PURCHASING AND MATERIAL

MANAGEMENT

TANJANG STELLA BITONG

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 CONTENTS

SECTION ONE........................................................................................................................4

INTRODUCTION....................................................................................................................4

Introduction............................................................................................................................4

Types of Material Management..............................................................................................5

What do Material Managers do?............................................................................................6

Why is it Important?...............................................................................................................7

Conclusion..............................................................................................................................7

SECTION TWO.......................................................................................................................8

INTRODUCTION TO PURCHASING OF MATERIALS.................................................8

Introduction............................................................................................................................8

What to Purchase....................................................................................................................9

When to Purchase...................................................................................................................9

Where to Purchase................................................................................................................10

How Much to Purchase........................................................................................................10

At What Price to Purchase....................................................................................................10

Types of Purchasing.............................................................................................................11

Purchasing Procedure or Purchasing Cycle..........................................................................13

SECTION THREE.................................................................................................................17

CENTRALIZED AND DECENTRALIZED PURCHASING AUTHORITY.................17

Introduction..........................................................................................................................17

Degrees of Centralization.....................................................................................................17

Centralized Purchasing Advantages.....................................................................................17

Centralized Purchasing Disadvantages.................................................................................20

Advantages and Disadvantages of Decentralisation.............................................................22

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 What is Decentralization?.....................................................................................................22

Advantages and Disadvantages of Decentralisation.............................................................22

Disadvantages of Decentralization.......................................................................................25

SECTION FOUR...................................................................................................................26

SUPPLIER SELECTION CRITERIA.................................................................................26

Introduction..........................................................................................................................26

What is Supplier Selection?..................................................................................................26

What is Supplier Selection Criteria?....................................................................................26

Factors to Consider in Supplier Selection............................................................................27

Criteria for Supplier Evaluation...........................................................................................28

Software Available for Managing Supplier Selection Criteria.............................................29

Procurement Expert’s Advice on Supplier Selection Criteria..............................................31

Conclusion............................................................................................................................32

SECTION FIVE.....................................................................................................................33

PRICING: FACTORS AFFECTING PRICING................................................................33

Introduction..........................................................................................................................33

Pricing Objectives................................................................................................................33

Pricing Procedure.................................................................................................................35

Factor Affecting Pricing Decisions......................................................................................37

Role of Pricing......................................................................................................................41

Summary...............................................................................................................................41

SECTION SIX........................................................................................................................43

RIGHTS OF PROCUREMENT...........................................................................................43

Introduction..........................................................................................................................43

Summary...............................................................................................................................46

REFERENCES.........................................................................................................................47

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 SECTION ONE

INTRODUCTION

Introduction

Materials management is a core function of supply chain management, involving the

planning and execution of supply chains to meet the material requirements of a company or
organisation. These requirements include controlling and regulating the flow of material
while simultaneously assessing variables like demand, price, availability, quality, and
delivery schedules. Material managers determine the amount of material required and held in
stock, plan for the replenishment of these stocks, create inventory levels for each type of item
(raw material, work in progress or finished goods), and communicate information and
requirements to procurement operations and the extended supply chain. Materials
management also involves assessing material quality to make sure it meets customer demands
in line with a production schedule and at the lowest cost.

Material management systems embrace all of the activities related to materials and are a basic
business function that adds value to a finished product. It can also include the procurement of
machinery and other equipment needed for production processes as well as spare parts.
Typical roles in Materials Management include inventory analysts, inventory control
managers, materials managers, material planners, and expediters as well as hybrid roles like
buyer/planners. Regardless of role, the main objective of Materials Management is assuring a
supply of material with optimised inventory levels and minimum deviation between planned
and actual results.

The objectives of material management are sometimes referred to as the ‘Five Rs of Materials
Management:’

1. The right material

2. At the right time
3. In the right amount

And of the quality that is:

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 1. At the right price
2. From the right sources

Types of Material Management

The work undertaken by materials management experts can be broken down into five
different types, as follows:

1. Material Requirements Planning

This important step in material management directly affects profits as the lower the amount
of material used, the lower the cost of production and the more profit is delivered. Reducing
material overspend has caused some industries to consider ‘Just in Time (JIT)’ strategies that
require very small levels of inventory. However, this still requires careful planning to
maintain without impacting production schedules.

