement, the following standard or pattern of social behaviour is

expected among the professionals:
1) To consider first, the interest of one’s organisation in all

transaction.
2) To strive for increased knowledge of materials and processes of

manufacturing.
3) To participate in professional development programmes.
4) To subscribe to and work for honesty in buying and selling.

5) To accord a prompt and courteous reception to all who call on a
legitimate business mission.
95
(6) To abide by and to encourage others to practice the professional

code of ethics of the Nigerian Institution of Purchasing & Supply
Management (IPSM) and its affiliated institutes and corporations.
7) To counsel and assist fellow purchasers in the performance of

their duties.
8) To cooperate with all organisations and individuals engaged in

activities, which enhance the development and standing of
purchasing and materials management.
9) To be receptive to competent counsel from one’s colleagues and

guided by such counsel without impairing the responsibility of
one’s office.
10) To buy without prejudice, seeking to obtain the maximum value

for each naira of expenditure.
c) Rules of Conduct
In applying these rules of conduct, personnel involved in purchasing

should follow the guidance set out below:
(1) Declaration of Interest

(2) Confidentiality and Accuracy of Information
(3) Competition
(4) Business Gifts and Hospitality
To preserve the image and integrity of those involved in

purchasing and the profession. Business gifts other than items of
small intrinsic value should not be accepted.
(5) Environmental Issues.

Anyone involved in purchasing should recognise their
responsibility to environmental issues consistent with their
corporate goals or missions.
Highlight the series of simple steps involved in most planning.
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HCM 343 MODULE 2
4.0 CONCLUSION
It is important to emphasis that in many organisations, purchasing is a

primary function and therefore a key influence on the business. In other
words, there is a necessary requirement to buy materials and equipment
in order to produce, and without those purchases the business could not
function. When this situation is linked to the fact that the average
manufacturing company spends well over half its income on buying
goods and services, it is clear that the management of purchasing should
command the attention of the company’s top management level. A
materials manager’s responsibilities however differ little from those of
other functional manager’s. All managers function primarily as decision
makers. Although the details involved in managing a purchasing
department differ from those involved in managing an engineering or
production department, the basic managerial activities are the same. All
managers develop the specific pattern of activity required in their own
functional areas by applying the same general management concepts.
5.0 SUMMARY
The procurement department must have a plan for carrying out its
activities. In fact, managerial efficiency starts with planning. Without a
plan, purchasing will tend to be carried out in a stab-and-grab
opportunistic manner, and the department may be very much overloaded
during some months and be relatively without much work for the rest of
the year. The first function of management is therefore, the development
of a series of plans that establishes the framework within which future
activities will be conducted. Every managerial job demands that
planning be done before other functions of management are executed.
Dobler D.W (1981) identified and extensively discussed three widely

used techniques in materials planning, namely; budgeting, purchasing
research and network analysis and planning. The purchasing
department is obliged to maintain a complete set of records regarding
the operations and activities of the department. Good record keeping is
germane to the achievement of the purchasing and inventory
management objectives, of making available the right product in the
right qualities, at the right time, in the right place.
The significance of computerisation for procurement and materials

management is readily understood when one considers the amount of
purely administrative work involved in the procurement cycle of the
average buying company. Literally, thousands of requisitions, requests
for quotation, purchase orders, change orders, status reports, receiving
records, invoices, and other documents must be processed and recorded.
97
Today, a computer based system for handling these activities is a

necessity.
State clearly the basic materials based activities that can be well
performed by a computer based system.

Mayard, H. B. [ed]. Handbook of Business Administration.
McGraw-Hill Book Company: New-York pp.688-699.
David, J. and Alex, M. (1994). Storage and Supply of Materials, Pitman

Publishing, Sixth Edition.
Dobler, W. D. and Burt, N.D. (2000). Purchasing and Supply

Management: Text and Cases, Tata McGraw –Hill Publishing
Company Limited: New Delhi.

Management. Wadtson Dusme Int. Limited: Mushin Lagos.
Lamar, Lee Jr, and Donald, W. D. (1981). Purchasing and Materials

Management: Text and Cases. Tata Mc Graw –Hill Publishing
Company Limited: New Delhi.
Musselman, V.A and John, H.J (1984). Introduction to Modern

Business: Analysis and Interpretation. Prentice-Hall Inc. New
Jersey, Sixth Edition, pp. 193-194.
Shubin, A. John. (no date). Business Management: an Introduction to

Business and Industry. The Barnes and Noble outline Series pp
184-194.
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HCM 343 MODULE 2
UNIT 3 PROCUREMENT PRACTICE AND METHODS.
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Origin of the Need to Purchase
3.1.1 Product Classification
3.1.2 Authority To Purchase
3.2 Procuring Capital Goods
3.2.1 Factors to consider in Buying Capital Equipment
3.2.2 Purchase and Product Characteristics of Capital
Goods
3.2.3 The Role of Purchasing Department in the
Procurement of Capital Goods
3.3 Acquisition of Used Equipment
3.3.1 Used Equipment Sources
3.3.2 Reasons for Purchasing Used Equipment
3.3.3 Cautions in Purchasing Used Equipment
3.4 Leasing
3.4.1 Types of Leasing Arrangement
3.4.2 Advantages of Leasing
3.4.3 Disadvantages of Leasing
3.5 Buying for Resale
3.6 Future Dealing
3.6.1 The Purpose Of and Conditions for Future Dealing
3.6.2 Some Terms Used In Futures Contracts
3.7 Sub-Contracting
3.7.1 Reasons Why Subcontracting Has Become A Major
Management Activity
3.7.2 Selecting a Sub-Contractor
3.7.3 The Rules of Behaviours in Subcontracting
3.8 Purchasing Services
3.8.1 Selection Service Contracts
3.8.1.1 The Ideal Services Supplier
3.8.1.2 Professional Services
3.8.1.3 Operating Services
3.9 Contract Administration
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
99
Procurement has long been considered one of the basic functions

common to all organisations. Retailers, wholesalers, and in certain cases,
service establishments, buy merchandise to sell to their customer.
Manufacturer purchase the materials they use in their production
processes. In all cases, purchasing is vital to the success of the business;
without an adequate supply of merchandise and / or materials, the firm
would be unable to operate at maximum efficiency.
A company procurement function becomes particularly important when:
1) Its purchased items account for a high proportion of the unit cost
of the product.
2) When the price fluctuate widely
3) When numerous diverse items are needed
4) When the quality of the materials appreciably influences the cost
of manufacturing.
Regardless of the type of business, procurement and supply work is

divided naturally into five distinct classifications, each of which
encompasses a fairly wide range of activities.
The five classifications of works found in a procurement operation are:
1) Management.
Management of the purchasing function involves all the tasks associated

with the management process.
2) Buying
This includes a wide variety of activities, such as working with users to

help develop requirements and specifications, reviewing requisitions,
analysis specification, investigating supplier, studying costs and prices,
analysis of bids and negotiation and selecting suppliers. Some
companies have expanded the buying job and now see it as supplier
management.
3) Follow-Up and Expediting.
Other follow-up activities involves various types of supplier liaison

work, such as reviewing the status of orders, writing letter, telephoning
and faxing suppliers, and occasionally visiting supplier’s plant.
4) Strategic Planning and Research Work.
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HCM 343 MODULE 2
The more an organisation progresses toward a purchasing management

focus, the more emphasis it places on these strategic activities.
5) Clerical activities
Every department must write orders and must maintain working files,
catalogue and library materials, and records for commodities suppliers,
price and so on.
2.0 OBJECTIVES
• state and explain how the need to procure different materials arise
• discuss the issues involved in purchasing capital goods; in leasing
arrangement; in buying used equipments, and in buying for
resale.
• explain the meaning and factors influencing future dealing, sub-
contracting and the purchase of services
• highlight and comment on the keys to a successful service
contract administration.
3.0 MAIN CONTENT
3.1 Origin of the Need to Purchase
Every purchase transaction originates with the recognition of the need

for an item by someone in the enterprises. This need may originate in
the department using the materials. The office manager may want a new
typewriter. Quite often, the need for the material may be satisfied by
transfer of materials from one to another department or drawing it from
the stores. However, eventually the stores must replenish its supplies of
the items issued to the user. Thus one may say that directly or indirectly,
purchases originate from the recognition of need for an item by a user
department.
In regard to most items, an efficient purchasing department will

anticipate the needs of user departments. To however appreciate the
range and variety of materials needed in an organisation, an examination
of the wide range to needs that cover all types of business organisation
whether in the private or public sector of the economy becomes very
necessary. It is therefore possible to easily and broadly identify and
discuss two bases for product classifications; the product based (goods
and services) and the user-based (consumer and industrial goods).
3.1.1 Product Classification
101
There are many ways to categorise products, the most basic being to
distinguish between goods and services. Another common approach
among markets is to distinguish between consumer and industrial goods.
(a) Product – Based Classification
Product-based classification groups together products that have similar

characteristics, although, they may serve different purposes and markets.
There are three main categories:
(1) Durable Products: Durable products last for over a long period
before having to be replaced.
(2) No-durable Products: Non-durable products can only be used

once or for a few times before they have to be replaced.
(3) Service Products: Services represent intangible products

comprising activities, benefits or satisfactions that are not
embodied in physical product.
(b) User – Based Classification
This classification deals with consumer markets (goods purchased for

personal or family consumption) and industrial or organisational
markets (goods purchased for business or institutional use).
Industrial Goods and Services
Industrial products are goods purchased by organisations or institutions

that are used in the process of manufacturing other goods.
Those that are more expensive and have a longer useful life are
considered capital items. Industrial goods are more usefully classified in
terms of how they enter the production process and their relatively
costliness.
The following industrial items can be easily identified:
1) Capital Goods
Capital equipment consists of all the buildings and fixed
equipments that have to be in place for production to happen.
They are industrial goods that enter the finished product partly,
and there are two group: installation and accessory equipment.
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2) Raw Materials
These are industrial goods that enter the manufacturer’s products
completely. Raw materials arrive more or less in their natural
state, having been processed only sufficiently to ensure their safe
and economical transport to the factory. The raw material then
go on to further processing within the purchaser’s own
production line.
3) Components and Parts

Components and parts are finished goods in their own right,
which simply have to be incorporated into the assembly of the
final product with no further processing. Car manufacturers for
example buy in headlamp units, plugs, alarm system, and tyres as
complete components or parts and then fit them to the cars on the
assembly line.
4) Supplies and Services

There are several categories of minor consumable items (as
distinct from the accessory goods) and service that facilitate
production and the smooth running of the organisation without
any direct input.
a) Operating Supplies: These are frequently purchased
consumable items that do not end up in the finished
products.
b) Maintenance and Repairs: These are industrial services
that ensure that all the capital and accessory goods
continue to operate smoothly and efficiently.
c) Business Services: These involve the purchase of service
like management consultancy, accounting and legal advice
and advertising agency expertise.
The above list is not exhaustive, but by examining its contents in terms
of purchasing responsibilities in different organisations or industries, it
becomes clear that needs must be recognized, authorised and satisfied in
a variety of ways. In order to clarify this, it is first advisable to classify
all requirements into groups, which have common characteristics and
require similar treatment. All basic needs are thus classified into three
main groups according to their common characteristic:
(a) Needs, which entail capital expenditure such as buildings,

machines, vehicles, furniture, etc.
(b) Needs for production materials, which go directly into the
finished product.
(c) Needs for miscellaneous suppliers, which are supplies other than
production materials required to operate the business.
103
It can therefore be seen immediately that these three classes of needs

will arise in different circumstances and at different place in the
company.
3.1.2 Authority to Purchase
According to Menon K.S. (1993), when the aspects of authority in

matters relating to purchases are discussed, there are usually two
separate groups of people who are involved. They include:
1) The authority of the person who needs the items to make

requisition for the item. This person may be the actual user (e.g.
the plant foreman), or it may be the stores officer in charge of the
stores where the item is stocked.
2) The second one is the authority vested in officers of the
purchasing department for making purchase of the items required.
The authority to purchase is basically related to its status as a service

department orientated towards catering for the supply requirements of
various departments by making purchases of materials, equipments etc.
which they need. There are three ways in which a user department or
store authorises the purchasing department to make purchases for them:
• By means of a purchase requisition often called the materials

indent form;
• By means of a permanent order card or travelling requisition.
• By means of a bill of materials or parts list made in conjunction
with production department.
1) The Purchase Requisition

When a department or store needs a particular material, which
may be raw materials or equipment or stationery, it prepares a
material requisition usually on the Materials Indents Form. This
form is usually prepared in duplicate being retained by the
requisitioning department for reference and follow-up. The
purchase requisition should provide the following essential
information:
(a) Specification
(b) Quantity
(c ) Delivery
(d) Work Order Reference
(e) Materials Indent Form
(f) Signature
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HCM 343 MODULE 2
2) The Permanent Order Card or travelling requisition SS (TR).

This methods or requisitioning is used for materials purchased on
repeat basis or for standard stock items, i.e., items which are
stocked on a regular basis in the stores. This is a permanent card
with all details on the materials recorded inside it. Each time a
quantity is needed, the card is sent to the purchasing department
indicating the quantity or volume required.
A Travelling Requisition (TR) on the other hand carries all

relevant information required to enable the purchasing
department to place orders for fresh supplies.
When stock level reaches the re-order level, the stock control
clerk sends the TR to the purchasing department. When the TR is
received, the purchasing department swings into action. It decides
upon the source from which the purchase is to be made, as well
as the quantity that is to be ordered, and then passes the card on
for typing out the purchase order.
3) Bill of Materials or Part List:

When the design department designs a particular product, a list of
the various materials, which are required to make that particular
product, is made out. This is called a Bill of Materials or Part
List. When a production schedule is prepared, it is usually
converted into a Bill of Materials which will show exactly what
materials are required and when. The purchasing department can
then establish the total material requirements and determine when
exactly each would be required and in what quantities.
In some cases, the Bill of Materials is routed to the purchasing

department through the stock control department who will indicate
which items on the list are regular stock items and which items have to
be purchased. The purchasing department then takes out the remaining
requirements from the bill of materials and places the purchase orders
that are necessary.
3.2 Purchasing Capital Goods
Modern advanced industrial technology rests upon the use of vast

amount of capital: elaborate machinery, large-scale factories and plants,
stores and stocks of finished and unfinished materials. Capitalism got its
name because this capital or productive wealth is primarily the private
property of somebody – the capitalist. Capital, which is the word often
used to refer to capital goods generally, is a different kind of production
factor. A capital good differs from the primary factor (such as land,
labour) in that neither land nor (these days) labour is regarded as result
105
of the economic process; but instead, exist primarily by virtue of

physical and biological, rather than economic factors. Capital is on the
other hand, an input which is itself the output of the economy. Capital
goods then represent produced goods that can be used as factor input for
further production.
In most firms capital equipment is not purchased every day – but when it
is, such represent important management decisions as a rule, these
purchases are major investments.
1) Investments that lead to improved productivity, and or

2) To the manufacture of more competitive products that increase
sales in the market place.
3.2.1 Factors to Consider in Buying Capital Equipment
Apart from the mode of purchase, finance and the investment made,
Lysons, K (2000, p. 323) argued that the factors to be considered should
include the following:
1) Purpose: what is the prime purpose of the equipment?

2) Flexibility: How versatile is the equipment.
3) Standardisation: is the equipment compatible with any already
installed, thus reducing the cost of holding spares?
4) Life: This usually refers to the period before the equipment will
have to be written off due to depreciation or obsolescence. It is,
however, not necessarily linked to the total life span if it is
intended to dispose of the asset before it is obsolete or unusable.
5) Reliability
6) Durability
7) Product quality
8) Cost of operation: Costs of fuel, power and maintenance.
(9) Cost of installation
10) Cost of maintenance
11) Miscellaneous
12) Life cycle costing (Terotechnology) is an important aspect of
capital expenditure.
Chartered institute of Management Accountant (CIMA) has defined life

cycle costing as:
The practice of obtaining over their life time the

best use of the physical assets at the lowest cost
to the entity (Terotechnology). This is achieved
through a combination of management,
financial, engineering and other disciplines.
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HCM 343 MODULE 2
The term ‘Terotechnology’ coined in 1970 is derived from the Greek

verb tereo and literally means ‘the art and science of caring for things.’
Life cycle costs are therefore those associated with acquiring, using,
caring for and disposing of physical assets, including feasibility studies
research, development, design, production, maintenance, replacement
and disposal, as well as the associated support, training and operating
cost incurred over the period in which the asset is owned.
3.2.2 Purchase and Product Characteristics of Capital Goods
The role of the purchasing department is distinctly different in the

buying activity of capital goods than it is in production buying. The
peculiar characteristics of capital goods make both the purchase of
capital equipments and the product itself differ in a number of ways.
This includes:
(1) This fundamental difference between capital and non-capital

goods is a time difference. No capital goods represent
expenditure on current needs, and goods of this kind are used up
in a relatively short time. Capital goods represent investment in
fixed as sets or capital assets, which will be used for a relatively
long-time.
(2) Some of the items of capital goods are high specialised and are
built in order to meet the needs of buyers: others are more or less
standardised and are used by a number of different industries.
(3) Capital goods have initial high price, and commitment to one
capital project means that others have to be turned down.
(4) In evaluating capital goods, buyer will consider such properties
as productivity, versatility, durability, economy of operation and
maintenance, and time and labour-saving features.
(5) Acquisition of capital goods is frequently subjected to the
participation of various executives in the buying firm, because
the equipment is of high value and of great significance to the
buyer.
(6) Sales of capital goods are largely through direct buyers because
of;
(a) The small numbers of users

(b) The concentration of the demand market
(c) The large unit of sale
(d) The need for most effective communications with sellers
to enable speedy negotiation of particular needs
(e) The need to provide various types of service (e.g.
installation advice the supply and training of operators).
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(7) Another special characteristic is that expenditure on most capital

goods is personable. Just as the individual consumer can
postpone the replacement of his car or refrigerator until next year,
so a manufacturing organisation can postpone the replacement of
an old machine tool until prospect looks brighter or the financial
situation is better.
(8) Creation of demand is difficult for the supplier or seller as the

capital equipment will only be required in connection with new
plant, for expansion or replacement.
(9) Most organisations use special requisition forms for capital

purchases because of these special characteristics. The procedure
for authorising the expenditure tends to be more formal; often a
director’s signature is required.
3.2.3 The Role of Purchasing Department in the Procurement

of Capital Goods
Peter Baily et al (1981:224) argued that the purchasing executive is the

key figure in communications between his organisation and supplier.
Although policy in regard of the purchasing department’s role varies
widely between companies, one basic area of consideration is the calibre
and competence of the people who constitute the department. Many
small purchasing departments play a clerical role only, while others are
able to make useful contributions to the whole process of considering,
deciding upon, and actually undertaking the project.
Large organisations which employ substantial procurement personnel

and make numerous purchases of plant and equipment usually have
specialist buyers who have built up extensive market knowledge and
considerable expertise in the negotiation and administrations of capital
contract. The procurement of capital equipment calls for purchasing
personnel that functions in a creative capacity as facilitators and
coordinators. David N. Burt et al (1996:399) summarized key points of
purchasing role in a typical capital equipment purchase. This includes:
1) Participate in the preliminary discussion phase, including

solicitation of information and budgetary estimates.
2) Review and request clarification of specifications.
Specification must be precise and complete, and they must be
written as functionally as possible.
3) Coordinate the development and qualification of potential
supplier, including various qualitative analyses. The purchasing
executive must first determine, usually with engineering
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assistance, the level of a supplier’s technical and production

capabilities. This is of utmost importance.
4) Compile required commercial terms and conditions.
5) Prepare and process the request for proposal from potential
suppliers.
6) Coordinate the analysis of supplier proposal, including economic
analyses and the resolution of any exceptions to specifications.
Economic analysis of each machine must be made, relating its
ultimate cost to its productivity. Several measures or profitability
can be used, the payback approach being the most common or
any of the more sophisticated discounting cash flow (DCF)
approaches. Economic analyses must be thorough, and must be
based on accurate data.
7) Arrange for side-by-side demonstration, if practicable.
8) Plan, coordinate, and conduct negotiations as necessary. After
management has approved a proposal for the purchase of capital
equipment, the buyer assumes his/her customary responsibility
for negotiating the final price, and related terms of the contract.
9) Coordinate and conduct contract inspection and expediting
services.
10) Critique and document supplier’s performance by means of
objective vendor rating exercise.
11) Maintain records of price and delivery trends for future
procurements.
The purchasing executive contributes directly to the accomplishment of

some of these activities. More important, however is his or her
responsibility to orders and coordinate the total performance. The
buyer’s main job is to ensure that every thing happens as it should.
3.3 Acquisition of Used Equipment
A buyer is by no means restricted to the purchase of new capital

equipment. The existing used equipment available from supplier auction
or direct purchase from a previous owner may be an alternative to
purchasing new equipments. Purchases of used equipment, in fact,
constitute an important percentage of total machinery sales. Used
equipments are available for a number of legitimate reasons.
a) When a firm buys a new machine, it frequently disposes of its old

ones.
b) A firm that extensively modifies its product design or its total
production process is in a better to position to obtain more
specialised production equipment and hence put up the old ones
for sale.
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c) Some use equipments equally becomes available because the

owner lost a particular contract or has discontinued operation
altogether.
3.3.1 Used Equipment Sources
Lamer Lee Jr. et al (1981) listed four sources from which used
equipment is available and commonly purchased:
(i) Used equipment Dealers