2. Purchasing

Purchasing should be done economically and on time to maintain material supplies and
increase final profits by lowering expenses.

3. Inventory Control

An inventory can include a range of goods being held including partially finished items,
goods ready for sale and those used in production. Many industries try to time purchasing so
that materials enter stores just ahead of production, although there is also a need to gauge
supplier levels so items can be stocked before they become unavailable. Inventories are
required to control the flow of raw materials, purchased goods and finished parts and
components.

4. Material Supply Management

Supply chain management can require materials to be distributed to different sites or

production centres, each of which needs to be continuously supplied. Lack of stock can lead
to financial losses through having to source replacement production materials or having to
halt production schedules.

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Poor storage can also lead to material supply disruptions through damaged or misplaced
stock. Material management teams should be able to mitigate against these situations by
using alternative supply systems.

5. Quality Control

Quality control of materials is also important, since good quality materials lead to good
quality products. Factors such as durability, dimensional accuracy, dependability,
performance, reliability and aesthetic value can all be important quality factors for materials
management, depending upon the applications. All five of these types need to work together
for the successful management of materials from purchase and supply through to utilisation.

What do Material Managers do?

The overriding aim of material managers is to maintain a consistent flow of materials for
production. This seemingly straightforward task has a range of potential difficulties to
overcome including incorrect bills of materials, inaccurate stock-taking, shipping and
receiving errors, unreported scrap, and production reporting issues.

Planning, organising and controlling the flow of materials means it is possible to manage
purchasing and shipping to coincide with a manufacturing process and the final delivery of
products. While material managers oversee the inventory management needs of a company,
the actual procurement of materials may be undertaken by a separate purchasing
team.Material managers don’t just manage the flow of materials to ensure on-time delivery,
but also seek to manage costs and quality through the supply chain. Keeping track of the
availability of raw materials and products can also deliver cost savings and ensure a
maximum return on working capital.

Materials are usually classified as either direct or indirect materials. Direct materials are those
that are required for a finished product, while indirect materials are those that do not directly
generate the final product. In either case, inventory management is a vital aspect of material
management. This can be broken down into three factors:

1. Maximum Stock

This is the maximum amount of material that is held in stock at any given time.

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2. Minimum Security Stock

As stock levels fluctuate during production, there is also a need to ascertain a minimum stock
level, bearing in mind supplier delivery times, cost of the orders and production requirements.

3. Re-Order Point

This is the point at which orders should be made so as to keep warehouse supplies aligned
with supplier delivery times and production schedules.

Why is it Important?

Materials management is vital to ensure there is an unbroken chain of materials for

production purposes to meet customer demands. Not only does it make sure production
schedules can be met, but it can also save costs for a finished product while also maintaining
quality through the materials that are purchased and used. Materials management crosses the
line between purchasing, logistics and inventory management, making it vital for processes
reliant on raw materials, machinery, and maintenance, among others.

Conclusion

Materials management uses inventories and production requirements for planning and control
to ensure materials are available as required to meet production schedules. This material
planning includes managing logistics, stock levels, materials quality, cost and more. This
requires a step-by-step overview of processes and requirements. Materials management has
been an important part of industrial processes since the industrial revolution (if not before!),
and is still used by modern companies across a range of industries to prevent any pauses in
production. With ties to other business areas, such as purchasing and warehousing, material
managers need to interact with a supply chain to make sure materials are delivered where
they are needed at the right time.

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 SECTION TWO

INTRODUCTION TO PURCHASING OF MATERIALS

Introduction

Purchasing of materials refers to the procurement of materials for a price. It is usually

handled by a specific department (e.g., purchase manager in the procurement department),
particularly in large companies.

A purchasing department can function effectively if:

 It is organized on a centralized basis

 Full co-operation between purchasing department and other departments is
assured
 A close relationship exists between the purchasing department and the accounts
department
 The purchase manager is technically qualified and sufficiently experienced
 A proper procedure is clearly set out and strictly adhered to

Purchasing is a critically important and specialized activity in manufacturing companies.