Used equipment dealers sell two types of machine viz,
reconditioned machines and rebuilt machines. Generally
speaking, a reconditioned machine carries a dealer’s guarantee
and sells for about half or less of the price of a similar new
machine. A rebuilt machine typically carries a more inclusive
dealer warranty and sells for perhaps half for even more than a
new machine’s price.
(ii) Directly from the Owner

Some owners prefer to sell their used equipment directly to the
next user because they feel they can realise a higher price than by
selling to a dealer. Some buyers also prefer this arrangement. It
permits them to see the machine in operation and learn something
about its usage history before making the purchasing decision.
(iii) Brokers
Occasionally, an industrial supply house or a manufacturer’s
agent will act as a broker for a good customer by helping him
dispose of an old piece of equipment which has a limited sales
market.
(iv) Auction
Auction represents still another source of used equipment. When
a commodity is sold by auction, prospective buyers make bids. It
is commonly being sold to the person making the highest bid.
Generally speaking, buying at auction is somewhat more risky

than the other supply sources because;
a) Auction machine usually carries no warranty, and so there
can be no return after sales.
b) It is rarely possible to have the machine demonstrated
c) Buyer’s lack of perfect knowledge about the goods bidded
for.
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d) Absence of after sales services. It is therefore advisable

that industrial buyers must have a spending limit and
should avoid always buying at auction because of its
inherent risks or shortcomings
Two types of auction are common. These are open and closed auction.
3.3.2 Reasons for Purchasing Used Equipment
A purchaser may have several reasons for deciding to buy used

equipment. Some of the important reasons include:
(1) The cost of used machinery is substantially less than that of new
equipment.
(2) Used equipment is frequently more quickly available than new
equipment. In some situations, availability may override all other
consideration.
(3) Used equipment, especially when reconditioned and rebuilt, may
have a long life and be protected by warrants.
(4) Another common reason for the purchase of used equipment is
that used equipment adequately satisfies the purchaser’s needs, in
which case there is no point in buying new equipment.
3.3.3 Cautions in Purchasing Used Equipment
The age-old adage of caveat emptor – let the buyer beware – is

particularly applicable when purchasing used equipment. Though,
protection is given by the sales of goods, misrepresentation and Trade
descriptions Acts; the buyer of used equipment should work on the
principle of Caveat emptor.
As a procedural guide, the buyer of used equipment should be able to

ask some of the following questions:
1) Is the usage history of the equipment available?
2) Are component and parts readily available? Will they continue to
be?
3) Is there any indications of the equipment age such as serial
number?
4) How well has the equipment been maintained over the usage
period?
5) What will be the cost, where appropriate, of dismantling,
transporting and re-erecting or installing equipment?
6) How does the price asked for used equipment compare with the
cost of buying new one?
7) Does any warranties supersede the protection given under the
Sale of goods Act?
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8) What trials, test or approval period will the vendor allow?

9) What special term conditions, if any apply to the purchase?
The above questions are by no means exhaustive. A purchaser of used

equipment may ask more questions than the aforementioned ones. This
depends on the personal intelligence endowed to the buyer. Generally
speaking, it is difficult to determine the true condition of a used machine
and to estimate the type and length of service it will provide. For this
reason, it is;
1) Wise to have one buyer specialise in used equipment.

2) Moreover, it is virtually essential to enlist the cooperation of an
appraising used equipment.
3) In preparing a purchase order for used capital equipment, care
must be taken to include all essential data.
3.4 Leasing
The purchasing manager may be involved in deciding upon the most

appropriate method of acquiring a set of equipments or replacement of
equipments for the organisation. The method selected will be affected by
the following major consideration;
The three options regarding equipment acquisition are:
(i) Leasing
(ii) Hiring
(iii) Outright purchase.
Product leasing is not a new way of doing business. Leasing is a means

whereby a firm may acquire the use of equipment without the necessity
of taking title. As a concept, a lease has been defined by the Equipment
Leasing Association as:
“A contract between lessor and lessee for the hire of a specific asset
selected from a manufacturer or vendor of such assets by the
lessee.”
The lessor retains ownership of the asset. The lessee has possession and
use of the asset on payment of specified rentals over a period. The
agreement with the owner to use the property is a lease. The owner is the
lessor and the person taking possession is the lessee. The equipment
remains the property of the lessor but responsibility for its maintenance
is the duty of the lessee.
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Under the status for Frauds, a lease for longer than a year must be put in
writing to be enforceable. The more formal written lease usually
contains the following:
1) Date of agreement
2) Names of lessor and lessee
3) Property description
4) Duration of lease
5) Manner of paying rent
6) Responsibility for making repairs
7) Liability for injury to third party
8) Right to sublet or resign
3.4.1 Types of Leasing Arrangement
Lease agreements have become popular methods for financing both

small and large enterprises, and it is carried on under a number of types
of arrangement. The following are almost certainly the most common.
1) By Maker to User
The manufacturers of equipments such as data processing
equipment usually lease directly to users as a means of marketing
their products, which are often highly specialised and technical.
2) By One User to another User
3) By Leasing Company to a User

The arrangement of leasing by one user to another user is
somewhat cumbersome and depends on cooperation between
firms that often compete with one another. The result has been
the emergence of firm that buys machines from the equipment
makers and leases them to users.
4) By a Finance House to User

In this type of leasing agreement, the lessor has no commercial
interest in the transaction other than as a supplier of finance. The
lessor pays for the asset and thereby become its owner.
3.4.2 Advantages of Leasing
There are several advantages to the leasing method and it is an

increasingly popular option.
(a) No capital commitment: The organisation will not have to find

large sums of money to acquire the equipment.
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(b) Low cost: The leasing method of acquiring equipment is the

lowest of the three options (i.e. leasing, hiring and outright
purchase), and this is an advantage.
(c) Leasing enables the suitability of equipment to be assessed over a
predetermined trial period.
(d) Leasing provides an edge against the risk of obsolescence.
(e) Replacement decisions are made easier.
3.4.3 Disadvantages of Leasing
(a) The lessee has to maintain the equipment: This can be very
expensive
(b) Fixed term contract: The equipment cannot be returned to the
lessor in the event of change in the lessee’s business needs.
(c) Leasing does not provide the prestige of ownership.
(d) Resale value: In time of inflation, ownership is generally at an
advantage because the resale value rises with inflation.
3.5 Buying for Resale
Buying goods (or merchandise) for resale has much in common with
other kinds or purchase; even though purchasing for resale is one vital
aspect where the business function of marketing and procurement
considerably overlap. Sometimes described as speculative buying,
buying for resale is
a process that involves reselling the

merchandise bought, in most instances,
without anything being done or any
value being added to the purchased item.
Buying for resale is the glamour job in retailing. It is an activity, which

owes more to marketing than purchasing. What retailers, wholesalers or
other members to the distributive sector but they also sell.
Important Consideration
Generally speaking, the decision as to what to buy must frequently be
taken with a strong feeling for what to sell. This is because, decision in
the buying for resale practice has to be made in terms of what to buy,
quantities, prices, delivery terms, and mode and timing of payment. In
deciding what to buy, the first major task is to apply marketing research.
In specific term, marketing research has been defined as: “the systematic
gathering, recording and analysing of data about problems in marketing
goods and services”.
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This major activity will help satisfy the resale buyer’s unending need for
information about the market, sources of supply, the goods etc.
All retailers need to plan what goods to sell for. In most cases, what a
business sells is what that business is. The terms merchandising and
buying are used interchangeably. And in developing a range of
merchandise (i.e. the product mix; a group of related products) a resale
buyer should consider such questions as:
(a) Is this product suitable for our store image?

(b) Is it appropriate for our target markets?
(c) What is the likely demand for the product?
(d) How readily is the product group available?
(e) On what terms could we buy it?
3.6 Future Dealing
According to Lyson (2000:335), a commodity such as copper may be

bought directly from the producer or on a commodity market. The latter
(i.e. the commodity market) provides the advantages of futures dealing.
The London markets for example are divided into two main areas:
metals and soft commodities. The non-ferrous metal markets in copper,
tin, zinc, and silver operates at the London Metal Exchange (LME). The
soft commodity markets dealing in cocoa, coffee, sugar, vegetable oils,
wool and rubber are situated at the Corn Exchange building.
The Functions of Exchanges
(1) To enable customers, merchants and dealers to obtain supplies

readily and at the competitive marketing price.
(2) To smoothen our price fluctuation due to change in demand and
supply
(3) To provide insurance against price fluctuation through the
procedure known as ‘hedging’
3.6.1 The Purpose of and Conditions for Future Dealing
The purpose of future dealing is to reduce uncertainty arising from price

fluctuation due to supply and demand changes. This reduction in
uncertainty benefits both producers and consumers. The producer can
sell forward at a sure price; the consumer can buy forward and fix
materials cost in accordance with a predetermined price. Manufacturers
of copper wire, for example, might be able to obtain an order based on
the current price of copper. If they think the price of copper may arise
before they can obtain their raw materials they can immediately cover
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their copper requirements by buying on the LME at the current price for
delivery three months ahead, thus avoiding any risk of an increase in
price.
For future dealing to be undertaken the following conditions must apply:
(1) The commodity must be capable of being stored without

deterioration for a reasonable period.
(2) The commodity must be capable of being graded for the purpose
of providing a basis for description in the contract
(3) The commodity must be tradable in its raw or semi-raw state
(4) Producers and consumer must approve the concept of futures
dealing
(5) There must be a free market in the commodity, with many buyers
and sellers, making it impossible for few traders to control the
market and thus prevent perfect competition.
3.6.2 Some Terms Used in Futures Contracts
1) Arbitrage
The (usual) simultaneous purchase of future in one market
against the sale of future in a different market to profit from a
difference in price.
2) Backwardation.
The backwardation situation exists when forward price are less
current ‘spot’ ones.
3) Contango
A contango situation exists when forward prices are greater than
current ‘spot’ ones.
4) Force Majeure
The clause which absolves the seller or buyer from the contract
due to events beyond his or her control, e.g. unavoidable export
delays in producing countries due to strikes at the supplier’s
plant. Note.
5) Futures
Contracts for the purchase and sale of commodities for delivery
some time in the future in an organised exchange and subject to
all the terms and condition included in the rules of that exchange.
6) Hedging
Hedging is the use of future contract to insure against losses due
to the effect of price fluctuations on the value of stocks of a
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commodity either held or to be acquired. Basically this is done by

establishing a position in the futures markets opposite to one’s
position in the physical commodity.
3.7 Sub-Contracting
Organisations of all kinds subcontract aspects of their activity, and

subcontracting is often viewed as a means of augmenting limited
resources and skills while still enabling the contractor to concentrate on
his or her main area of expertise in the execution of prime contract.
When a contract has been awarded to a supplier (the prime contractor),
the supplier frequently subcontracts some of the production work
required to the job. Items purchased on subcontracts are actually
purchased parts or components. However, subcontracting usually takes
place when it is not possible to produce the parts in the local plant by the
prime contractor. Hence subcontracting is:
the work of obtaining the prime contract’s

(manufacturer’s) requirement, mostly of fabricating
parts and components, from outside sources in
order to manufacturer a certain product (or execute
an awarded contract) in the prime contractor’s plan.
A large firm may like to concentrate its efforts on major items of the
contract and leave several minor ones to small manufacturer. Thus
many types of organisation subcontract security arrangement, waste or
scrap disposal, plumbing and a whole range of specialist activities
provided they are considered more conventional sub-contract services.
The subcontractors are thus legally responsible to the prime contractor
rather than the buyer or client even when the client has stipulated which
subcontractors is to be used. The prime contractor’s subcontracting
decisions are however important to a buyer because they may involve a
large percentage of prime contract money.
Sub-contract price and performance influence the prices the buyer pays
the prime contractor.
3.7.1 Reasons why Subcontracting has become a Major

Management Activity
Three reasons have been responsible for the prominent rise of

subcontracting as a major activity requiring management decision on
part of both the prime contractor and the sub-contractor. These are:
(a) The rapid rate of technological inventions.
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(b) The fast rate of installation of this change in products and

processes.
(d) Further movement toward specialisation, which is characterising
business enterprises throughout the world.
For the above reasons and others as listed Peter Bailey and David
Farmer (1981:254), subcontracting is a major management activity.
(1) One major reason is insufficient financial resources to provide

facilities to perform the function within the company.
(2) Lack of (production) capacity internally.
(3) Lack of time for completion of work to meet a rapidly
approaching “target date”.
(4) Lack of know-how because of complexities of rules and
procedures to make the item in-house.
(5) Because a specialist sub-contract is more cost effective either in
production or geographical location terms.
(6) Customer or buyer stipulates that work should be sub-contract,
usually for a nominated firm.
3.7.2 Selecting a Sub-Contractor
Although, all issues relating to sourcing (as discussed in unit five) are
relevant in the selection of a subcontractor, certain pertinent and
additional issues require further detail consideration in the selection of a
subcontractor. Bailey and Farmer (181) suggested a number of key
questions to be asked and answered in subcontractor selection.
1) What is the company’s major specialisation? For example, are

they jobbing machinists, or are they capable of working to close
tolerance? For whom have they worked? How long have they
worked for these companies? Can we ask these customers about
their service and quality performance record?
2) They do have a permanent and well-trained labour force? What is
their industrial relations record?
3) Are their quality – control procedures adequate?
4) Are their production –control procedures adequate?
5) Are they adequately financed?
6) If tooling is required, can they make the tools themselves?
7) Do they own their own transport? Is it reliable?
8) In government work, are they approved by the relevant
inspectorate?
Where possible, each of these questions can be expressed in quantitative

terms. Notwithstanding, the extent to such investigations depends upon
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HCM 343 MODULE 2
the quality and importance of the work to be undertaken. To however do

an effective buying job, the following necessary actions are to be taken:
(a) Continuous appraisal of subcontractors because of changes that

inevitably take place in companies over time.
(b) Specification and standardisation of working should be agreed
before subcontractors submit quotations particularly with new
subcontractors.
(c) In higher subcontracting, close liaison between the prime
contractors and the sub-contractor’s staff essential.
3.7.3 The Rules of Behaviours in Subcontracting
It is a truism that two cannot walk unless they agree. This also found
expression in subcontracting. Until the two organisations involved know
each other well and technical requirements are fully understood, the
maxim, if in doubt –ask! Should be adopted. It is therefore further
suggested. By Peter Bailey and David Farmer that it is a good practice
to:
(1) Make an individual particularly responsible for all contracts with

sub-contractors.
(2) From the outset, work requirements of the sub-contractor must be
clearly established.
(3) From the outset, understanding must be reached as to the quality
and workmanship, which is required of the sub-contractor.
(4) Make provision for compensation for any spoilage or partially
finished work by the subcontractor subject to accepted conditions
of trade.
(5) It is often advantageous to supply the sub-contractor with tooling
and equipment on loan, particularly if the subcontracting
arrangement is temporary.
(6) Inspection arrangement needs to be clearly
(7) Procedure and documentation should also be clearly b established
at the outset.
(8) The limit of the sub-contractors liability for damage to persons or
property in respect of claims arising from the contract should be
clearly defined.
3.8 Purchasing Service
The procurement of service is one of the purchasing most interesting and

challenging assignment because large sums of money are involved.
Expenditure on service in all types of organisation (e.g. profit or non-
profit making organisations, government or non-governmental
organisation etc) increases each year. The reasons for this are the key
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roles played by purchased services in the successful operation of these

organisations.
In many instances, the impact of the services themselves on the success

of the organisation’s operation is far greater than the impact of the naira
spent. Service ranging from architectural engineering, promotion and
advertising, and development of software, to the maintenance and repair
of production equipment are of critical importance to the operations of
the organisation. More mundane purchase such as cafeteria and
janitorial operations impact the morale of all employees.
Services which are not at all in the areas of competence of an

organisation such as management information system, payroll travel
services, delivery service, even the procurement of MRO supplies and
service, are being outsourced to service providers. These suppliers have
the expertise and economies of scale to allow them to provide the
service at the same or higher quality level than the purchasing firm and
at a lower total cost.
3.8.1 Selection Service Contracts
Selecting the “right” source is much more of an art when purchasing

services than when purchasing materials.
• Based on the complexity of such services procurement and the

unexpected problems that tend to rise, it is normally prudent
practice to select only established, reputable firms.
• When a large number of potential contractors are available, the

buyer and the customer normally reduce this list to three to five
firms.
• The buyer then invites proposal from only the potential suppliers
with which the buying firm would be comfortable doing business.
During the evaluation process, emphasis should be placed on the
total cost and total benefits to the buying organisation.
• In addition to the traditional concerns about a prospective

contractor’s financial strength, management capability,
experience, and reputation, the area of technical capabilities
requires special analysis.
3.8.1.1 The Ideal Services Supplier
The ideal service supplier listens to what users complain about most and
then design service products that supply the market’s missing
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HCM 343 MODULE 2
ingredients. Satisfaction is built into service products rather than added

as an afterthought. The ideal services supplier invests to increase both
employee productivity and customer satisfaction.
If such an “ideal” services supplier or contractors is not available, the

purchasing firm should consider the development of a long-term
relationship with a supplier willing and able to grow into an “ideal”
provider.
3.8.1.2 Professional Services
Architect, engineering firms, lawyers, consultants, and educational

specialist are representative of the individuals and firms which provide
professional service. The professional buyer pays particular attention to
the relationship between the price mechanism (e.g. firm fixed price, cost
plus incentive fee, fixed price with award fee, and so on) and the
contractor’s motivation on critical professional services contracts. Every
naira that the supplier’s costs are reduced results in a naira of additional
profit
Administratively, it may be impractical to use anything other than a

fixed price contract or an hourly rate price for relatively small
professional services contracts. Even on larger naira amounts, the
supplier’s reputation may allow the use of a fixed price contract. But
buyers should be aware of the potential effect of the pricing mechanism
on the contractor’s performance.
3.8.1.3 Operating Services
Janitorial, security landscaping, and cafeteria operations are operating

services. Experience has shown that obtaining effective performance of
such can be very challenging for administrators. Accordingly, the
compensation scheme should reward the supplier for good and penalize
it for poor service. Such an approach to pricing greatly aids in the
administration of the contract and results in a higher level of customer
satisfaction.
Insurance, plant and equipment maintenance, and anticipated emergency

service should be priced through the use of competition of carefully
prequalified supplier. Unanticipated emergency repairs normally are
purchased on a “not- to exceed” time and materials basis.
3.9 Contract Administration
The four keys to successful service contract administrations are:
121
(1) a sound statement of work

(2) selection of the “right” source
(3) a fair and reasonable price, and
(4) aggressive management of the contract.
The administration of many service contracts can be a very challenging

responsibility. The buyer needs to monitor and have a realistic degree of
control over supplier’s performance. Crucial to success in this is the
timely availability of accurate data, including the contractor’s plan for
performance and the contractor’s actual progress. The buyer must
proactively manage the relationship to ensure success.
Why is auction-based purchase considered risky?
4.0 CONCLISION
There is no gainsaying that purchasing has been an important aspect of

management, be it business management or management of non-profit.
In contemporary business operation, how well an organisation does its

buying may spell the difference between profit and loss. Indeed, there is
an old proverb, Goods well bought are sold. This is literally true in the
purchasing function of a manufacturer, purchasing raw materials and
equipment or in the purchasing function of merchant middlemen
whether wholesalers or retailers. Even in the modern consumer market,
particularly, for sophisticated goods, e.g. specialty goods, the purchasing
function is very important; purchasing however has a wider meaning. It
is more than mere buying. It is considered a managerial activity and it
includes planning, organisation and control of a wide range of
interrelated activities. Purchasing is very closely related to production as
well as marketing departments of an organisation. All these three
functional areas of business must work in cooperation to fulfill the
company-wide targets.
5.0 SUMMARY
Modern advanced industrial technology rests upon the use of vast

amounts of capital: elaborate machinery, large-scale factories and plants,
stores and stocks of finished and unfinished materials. Capitalism got its
name because this capital or productive wealth is primarily the private
property of somebody – the capitalist.
There is no single market for industrial goods, but several markets.

Industrial buyers tend to base their selection of goods and services on
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HCM 343 MODULE 2
objective criteria. The industrial buyer buys a vast variety of goods and
services. Some goods and services are relative expensive and are
generally used within a year of purchase. Those that are more expensive
and have a longer useful life are considered capital items. Every
purchased transaction originates with the recognition of the need for an
item by someone in the enterprise. This need may originate in the
department using the material.
What factors would you advise you advise your company to consider in
the purchase of capital goods?
7.0 REFRENCES/FURTHER READING
Amrine, T. Harold et al (1984). Manufacturing Organisation and

Management. Fourth edition. Prentice Hall of India Private
Limited: New Delhi.

In Mayard, H. B. [ed]. Handbook of Business Administration.
McGraw-Hill Book Company: New York.
Lysons Kenneth (2000). Purchasing and Supply chain Management.

Fifth Edition. Henry Ling Limited: Dorchester, Dorset (Prentice
Hall)
Menon, K.S. (1993). Purchasing and Inventory Control. Wheeler
Publishing, India, Third Edition.
Ninemeier, D.Jack (1999). Principle of Food and Beverage Operations.

By the Educational Institute, America.
Williamson, R.J. (1985). Business Organisation. The Institute of

Marketing and the CAM Foundation-Heinemann: London. First
Published 1981 pp. 141-146.
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UNIT 4 MANAGEMENT OF INVENTORY
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Inventory Classifications
3.2 Reason for Holding Inventory
3.3 The Objectives of Stock Control
3.4 The Economics of Stock Control
3.5 Approaches to Stock Control
3.5.1 The Action Level Method
3.5.2 Inventory (Stock) Control Models
3.5.3 Problem Associated with EOQ Based System
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
One of the major tasks of any management today is to control stock or

inventory (These two terms-inventory and stock – shall be used
interchangeably for the purpose of this book as the terms are
definitionally indistinct). Both goods producing and service providing
companies use materials. In majority of industries, inventories constitute
the most significant part of current assets. Indeed, for many
manufacturing firms materials costs account for over 50 percent of total
production costs.
To neglect effective and efficient management and control of inventories

is to jeopardize a business Lon run profitability and survival (Ishola, T.
O; 2002, P. 263).
Stocks are defined by the Chartered Institute of Management

Accountants as; Goods or inventory held comprising:
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HCM 343 MODULE 2
• Goods or other assets purchased for resale;

• Consumable stores;
• Raw materials and components purchased for resale
incorporation into products for resale;
• Products and services in intermediate stage of completion (work-
in-progress);
• Long-term contract balances; and
• Finished goods.
Similarly, inventory is an American accounting term for the value or
quantity of raw materials, components, assemblies, consumables, work-
in-progress and finished stock that are kept or stored for use as the need
arises. The term also applies to;
(1) A detailed list of goods or articles in a given place or

(2) A stocktaking.
Thus in an organisation, Inventory refers to the storage in storehouse or

warehouse of products manufactured for sale and components that make
up the product.
Inventory relates to only materials or goods; services are excluded.
Inventory (or stock) control in this context therefore, refers to ‘the

techniques used to ensure that stocks of raw materials or other supplies,
work-in-progress and finished goods are kept at minimum levels of
cost’.
2.0 OBJECTIVES
• highlight various classifications of inventory and the reasons for

holding inventory
• explain the economic principles behind stock control
• state and describe different approaches to stock control
• comment on the problem associated with the EOQ model.
3.0 MAIN CONTENT
3.1 Inventory Classifications
Much as the various functions of stores management has been identified

with the receipt, preservation different types of inventories or stocks or
materials maintained in a business organization can also be identified.
All businesses use the same general classification of inventories,
125
including raw materials, purchased parts, work-in-progress, finished

good and supplies.
1) Raw Material.
A raw material inventory includes all items that being received at
the plant require additional processing before becoming an
identifiable part of the finished product.
2) Purchased Parts
This classification of inventory is applied to component parts of a
product that need no additional processing before being
assembled into the finished product.
3) Work-in-Progress
This classification of inventory is self-explanatory. All material
that leaves either raw materials store or purchased parts stores
enter the work-in-process inventory until the product is
completed and placed in finished goods.
4) Finished goods
Again, this is self-explanatory – it is the stock of finished or
completely manufactured goods/products which are ready for
sale. Generally speaking, this classification applies to the
quantities of finished goods that are held at the factory awaiting
shipment.
5) Supplies
All the materials needed for the operation of the firm that are not
used as parts of the finished product are classified as supplies.
Cost accounting commonly identifies this stock classification as
‘indirect material’. On the other hand, the material that becomes
parts of the finished product is called ‘direct material’.
3.2 Reasons for Holding Inventory
The question of managing and controlling inventories or stocks arise

only when the company holds inventories. Maintaining stocks arises
only when the company holds inventories. Maintaining inventories
involves typing up of the company’s funds. Unintentional excess buying
and overstocking inevitably result in unprofitable investment, high
inventory holding or carry charge (e.g, storage and deterioration
expensive) and possible losses caused by price declines. If it is so
expensive to maintain inventories, why do companies then hold stocks?
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HCM 343 MODULE 2
There are three general motives for holding inventories or stocks. These
are:
1) The transaction motive which emphasizes the need to maintain

inventories to facilitate smooth production and sales operation on
basis.
2) The precautionary motive explains the need for inventories to
guard against the risk of unpredictable changes in demand and
supply forces and other factors
3) The speculative motive influences a firm’s decision to increase or
reduce stock levels to take advantage of price fluctuations.
In more specific terms, the following additional reasons have been
severally advanced as reasons for holding inventory:
(a) To avoid the loss of customers that occurs when product is not
stocked.
(b) To meet sudden spur in customer demand
(c) To keep the firm from cutting back or shutting down briefly due
to material shortages, depletion or exhaustion.
(d) To capitalize on discount in the price of raw materials.
(e) To protect against strikes
(f) To manufacture product in quantities that minimize cost.
3.3 The Objectives of Stock Control
Objectives are the desired end-results. The ultimate objective of all

manufacturing controls is to realise a profit through the operation of the
business. A more restricted objective of the control of materials is to
satisfy the customer by meeting the schedule for deliveries. Failure to
deliver customers’ orders on time is one principal cause for the loss of
business and customers. Effective control of materials throughout the
manufacturing cycle prevents this problem from arising. The following
additional objectives or aims of inventory control are classical to
mention:
(1) To provide both internal and external customers with the required
service levels in terms of quantity and order rate fill.
(2) To ascertain present and future requirements for all types of
inventory to avoid overstocking while avoiding bottlenecks in
production.
(3) To keep costs to a minimum by variety reduction.
(4) To improve the quality of manufactured goods by the use of
better raw materials or components.
(5) To ensure co-operation among all departments of the enterprise to
meet materials management objectives.
127
3.4 The Economics of Stock Control
Inventory or stock constitutes an investment, which must be controlled.

Firms are however commonly faced with the problem of meeting
conflicting needs in the context of inventory management. These are:
(1) To maintain a large size of inventory for efficient and smooth

production and sales operations.
(2) To main a minimum investment in stocks to maximise
profitability.
Business firms should always avoid over-investment or under-
investment in stocks or inventories. There are basic costs incurred by
any organisation, which holds stocks.
The economics to stock management and control can therefore be

determined by an analysis of the costs incurred in obtaining or acquiring
and carrying inventories.
Lyson, k (2000:222) presented the procedures for such costs analysis

under the following headings:
3.4.1 Acquisition Costs
Many of the costs incurred in placing an order are incurred irrespective

of the order size, e.g. the cost of an order will be the same irrespective of
whether 1 or 1000 tons are ordered. Ordering costs including:
(1) Preliminary costs, e.g. preparing the requisition, vendor selection,

and negotiation.
(2) Placement costs, e.g. order preparation, stationery, postage, etc.
(3) Post-placement costs e.g. progressing, receipt of goods.
3.4.2 Holding Costs
These costs relate primarily to the consequences of over-investment in

inventories or excessive stocks, and these are of two types:
(A) Costs proportional to the Value of Inventory, e.g.
(1) Financial costs, e.g. interest on capital tied up in stock or

inventory. This may be bank rate or, more realistically, the
target return on capital required by the enterprise.
(2) Costs of insurance
(3) Losses in value through deterioration, obsolescence and
pilferage.
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HCM 343 MODULE 2
(B) Costs Proportional to the Physical Characteristic of

Inventory. These include:
(1) Storage costs, e.g. storage space, stores rate, light, heat and
power.
(2) Labour costs relating to handling and inspection.
(3) Clerical costs relating to stores records and
documentation.
The total costs per annum under each heading will be expressed as a
percentage of the monetary value or quantity of the average stock held.
3.4.3 Costs of Stock Outs
These are costs incurred for under-investment in inventory resulting in

inadequate stocks of materials. These comprise:
1) Loss of production output.

2) Costs of idle time and of fixed overheads spread over a reduced
output.
3) Costs of action taken to deal with the stock out, e.g panicky
buying at an uneconomical price for lack of time for proper
negotiation, switching production, obtaining substitute materials.
4) Loss of customer goodwill through the inability to supply or late
delivery.
5) Opportunity cost like forgone quantity discount.
Often costs of stock outs are hidden in overhead costs. Costs of
stock outs are difficult to estimate or incorporate into inventory
models.
3.5 Approaches to Stock Control
As previously noted in the sub-section 3.3 discussion, the objective of

inventory or stock control should be the avoidance of excessive and
inadequate levels of inventories and the maintenance of sufficient stock
to ensure operational smoothness.
Although there are many systems for the control of stock, both manual
and automatic, there are really only two basic approaches on which
these stock control systems are based. Re-ordering of supplies will either
take place:
(1) When stocks fall to a predetermined level, or

(2) According to the situation discovered when physical stock levels
are reviewed on a periodic regular basis.
129
Sometimes, these approaches will be used in combination. For example,

it might be the case that the reorder level approach is employed with the
backup of periodic regular review of physical stock levels. The two
approaches are commonly called the “action level” method and the
“period review” approach. Emphasis shall however be on the former for
the purpose of this book.
3.5.1 The Action Level Method
The basic method of controlling stock by quantity is by means of fixed,

for each commodity, stock levels that are recorded in the stock control
system (usually the perpetual inventory record) and subsequently used
as a means of indicating when some action is necessary. There are
various kinds of stock levels, but the fundamental controls are;
1) Maximum
2) Minimum
3) Re-order
4) Hastening
5) The Economic Order Quantity (EOQ)
It does not follow that all these are necessary or even desirable for every
material items, and they should be employed with discretion, because
the fixing of too many levels make the work of provisioning unduly
complicated.
1) The Maximum Stock Level
This is the level calculated representing the maximum stock that should
be held in store in order to minimise the costs of over-stocking. Only
under abnormal circumstances should management authorize purchases
above this uppermost limit. In determining the maximum stock level,
consideration is given to a number of factors like;
1) The rate of materials consumption,

2) Availability of storage space,
3) Risk of deterioration, obsolescence, and / or evaporation,
4) Economic conditions like price stability and availability of
materials from suppliers.
There is no general consensus about the method for calculating this

stock level but it may be expressed as:
Maximum stock = Recorder level +Recorder quantity
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HCM 343 MODULE 2
= Minimum usage during reorder period.
2) The Minimum Stock Level
This is the lowest level below which stock should not be normally
allowed to fall if the firm is not to risk the consequence of inadequate
inventory or stock outs. It is the minimum reserve or buffer stock, which
comes in handy duringemergencies. The factors affecting the minimum
stock level include:
1) The rate of consumption
2) The lead or re-procurement time.
The lead-time is the period of time between placing order or raising

requisition (internally or externally) and materials delivery i.e. when
goods are made available for use.
It is expressed as a mathematical formula as follows:
Minimum Level = Demand x delivery period

(100 per week) x (6 weeks) = (600)
Min Level = 600.
3) Re-order Level
This is point at which it is essential to initiate purchase requisition. It is

a point in betweens the maximum and minimum stock levels. It is the
quantity of stock necessary to protect against the exhaustion of the stock
during the gap between the date of order and the date of delivery. When
the level of stocks or the balance on hand reaches this level, it is an
indication that a new order must be placed at once. The reorder level is
affected by factors like:
1) Material consumption rate

2) Minimum level
3) Lead time and risk factors like variations due to uncertainty.
As a formula, it is expressed as follows:
Reorder Level = Minimum stock + 25 per cent buffer stock.
Because of the risk involved in telling on prompt deliveries, a figure for

extra or buffer stock (often 25 per cent of minimum stock) is added to
the minimum stock. Applying the above formula therefore, we have;
Minimum stock = (600) + 25 per cent buffer stock

= (600) + (150) = (750)
131
Reorder level = 750.
4) The Hastening Stock Level.
This is the amount expressed in units of issue at which it is estimated

that hastening action is necessary to request suppliers to make early
delivery. It is fixed between the minimum and the reorder stock levels.
These stock levels are graphically illustrated in figure 9.1 below.
Maximum stock
Record level
Hastening level
Minimum stock level
Time (days/weeks/months
= Lead. Time Constant ordering quality
Figure 4.1: An action level approach to stock control
The point that must be stressed is that, in order to keep abreast of

changing market (environmental) conditions, after stock levels have
been established in the first instance, they should be carefully reviewed
at suitable intervals e.g. quarterly, monthly, or even weekly, and
adjusted to meet changes in the prevailing circumstance. Unless this is
done, the levels originally fixed soon become out-dated and system of
stock control is rendered ineffective.
3.5.2 Inventory (Stock) Control Models
As a concept, a model is a simplified representation of reality. It is a

pattern for solving problems and consists of set of interrelated variables
that represent some realities (either of a system, process, or outcome) as
closely as possible. A model is used to answer such questions as what if,
and which is best? Given this conceptual framework, therefore,
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HCM 343 MODULE 2
Inventory control model deals primarily with the problems of “how

often” to order more raw materials and “how much” to order, “How
many” goods to produce during a period to keep the finished goods
inventory at the right level.
BUT WHAT LEVELS ARE RIGHT?
Among the most useful techniques for determining how much to order?
Is the economic order quantity (EOQ); that is the level that balances two
different kinds of inventory costs-holding (or carrying) costs and
ordering (or acquisition) costs. The EOQ is simply the stock level that
mimeses the total of ordering and carrying costs (please refer to the
9.4.1 and 9.4.2 for the detailed discussions of these two costs.)
An easy way to determine EOQ is to use the order formula approach

even though it can also be found out graphically. Hence, the EOQ of an
item can be expressed in more detailed terms using the formula below:
2 DC
EOQ =
CI
Where: D => Demand or annual usage

O => Ordering cost or acquisition cost
C => Carrying cost or holding cost
To be able to calculate a basic EOQ, certain assumptions are necessary.
These includes:
i) That there is a known constant stock-carrying cost.

ii) That there is a known, constant ordering cost.
iii) That the rates of demand are known.
iv) That there is a known, stable price unit
v) That the whole ordered batch is delivered at once without any
limitation imposed by stores capacity.
The EOQ formula can be derived or obtained using differential calculus

as illustrated in the following section.
1) ORDERING COSTS
The number of orders placed each year is:
a
Annual Usage in units =
q
Order quantity
The ordering costs are costs of placing an order x number of orders =
133
a. ac
cx =
q. q
2) HOLDING COSTS
q
The average stock level is half the order quantity =
2
The holding costs are average stock level x holding
q. hq
xh =
2 2
(3) TOTAL COST

Total cost =holding costs + ordering costs
Hq ac
T= +
2 q
(4) Minimum cost

T will be maximized or minimized when
dT
=O
dq
dT h ac
= -
dq 2 q2
dT h ac
=O= - 2 = O hq2
dT 2 q
2 ac
On cross multiplying = q2 =
h
2 ac
= q2. =
h
NOTE: (Since q cannot be negative only the positive square root is

used.)
Thus the total cost is a minimum when:
2 ac
EOQ = q =
h
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HCM 343 MODULE 2
The formula may be clarified by means of a simple illustration, in which

the following facts are assumed:
q. = Order quantity in unit

a. = Annual usage in unit
c. = Acquisition cost per order
p. = Price per unit
h. = Holding cost per unit
Note: h is the actual cost of holding one unit for one year.
In examination questions, the holding cost is sometimes given as a
percentage of the price of a unit.
EXAMPLE 1
If the holding cost is 5% and the price of a unit is N 140.oo then

N140 x 5 N 7.00
h. = 100
EXAMPLE 2
To check that the formula works let’s apply it to this problem in which
a= 8,000; c = 25, h = 2.50. Hence:
2 ac
EOQ = q =
h
2. x 25 x 8000
=
2.50
400,000
= = 160,000
2.50
EOQ => 400 Units.
EXAMPLE 3
A manufacturing company has an expected usage of N50,000 units of

certain product during the next year. The cost of processing an order is
N20 and the carrying cost per unit is N 0.50 for one year.
Lead-time on an order is five days and the company will keep a re-
service supply of two days usage.
135
You are required to calculate:
(a) The economic order quantity, and

(b) The re-order point (Assume 250 – day year)
136
HCM 343 MODULE 2
SOLUTION
(a) The economic order quantity is
2 ac
EOQ = q =
h
2 x 20 x50,000
=
0.5
= 4,000,000
q. = 2,000 units
(b) The re-order point is
Daily usage = 50,000 / 250 = 200 units
Re-order point = Safety stock + lead time X Usage
= 2(200) + 5 (200)
= 400 + 1,000
= 1,400
3.5.3 Problems Associated With EOQ Based System
There are a number of problems that the inventory (or stock) controller
must bear in mind when employing the EOQ method of stock control.
These are as follows:
(a) Accurately establishing the true cost of ordering and setting a

standard to cover every type of order.
(b) Establishing true storage costs, given that many organisations
have a very wide range of stock, each requiring different forms of
handling and storage
(c) How to cope with unexpected alteration in the pattern of demand
for stock.
(d) How to cope with variations in lead-time, even though deliveries
may be set at regular intervals, delays can still occur.
Select a manufacturing company and list out the various forms stocks
are held.
137
4.0 CONCLUSION
Both excessive and inadequate stocks are not desirable. In the past,
managers of manufacturing concerns assumed that accumulation of
adequate stocks were beneficial and therefore do not feel the necessity
for controlling. A number of factors have however helped to change this
traditional outlook.
Firstly, the modern industrial economy put greater pressure for

maintenance of adequate liquidity on firms.
Secondly, the wide variety and complexity of requirements of modern

industry necessitates a conscious improvement in inventory control.
Today, stock management and controls is a commanding concern in

modern business because of the grave implications of poor control over
stocks. Business firms should always avoid over-investment or under-
investment in stocks or inventories. There are basic costs incurred by
any organisation, which holds stocks.
5.0 SUMMARY
Because the stock held by any organisation represents money, the

control of that stock has serious financial implications on the company.
If the stock is inefficiently controlled, it can cause high storage costs,
obsolescence, and a reduction in working capital. Therefore stock
control is very much concerned with ensuring that stock is controlled
very carefully. In many situations, the actual level of profit earned by an
organisation will depend on the success of stock control.
Both goods producing and service providing companies use materials. In

majority of industries, inventories constitute the most significant part of
current assets. Indeed, for many manufacturing firms, materials costs
account for over 50 percent of total production costs
How is the economics of stock control determined?
7.0 REFERENCES/FURHER READING

Management. Fourth edition. Prentice Hall of India Private
Limited: New Delhi- 110001. pp. 225-245.
138
HCM 343 MODULE 2
Banjo, F. (1997). Introduction to Purchasing and Supply Management.