Materials account for a considerable portion of production costs. As such, the purchase
manager in such a business is responsible for spending more of its money than anyone else.
Any errors on the part of the purchase manager, therefore, may be extremely expensive.
Furthermore, purchasing sub-standard materials will undermine product quality, cause
wastage, and lead to costly machine breakdowns. Hence, it is fundamentally important to
ensure that the function of purchasing materials is performed effectively, efficiently, and
economically.

According to Alford and Beatty, "purchasing is the procuring of materials, supplies,

machines, tools, and services required for the equipment, maintenance, and operation of a
manufacturing plant. “As noted above, the purchasing function is typically performed by a
separate purchasing department set up under an expert buyer (or purchase manager). To carry
out their duties effectively, the purchase manager must know:

 What to purchase

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  When to purchase
 Where to purchase
 How much to purchase
 At what price to purchase

What to Purchase

Normally, some of the spare parts and components that a manufacturing concern requires are
manufactured in the company itself rather than being purchased externally.

The various items of stores that the purchasing department should procure are:

 All the items of materials, stores, spares, and components that the manufacturing
concern cannot make
 Other items that the manufacturing concern can make but does not want to make

Decision-making in respect of the items falling under the second category is an important
function of the purchasing department.

The decision about whether to buy or produce a particular item depends on factors such as:

 Annual requirements for the item

 Purchase frequency for the item
 Availability of spare manufacturing capacity to produce the item
 The price advantage arising out of the comparative cost of making and buying
 Product secrecy

The decision to give preference to buying is of the utmost importance. Such decisions are
made by the purchasing department under the guidance of the planning department and cost
department.

When to Purchase

Materials are generally purchased as and when requisitions are received from the stores
department. If certain items are only available during a particular season, purchases are made
during the season. For items restricted by government regulations, the question of when to

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purchase will be determined with reference to the date of the license, quota, or permit, as the
case may be.

Where to Purchase

The purchasing department generally maintains a list of approved suppliers for various items
of materials. Whenever materials are required, purchases are made from these suppliers after
receiving their quotes. If there are long-term requirements to purchase materials on a regular
basis in bulk, the materials are purchased from specific suppliers only. In the case of
controlled materials, purchases are also only made from specific suppliers.

How Much to Purchase

The quantity of materials to be purchased is another important criterion for decision-making.

The purchase department is guided in this respect by the purchase requisition received from
the stores department. However, in organizations that use the budgetary control technique,
the purchase budget that is prepared and approved in advance shows the timings and quantity
of purchases.

Thus, in such cases, the approved budget is the guiding factor. Some manufacturing concerns
adopt the control technique of economic order quantity (EOQ), which indicates the quantity
and frequency of purchases. EOQ ensures that the costs involved in purchasing materials and
carrying inventory are minimized.

At What Price to Purchase

The price to be paid is a key factor that influences the cost of materials. In case tenders or
quotations have been invited and received, it is the responsibility of the purchasing
department to select the price at which the materials should be purchased. Normally, in this
case, the tender or quotation that offers the lowest price is selected. However, the terms of
delivery, credit period allowed, rate of discount, and the reliability and capacity of the
supplier to execute orders should also be considered. If materials are supplied through a
controlling authority, the purchase manager has no option but to procure the supply at the
price fixed by the authority.

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Types of Purchasing

Purchasing of materials can be undertaken on a centralized or decentralized basis. In either

case, it is important to keep in view the nature, size, and requirements of the business.

Centralized Purchasing

Under centralized purchasing, the authority to purchase materials for all the departments in an
organization is placed on one individual or one department (e.g., the purchasing department
headed by a purchase manager).

Advantages of Centralized Purchasing

The main advantages of centralized purchasing are as follows:

 A uniform and firm policy can be pursued with regard to the conditions of purchasing
(e.g., terms of payment).

 Purchasing of materials is the sole responsibility of the purchasing department,

meaning that other departments can concentrate on production.

 Since the materials are purchased in larger quantities, it is possible to benefit from
better rates from suppliers.

 Different items of material can be standardized.

 The buying staff, by concentrating on purchasing alone, develop specialized

knowledge and skills, leading to expertise and, in turn, economical buying.

 Centralized purchasing facilitates the maintenance of one complete set of records for
purchase transactions, enabling management to exercise better control over purchases.