Obafemi Awolowo Press Limited
Bosler, W. Robert (1970). “Storekeeping and Warehouse Management.

Mayard, H. B. [ed] Handbook of Business
Administration.McGraw- Hill Book Company, New-York
pp.688-699.

Management. First edition. Wadtson Dusme Int. Limited, Mushin
Lagos.

Fifth Edition. Henry Ling limited: Dorchester, Dorset (Prentice
Hall).
Samuelson, A.P.(1980). Modern Business Organisation and

and Management of Business. Himalayan Publishing House:
139
UNIT 5 ABC ANALYSIS: THE 80-20 CONCEPT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Which Items to Controls?
3.2 What the 80-20 Rule Means
3.3 How it can Help You
3.4 Benefits of ABC Analysis
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Many companies subject all items purchased and produced, irrespective

of their value, usage or quantity, to the same type of stock control
procedure. Such policy can be a waste of time and effort.
Although a high usage rate does not necessarily mean high stock levels,
fast-moving items (i.e. those for which the usage rate is high) and
expensive items are likely to incur greater storage costs than slow
moving inexpensive items. Consequently it should be our primary aim
in stock control to control the ‘fast-moving / expensive items’ since, by
doing so, greater potential savings are possible than by concentrating on
inexpensive items, the usage of which is small.
One of the ubiquitous phenomena of business is expressed by the so-

called ‘80/20 law.’ In relation to inventory stock, the law reads as
follows:
‘80 per cent of the firm’s total inventory cost is caused by only 20 per
cent of all items.’
In other words the 20 per cent high-cost/high-usage items account for 80

per cent of total inventory costs.
2.0 OBJECTIVES
• Identify and describe which items to control
140
HCM 343 MODULE 2
• Explain the meaning of the 80-20 concept and how the ABC
analysis can help you
• State clearly the benefits of ABC analysis.
3.0 MAIN CONTENT
3.1 Which Item to Control
As soon as an inventory is identified and described, the manager must

determine the importance and the naira value of each individual
inventory or stock item. This calls for a study of each stock item in
terms of:
a) Its price or costs

b) Usage (demand)
c) Lead time
d) Specific procurement or technical problems.
Without the data provided by such a study, an inventory manager

normally does not have enough information to determine the best
allocation of departmental effort and expense to the tasks of controlling
thousands of inventory items.
A recently conducted study of several hundred medium-sized

manufacturing firms conducted by the Dobler and Burt (2000) revealed
the data illustrated in Figure 11.1. This figure shows that in the typical
firm a small percentage of the total number of material items carried in
inventory constitutes the bulk of the total naira invested in inventory.
141
100
90
C
75
Category A items, small
in number, high in usage
value the vital few from a
financial point of view,
Percentage of average inventory
50
investment
Category B items, medium

B number, medium demand or
usage value’ normal’ items
25
Category C items, high

numbers, long usage value
the “trivial many”.
A
0
0 10 25 50 75 100
Percent of number of inventory (or stock) items.
Figure 5.1: Graphic analysis of production and MRO inventories
In the study cited: 10 percent of the stock items account for

approximately 75 percent of the (total) investment, and only a quarter of
the items make up approximately 90 percent of the total investment. The
remaining 75 percent of the stock items constitute, roughly, only 10
percent of the inventory (or stock) investment. While these figures vary
somewhat from one firm to another, the magnitude of variation usually
is not great. Several similar studies in large corporations have produced
strikingly similar results, leading to what some business firms call the
80-20 phenomenon (20 percent of the stock items account for 80 percent
of total stock (or inventory) investment.
Historically, some firms have termed this phenomenon the Pareto

principle, based on the law of “the vital few and the trivial many”.
Developed by the Italian economist, Vilfred Pareto around the turn of

the twentieth century, the Pareto principle is essentially the focus of this
unit.
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HCM 343 MODULE 2
3.2 What does 80/20 Means?
The 80/20 Rule means that in anything a few (20 percent) are vital and
many (80 percent) are trivial. In Pareto’s case, it meant 20 percent of the
people owned 80 percent of the wealth. In Juran’s initial work, he
identified 20 percent of the defects causing 80 percent of the problems.
Project managers know that 20 percent of the work (the first 10 percent
and the last 10 percent) consume 80 percent of your time and resources.
You can apply the 80/20 rule to almost anything from the science of
management to the physical world.
A stores manager for instance knows that 20 percent of his stock takes
up 80 percent of his warehouse or storage space and that 80 percent of
his stock comes from 20 percent of his suppliers. Also 80 percent of the
sales will come from 20 percent of the sales staff. 20 percent of a
company staff member will cause 80 percent of the company’s
problems, but another 20 percent of your staff will provide 80 percent of
your production. The Pareto’s principle works both ways.
Illustrating ABC or Pareto’s Analysis
The table below summarises the main point of ABC analysis. In the
table below, the terms usage (or demand) means the value in money in
terms of the stock items consumed.
Percentage of Percentage value

Items of annual usage
Category A items About 20% About 80% Close day to day control
Category B items About 30% About 15% Regular review
Category C items About 50% About 5% Infrequent review
The following example will illustrate how items may be divided into
category A,B, or C.
A purchasing department surveyed the ten most commonly used components a year.
Items Number 101 102 103 104 105 106 107 108 109 110
Unit Costs (Naira) 50 110 150 80 70 160 200 40 90 120
Annual Demand 48,000 2000 300 800 4,800 1200 18,000 300 5,000 500
Step 1: Calculate the annual usage in Naira and the usage of each item
as a percentage of total annual cost.
143
Item Unit cost Annual Usage(N)= Usage as % of Total

Number (Naira) Demand demand x cost =Usage x 100
Total
101 50 48,000 2400,000 32.5%
102 110 2000 220,000 3.0%
103 150 300 45,000 0.6%
104 80 800 64,000 0.9%
105 70 4,800 336,000 4.6%
106 160 1,200 192,000 2.6%
107 200 18,000 3,600,000 48.8%
108 40 300 12,000 0.2%
109 90 5,000 450,000 6.1%
110 120 500 60,000 0.8%
Total Usage 7,379,000
Step 2: Sort the stock items by usage or demand as % of Total

= Calculate the cumulative percentage
= Classify or Categorise item
Item Cumulative Unit Annual Usage %of Cumulative Classif

Number %of items Cost (N) Demand (N) total % of total cation
107 10% 200 18,000 3,600,000 48.8% 48.85 A
101 20% 50 48,000 2,400,000 32.5% 81.3% A
109 30% 90 5,000 450,000 6.1% 87.4% B
105 40% 70 4,800 336,000 4.6% 92. 0% B
102 50% 110 2,000 220,000 3.0% 94.9% B
106 60% 160 1,200 192,000 2.6% 97.5% B
104 70% 80 800 64,000 0.9% 98.4% C

110 80% 120 500 60,000 0.8% 99.2% C
103 90% 150 300 45,000 0.6% 99.8% C
108 100% 40 300 12,000 0.2% 100.0% C
There are ten (10) stock items. Thus each

Item accounts for = 10 = 10% of usage
100
Step 3: Report your findings.

Stock Percentage Percentage Action
Items of items usage
A 107,101 20% 81.3% Close control
B 109, 105, 102, 106 40% 16.3% Regular review
C 104, 100, 103, 108 40% 2.4% Infrequent review
Step 4: Illustrate your report with a diagram if required. The diagram is

a percentage ogive and is called a pareto diagram. This is done by
plotting Cumulative % Usage against Cumulative % Items. The data
needed has been extracted in the table below:
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HCM 343 MODULE 2
Item Number 107 101 109 105 102 106 104 110 103 108
100 Cumulative
% Items 10% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
90 Cumulative %
Usage 48.8% 81.3% 87.4% 92.0% 94.9% 97.5% 98.4% 99.2% 99.8% 100.0%
Classification A A B B B B C C C C
80
70
60
50
40
30 A B C
20
10
10 20 30 40 50 60 70 80 90 100
Figure 5.2: Pareto Curve
3.3 How It Can Help You
The value of the Pareto Principle for a manager is that it reminds you to
focus on the 20 percent that matter. Of the things you do during your
day, only 20 percent really matter. Those 20 percent produce 80 percent
of your results. Identify and focus on those things. When the fire drills
of the day begin to sap your time, remind yourself of the 20 percent you
need to focus on. If something in the schedule has to slip, if something is
not going to get done, make sure it is not part to that 20 percent.
There is a management theory floating around at the moment that

proposes to interpret Pareto’s Principle in such a way as to produce what
is called Superstar Management. The theory’s supporters claim that
since 20 percent of your people produce 80 percent of your results you
should focus your limited time on managing only that 20 percent, the
superstars. The theory is flawed, as it is being discussed here because it
overlooks the fact that 80 percent of your time should be spent doing
what is really important. Helping the good become better is a better use
of your time than helping the great becomes terrific. Apply the Pareto
Principle to all you do, but use it wisely.
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3.4 Benefits of ABC Analysis
1) Reduces holding costs

2) Lowers order time delays
3) Fewer stock-out of key items
4) Less time managing inventory
5) Easy but powerful
6) Essential for any large inventory system
Explain with specific example the concept of 80/20 rule.
4.0 CONCLUSION
Pareto Analysis reveals the “vital few” cause of a problem, allowing a

narrowed focus study and investigation, which will have the greatest
impact on the overall activity.
In a real firm there may be hundred if items used each year. A computer
package may be used to determine the percentage of annual usage for
which each item accounts. The package can be used to sort the items
into order. The boundary between Class A and Class B might not be as
sharply defined as in the example give in the previous page. The
purchasing manager may need to use judgment in deciding where the
class boundaries should be drawn.
In practice, a never-ending problem is that of adequately planning for

handling the thousands of low-value C items. In many cases, availability
and reliability for these items are just as important as they are for the A
and B items. Even with good purchasing planning, because of the sheer
number of C items, low-value nuisance purchases frequently require
more time than should be allotted to them. Consequently, they reduce
the amount of time available to purchasing and supply personnel for
supplier studies, value analysis, and other creative work involving high-
value A and B items.
5.0 SUMMARY
In 1906, Italian economist Vilfredo Pareto created a mathematical

formula to describe the unequal distribution of wealth in his country,
observing that twenty (20) percent of the people owned eighty (80) per
cent of the wealth. In the late 1940s, Dr, Joseph M. Juran inaccurately,
attributed the 80/20 Rule to Pareto. Calling it Pareto’s Law as it is
sometimes called, can be a very effective tool to help you manage
effectively.
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HCM 343 MODULE 2
In what definite ways can the Pareto principle help your organisation?
Dobler, W.D and Burt, N.D (2000). Purchasing and Supply

Publishing Company Limited. Sixth Edition
http://www.Vgpb. Vic.gov.au/poguid/polC3. htm 21/sep/02
http://www.ipfonline.Com/content/archive/General/Logistics/1g010420
022.jsp.
http://www2.ncsu. Edu/ncsu/ehs/www99/right/hands Man/worker/ppel

8/9/2003
http.//www.smthacker.co. uk/materials-management-stock-control.htm
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HCM 343 MODULE 3
MODULE 3
Unit 1 Government Purchasing

Unit 2 Competitive Bidding Procurement
Unit 3 Negotiated Procurements
Unit 4 Expediting or Follow-Up of Order
Unit 5 Buying Internationally
Unit 6 Just –In- Time Inventory
UNIT 1 GOVERNMENT PURCHASING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Differences and Similarities between Industrial and
Government Purchase
3.2 The Role of the Government Purchasing Agency
3.2.1 Functions Performed
3.3 Tendering
3.3.1 Types of Tender
3.3.2 Tendering Procedure
3.3.3 The Disadvantages of Tendering
3.4 Supplier Selection in Governmental Purchasing
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In virtually all economies of the global community – the government is

the single largest purchaser. The case of Nigeria is particularly classical
to mention. The federal, state and local governments’ purchasing
accounts for almost 55 percent of the Gross Domestic Product (GDP).
And the reasons for this are not far-fetched. Government at the various
levels is a key player in the service economy of our present society.
Among many useful functions they perform are provision of education,
health care, security and the maintenance and enhancement of quality of
life. Governments, which are the organisations through which “political
units exercise authority and perform function,” include the massive
federal government, the state governments, and some 776
constitutionally recognised different local government unit areas in
147
Nigeria. Two reasons are commonly cited for the focus on purchasing
by governmental organisation, and this includes:
i) Purchasing by governments can be clearly distinguished from

that in profit making industrial organisations.
ii) The naira value of purchases by such government organisations is
significant and increasing.
2.0 OBJECTIVES
• Highlight and describe distinctively, the differences and

similarities between industrial and government purchases.
• State in clear language the roles of government purchasing
agencies
• Explain what tendering is all about and the issues involved.
• Describe how suppliers are selected under governmental
purchases
3.0 MAIN CONTENT
3.1 Differences and Similarities between Industrial and

Government Purchasing
There are however significant points of similarities and differences

between industrial purchasing and government purchasing. In the area of
the purchasing objectives there are fundamental similarities. Harold E.
Fearon et al (1993:19-820) describes the similarities in the following
ways:
The fundamental objective is to identify source of

needed materials and to acquire those items when
needed, as economically as possible within
accepted standards of quality. The function must
be able to react quickly, effectively, and
efficiently. Requirements, and policies and
procedures must conform to sound business
practice. Purchasers utilise professional
techniques and modern methods, and they employ
professional buyers and managers to assure that
the purchasing programme fully supports their
organisationsal needs.
Purchasing in government organisations differs from purchasing in

industry in several respects as follows:
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HCM 343 MODULE 3
1) Purchasing in government sector is a stewardship function

because in this arena hired administrators spend the money
derived from someone else’s contributions, fees, or taxes in
support of activities that the employer has decided to provided on
behalf of its clients or constituencies.
2) Governments also tend to differ from industrial organisations in

that they generally purchase a much broader range of items in
order to support a wider spectrum of services by a large number
of differentiated sub-units.
3) The openness and frequency with which governments cooperate

and share information is another point of difference. Generally
speaking, the records of government institutions are open to
public review and anyone who desires may ask questions and
expect answers. An aggrieved party particularly can file protests
at any step in the governmental procurement process.
Purchasing departments in government generally operate under authority

granted to them by constitutional provisions, statutes, and, in the case of
local governments, ordinances. (These are generally the sources of
authority for governmental purchasing). Many state and local
governments also operate in accordance with regulations developed by
policy boards created specifically for that purpose. Purchasing by
governmental organisations tends to be somewhat more regulated by
legal requirements and more open to public scrutiny.
3.2 The Role of the Government Purchasing Agency
The Government Purchasing Agency is in most country of the world the

central procurement unit of the Government (In most cases at all levels)
and is responsible for purchasing more than several billion naira in
goods and services annually on behalf of departments and agencies. Its
responsibilities also include the administration of Tendering and
Contracts Division.
Any individual, company or organisation-regardless of size that wants to

expand its opportunity for sales is a potential supplier of government
requirements. The business community should be aware of the
purchasing policies and practices of the government at all levels in the
areas of tendering, security and evaluation of bids, source listing and
opportunities available through public sector procurement.
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The purchasing agency or department in a government plays several

roles. These roles, which distinguish it from the purchasing department
in an industrial organisation, include those of;
1) A supplier of a wide variety of goods and services to many

departments and agencies, which, in turn, use those items to
produce public services and support internal operations.
2) A decision maker, which must strike the appropriate balance
between qualities, total cost, timeliness, control, accountability,
and politics.
3) A staff adviser, which assists management and line departments
in developing budgets, planning projects, and making lease-or-
buy and make–or-buy decision.
4) An implementer of socio-economic policy, which often is on the
frontline of economic development for local, small, and
disadvantages business.
5) A marketer of business opportunities and a provider of
information and technical assistance, especially to small and
disadvantaged businesses.
6) The application and administration of inter-governmental
procurement agreements.
3.2.1 Functions Performed
Functions performed by government purchasing departments include:
1) Developing and maintaining dodders’ lists

2) Working with end users to prepare invitations to bid, request for
proposals, and other written solicitations.
3) Evaluation of bids and proposal in cooperation with end users
and others.
4) Ensuring continuity of supply through planning and scheduling of
purchases, term contracts, and other strategies and techniques.
5) Responding quickly to emergency situations when goods or
services must be obtained immediately in order to protect life/or
property.
6) Assuring the quality of goods and services through
standardisation, specifications, and contract administration.
7) Documenting purchasing actions and making pricing and other
non-proprietary data reasonably available to those who request it.
8) Advising management, departmental officials, and others on such
matters as product improvements and new products, lease-or-buy
and make-or-buy decisions, and economic development
opportunities.
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3.3 Tendering
In most governmental institutions of the world, the Government

Purchasing Agency functions under the legislative provisions of the
Public Tender Act. The Act defines the legislative framework within
which the Agency operates.
The main goal of the public tender system is to ensure procurement is
conducted in an open and competitive environment while maintaining
fair and equitable opportunities for suppliers to compete for government
business.
Tendering is indeed one of the support tools in purchasing which

though is sometimes used to obtain prices by private sector enterprises
or undertakings, particularly in respect of construction and service
contracts, it is in the public sector that tendering is most used to ensure
the principles of public accountability.
As a concept, Lysons, K. (2000, p. 404) defined tendering as;
A purchasing procedure whereby

potential suppliers are invited to make
affirmative and unequivocal offer of the
price and terms which, on acceptance
shall be the basis of the subsequent
contract.
3.3.1 Types of Tender
1) Open Tenders
Prospective suppliers are invited to compete for a contract
advertised in the press; the lowest tender generally being
accepted, although the advertisers usually state that they are not
bound to accept the lowest or any tender.
2) Restricted Open Tenders

Prospective suppliers are invited to compete for a contract, the
advertising of which is restricted to appropriate technical journals
or local newspapers.
3) Selective Tenders
Tenders are invited for suppliers on an ‘approved list’ who have
been previously ‘vetted’ regarding their competence and financial
standing.
4) Serial Tenders
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Prospective suppliers are requested either on an open or selective

basis to tender for an initial scheme on the basis that, subject to
satisfactory performance and unforeseen financial contingencies,
a programme of work will be given to the successful contractor,
the rates and prices for the first job being the basis of the rest of
the programme.
Advantages claimed for this system include:
1) Contractor are given an incentive to maintain a high performance

level
2) Saving in cost and time by eliminating pre-contract negotiations
for each stage of a programme.
3) Reams of employees and plant can be moved to successive jobs
without disruption.
4) Supplier security of contract should enable purchasers to
negotiate keener prices.
5) Negotiated tenders: a tender is negotiated with only one supplier
so that competition is eliminated. This type of contract is unusual.
In the case of a local authority it would require the waiving of
standing orders.
3.3.2 Tendering Procedure
In public purchasing, procedures are usually codified within standing

orders which usually prescribe;
a) a cash limit above which tenders must be invited,

b) the forms of contract to be used, and
c) to whom and under what circumstance responsibility may be
delegated, e.g. to senior officers.
In general, the procedure for open tendering involves:
1) The issuance of a public advertisement inviting tenders.