 Centralized purchasing helps to coordinate purchasing activities and, by placing

authority for purchasing on one person, avoids duplication and overlap.

 Centralized purchasing helps to control inventories and avoid excessive investment in

materials.

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Disadvantages of Centralized Purchasing

Centralized purchasing also has several well-defined limitations, including:

 The procedure used to purchase materials is not flexible, which may lead to delays in
obtaining supplies.

 Setting up a separate purchasing department leads to high administration costs.

Decentralized Purchasing

Under decentralized purchasing (also known as localized purchasing), the authority to

purchase materials is placed in the hands of more than one individual or department.

Under this system, each departmental head makes purchases for their own department.

Advantages of Decentralized Purchasing

Decentralized purchasing is beneficial for the following reasons:

 It enables flexibility in the purchase routine, thereby helping to avoid procurement

delays.
 Under decentralized purchasing, no specialized buying team is appointed, which
reduces administration costs.
 Decentralized purchasing is more efficient than centralized purchasing because each
departmental head can assess their department's requirements and problems most
effectively.

Disadvantages of Decentralized Purchasing

Decentralized purchasing also suffers from the following disadvantages:

 Decentralized purchasing is not economical because materials are purchased in

smaller lots (as such, volume discounts or favorable purchase terms cannot be
obtained).

 Lacks a uniform policy for the purchasing of materials.

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  Different prices may be paid for the same materials by different departments.

 Expert buying staff cannot be engaged for each department of the organization.

 There is no coordination among departments, which can lead to duplication and

overlap.

 The heads of various operating departments, in being responsible for purchasing

materials, cannot concentrate fully on their routine duties.

Purchasing Procedure or Purchasing Cycle

1. Initiation of Purchase

This starts with the receipt of a purchase requisition by the purchasing department. The
purchase requisition is prepared by the storekeeper based on:

 Requisitions received from the departments of the enterprise

 Replenishment policy being pursued

 Special requisitions for specific equipment and materials

 Personal judgment and experience (if permitted)

The requisitions are usually approved by staff who are authorized to grant approval. The
storekeeper ensures that they are acting according to standard policies. They prepare the
purchase requisitions in triplicate. The first one (i.e., the original) is sent to the purchasing
department, the next one is sent to the cost department, and the last one is retained by the
stores department. More copies may be prepared depending on the requirements of the
enterprise.

The purchase requisition forms the basis of the order to be placed with suppliers. Therefore,
this should be prepared with careful attention. This helps to purchase the right quantity of
materials at the right quality, the right place, from the right source, and at the right time. This
helps the enterprise to procure materials at a competitive price. It also helps to ensure the
smooth and uninterrupted operations of the enterprise.

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Format/Specimen of Purchase Requisition

2. Inviting Quotations

After the receipt of the purchase requisition, the purchase department would proceed further
and invite quotations, etc. from suppliers. The usual practice is to send an inquiry proforma to
the supplier. The specimen of the Enquiry Proforma is given below :

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3. Receipt of Supplier's Quotation

The supplier, after receiving the inquiry letter, provides a quote and states the terms and
conditions of the supply of materials to the purchasing department. The supplier also provides
quality, quantity, time of delivery, price, discount, and other necessary information. This
submission is important from the point of view of both the purchaser and the supplier. It is an
offer in legal terms. This, therefore, requires careful handling and proper preservation.

4. Preparation of Comparative Statement

The comparative statement (or a comparative schedule of quotations) is prepared after the
quotes are received from the supplier. It is prepared with a view to comparing the prices,
terms, and conditions, and it helps in selecting the supplier whose terms are most favorable to
the organization. The comparative statement is an important document that should be
carefully kept on record for future reference and guidance. The prepared statement is
submitted to the head of the purchasing department for approval. The purpose of preparing a
comparative statement is to realize the money's worth. A proforma of a comparative
statement is given below.

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5. Preparation and Placement of Purchase Order

The last action involved in purchasing materials is to prepare and place a purchase order. A
purchase order is a legal document that implies the acceptance of the supplier's offer. The
purchase order should, therefore, be prepared with great care and in complete detail. This
helps the supplier to ensure that they will supply materials of the right quality, the right
quantity, and at the right time. Purchase orders are orders to the supplier to supply the
required materials as per their quotations and the instructions contained therein. A proforma
of the purchase order is given as follows:

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Generally, the purchase order is prepared in triplicate. The original copy is dispatched to the
supplier, the duplicate is sent to the account section, and the triplicate is retained for future
reference. However, if more copies are required, these should also be prepared. For example,
if five copies are to be prepared, the fourth one could be sent to storekeeping and the fifth one
could be sent to the requisitioning department.

SECTION THREE

CENTRALIZED AND DECENTRALIZED PURCHASING AUTHORITY

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Introduction

As a business grows, centralized purchasing becomes more important. With a decentralized

purchasing structure where individual departments are responsible for their own purchasing,
businesses often end up paying more as a result of their inefficient processes. Centralized
organizations, on the other hand, operate with a more efficient purchasing process by
dedicating their own department, otherwise known as a procurement department. In some
instances, a small business only needs a purchasing or procurement manager rather than an
entire department with multiple staff members.

Degrees of Centralization

Centralized purchasing may refer to an entirely centralized organization or a center-led

organization structure. The purchasing department develops purchasing pause policies as well
as standard operating procedures for the entire are business. With an entirely centralized
structure, the purchasing department handles all purchasing duties in activities for every
department or division from a home office or headquarters. With a center-led structure, the
purchasing department develops purchasing policies and standard operating procedures but
allows each department or division to maintain their daily purchasing duties and
responsibilities. For many organizations, a centralized purchasing department makes the most
sense.

Centralized Purchasing Advantages

Better Strategic Efficiency

Your long-term business goals and purchasing department injective are often linked directly
to your centralized purchasing structure. The primary reason for this is that many companies
consider procurement more important within a centralized purchasing structure. When a
business perceives greater importance on centralized purchasing, it improves visibility within
the organization and makes means they’re more likely to participate in long-term strategic
planning. By building procurement initiatives into your long-term goals, your business’s
financial success automatically links to your procurement goals.

More Procedural Efficiency

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Moving towards centralization eliminates duplicated and redundant efforts. By sharing
information and resources, there are opportunities to combine departmental purchases so that
you can qualify for volume discounts and also reduce your delivery and transportation costs.
You’ll be able to streamline the process with automation, across different departments if you
handle everything from a central location.

A centralized procurement model also makes it easier to create and maintain strong
relationships with your vendors and suppliers. How? One way is that it reduces confusion
among your suppliers who no longer have to wonder about who to speak with regarding each
purchase order. With a decentralized approach, your employees are empowered with a budget
and the initiative they need to determine what they think is useful and can buy right away up
to a certain limit of course. Whether it’s physical supplies or software subscriptions, your
employees can make expenses without needing to sign any kind of Link the contract.

Because most purchases made this way are one-off and not made under contract,
decentralized purchasing is generally purely transactional. Your employees make their
purchases without building any kind of long-term relationship with vendors even if they’d
love to do so. It’s not possible because the volume of business each employee or department
brings to the vendor is not worth the time and effort for the supplier to build better
relationships. When you look across the entire organization, however, it’s easy to see that
you’re spending substantial amounts of money on requiring supplies. However, it’s
impossible to tie that to a beneficial vendor relationship or use it to negotiate volume
discounts. When you implement a centralized purchasing model, however, everything comes
to a single location which allows your purchasing department to leverage your volume with
suppliers to foster has long-term relationships that help you save time and money in the
future.

Improved Control and Management

By centralizing your purchasing policies, you’ll have greater internal control. You’re
purchasing policy allows for top-down information flow which standardizes decision-making
and purchasing activities. For instance, a centralized policy clearly outlines the employees
who are authorized to create a purchase order along with outlining the criteria for choosing
vendors and specific spending limits. Everyone else has to rely on purchase requisitions,
which are only converted to an official order upon approval. Relying on a centralized

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procurement organization structure can also help you address ethical issues. For example, it
clearly outlines your business’s position on accepting gifts from suppliers, helps identify
instances that may constitute a conflict of interest, and specifies the company’s position on
maintaining confidentiality.

With that improved control and management, organizations often find cost savings in
multiple areas. Not only will they find that they have reduced overhead expenses, but the
improved purchasing power will qualify them for volume discounts to help save money. The
savings can then be transferred to other areas of the business to help it grow.