2) Full and identical specifications being issued for each prospective
contractor, who is required to submit his tender in a sealed and
identifiable envelop by a prescribed date.
3) On the date arranged for the opening of tenders, appointed
officers from the purchasing department and an external
department, e.g. finance department, will attend.
4) Tenders will be initialed, listed and entered on an analysis sheet
showing details of prices, rates, carriage charges, delivery,
settlement terms and other information necessary for their
evaluation.
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5) Late tenders are not considered and are usually returned

unopened.
6) Standing Orders frequently give delegated powers to chief
officers or the officer in charge of the purchasing function to
place orders against tenders up to a specified value. For contracts
exceeding this amount, delegated authority is given provided the
lowest tender to the specification is accepted; where the
acceptance of the lowest tenders is not recommended, Standing
Orders may require the consent of a prescribed committee
chairman (e.g. policy and Finance) before the tender is accepted.
3.3.3 The Disadvantages of Tendering
1) Contractors may quote a price that is too low, leading to

subsequent disputes if goods or services supplied are
unsatisfactory.
2) Tendering is unsuitable for certain contracts. With plant
contracts, for example, consultation with one or more of the more
favourable tenders is often essential to clear up technical points.
These often result in the tender making suggestions that will
result in cheaper running and maintenance costs. The extent to
which technical change can be allowed without affecting the
validity of open competition is a matter of difficulty.
3) Tendering procedure is too slow for emergencies- this is usually
recognised by Standing Orders.
4) Where tenders are accepted on the principle of the lowest price,
credit may not be given to suppliers for past performance.
5) Tendering procedure, particularly with open tendering, may be
expensive from the standpoint of clerical, stationery and postage
costs.
6) Tendering is expensive to the contractor. For this and reason 5,
selective tendering is usually preferable.
3.4 Supplier Selection In Governmental Purchasing
Dobler and Burt (2000:754) presented five principal methods of source

selection commonly used in government procurement; these are
discussed in the following section:
3.4.1 Competitive sealed bidding
1) Conditions for Use: Contracts shall be awarded by competitive

sealed bidding except as otherwise provided.
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2) Invitation to Bid: An invitation to bid shall be issued and shall

include a purchase description and all contractual terms and
conditions applicable to the procurement.
3) Public Notice: Adequate notice of the invitation to bid shall be

given a reasonable time prior to the date set forth therein for the
opening of bid, in accordance with regulations promulgated by
the standards board or Public Procurement Commission (PPC).
The standards boards or PPC may require different types of
public notice on the basis of the size of the purchase or contract
or the type of supplies, services or construction. Such notice may
include, but is not limited to, publication in a newspaper of
general circulation within a reasonable time prior to bid opening,
mailing to suppliers on a list of established suppliers, and/or
posting notice.
4) Bid Opening: Bids shall be publicly opened in the presence of

one or more witnesses at the time and place designed in the
invitation for bids. The amount of each bid and such other
relevant information as may be specified, shall be read aloud and
recorded and the record shall be open to public inspection.
5) Bid Acceptance and Bid Evaluation: Bids shall be accepted

without alteration or correction, except as authorised in this code.
Bids shall be evaluated based on the requirements set forth in the
invitation to bid, which may include criteria to determine
acceptability such as inspection, testing, quality, workmanship,
delivery and suitability for a particular purpose. Those criteria
that will affect the bid price and be considered in evaluation for
award shall be objectively measurable, such as discounts,
transportation costs and total or life costs. The invitation to bid
shall set forth the evaluation criteria to be used. No criteria may
be used in bid evaluation that is not set forth in the invitation to
bid.
6) Correction or Withdrawal of Bids: Cancellation of Awards.

Correction or withdrawal of inadvertently erroneous bids before
or after rewards, or cancellation of awards or contracts based on
such bid mistakes, shall be permitted in accordance with
regulation promulgated by the standards board or PPC. After bid
opening no changes in bid prices or other provisions of bids
prejudicial to the interest of the government or fair competition
shall be permitted. In accordance with regulations of the
standards board or PPC, the purchasing division may correct
mathematical errors. Except as otherwise provided by regulation,
all decision to permit the correction or withdrawal of bids, or to
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HCM 343 MODULE 3
cancel awards or contracts based on bid mistakes, shall be

supported by a written determination made by the purchasing
agent.
7) Multi-Step Sealed Bidding: When it is considered impractical to

initially prepare a purchase description to support an award based
on price, an invitation to bid may be issued requesting the
submission of unpriced offer to be followed by an invitation to
bid limited to those bidders whose offers have been qualified
under the criteria set forth in the first solicitation. The standards
board or PPC shall adopt regulations governing the use of multi-
step sealed bidding and establishing procedures.
8) Award: The contract shall be awarded with reasonable

promptness by written notice to the lowest responsible and
responsive bidder whose bid meets the requirements and criteria
set forth in the invitation for bids.
9) Rejection: The purchasing agent may reject any or all bids
received for purchasing or sales.
Which roles distinguish a government purchasing agency from a similar

department in an industrial organization?
4.0 CONCLUSION
The Government Purchasing Agency in most country of the world is the

central procurement unit of the Government (in most cases at all levels)
and is responsible for purchasing worth more than several billion of
naira in goods and services annually on behalf of departments and
agencies. Its responsilities also include the administration of Tendering
and Contracts Division.
Any individual, company or organisation-regardless of size that wants to

expand its opportunities for sales is a potential supplier of government
requirements The business community should be aware of the
purchasing policies and practices of the government at all levels in the
area of tendering, security and evaluation of bids, source listing and
opportunities available through public sector procurement.
5.0 SUMMARY
Purchasing departments in government generally operate under authority

granted to them by constitutional provisions statuses, and, in the case of
local governments, ordinances. (These are generally the sources of
155
authority for governmental purchasing). Many state and local

governments also operate in accordance with regulations development
by policy boards created specifically for that purpose. Purchasing by
governmental organisation tends to be somewhat more regulated by
legal requirements and more open to public scrutiny.
Discuss fully the general open tendering procedures.
Dobler, W.D AND Burt, N.D (2000). Purchasing and Supply

Management: Text and Cases. New Delhi: Tata McGraw-
Hill Publishing Company Limited, Sixth Edition.
Harold, T.A et al., (1984). Manufacturing Organization and

Management. Prentice-Hall of India Private Limited,
Fourth Edition.
http://www. Scicom.lth.se/fmet/ethics 03 html
http://www.Vgpb. Vic.gov.au/poguid/polC3. htm 21/sep/02
http:/cwis.livjm.uk/bus/busnedere/ae.3037/invmod.htm 8/6/01
http.//www.smthacker.co. uk/materials-management-stock-control.htm
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HCM 343 MODULE 3
UNIT 2 COMPETITIVE BIDDING PROCUREMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 Types of Competitive Bidding
3.2 Five Prerequisites of Competitive Bidding
3.2.1 Four Conditions When Competitive Bidding
Should Not Be Used
3.3 The Competitive Bidding Process
3.3.1 Specifications
3.3.2 Bid Amendments
3.3.3 Bid Receipt and Opening
3.3.4 Bid Evaluation
3.3.5 Responsiveness
3.3.6 Bid Award
3.4 Waiver of Competitive Bidding
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Competitive bidding is a formal process consisting of procedures that

may also be referred to as competitive sealed bidding, or more simply as
sealed bidding or formal bidding. According to the America Bar
Association model procurement code, competitive bidding is the
preferred method of procurement
Competitive bid procurement, as the name implies, involves vendors or

suppliers competing in some way for the contract. The traditional
method involves the owner issuing an invitation or request to either
select vendors (invitation bidding) or even the general contracting
community (public bidding) to participate in a process of competition.
Bidders who wish to participate submit binding offers to do the work or
supply the goods by a fixed rate and time and in accordance with the
owner’s requirements. The owner then reviews and evaluates all on-time
bids and (usually but not always) chooses one Bidder to do the work.
The owner and that Bidder then sign a contract to do the work.
Within this basic system, there are many variations but the basic
features:
157
(1) Invitation to bid issued

(2) Bound bids submitted
(3) Owner chooses one for award,
are common to all types. In the Courts, what turns a procurement into a
competitive bid are these three features- a competition for award,
bidding bids and the Owner choosing from the competitors.
2.0 OBJECTIVES
• Describe each types of competitive bidding

• State and explain the prerequisites of competitive bidding
process.
• Discuss the issues involved in the waiver of competitive Bidding
3.0 MAIN CONTENT
3.1 Types of Competitive Bidding
The three most common types of competitive bidding in current use in

Nigeria are:
1) The Request for quotations,

2) The Invitation to Tender, and
3) The Request for Proposals.
Requests for Quotation (RFQ) to be issued to select suppliers, tends to

be used for small purchases or those where several vendors/suppliers
can supply the same or similar products and the real competition occurs
over such things as price or delivery date.
Invitations to Tender (Invitations) for major construction projects and

other large naira purchases, are most often issued to the general
Contractor / Vendor/supplier community, tend to have very detailed
requirements (specifications) to be met, and con use a host of factors or
criteria in evaluation but price is often the most critical competitive
factor in award.
Requests for Proposal (REP) follows the same general format but tends
to be used for procurements where the Owner is generally describing its
needs and the proponents are expected to offer their method of achieving
the objectives described by the owner. REP tends to be issued to select
vendors/suppliers and evaluation. Price is not unimportant but the
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HCM 343 MODULE 3
manner and method of achieving the Owner’s described result are much
more critical in award.
The law does not control which method of competitive procurement is

chosen. Most often, an organisation’s policies will dictate at is used and
more importantly how is used. However, the law does become deeply
involved in the process once the owner chooses any method of
competitive bidding. Once a buyer or the sourcing team has identified
the potential suppliers to be invited to submit bids (or proposals), a
decision must be made whether to use competitive bidding or
negotiation (or a combination of the two) as the basis for source
selection. When competitive bidding is used by private industry:
• Request for bids are traditionally sent to three to eight potential

supplies depending on the naira size and complexity of the
purchase.
• Requests for bids ask suppliers to quote the price at which they
will perform in accordance with the terms and conditions of the
contract, should they be the successful bidder.
Government buyers generally are not able to restrict the number of

bidders to only eight. Rather, all suppliers desiring to bid are permitted
to do so (for large purchases, the numbers are literally in the hundreds)
under competitive bidding, industrial buyers generally, but always
award the order to the lowest bidder. By law, government buyers are
routinely required to award the order to the lowest bidder provided the
lowest bidder is deemed qualified to perform the contract.
3.2 Five Prerequisites of Competitive Bidding
The proper use of competitive bidding is dictated by five criteria (Dobler

& Burt, 2000:249). When all five criteria prevail, competitive bidding is
an efficient method of source selection and pricing. The criteria are:
1) The naira value of the specific purchase must be large enough to

justify the expense; to both buyer and seller that accompanies this
method of source selection and pricing.
2) The specifications of the item or service to be purchased must be
explicitly clear to both buyer and seller.
3) The market must consist of an adequate number of sellers.
4) The sellers that make up the market must be technically qualified
and actively want the contract-and, therefore, be willing to price
competitively to get it. Frequently, criteria 1,2 and 3 prevail yet
there is no real competition because the sellers are not anxious to
bid.
159
5) The time available must be sufficient for using this method of

pricing. The time required for preparing, mailing, opening, and
evaluating bids is usually considerably longer than those
unfamiliar with this system would expect. Thirty days is not an
uncommon time.
3.2.1 Four Conditions when Competitive Bidding Should not

be Used
In addition to satisfying the preceding five prerequisites, four other

conditions should not be present when employing competitive bidding
as the means of source selection:
1) Situations in which it is impossible to estimate costs with a high

degree of certainty.
2) Situations in which price is not the only important variable, for
example, quality, schedule, and service may well be negotiable
variable of equal importance.
3) Situations which the purchasing firm anticipates a need to make
changes in the specification or some other aspect of the purchase
contract.
4) Situation in which special tooling or setup costs are major factors.
The allocation of such costs and title to the special tooling are
issues best resolved through negotiation.
If these nine conditions are satisfied, then competitive bidding usually

will result in the lowest price and is the most efficient method of source
selection.
When all these prerequisites to the use of competitive bidding are not
satisfied, the negotiation process should be employed to select sources
and to arrive at a price.
3.3 The Competitive Bidding Process
Competitive bidding serves several purposes.
• First, it is designed to prevent fraud, collusion, favouritism or

improvidence in the awarding of public contracts and enable the
buying organisation to obtain the best work or supplies at the
most reasonable prices.
• A secondary purpose of competitive bidding is to provide a fair
forum for bidder.
• Competitive bidding system also projects the public interest.
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HCM 343 MODULE 3
3.3.1 Specification
Specifications should be written in a manner to promote full and

unrestricted competition by citing actual, minimum requirements. Here
are elements to consider when writing specifications:
1) Identify these essential characteristics of the item to be
purchased. Don’t include unnecessary features.
2) Emphasize performance over design
3) Do not allow them to be written by a bidder
4) When possible provide for commercial, off-the-shelf products.
5) Avoid unique requirements.
6) Allow for competitive bids to the maximum extent possible
7) Should be quantifiable rather than qualitative
8) Should be verifiable
9) Do not overstate quality.
3.3.2 Bid Amendments
If after issuance of a bid, changes must be made in quantity,

specifications, delivery schedule, or closing date, or if corrections are
needed because of defects or ambiguities, an amendment to the bid
should be issued. The amendment should be in writing. You will need to
consider the time set for receipt of quotations and the necessary or
desirability of extending the closing date. You may inform bidders of
such extension by telephone and then send confirmation by mail or
electronically. All firms to whom the original bid was sent must be
notified of all changes and time extensions.
3.3.3 Bid Receipt and Opening
The requirement for public opening of bids is designed to reduce the

possibilities of collusion and favoritism and to foster public confidence
in the procurement system. The language of the laws and rules state that
only pertinent information is to be read at the opening and that time for
complete and full disclosure is after award.
Upon receipt, bids should be time-and-date-stamped to document

whether they were received in compliance with the specifications.
Bids that are not received in a sealed envelope by bid opening date and
time should be rejected. Bidders who deliver their bids in an envelope
that is not sealed may be allowed to correct this, however, decency
provided they do so before the date and time specified for opening of
bids
161
Bids/quotes that are neither signed nor include satisfactory evidence of

the bidders desire to be bound by terms and conditions should be
rejected.
3.3.4 Bid Evaluation
Bids must be evaluated in exact compliance with criteria stated in the

specifications in order to determine which represents the lowest
responsive and responsible bidder. Any criteria, other than price, to be
used in evaluating solicitations should be clear and exact and stated in
the bid document. Such criteria must be stated in the bid request with
sufficient clarity and exactness to inform each bidder of the factors that
will be used in evaluating a bid in relation to others. This statement
enables bidders to estimate, within reasonable limits, how the
application of the evaluation factors will be applied to their bid.
3.3.5 Responsiveness
The first event that must occur in bid evaluation is determining if the bid
is responsive. If a bid is non-responsive then it must be rejected.
Rejected bidders should be notified and should not be considered for
award.
To be considered responsive, the bidders need to comply with the

requirement of the solicitation, including specifications and contractual
terms and conditions. It also ensures that all bidders responded to a
solicitation in a common manner that provides the basis for equal
competition. Absolute conformity is not required.
Failure by the bidder to accept the requirements of the bid is grounds for
rejection of its bid. Some common instances in which bids must be
rejected and declared non-responsive are:
1) The bidder does not submit all required documents.

2) The bidder states that he will not accept an award unless the
solicitation terms and conditions are modified or altered.
3) The bidder states that it will only accept an award for all line
items when the solicitation allows award by line item or
aggregate grouping of line items.
4) The offer and award sheet is not signed and there is no indication
such as a cover letter the bidder is responding.
5) The bid item does not meet the stated specifications and the
bidder has not indicated the item bid is an alternate.
There are factors that come into play in evaluating a responsive bid:
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HCM 343 MODULE 3
a) Price of cost: In many acquisitions, various statutory adjustments

to price may need to be made, singly or in combination. The
buyer must often analyses cost factors such as multiple awards,
all-or-none qualifications, and transportation charges in
determining the lowest evaluated price to the state.
b) Technical: Acquisitions require technical evaluation to
determine which quotes are technically acceptable, i.e., are they
responsive to the specified quality requirements?
c) Responsibility: A determination must be made that a bidder is
responsible. A review indicates that it has the wherewithal and
the commitment necessary to do the job and do it properly.
3.3.6 Bid Award
Upon award, all bidders should be provided bid results. Notification to

bidders may be by facsimile, e-mail or Nigeria Postal Service.
Regardless of the notification method used, timely action must be taken
in order to minimise any liability to the federal, state to local
governments in the event a protest is filed. Evidence of notification of
all bidders should be maintained in the purchase file.
3.4 Waiver of Competitive Bidding
CIRCUMSTANCES PERMITTING WAIVER

If deemed to be in the public interest, competitive bidding may be
waived in cases of emergency, where performance or price competition
is not available or otherwise as provided below.
Circumstances permitting waiver and providing for direct negotiation
include, but are limited to:
1). Where a needed product or services is available from only one

source of supply
2) Where bids have been solicited but no satisfactory bid(s) were
received
3) Where standardisation or compatibility is the over-riding
consideration
4) Where personal or certain professional services are required
5) Where an ongoing job or task is involved
6) Where products are bought for “over-the-counter” resale
7) Where a particular product or service is desired for experimental,
developmental of research work
8) Where the equipment is already installed, connected, and
serviced and it is determined advantageous to purchase
9) Where there is evidence of resale price maintenance or other
control of prices, lawful or unlawful, which thwarts normal
bidding procedures
163
10) Where the amount of the purchase is too small to justify soliciting
quotations
11) Where small purchase is being made and a satisfactory price is
available from a previous bid or quotation.
12) Where the requirement is for an authorised cooperative project
with other governmental unit(s) or charitable non-profit
organization(s);
13) Where a used item is available on short notice and subject to
prior sale.
JUSTIFICATION
The waiver of the competitive bidding process, like single source
purchase, is infrequently used and subject to substantial justification. All
requests to waive competitive bidding should be forwarded to the
Purchasing Department accompanied by a purchasing requisition and
justification.
What are the criteria that determine the efficiency of competitive

bidding as source selection and pricing methods?
4.0 CONCLUSION
Lately, attention has been focused on the advertising requirements

associated with the competitive bidding process, especially in instances
of inter-local agreements. A point of reminder must however be made to
the audit staff, federal, state, and local governments that advertising is
just one compliance requirement to address when auditing or engaging
in a formal bid process. Even when an original bid was executed in a
competitive manner. This guidance is being provided as a resource to
help increase awareness of best practices regarding the bid process.
5.0 SUMMARY
Competitive bid procurement, as the name implies, involves vendors or

suppliers competing in some way for the contract. The traditional
method involves the owner issuing an invitation or request to either
select vendors (invitational bidding) or even the general contracting
community (public bidding) to participate in a process of competition.
Bidders who wish to participate submit binding offers to do the work or
supply the goods by a fixed rate and time and in accordance with the
owner’s requirements. The owner then reviews and evaluates all on-time
bids and (usually but not always) chooses one bidder to do the work.
The owner and that Bidder then sign a contract to do the work.
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HCM 343 MODULE 3
Explain the instances in which bid can be rejected and declared non
responsive.
7.0 REFERNECES/FURTHER READING
Bosler, W. Robert (1970), “Storekeeping and Warehouse Management”.