Purchasing isn’t always a clear-cut venture. There are generally other responsibilities that
come up alongside purchasing supplies, for instance making sure that the vendors supply
quality products, minimizing vendor risk, and signing contracts with suppliers. If there’s ever
a situation where employees across your organization are making these purchasing decisions
and commitments, you’ve definitely got a problem on your hands.

With centralized purchasing, you address many micro-purchases and combine them across
the organization. This reduces your overhead costs associated with inventory management,
quality monitoring, risk analysis, and transportation. Using a centralized purchasing
approach, your purchasing department combines identical orders and pushes them toward the
vendors that can offer them the best deals. This leads to even better pricing because the
volume of business to purchase department can offer is stronger. As such, the vendor is more
willing to offer volume discounts to secure your business for the future. You’ll also be able to
eliminate maverick spending which occurs when employees make purchases outside of
existing contracts that you’ve established with vendors. This only happens within companies
that run with a decentralized purchasing model because there’s no easy way to track all of the
contracts the organization has with suppliers. What commonly occurs is that employees
purchase from the most convenient suppliers they can reach regardless of whether there’s a
contract or not.

Contracts they don’t perform well may attract penalties for your organization because you
don’t keep your end of the bargain in terms of minimum order figures. Using a centralized
approach eliminates the risk of employees going outside of the existing procurement process
to prevent maverick spending before it can occur in the first place.

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Centralized Purchasing Disadvantages

Standard Procedure May Cause Receiving Delay

The early stages of developing policy and procedures may cause delays in receiving items
that are needed. Even after these policies have been established, the time it takes to follow the
standard procedure may also lead to receiving delays.

Wrong Buying is Possible

In some situations, specific requirements of individual items may not be addressed

successfully. In certain situations, it may mean that there is a mismatch between the people
who need the item and the people who are buying it. When this happens, the procurement
department may purchase items that the requesters cannot use because they don’t meet their
needs.

Procurement Expertise May Not Be Matched to Company Needs

With a centralized buying department, there’s always the possibility that the purchase
purchasing staff may not be experts and buying all of the varied types of items the company
needs to run smoothly. In this case, the document staff may not be buying the items and
services the company needs to be successful.

May Adversely Impact Employee Morale

Empowering employees with The ability to buy what they need when they need it as long as
it falls within a certain dollar amount threshold, helps to boost morale. If they lose the ability
to make individual decisions about their own purchases in accordance with centralized
policies, they may become frustrated by the fact that they have to rely on someone else to
secure the things they need to effectively do their jobs.

Where Centralized Purchasing May Not Make Sense

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A centralized purchasing process does have many advantages for companies, there are some
situations where it isn’t the most effective choice. If each business unit or location has unique
needs, centralizing everything in a single procurement department won’t help you reap any
benefit.

If your business has:

 Limited to no overlap between suppliers

 Has a different come concentration of purchase types – for example, one business unit
spends more on services rather than materials
 Each business unit has its own profit and loss, making consolidation difficult

Then keeping a decentralized purchasing model in place is the right way to go. The key to an
effective centralized purchasing strategy lies in the expertise of your procurement staff and
the effectiveness of your purchasing manual. Your purchasing manual is the document that
outlines policies and procedures that need to be followed by the people purchase making the
purchases. It contains all of your approved statements of policies and will answer any
recurring questions. Producing the purchasing manual may become a source of conflict
because many purchasing managers find it to be restrictive.

As you build the manual and develop the processes, you can eliminate much of the potential
for conflict by:

 Clearly defining the purchasing authorities

 Clarifying the relationship with other departments
 Seeking cooperation from team members and stakeholders while preparing the
policies and the purchasing manual
 Keeping these policies and procedures separate from those that are of a permanent
nature. As the business grows and evolves, certain procurement procedures will
change frequently. For example, when new or better vendors come along with
contracts that are more friendly for your business and others, you may need to change
the manual to update the list of vendors you want people to use.