Mayard, H. B.[ed]. Handbook of Business Administration.
McGraw-Hill Book Company, New-York pp.688-699
Carter, R.J. (1989). ‘Stores Management and Related Operations’. The

M&E Handbook Series, Second Edition
David, J. and Alex, M. (1994). Storage and Supply of Materials, Pitman

Publishing, Sixth Edition.

Management: Text and Cases. New Delhi: Tata McGraw –Hill
Publishing Company Limited, Sixth Edition.
Jessop, D. AND Morrison, A. (1996). Storage and Supply of Material.

Mathew, S.A (1989). Purchasing and Storage Techniques (Local and

Foreign), Iju –Ishaga, Agege: Samicent Publishing (Nig) Limited.
Sherleker, S.A. (1982). Modern Business Organisation and

165
UNIT 3 NEGOTIATED PROCUREMENTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 What is Negotiation
3.1.1 Objectives of Negotiate
3.1.2 When to Negotiate
3.1.3 The Negotiator’s position and Qualification
3.2 The Process of Negotiation
3.3 Negotiation Position
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The most flexible, but sometimes complicated, means of procuring

goods and services is negotiation. This method is used when contracting
offices:
1) cannot define all the requirements of a procurement, or

2) when factors other than price are important enough to require
evaluation.
Negotiation procurements take many forms. They may call for

competitive proposals, may involve restricted competition, or may even
be sole source. Some permit discussion with of errors, while others
allow award of a contract without discussion
2.0 OBJECTIVES
• Define the term Negotiation and clearly states its objectives.

• Comment on time Negotiation is most appropriate and Highlight
the requisite position and qualifications of the Negotiator
• List and Explain the steps involved in the Negotiation process
• Identify and describe the various Negotiation Postures.
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HCM 343 MODULE 3
3.0 MAIN CONTENT
3.1 What is Negotiation?
Regardless of the size of the purchasing department or the volume of

purchases, negotiations have to be conducted in every type of industry
or business engaged in the function of procurement, whether it is of
services or of materials. It is generally accepted that the ability to
negotiate is a key competence in a purchasing executive. In industry,
and most levels of government, the term negotiation frequently causes
misunderstanding. Depending on the level of perception and/or
objective:
(1) some may consider negotiation as a form of horse-trading

(arguments about something e.g. prices); or hassling and
(2) sometimes, it is confused with price chiseling (that is obtaining
price deceitfully). But negotiation is neither haggling nor
bargaining.
The dictionary defines negotiation as a:
“Mutual discussion and arrangement of the term of a transaction or

agreement”. OR simply; confer with others in order to reach a
compromise or agreement”
Another expert opinion descried negotiation as,
‘The process by which we search for terms to obtain what we want from
somebody who wants something from us.’
This particular definition more importantly revealed that negotiation

implies some mutuality of wants, resolved by exchange. Purchasing and
supply is certainly concerned with exchanging for value, and with
finding new ways of doing business. However, defined, negotiation is
more usefully seen as a process whereby agreement is sought.
Professional negotiation is thus a means by which two parties reach an

agreement by a specialised process of communication techniques and
arrives at a mutually satisfactory settlement, resulting in a balancing of
the interests of the parties.
Indeed, the following facts must be established about negotiation in

purchasing.
i. Negotiations may involve dealing with a single issue or many
167
ii. They may also be conducted on a one-to-one basis or between

teams of negotiators representing different interests, and
iii. May be conducted over a telephone in a matter of minutes, or
take many months to complete.
iv. It can be for the purpose of setting the price of materials or it can
relate to finalizing various terms and conditions such as
specifications, delivery packaging, insurance and so on.
The most import ingredient in the art of negotiation is communication.

Therefore the essential techniques in negotiation are those, which are
employed in the communication of ideas. Since negotiation involves
convincing the other party of your point of view and reaching an
agreement, communication skills, prove useful. It does not involve any
science or mathematical formula. It is an art.
Contracting officers use negotiated procurements whenever sealed

bidding is not appropriate. Generally, negotiation is appropriate:
a) if item does not permit sealed bidding,

b) if award will be based on factors other than just price,
c) if discussions are necessary, or
d) if the Government is only aware of one source.
David Jones et al (1994:165) argued that there are alternative ways of

reaching agreement that do not involve negotiations and can be
appropriate and effective in the right circumstances.
Some of these alternatives to negotiation are:
1) PERSUADE: This involves encouraging the other party to accept

the merits of a particular case with no concessions from yourself.
2) GIVE IN: That is, accepting totally what the other side offers.
3) COERCE: This is an insistence that the other side meets your
demands or else.
4) PROBLEM SOLVE: This alternative removes the difference
between the parties so that there is no need to negotiate.
3.1.1 Objectives of Negotiation
Generally speaking, the objective of negotiation is agreement. In other

words, it is to persuade and convince the other side with your viewpoint
and it must not be used to win an argument but to reach an agreement.
This is one major difference between negotiations and a ball game or a
war. Those activities, only one side can win; the other side must lose. In
successful negotiation, both sides win something. Popular usage calls
this approach, win-win negotiation.
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HCM 343 MODULE 3
Several objectives are common to all procurement/sales negotiations:

1) To obtain the quality specified.
2) To obtain fair and reasonable price.
3) To get the supplier to perform the contract on time.
In addition, the following objectives must be met:
1) To exert some control over the manner in which the contract is

performed.
2) To persuade the supplier to give maximum cooperation to the
buyer’s company.
3) To develop a sound and continuing relationship with competent
suppliers.
4) To create long-term partnership with a highly qualified supplier.
3.1.2 When To Negotiate
In most cases purchasing orders are concluded on the basis of quotations

received. Negotiations with the vendor will quite often follow after he
has submitted his quotation, but sometimes negotiations take place as
the first step in the purchasing deal. Negotiation is required when
changes in the scope of a contract, call for changes in initial pricing and
terms and conditions. Menon K.S. (1993:142) listed the following
instances when the buyer and seller may consider negotiating:
1) Variations in the quality being purchased.

2) Changes in drawings and specifications.
3) Change in transportation, packaging or delivery point.
4) When supplies or services can be obtained from only one source.
That it when competitive bidding is impractical
5) When no acceptable quotations are received from the responding
vendors.
6) Price or other items and conditions of the contract, relating to
large volumes of a large value, especially of scarce commodities
where the contract relates to a long period.
7) When it is not practicable to draw up detailed specification and
descriptions for certain service or supplies and these are required
to be orally explained or clarified.
3.1.3 The Negotiator’s Position and Qualifications
Purchasing executive and salesmen are individuals usually acting as

representative of the various organisations that employ them.
Their behaviour in negotiation will be influenced:
169
(i) by their personal characteristics,

(ii) which in turn will be partly determined by their roles, and
(iii) the situation in which they are negotiating.
3.1.3.1 The Negotiator as a Representative
In negotiation, it is important for a buyer to know the extent of his

authority to commit the organisation he is representing, since such
authority prescribes his options and his responsibility for the outcome of
the negotiation. The degree of authority he has as a negotiator may range
from that of:
1) An emissary commissioned to present without variations, a

position determined by his superior,
2) To that of being a free agent. And as a free agent, he can
negotiate freely and even vary the stand taken by his company
depending on the situation at the negotiation table.
It is however recommended that the complex can open the negotiations,

the greater should be the status of the negotiator(s).
There are five conditions that prevent a negotiator from responding

spontaneously to his opposite number:
1) When a negotiator has little in determining his position.

2) When he is held accountable for his performance.
3) When he has sole responsibility for the outcome of the
negotiation.
4) When he is obligated to a constituency that is present during the
negotiations.
5) When he is appointed rather than elected.
In the above situations, a negotiator’s behaviour is constrained by his

obligations.
3.1.3.2 Personal Characteristic of the Negotiator
The fewer the constraints imposed in a negotiator such as knowledge,

experience and personality the wider the scope of his ability to influence
the negotiation process. Studies have shown that personality variables
such as anxiety, dogmatism, risk-avoidance, self-esteem and
suspiciousness affect the degree of cooperation or competitiveness
present in a negotiation situation.
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HCM 343 MODULE 3
3.2 The Process of Negotiation
In the broadest sense, negotiation begins with the origin of a firm’s

requirement for specific materials or services. According to Donald
Dobler and David Burt (1996:363), actual two-party negotiation begins
with a buyer’s requests for proposals from potential suppliers. It
develops as the negotiator carefully evaluates these proposals and
prepares for discussion of the important issues that may arise in the
impending negotiation conference. The negotiation process ends with
the resolution of all issues that actually do arise during the negotiation
conference. It is therefore useful to consider negotiation conceptually as
a three-phase process.
• The first of the phases is the preparatory stage.

• The establishment of objective is the second stage.
• While face-to-face discussions, which result in agreement on all
items and conditions of a contract or a decision not to enter into
an agreement with the potential supplier is the third phase.
3.2.1 Preparation for Negotiation
It is arguable that over 90 percent of the time involved in a successful

negotiation is spent in preparing for the actual face-to-face discussions.
David Jones et al (1996:169) provided a list of key considerations as
identified by Kennedy in the preparation for negotiation.
This includes:
1) What do we want? Such want may for example include:

a) A lower price
b) An improved relationship
c) A bigger discount
d) Faster delivery
e) Changes in quality.
The range of negotiable variables in most buyer-seller

relationships or transactions is very wide.
2) How valuable is each of our wants to us? Perhaps, for example;

a) Prompt delivery = high priority;
b) Lower price = medium priority; and
c) Quality changes = low priority.
3) What are my entry and exit point?
171
As a negotiator, your point is really your opening bid. Once disclosed,

you are unlikely to better it, so the bid obviously requires careful
thought. The exit point is your walk away position. It is important that
these facts be identified and understood at the preparatory phase. If only
remove the possibility of striking an agreement, which may be regretted
later.
In addition, Dobler and Burt suggested that the negotiator must:
1) Know the item or service.

2) Know the seller’s Bargaining Strength
The seller’s bargaining strength usually depends on three basic factors:
a) how badly the seller wants the contract;

b) how certain he or she feels of getting it, and
c) how much time is available to reach an agreement on suitable
terms.
The buyer should encounter no difficulty in determining how urgently a

seller wants a contract. The frequency with which the sales person calls,
and general market conditions are positive indicators of sellers’ interest.
3) Know the Buyer’s bargaining strength. The buyer’s bargaining

strength depends on three basic factors:
a) The extent of competition present among potential

suppliers
b) The adequacy of cost or price analysis; and
c) The thoroughness with which the buyer and all other
members of the buying team have prepared for the
negotiation.
4) Know the adequacy of cost or price analysis.

5) Know the Seller.
6) Know the thoroughness of buyer and negotiating team
preparation.
3.2.2 Establishing Objectives
Meaningful objectives are essential to successful negotiating but rarely

are such negotiation objectives meaningfully and clearly defined.
Negotiation objectives must be specific. General objectives lower than
previous prices; good delivery etc, are inadequate. For each term and
condition to be negotiated, the negotiating team should develop three
specific positions:
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HCM 343 MODULE 3
1) An objective position;
2) A minimum position, and
3) A maximum position.
The objective position for instance, is the negotiator’s best estimate of

what he or she expects to strike as an agreement. It can be very helpful
to write down the agreed objectives(s) for the coming negotiation.
Writing them down will serve to ensure that those involved know;
1) What is to be achieved; and

2) Upon what assumptions those objectives have been based.
It is important to recognise that the objectives, which are set, will be

based upon an assessment of the situation within the given existing
information. If some of the information proves to be faulty, then it may
be necessary to change the stated objectives and probably the methods
by which they are to be achieved
3.2.3 The Actual Negotiation
The actual negotiation involves a four phase face-to-face negotiations

and specifically the processes include:
1) Fact Finding.
During the initial meeting with the potential supplier, the professional
negotiator and the negotiating team limit discussions to face-finding.
The important consideration is that during the face-finding session, the
buyer and the supplier should attempt to analyse each other’s point of
view. The buying and selling representatives should disclose their
interests – not their positions.
2) The Recess
While it may not be necessary to call for a recess in negotiation relative

to small procurement, in major negotiations, it would be good strategy
to call for recess after the face-finding session, to enable both teams to
evaluate the facts and analyse the issues, assess the negotiating ability of
the opposite team and, if needed, revise the issues. The duration of the
recess depends on the circumstance and the issues involved.
3) Narrowing the Difference
When the formal negotiations reconvene, the negotiator defines each

issue, states the facts, and attempts to convince the supplier’s
173
representatives(s) that the negotiator moves on to the next issue. During

this phase of the negotiating process, problem solving and compromise
are used to find creative solutions where both parties win. If a
satisfactory agreement cannot be reached, the negotiating team has the
choice of adjourning (an attractive alternative for buyer if another
supplier is in the wings) or moving on to hard bargaining.
4) Hard Bargaining
Hard bargaining session is the last resort and this involves the use of
take – it –or – leave – it tactics. Its use is limited to one –time or
adversarial situation where long-term collaborative relationships are not
objective.
3.2.4 The Post-Negotiation Phase
The primary activity of the post-negotiation phase is implementation.

Successful negotiation is complete until what has been agreed is
implemented. Only very ordinary or value free negotiators will pay
insufficient attention to his aspect of the work. An effective negotiator
would therefore need to take a number of necessary actions.
Firstly, skilled negotiators need to confirm with other party a clear

understanding of what has been agreed.
Secondly, they also specify who is to do what, and by when, not only as
between them and other party but also in their organization.
David Jones et al in their model of negotiation process provided the

following prescriptive guidelines for the post – negotiation phase:
1) Produce the first draft agreement. This involves reporting in your

own version what has been agreed, developing such agreement
and sending your draft to the party for his comments and
agreement
2) Ensure the commitment of people in your organisation to making
the agreement work
3) Prepare official contract in line with the agreement
4) Remember no negotiation is successful until what has been
negotiated is done.
5) Find time to evaluate performance, first, in negotiation, and
secondly in, implementation. Implementation of successful
negotiation has the consequence of positively influencing the
behaviour of both parties in future negotiations especially where
purchasing transaction involves long-standing partners in the
supply and demand market.
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HCM 343 MODULE 3
3.3 Negotiation Postures
Negotiators must be skilled at watching for, understanding and

interpreting body language. No matter what people say, how they really
feel can often be picked up from their body positions and gestures
during the negotiations. You may consider that the other party is being
honest and open, but this may not be true. You may equally feel the
other side is happy; this also may not be the case. Therefore as a
negotiator, you must watch for the body language.
A number of postures and what they might indicate have been provided
by David Jones et al (1996 pp. 180) as shown in table 1 below:
Posture Possible Meaning

Leaning forward when making Interested; wants to emphasize
A point a point
Avoiding eye contact May be embarrassed; not
telling
The truth
Arms folded. Body turned away Defensive; no compromise
From you Not interested.
Body turned toward you leaning Interested; Warning toward
your
Forward. Comments
Looking away to watch or at a Wants to leave or avoid any
further
Window discussion
Hands supporting head and confidence.
Leaning back in chair.
Stroking nose regular with a May be lying.
Finger-avoid eye contact
Good eye contact. Fingers stroking Interested in what you are
saying
Face.
Table 15.1 The Interpretation of Postures.
A negotiator should however interpret body language with sufficient

caution. He/she may indeed be wrong. Nevertheless, it is a quality, that
over a period of time, an experienced negotiator gets to understand the
body language of the other side; this can greatly contribute to
effectiveness at negotiation conference.
175
What would you regard as the conceptual facts about negotiation?
4.0 CONCLUSION
The objective of negotiation, it must be emphasized is agreement. Even

though agreement is the fundamental goals of negotiation, negotiations
occasionally end without agreement. In the short run, reaching no
agreement is sometimes better than reaching an unsatisfactory
agreement. By its nature, negotiation is a complex, fascinating subject,
since it involves people, contains many variables. Generally speaking,
however, experienced negotiators seldom let negotiations break down
completely.
5.0 SUMMARY
However, defined, negotiation is more usefully seen as a process

whereby agreement is sought. The most important ingredient in the art
of negotiation is communication. Therefore the essential techniques in
negotiation are those, which are employed in the communication of
ideas. Since negotiation involves convincing the other party of your
point of view and reaching an agreement, communication skills prove
useful. It does not involve any science or mathematical formula. It is an
art.
In most cases purchasing orders are concluded on the basis of quotations

received. Negotiations with the vendor will quite often follow after he
has submitted his quotation, but sometimes negotiations take place as
the first step in the purchase ideal. Negotiation is required when changes
in the scope of a contract, call for changes in initial pricing and terms
and condition.
Highlight in clear order the schematic process of negotiation.
Baily, P. Farner, D., Jessop. D. (1981). Purchasing Principles and

Management. Pitman Books Limited, Massachusetts, Fourth
Edition.
176
HCM 343 MODULE 3
Baily, P., Farmer, D., Jessop. D. and Jones, D. (1994). Purchasing

Principles and Management. ELBS with Pitman Publishing,
London; Seven Edition.
Carter, R.J. (1989). Stores Management and Related Operations. The


Management: Text and Cases. New Delhi: Tata McGraw–Hill
Publishing Company Limited. Sixth Edition.
Isola, T. Oladele (200). Contemporary Purchasing and Materials

Management. First edition. Wadtson Dusme Int. Limited, Mushin
Lagos.
Jessop, D. and Morrison, A. (1996). Storage and Supply of Material.

Lysons, Kenneth. (2000), Purchasing and Supply Chain Management.

Fifth Edition. Britain: Henry Ling Limited, Dorchester, Dorset
(Prentice Hall)
177
UNIT 4 EXPEDITING OR FOLLOW-UP OF ORDER
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Nature of Expediting Work
3.2 Expediting Process
3.3 Characteristic of Good Expeditor
3.4 Organization of the Expediting Activity
3.5 Advantages of the Expediting Function
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In order to achieve the purchasing aim of obtaining delivery on time,

expediting is frequently undertaken. A dictionary definition of expedite
is: assist the progress of something. In manufacturing industry, this
activity may be undertaken in connection with the progress of a
customer’s order to the point of dispatch (this is internal expediting), or
liaising with suppliers to ensure that materials are received from them or
as scheduled (this is external expediting). In organisations providing a
service rather than manufacturing anything, most of the expediting will
be internal, and in manufacturing companies, it is the external
expediting, which involves the purchasing function. Following-up the
order to ensure prompt deliveries is an important function and this
function is also variously called, progressing, expediting or follow-up.
2.0 OBJECTIVES
• describe the nature of expediting work

• explain the expediting process
• state the characteristic of a good expeditor
• discuss the various methods of organization for expediting
activity
• list the advantages of the expediting function.
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HCM 343 MODULE 3
3.0 MAIN CONTENT
3.1 The Nature of Expediting Work
Expediting is a planned, proactive task. As a concept, expediting is a

purchasing responsibility/task of attempting to speed up delivery as the
buyer’s timing requirements undergo unexpected changes. More
concisely, to expedite (a term that is used rather loosely in industry)
involves actions to achieve an earlier delivery than originally planned.
To de-expedite is indeed the opposite and this is to attempt to delay

delivery beyond the original schedule delivery time.
Expression such as hastening, progress chasing, and urging are

sometimes used to describe the process of attempting to ensure that
delayed supply of materials does not cause problems for the buying
organisation. These expressions often indicate that process is seen as a
reactive one, where a problem of lateness arises, and work then begins
to try to save the situation. Ideally, the relationship between the selling
and buying organisations is one of mutual trust and respect, and liaison,
rather than expediting.
3.1.1 Elements of Expediting
The following elements are involved in expediting work i.e., the specific
issues inherent in the follow-up job:
1) First, it is necessary to secure an acceptance of the purchase order

by the supplier so also a promise of delivery
2) A proper record must be kept of due delivery dates and these
records must be updated as and when deliveries arrive.
3) A review should be made of outstanding orders at regular
intervals.
4) Communication should be made with suppliers as and when
required. This can be through e-mail, telex message, phone calls,
personal visits, etc.
3.2 Expediting Procedures
One very important matter relating to expediting is that all suppliers

should be given strict instructions to inform the buying company as soon
as some trouble is noticed about fulfilling delivery dates. If the suppliers
can be trusted to do this, expediting becomes easier. Menon K.S.
(1993:162) presented a simple procedure, which can be followed as
follows:
179
1) Two copies of the purchase order are sent to the supplier and one
copy to the expeditor.
2) The expeditor files the purchase order, vendor-wise, in a current
file. This file is checked every week.
3) If the acknowledgement copy has not been received back within
ten days, the expeditor should do the following:
(a) He should check back with the buyer if there has been any
development in regard to the order; (for example, the supplier
may have written that the term of agreement requires revision).
(b) If nothing has been heard from the supplier, he should
send him a routine reminder.
(c) If within a week after the first reminder no
acknowledgement has arrived, a letter should be sent,
preferably by name to the official concerned in the
supplier’s company. If this fails, a telegram and a
telephone call respectively should be the means of
communication.
(d) Though the supplier has not formally accepted the order,
he may have started supplies. In law, this is a proof of
acceptance. The expeditor should check with the stores on
this matter.
4) The expeditor will consult the file every week and take such
action as is necessary for follow up.
5) When a delivery has been effected, the receipt section will send
him a copy of the materials receipt note. The expeditor will make
the relevant entries in the order copy. As soon as the order has
been fulfilled, the copy of the order is removed from the file.
Follow-up procedures may be more elaborate than the one described

above, but the basic elements are the same. Another point that must be
made is that progressing activities does not commence until a reasonable
period of time has elapsed; constant progressing can become counter-
productive and results in sour supplier relationships. Figure 16.1 below
shows a typical progressing format, indicating that progressing does not
commence until a reasonable period of time has elapsed.
Date of Jan Feb Mar June July Aug Sept

Order
1st Jan Estimated completion period
Item A Progress 1 2
Figure 4.1: Progressing Format
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HCM 343 MODULE 3
3.3 Characteristic of Good Expeditor
The work of an expeditor calls for considerable foresight, good

judgment, initiative and intelligence to ensure that the right degree of
attention is given to the various types of orders. A good expeditor must
therefore have the following characteristics.
1) An expeditor must be a good communicator. An expeditor must

be skilled at transferring information in a language that can be
easily understood.
2) An efficient expeditor must be resourceful.
3) An expeditor must be a progressive individual, in other words, he
must be capable of gingering up and building up pressure on the
supplier.
4) Time consciousness and alertness is another characteristic. A
good expeditor will know when to take strong action and how.
Expediting is not a routine function carried out by clerks. A supplier

does not often have the courage to be honest and gives reports which do
not commit him but which can be interpreted as encouraging by a buyer.
A clever expeditor can see through such reports and distinguish the
genuine from the misleading report.
3.4 Organisation for the Expediting Activity
There are various methods for organising for the follow-up activity.
Indeed, there is a wide difference of opinions concerning the most
effective arrangement for handling the expediting activity.
Some firms require each buyer to do his/her own expediting.
1) Because of the buyer’s status and intimate knowledge of the

order, these firms believe that a buyer can obtain more effective
results from suppliers than can someone of lesser status in the
organisation.
2) More important reason is that many companies using this

approach want the buyer to assume total responsibility for each of
his or her orders. They feel that the buyer can do this best by
personally participating in all phases of an order and for all
supplier contracts; it is easier to measure and control his or her
performance.
Since much follow-up and expediting is a routine work, it often

represents an inefficient use of a buyer’s time. Some companies
181
therefore develop a hybrid organisation. To achieve the benefits of

specialisation, they assign the follow-up and expediting function to a
separate expediter. So that the buyer can retain full control of his or her
orders, though, each expediter is assigned directly to one buyer (or a
buying group). Thus, the expediter does his or her work as directed by
the buyer, and the buyer is helpfully accountable for his or her orders. In
practice, the expediter usually handles all routine follow-up enquiries
and calls on the buyer for assistance with the difficult or delicate
expediting problems. Figure 16.2 shows a typical basic structure of
organisation for the follow-up and expediting activity.
Purchasing
Manager
Strategic Planning
Research
Buying Dept Buying Supervisor Follow Up

Manager Manager & Off. Administration
Expeditor I Order Preparation
Expeditor II Working Files
Expeditor III Records and

Catalogues
Figure 4.1: A Typical purchasing Organisation Internal structure

showing the Expediting Section
3.5 Adavantages of the Expedting Function
The progressing or follow-up activity has the following advantages:
1) The supplier is aware of the purchasing department’s interest and

control
2) Possible late deliveries or delays will be identified via the early
warning system and therefore alternative suppliers can be secured
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HCM 343 MODULE 3
or alterations of production programmes can be made, without

loss of output.
3) The purchasing manager has a complete and updated visual
picture of the purchasing department’s position in term of
ordering and suppliers.
List the basic characteristics of a good expeditor.
4.0 CONCLUSION
Expediting is an important function, which ought to be centralised. The

term “expedite” is used rather loosely in industry. In a more precise
sense “follow-up” involves activities to ensure delivery as scheduled.
This function is absent in most of the companies. It is true that this
function is irrelevant when you have an excellent relationship with the
supplier, i.e., with the Electronic Data interchange (EDI) system where
company’s computer constantly talks to the supplier’s computer and the
company is able to follow the just-in-time system of inventory. Until
this is into practice, expediting will ever be inevitable and must be
available centrally.
5.0 SUMMARY
The systematic follow-up of the orders to secure the required delivery is

an important purchase function. The purchasing department
responsibility for an order does not terminate with the making of a
satisfactory contract. Purchasing bears full responsibility for an order
until the materials are received and accepted. The purchasing
department will often have a wide range of outstanding orders at any
given time, orders which are in process of being produced or obtained
by the supplier. All these orders will beat various stages of completion.
The purchasing executive must maintain a degree of control over this
area of the purchasing function. To enable this control to be effective, a
system of progressing has to be introduced and monitored.
Explain the issues involved in the follow – up procedure.
Baily, P., Farmer, D., Jessop. D. and Jones, D. (1994). Purchasing

Principles and Management, ELBS and Pitman
Publishing, London, Seventh Edition.
183
Banjo F. (1997). Introduction to Purchasing and Supply Management,

Obafemi Awolowo Press.
Carter, R.J. (1989); “Stores Management and Related Operations”. The


Management: Text and Cases. New Delhi: Tata McGraw–Hill
Publishing Company Limited,Sixth Edition.

Management. First Edition. Mushin Lagos: Wadtson Dusme Int.
Limited,
184
HCM 343 MODULE 3
UNIT 5 BUYING INTERNATIONALLY
CONTENTS
1.0 Introduction
2.0 Objective
3.0 Main Content
3.1 International Procurement Concept
3.2 Approaches to International Sourcing
3.3 The Benefits and Risk of International Sourcing
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
1.0 INTRODUCTION
International purchasing is a rather complex discipline. Among the most

significant business developments in the last four and half decades have
been the rapid growth of international business and the proliferation of
multinational firms. Although a number of companies have been
engaged in this area for nearly a century, the explosive growth in the
size and the number of international firms is a recent phenomenon, as is
the much closer central control exercised by managements.
Conceptually,
“International business is business whose activities involve the crossing

of national borders.”
This definition includes not only international trade and foreign

manufacturing, but also encompasses the growing service industry in
areas such as transportation, tourism, banking, advertising, construction,
retailing, wholesaling, and mass communications.
Today, international expansion has made international problems an

organic aspect of purchasing and materials management. Indeed,
international procurement is one of the most challenging aspects of
purchasing and supply management.
2.0 OBJECTIVES
At the end of this unit, you should be bale to:
• Define concept associated with buying internationally

• List out and explain each of the approaches to international
sourcing
185
• State the benefits of buying internationally and the problems

associated with it.
3.0 MAIN CONTENT
3.1 International Procurement Concept
Technically, international purchasing involves the performance of the

purchasing activities across the national boundaries.
International sourcing, or purchasing goods from sellers in other

countries for internal use or resale, can be risky, as there is an increasing
need to understand foreign environments, purchasing methods and the
techniques of adapting purchasing management processes and
organizational behaviour to new and different conditions.
Dobler and Burt (1996:267) argued that, more recently, the term
“foreign sourcing” has largely been replaced with “international
sourcing”, the process of purchasing from suppliers outside of the firm’s
country of manufacturing. At a number of leading firms, international
sourcing is being replaced with a broader international approach called
“global sourcing”. Professors Monczka and Trent (1991:3) defined
global sourcing;
“…as the integration and coordination of requirements across worldwide

business wait, looking at common items, processes, technologies, and
supplier.”
This unit essentially focuses on the benefits, risks of and approaches to

international sourcing.
3.2 Approaches to International Sourcing
With ever increasing global competition and demands for continuous

cost improvement, today’s purchasing management is being challenged
with the question, “Are we buying from the best place in the world?”
Depending on your company’s internal resource, skill sets, and long-
term strategies, there are many ways to obtain the answer. In this
section, attempt will be made to discuss the advantages and
disadvantages of the following five most common methods that local
companies can use to approach international sourcing:
• Nigeria Sales Contacts of Foreign Suppliers

• Nigeria Global Sourcing Companies
• Overseas Sourcing Representatives
• Direct to Suppliers
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HCM 343 MODULE 3
• International Procurement Office (IPO)
3.2.1 Nigeria Sales Contacts of Foreign Suppliers
Nigeria Sales Contact of Foreign Suppliers abound in the country and

exist in all traditional supplier forms including sales representatives,
agents, distributors, Importers, direct sales officers, Trading Companies,
Brokers etc. They are distinguished from other global sourcing
approaches in that they are undisputedly working on behalf of the
supplier. Buyers approach to them is essentially the same as traditional
domestic/local supplier relationships and this of course is their greatest
advantage since they generally make buying from overseas extremely
simple They generally handle all communications, logistics, import,
contractual, and pricing issues on behalf of the foreign supplier to the
point that the local purchaser may not even know the name of the
foreign `Supplier. Sparing the purchaser from dealing with the many
issues that shall be discussed later in the Direct Approach is of course a
great advantage; particularly if the purchaser is limited in resources and
skill sets, however we should point out the disadvantages.
3.2.2 Nigeria Global Sourcing Companies

Purchasers can take advantages of the capabilities and experience of the
Nigeria Global Sourcing Company as in the case of many areas in
international business; this segment is not well defined so that
purchasers can find these Sourcing Companies having numerous
classifications. Whether they are called Trading Companies, Third Party
Sourcing, Importers, Brokers, Global Search or Sourcing Companies
they represent the purchaser and not the supplier. The advantages of
using the Nigeria Global Sourcing Company approach can be
summarised by stating that they can make buying internationally as
simple as buying from the Supplier across the street. Usually they
provide the following services:
1) Determine items suitable for global sourcing

2) Locate and develop suppliers
3) Negotiate pricing
4) Determine logistics and import costs
5) Coordinate formal evaluation process
6) Place and administer orders
7) Handle communication & Translation
8) Administer Quality Programme
9) Accept financial risk
10) Handle currency issues
11) Pay the supplier
12) Administer logistics and importation processes
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13) Pay freight, duty, insurance, broker and other import costs
The major disadvantages of using Nigeria Global Sourcing Companies

for global sourcing fall under the categories of (1) increased price,
(2) reduced control, and (3) the failure to develop internal
capabilities that may be essential to maintaining competitiveness.
Although Sourcing Companies do not usually restrict direct

communication between the purchaser and supplier, as a practical
matter, most communications flow through the Sourcing Company. As a
result, the beneficial exchanges between purchaser and supplier
personnel who have specific product knowledge may not occur, and
product or process improvements may be missed.
3.2.3 Overseas Sourcing Representatives
Overseas Sourcing Representative (OSR) can be a valuable resource in

the Purchaser’s efforts to determine the best value in the world. They are
based in and usually are citizens of the target country who have
extensive knowledge in purchasing, the capabilities of the local supplier
base, and acting as buying representative for Foreign Purchasers. They
range in size from one-person operations to companies with large staff
members with numerous departments specialising in specific
commodities. They routinely provide the following services:
1) Understanding the Purchaser’s requirements

2) Guidance in selecting viable opportunities
3) Translating
4) Finding and qualifying potential suppliers
5) Helping potential suppliers understand Purchasers
6) Obtaining Quotes
7) Negotiations with Suppliers
8) Arranging for evaluation visits by Purchaser and escorting
purchaser while in the country
9) Insure order entry
10) Resolve Issues
11) Facilitate communications
12) Expedite for delivery
13) Resolve any quality issues
14) Handle Shipping
15) Orders can be placed on OSR who will place on supplier
16) OSR may make payment to Supplier
17) OSR may perform or arrange for inspection
18) OSR may take full quality and financial responsibility
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HCM 343 MODULE 3
Just like Nigeria Global Sourcing Companies, OSRs can greatly speed-
up and improve the success rate of international buying projects.
Although it is not like buying across the street, since the purchaser must
communicate internationally and usually handles all import details, the
OSR does give the Purchaser what amounts to an experienced
purchasing department in that country. Since most OSRs work on
commission paid by the purchaser, the purchaser does not incur a cost
unless the OSR come up with a good Supplier used by the purchaser.
This is both good and bad news, since the OSR will not continue to
support the Purchaser’s Global Sourcing efforts unless there are
financial successes for the OSR along the way.
Finding the best supplier in a country is;
1) Usually made easier by using an OSR since they know the

reputations of the Suppliers and are more likely to find the small
obscure suppliers who often offer the greatest values.
2) OSRs can be invaluable in negotiations since they know the
customs, culture, and the objectives of the Supplier in ways not
known or easily understood by the Purchaser.
3) OSRs also have the ability to make in country visits by the
purchaser much more productive since they handle the logistics.
4) The ability of many OSRs to provide technical expertise and
perform or arrange for quality inspection.
The major disadvantages in using an OSR are that:
1) They will add 5 to 20% to the direct material cost.

2) Although there are many potential OSRs in each country, their
capabilities and performance vary widely so that purchasers have
to exercise a great deal of due diligence in the selection process.
3) Additionally OSRs are usually good in just one country or in
some cases good in only one major city, so that if an area such as
Asia is targeted, the Purchaser will have to select OSRs for each
targeted country
4) Since OSRs may also be limited in product expertise, specialising
in stamping, castings, or electronic
For example, purchasers having varied product categories to source may

do well to have multiple OSRs.
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3.2.4 Direct
With today’s improved communications and the availability of high

quality Suppliers all over the world, many purchasers deal directly with
the Supplier in the foreign location without the use of any third party.
According to a survey reported in the purchasing journal (April, 1997),
of those who source overseas, use the direct approach. When
considering whether or not to use the Direct Approach, Purchasers must
first understand that all the services identified above as being by Nigeria
Global Sourcing Companies and OSRs, will have to be provided by the
Purchasers in the Direct Approach. This means that the following skill
sets among others will have to exist or be developed by the Purchaser
for maximum success in international Sourcing:
1) Targeting countries
2) Locating suppliers in targeted countries
3) Selecting suitable products
4) International and country specific business practices
5) Understanding the foreign supplier’s capabilities, expectations,
and needs.
6) International terms and conditions
7) Dispute resolution
8) International negotiations
9) Communications
10) Understanding cultural differences
11) Inspection at foreign locations
12) Payment methods
13) International transportation, insurance, etc.
14) Import process, regulations and duties
15) Country specific export regulations
16) Currency exchange
17) International order administration and overseas expediting
18) Packaging for international shipments
In addition to the above skill sets, the purchaser must also have available
the financial and human resources to carry out the Global Sourcing
Process. These resources often involve the need for additional people
and considerable monies for travel, research, training, qualification and
approval.
For most purchasers, the decision to go Direct should be based on
1) The expected volume of international purchases,

2) The commitment to long-term international sourcing strategies
and
3) The internal resources available.
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HCM 343 MODULE 3
The direct approach cans results into the advantages of
1) greater control
2) development of internal capabilities,
3) avoiding the country references of third parties, and
4) obtaining lower total material cost.
3.2.5 International Procurement Office (IPO)
Having an International Procurement Office (IPO) is “actually” having

the Purchaser’s own Procurement Operation located overseas. An IPO is
owned and operated by the purchaser, staffed with the purchaser’s
employees and does sourcing only for the Purchaser. IPO while
providing all of the services defined above for the OSR, also gives the
following advantages to the Purchaser over the OSR.
1) No third party mark-ups

2) Dedicated overseas resource with no other
3) Direct in –country purchaser interface with the supplier
4) Development of long-term in –country relationships with
government and business community.
5) Better communications by direct interface with purchaser’s
engineering, production, and quality groups.
6) Reduces purchaser’s need for foreign travel.
7) Better in-country quality and engineering support.
8) Greater flexibility to coordinate with other purchaser’s overseas
entities such as sales offices, manufacturing plants. joint ventures,
etc. to obtain advantages in administrative cost, taxes, currency,
human resources, import / export status, logistics, etc.
With all the valuable services provided by IPOs and the above
advantages, why do not all international Purchasers use them? The
major reasons are that they are:
1) Costly and challenging to operate;

2) Usually difficult to staff, and
3) Add to the Purchaser’s head count.
Even with an IPO, the purchaser must still develop import capabilities.
These issues notwithstanding and because of their many advantages,
IPOs should be considered when:
1) there is sufficient annual volume to cover expenses,
2) a long-term –commitment to the country or region, and
3) the direct approach is not providing the expected results.
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3.3 The Benefits and Risks of International Sourcing
3.2.4 Why Purchasing International Goods and Services
International sourcing requires additional efforts when compared with

domestic sourcing, but it can yield large rewards.
1) Quality
A key reason for international sourcing is to obtain the required
level of quality.
2) Timeliness
A second major reason for purchasing international goods and
services is, generally, the dependability of the supplier in meeting
scheduled requirements
3) Cost
International sourcing generates expenses beyond those normally
encountered when sourcing domestically. Nonetheless after all of
the additional costs of “buying international” are considered, in
the case of many materials it frequently is possible to reduce the
firm’s total cost of the materials through international sourcing.
4) Product and Process Technologies