Your purchasing manual is one of the most important tools for managing your organization’s
purchase function efficiently. Even if you are a small organization that lacks a complex

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purchase function, the purchasing manual can still help you. If you rely on one person to
make all of the purchases for your company, and that person is out sick or quits the job, you
run the risk of completely paralyzing your purchase activity. With the purchasing manual,
however, it becomes easy for someone else to step in and take over the job reducing the risk
of becoming dependent on a single employee. Ideally, your purchasing department should
consist of employees with experience related to the products and services your business
requires to run. Procurement expertise in and of itself is of course helpful, but if it is not
related to your industry, you may find wrong buying to be a more frequent occurrence.

Advantages and Disadvantages of Decentralisation

What is Decentralization?

What is decentralization? Decentralization refers to a specific form of organizational

structure where the top management delegates decision-making responsibilities and daily
operations to middle and lower subordinates. The top management can thus concentrate on
taking major decisions with greater time abundance. Business houses often feel the
requirement of decentralization to continue efficiency in their operation. Today, we are going
to take a look at the basic advantages and disadvantages of decentralization from an
organizational point of view.

Advantages and Disadvantages of Decentralisation

Advantages of Decentralisation

Motivation of Subordinates

Decentralization improves the level of job satisfaction as well as employee morale, especially
amongst the lower level managers. Furthermore, it strives to satisfy the varying requirements
for participation, independence, and status. Decentralization also promotes a spirit of group
cohesiveness and spirit.

Growth and Diversification

Under decentralization, every single product division attains sufficient autonomy to exercise
their creative flair. In this way, the top-level management can create healthy competition

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amongst different divisions. While carrying out a discussion on the advantages and
disadvantages of decentralization, it is imperative to note that it aids subordinates in
exercising their own judgment. They even develop managerial skills and help in solving the
succession problem which ultimately ensures the growth and continuity of an organization.

Quick Decision Making

Another important pointer in the advantages and disadvantages of decentralization is that

decisions are taken and executed by authorized personnel. This, in turn, results in faster and
accurate decisions which are well aware of the real scenario.

Efficient Communication

The wider span of management under decentralization leads to fewer hierarchical level. This
makes the communication system more efficient as intimate relationships develop between
superiors and subordinates.

Ease of Expansion

Decentralization can add inertia to the expansion process of a growing business. This might
often result in the opening of new business units in varying geographical locations.
Decentralization unleashes the fullest potential of the organization and can react easily to
area-specific requirements.

Better Supervision and Control

Lower level managers can alter production schedules and work assignments with adequate
authority. They can even take disciplinary actions and recommend the promotion of their
peers. This, in turn, leads to greater efficiency in supervision. Performance evaluation of each
decentralized unit helps in exercising adequate control.

Satisfaction of Human needs

Decentralization serves as an important tool for satisfying our basic need of independence,
power, prestige, and status. A cadre of satisfied manager is built up by this satisfaction as
they feel responsible towards the company’s betterment.

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Relief to top executives

Top executives can focus more on more on the executive level work like planning and
decision making if the lower level employees take all the responsibilities on their own. This
relieves their workload which eventually is for the greater good of the organisation.

Disadvantages of Decentralization

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Difficult to Co-Ordinate

While talking about the advantages and disadvantages of decentralization, it is imperative to

note that substantial autonomy is enjoyed by every single division. This, in turn, makes it
difficult to coordinate the overall activity.

External Factors

The trade union movement, market uncertainties, and government intervention might make it
impossible to benefit the most out of decentralization.

Narrow Product Lines

Decentralized product lines need to be adequately broad so that autonomous units can
flourish within the same. This might not be of much help in small business houses having
narrow product lines. Lower levels in the organization also lack competent managers thus
adding to the difficulty quotient.

Expensive

In decentralisation, every employee takes responsibility for the better of the organization so
they work harder to achieve all the organisational objective. In return, they have to be paid
more which sometimes proves to be very expensive for the company.

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 SECTION FOUR

SUPPLIER SELECTION CRITERIA

Introduction

As a Procurement Manager, selecting the best supplier will yield the best results and get your
organization close to its goals; especially in today’s fiercely competitive business landscape.
For today’s article, we will dive into the ways for selecting the best supplier for your
organization and that is by setting criteria. We will also provide examples of criteria to give
you an idea and kickstart your supplier selection process. After this article, you will have a
better understanding of how setting criteria when selecting a supplier will enable you to
evaluate and choose the best one that fits the goals and specifications of your organization.