No country holds a monopoly on new technology. International
sources in some industries are more advanced technologically
than their domestic counterparts. Not to take advantage of such
product or process technologies can result in a manufacturer’s
losing its competitive position vis-a-vis manufacturers that
incorporate the new technologies.
5) Broadening the Supply Base

Professional buyers want to develop and maintain an adequate
supply base for required materials. It may be necessary to
develop international suppliers in order to have a competitive
supply base. In some cases, there may not be a qualified domestic
source.
6) Counter trade
Many countries require their non-domestic suppliers to purchase
materials in their country as part of the sales transaction. These
arrangements commonly are called barter, offsets, or counter
trade.
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HCM 343 MODULE 3
3.3.2 Problems Associated with International Procurement
1) Culture and Communications

The nature, customs, and ethics of individuals and business
organisations from two different cultures can raise a surprising
number of obstacles to successful business relations. What is
considered ethical in one culture may not be ethical in another.
Differences in culture, language, dialects, or terminology may
result in miscommunication and cause problem.
2) Payment Terms Conditions

From the buyer’s point of view, the preferred method of payment
is after receipt and inspection of the goods. However, it is
customary in many countries for advance payments to be made
prior to commencing work. Such a provision ties up the
purchaser’s capital.
3) Long Lead Times

Variable shipping schedules, unpredictable time requirements for
customs activities, the need for greater coordination in
international purchasing, strikes by labour unions, and storms at
sea (which can cause both delays and change) usually result in
longer lead times.
4) Additional Inventories
The quantity of additional inventory needed when purchasing
from foreign sources can be difficult to determine quite often,
however, the additional inventories are not as large as one might
expect. Nevertheless, inventory –carrying costs must be added to
the purchase, the freight, and the administrative costs to
determine the true total cost of buying from international sources.
5) Quality
As previously mentioned, international suppliers frequently are
utilized because many of them can provide a consistently high
level of quality. But problems do exist. Non-domestic suppliers
tend to be less responsive to necessary design changes than do
their domestic counterparts.
6) Higher Costs of Doing Business

The need for translators, communications problems, the distance
involved in making site visits, and so on all add to the cost of
doing business with international suppliers. Port-order services
are more complicated because of currency fluctuations, methods
of payment, customs issues, and the utilisation of import brokers
193
and international carriers. Inadequate local (international)

logistical support functions such as communication systems
(telephones, telexes, and fax machines), transportation systems,
financial institutions, and so forth can complicate
communications and product distribution.
What are the services of the global sourcing companies in the

international procurement functions?
4.0 CONCLUSION
International sourcing, or purchasing goods from sellers in other

countries for internal use, resale, can be risky, as there is an increasing
need to understand foreign environments, purchasing methods and the
techniques of adapting purchasing management process and
organisational behaviour to new and different conditions.
Today, international expansion has made international problems an

organic aspect of purchasing and materials management. Indeed,
international procurement is one of the most challenging aspects of
purchasing and supply management.
5.0 SUMMARY
With ever increasing global competition and demands for continuous

cost improvement, today’s purchasing management is being challenged
with the question, “are we buying from the best place in the world?’
Depending on your company’s internal resources, skill sets and long-
term strategies, there are many ways to obtain the answer. Today,
international expansion has made international problems an organic
aspect of purchasing and materials management. Indeed, international
procurement is one of the most challenging aspects of purchasing and
supply management.
6.0 TUTOR -MARKED ASSIGNMENT
Would you advise your manufacturing company to have an international

procurement office?

Management: Text and Cases. Tata McGraw–Hill Publishing
Company Limited; New Delhi, Sixth Edition.
194
HCM 343 MODULE 3
Heinz, W. and Harold, K. (1994). Management: A Global Perspective.

International Edition, McGraw–Hill Book Company –Singapore,
Tenth Edition, pp. 129-133.
Isola, T. Oladele (2000). Contemporary Purchasing and Materials

Management. First edition. Mushin Lagos: Wadtson Dusme Int.
Limited,
Jessop, D. and Morrison, A. (1996). Storage and Supply of Material.


Fifth Edition. Britain: Henry Ling limited, Dorchester, Dorset
(Prentice Hall).
Sherleker, S.A. (1982). Modern Business Organisation and

195
UNIT 6: JUST–IN-TIMES INVENTORY
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 JIT Definition
3.2 JIT Illustration
3.3 Characteristics of JIT
3.4 JIT Requirements
3.5 Comparison of JIT with Traditional Purchasing Approach.
3.6 Benefits of JIT
3.7 Possible Disadvantages of JIT
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
One reason for Japan’s high manufacturing productivity is the cost

reductions it achieves through its just-in-time (JIT) inventory method.
JIT is a philosophy of operation that is initially devised by Japanese
companies as an alternative to the use of inventories for meeting the
customer service objective of having the product at the right place at the
right time. It is a method of management of the supply channels.
Although originally pioneered by Henry Ford, the JIT manufacturing

concept has been refined and developed over the past several decades in
Japanese industry. The JIT concept is considered by many to be a
technique used for reducing inventories. In reality, its much more. To
complete JIT concept is an operations management philosophy whose
dual objectives are to reduce waste and to increase productivity. It is
true, however, that operationally speaking the basic theme of the JIT
concept is that inventory is evil. Inventory is considered to be undesired
as highlighted below:
i) It hides quality problem

ii) It hides production inefficiencies and productivity problem
iii) It adds unnecessary costs to the production operation-carrying
costs of approximately 25 to 35 percent of the inventory value per
year.
Hence, in an effective JIT application, the operating policy is to

minimise production inventories and work – in process inventories by
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HCM 343 MODULE 3
providing each work centre with just the quantity of materials and
components needed to do a given job at the exact time they are needed.
2.0 OBJECTIVES
• Define what JIT is as a concept

• Graphically illustrates the nature of JIT
• List the characteristics of JIT
• Compare with the Traditional Purchasing Approach
• State and explain the benefits and possible disadvantages of the
JIT Concept.
3.0 MAIN CONTENT
3.1 JIT Definition
White lee (1985:41) gave the definition of JIT as follows:
“Just-in-time (JIT) is an inventory control philosophy whose goals are to

maintain just enough material in just the right place, at just the right time
to make just the right amount of products.’ More concisely, JIT is ‘the
exact adjustment of production to quantity and time held.”
In the language of Ballou (1992:528) JIT is;
“A philosophy of scheduling where the entire supply channel is

synchronised, in response to the requirements of operations or
customer.”
JIT is really a philosophy, not a technique as such. The aim is the

prevention of all kinds of wastes, whatever their nature and wherever
they may occur. Hence, in this inventory system, the supplier delivers
the components and parts to the production line just-in-time to be
assembled.
Other names for this or very similar methods are zero inventory and
stock less production. And such other names as ZIPS (Zero Inventory
Production Systems), MAN (Materials as needed), DOPS (Daily
Overhead and Perfect Supply) and NOT (Nick-of-Time). In all such
cases, the essential requirement is that supplies must be delivered
frequently in relatively small qualities just-in-time for use. All resources,
therefore, are continuously flowing-from the arrival of raw materials to
sub-assembly, final completion, and shipment of finished products. JIT
indeed brings together all the needed materials and parts at the precise
197
moment that they are required for each production process because it is
time for it to be used.
3.2 A JIT Illustration
Figure 16.1 provides a flow diagram of the major production operations

in an electronic instrument manufacturing plant, both before and after
the firm implemented a JIT system.
The top portion of the figure shows the original operation. After
incoming material was received, counted, and logged into the system, it
went through a standard visual receiving inspection operation where
potential quality problems were detected, and perhaps submitted to
quality assurance for further detailed inspection. The next step was to
pre-package the materials parts and component that would subsequently
be used in putting together a given sub-assembly. This was done for
each sub-assembly produced to facilitate stock picking for the later
assembly work. Most production inventories were thus stored in this
sub-assembly kit form. After sub-assembly operations occurred, sub-
assembly units were then inventoried untie later used in a product’s final
assembly operation. Approximately a week’s finished goods inventory
for most products was maintained at the plant.
The lower portion of figure 6.1 shows the dramatic change that occurred
as a result of JIT implementation. The receiving inspection and quality
control technical inspection operations for purchased materials were
completely eliminated. The responsibility for incoming quality was
placed with the purchasing department and delegated to each supplier
organisation. This required a reasonable amount of supplier education.
In most cases, purchasing and QC work with suppliers to develop and
install Statistical Process Control (SPC) systems in their manufacturing
operations. SPC control charts were then required to be submitted with
each shipment of delivered material.
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HCM 343 MODULE 3
Conventional Operation
Receiving of Receiving Subassembly Inventory
(i) Materials Inspection Materials
(ii) Parts Prepackaging
(iii)Component
Subassembly Final Finished Production inventory = 6 weeks

Inventory Assembly Goods Work – in progress inventory = 3 weeks
Inventory Finished goods Inventory 3-6 days
JIT Operation
Receiving of Finished Final
(i) Material Goods Assembly
(ii) Parts Inventory
(iii) Component
Production inventory = 6-10 days
Work –in-process inventory = 1 day
Finished goods inventory = 3 days
Figure 16.1 How JIT was implemented in one US firm.
3.3 Characteristic of JIT
The main characteristics of JIT can be identified as follow:
1) Close relationship with few suppliers and transport carriers.

2) Information is shared between customer and suppliers
3) Frequent purchase and transportation of goods, in small qualities
with resulting minimal inventory levels.
4) Elimination of uncertainties whenever possible throughout the
supply channel
5) High quality.
A limited number of highly reliable suppliers are located and cultivated.

The relationship is workable and mutually beneficial with long-term
contracts. Suppliers are provided with buying companies production and
inventory planning data and thus can plan their policies in a coordinated
manner. This is achieved usually by on-line Electronic Data Interchange
(EDT). Thus the suppliers are treated as internal work centres and are
viewed as the external factory.
Frequent and relatively small deliveries are made to the work station
area without receiving and inspection processes conducted. Suppliers are
trusted with high quality controls as there are no quality checks on items
delivered. It also demonstrates the confidence placed on the supplier.
199
3.4 JIT Requirements
For the JIT method to work, a number of requirements must be fulfilled:
1) There must be significant beginning inventories

2) Demand and supply can be forecasted accurately
3) The quality of the parts must be very high
4) There must be dependable relationships and smooth co-operation
with suppliers.
5) Ideally, the suppliers should be located near the company, with
dependable transportation available.
For JIT to work, two additional things must happen as argued by

Lysons, K. (2000, p. 248);
1) All parts must arrive where they are needed, when they are
needed and in exact quantity needed.
2) All parts that arrive must be usable parts.
Where these are not achieved, JIT may easily become ‘just-too-late.’
In achieving these requirements, purchasing has the responsibilities

summarized below.
1) Liaison with the design function: The emphasis should be on

performance rather than design specifications. Loose
specifications enable suppliers to be more cost effective by being
more innovative with regard to the quality/function aspect of
suppliers. In JIT purchasing, value analysis is an integral part of
the system and should include suppliers.
2) Liaison with supplier to ensure that they understand thoroughly

the importance of consistently maintaining lead times and a high
level of quality.
3) Investigation of the potential of suppliers within reasonable

proximity of the purchaser to increase certainty of delivery and
reduction of lead-time.
4) Establishing strong long-term relationships with suppliers in

mutual effort reduce costs and share savings. This will be
achieved by the purchaser’s effort to meet the supplier’s
expectations with respect to:
• continuity of custom
• fair price and profit margin
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HCM 343 MODULE 3
• agreed adjustment to price when necessary

• accurate forecasts of demand
• firm and reasonably stable specification
• minimizing order changes
• smoothly timed order releases
• involvement in design specifications
• prompt payment.
5) Establishment of an effective supplier certification programme

which ensures that quality specifications are met before
component leave the supplier so that receiving inspections are
eliminated.
3.5 Comparison of JIT With Traditional Purchasing

Approach
When compared with the traditional approach to inventory management,

JIT produces the following effects:
Issue Traditional Approach Just-in-time

Approach
Quality Vs. cost Lease cost with “acceptable Top quality with
zero defects
Quality”
Inventories Large inventories Quality price. Low inventories

with reliable
Discounts manufacturing econ- continuous flow
deliveries.
omies of scale. Safety stock
Protection
Flexibility Long minimum lead times. Short lead times.

Customer
Minimum flexibility. services driven with
much
flexibility
Transportation Least cost with acceptable Totally reliable

service levels
service levels
Seller/carrier Tough ‘adversarial’ negotiations Joint venture ‘partnerships

Negotiations
Number of Suppliers Many Avoid single sourcing or Few long-term open

relationship
/carriers carrier. No exposure to leverage
Or dependency
201
Seller/Carrier Minimal secretive tightly Open information

sharing
Communications Controlled joint problem
solving
General Business is cost or Business is

customer
3.6 Benefits of JIT
The potential benefits of JIT to an organisation, and its purchasing

function in particular, have been summarised by Schnoberger and
Ansari (1984) as follows:
1) Part costs-low scrap costs; low inventory carrying costs

2) Quality- fast detection n and correction of unsatisfactory quality
and ultimately higher quality in purchased parts.
3) Design- Fast response to engineering change requirements
4) Administrative efficiency- fewer suppliers; minimal expediting
and order release work; simplified communications and receiving
activities.
5) Productivity- reduced rework, reduced inspection; reduced parts
– related delays.
6) Capital requirements reduce inventories of purchased parts, raw
materials, work progress and finished goods.
3.7 Possible Disadvantages of JIT
Some organization have experienced problems with JIT for the

following reasons:
1) Faulty forecasting of demand and inability of supplier to move

quickly to changes in demand.
2) JIT required the provision of the necessary systems and methods
of communication between purchasers and supplier ranging from
vehicle telephone EDI (Electronic Data Interchange). Problems
will arise if there is inadequate communication both internally,
i.e. from production to purchasing, and externally from
purchasing to suppliers and vice versa.
3) Organisations with, ideally, no safety stock are highly vulnerable
to supply failures.
4) Purely stockless buying is a fallacy; lack of low-cost C class
items can halt a production line as easily as a failure in the
delivery of highly priced A class items.
5) The advantages of buying in bulk at lower price may outweigh
the saving negotiated for JIT contracts, since suppliers may
202
HCM 343 MODULE 3
increase their prices to cover costs of delivery, paperwork and

storage.
6) JIT is not generally suitable for bought-out items having a short
lifecycle and subject to rapid design change
7) JIT is more suitable for flow methods with consequent changes in
system required to support the new methods
8) Even mass production manufacturers produce a substantial
percentage of components by number, if not value, on batches as
well as small number of high value components dedicated flow
lines.
9) Apart from suppliers, JIT requires a total involvement of people
from all disciplines and the breaking down of traditional barrier
between functions within an organisation. This may involve
substantial investment organisational development training.
What are the main features of just – in – time purchasing?
4.0 CONCLUSION
Summarising from the above, JIT (Just – in –Time) can be defined as

the processing of items or customers in the quantities required, when
required. JIT, therefore, involves processing materials items only as and
when required rather than in anticipation of needs. One of the
prerequisites for the effective implementation of JIT is vendor
reliability. JIT involves the pursuit of low or zero inventories, so that
incoming goods and materials inventory is of particular importance.
5.0 SUMMARY
The common problem most manufacturing firms have is the detection of

the massive waste that lies all around the companies; most of which is
hidden from observing eyes- although not hiding in the real sense of
being invisible but the inability of our mind’s eyes to identify the things
we physically see as waste.
A classical example in point is that probably since the industrial

revolution took place, man has recognised inventory as a necessary evil-
necessary because without it we would never be able to manufacture
goods in time (even a housewife needs inventory of everything from salt
and match sticks to rice and cooking oil) and evil because:
1) its carrying charges erode company’s profits;
203
2) it necessitates massive amount of space to store them (almost 50

percent of a factory premises is a storage area for one sort of
inventory or the other);
3) a large number of personnel are required to look after the stores,
and so on.
We got so used to inventory, that in course of time we forget the work

evil and took it for granted that inventory is something that is
indispensable. On the other hand, the Japanese dropped the word
necessary and considered inventory as a total evil. Once one gets such a
feeling, he begins to devise ways and means of attacking it.
Comment on the JIT requirements.

Management. Fourth edition. Prentice Hall of India: New Delhi
110001. pp. 225-245.
Bosler, W. Robert (1970), ‘Storekeeping and Warehouse Management’.

Mayard, H. B. Handbook of Business Administration McGraw-
Hill Book Company, New-York pp.688-699.
Carter, R.J. (1989). “Stores Management and Related Operations”. The


Management: Text and Cases. Tata McGraw–Hill Publishing
Company Limited: New Delhi, Sixth Edition.
Ishola, T. Oladele (2002). Contemporary purchasing and Materials

Management. First edition. Mushin Lagos. Wadtson Dusme Int.
Limited.

Fifth Edition. Britain – Henry Ling Limited, Dorchester, Dorset
(Prentice Hall).
Menon, K.S (1993). Purchasing and Inventory Control. India: Wheeler

Publishing, Third Edition.
204

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Course Code HCM 343

Course Title Procurement & Supply Management

Course Developer/ Writer

NATIONAL OPEN UNIVERSITY OF NIGERIA

All Rights Reserved

Unit 1 The Conceptual Framework and Objectives of

Unit 1 Pricing Procedures in Procurement

MODULE 3…………………………………………… 147

Unit 1 Government Purchasing……………………... 147

Unit 1 The Conceptual Framework and Objectives of

UNIT 1 THE CONCEPTUAL FRAMEWORK AND

There are only two fundamental inputs in which management, be it in

Failure to fulfill any of these responsibilities concerning materials adds

Procurement is an important phase in the control of the flow of materials

At the end of this unit, you should be able to:

• Define and give meaning to the terms-procurement and supply

3.0 MAIN CONTENT

3.1 The Concept of Procurement

Procurement or better still, Purchasing (The two terms shall be used

The department, which is

Most English dictionaries have stated that procurement means buying,

Viewing purchasing broadly, Siropolis (1977) conceptualized

1) pinpointing the need for materials and services

In summary therefore, Siropolis (1977) defined purchasing as a business

It is the entrepreneur’s responsibility

Lysons, K. (2000, p.1) in answer to a question, which he posed as “what

The function responsible for

Production as a concept broadly means the process of coordinating men

…in this definition, the term

By this last explanation, it could be argued that any persons or

The foregoing definitions demonstrate that purchasing plays an

Menon (1993) argued that BUYING is merely the act of procuring an

Procurement is thus a much broader concept than buying and covers a

There is however a fundamental distinction between purchasing as a

3.2 The Key Procurement Variables

Needle, David (1992) identified the key Procurement variables as

1. Source Management: This is faced with a number of decisions

3. Quality: The quality of incoming raw materials as components is

3.3 The Function of Purchasing Department

1) Market research for new materials and development of new

3.4 Objective of Purchasing

According to Dobler et al (1996), the objectives of purchasing can be

i) A very general managerial level,

• From a top managerial perspective, the general objectives have

• From an operating or functional perspective, an objective broadly

1) To support company operations with an uninterrupted flow

It is a truism, however, that the objective of the purchasing

• The third level focuses on the detailed objectives that are

3.5 Advantages of Effective Procurement

Deriving from the above objectives, we might identify the

(1) Lower prices of materials and items used

SELF ASSESSMENT EXCERCISE

What operational or functional level objective should Purchasing seek

Clearly, the procurement or purchase of items and material has

supply of consumable items such as medicines, sterile equipment, etc.

Procurement is one of the basic functions common to all types of

6.0 TUTOR-MARKED ASSIGNMENT

What sense, do you make of the statement, “no purchasing, no

7.0 REFERENCES/FURTHER READING

Carter, R.J (1989). “Stores Management and Related Operations”.