What is Supplier Selection?

Supplier Selection is the process of identifying, evaluating, and choosing the most suitable
suppliers to provide goods or services for an organization. It is a crucial aspect of the
procurement process as the performance and reliability of suppliers can significantly affect
the organization’s overall operations. It allows procurement managers to choose the best and
most suitable supplier by setting metrics, measures, and criteria to evaluate whether the
potential suppliers are reliable, competent, and trustworthy as well as if they meet the
organization’s goals. The supplier selection process is essential to ensure that the
organization is carefully selecting its suppliers resulting in less risk and a streamlined
procurement process. It is the process of finding the most compatible procurement partner.
Supplier selection is often included in the RFP Process.

What is Supplier Selection Criteria?

Supplier selection criteria are the measures, metrics, and key characteristics that an
organization looks for in a potential supplier. It defines the most important specifications and
requirements of an organization that potential suppliers should meet in order to be a serious
candidate. Strategic decision-making and careful selection of suppliers can lead to an
improved procurement operation, better quality, fewer costs, minimized risk, and an overall
efficient operation. This is all possible by setting criteria to compare the capabilities, stability,
and products and services of supplier prospects. Well-defined supplier criteria will allow

27
procurement managers to easily distinguish the most suitable supplier out of all the
candidates.

Factors to Consider in Supplier Selection

When making and setting criteria for supplier selection and evaluation, you should, as a
procurement manager, consider the factors and key elements that your organization is looking
for. This will help define the overall supplier selection process and create accurate selection
criteria that will fit the specifications and requirements of your procurement operations. Here
are some factors to consider:

1. Price and Cost competitiveness

Despite the importance of quality, it is also important for organizations to strike a balance
between effectiveness and cost. In view of the fact that it might entail compromising quality
or service levels, selecting the most expensive supplier may be no longer a good option.
Instead, businesses should seek suppliers who offer a price that does not compromise on
quality and allows them to retain profitability while meeting their customers’ needs.

2. Capabilities

Another important factor is the capability of the supplier to meet current and future
requirements. In terms of volume and timeframe, organizations have to assess whether they
are able to meet their demands from the prospective supplier. Additionally, the evaluation of
a supplier’s scale guarantees that they are able to cope with increasing demand as their
market size increases.

3. Financial Stability

In order to avoid interruptions in the procurement process, it is crucial that suppliers are
stable. For the purposes of determining their solvency, and for assessing all financing risks
they may present, an analysis of prospective suppliers can be useful. It is more likely that
long-term contracts are to be fulfilled and complied with by the financially stable supplier.

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4. Location

Logistics, lead times, and shipping costs can be significantly influenced by the geographical
location of the supplier. For businesses that rely on “Just Intime Manufacturing” or require
swift response to customer demands, the assessment of proximity is critical. In contrast, in
order to gain economies of scale or access to unique resources, some industries may prefer
foreign suppliers.

5. Ethical and Social Responsibility

It is necessary for organizations to align themselves with suppliers, who adhere to ethical
practices in an era of increased corporate social responsibility. Ethical policies, working
practices, the impact on the environment, and sustainability commitments by suppliers should
be examined by organizations. It is not only about enhancing a brand image but also
mitigating the risk of negative publicity and potential legal problems by working with
socially responsible suppliers.

6. Technological Capability

The key drivers of growth and competitiveness are innovation. An analysis of the provider’s
commitment to innovation and its technological capabilities can reveal how it delivers
cutting-edge solutions, as well as stays on top of industry trends. A supplier with an
innovative approach could bring fresh ideas, improved processes, and new products to benefit
both parties involved.

Criteria for Supplier Evaluation

We talked about how criteria set by the organization can be a deciding factor for a supplier to
be chosen. Now, here are several criteria you or your organization can use to evaluate a
supplier:

1. Price

A variety of prices is offered by suppliers for the same products. Monitoring of prices is often
useful for identifying changes in market demands or availability.

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2. Quality

Product quality is a qualitative measurement of how durable or effective the supplier’s

product is. Samples for the purpose of evaluation of quantities may be requested prior to
purchase.

3. Service

Before working with them, take into account an assessment of the service provided by a
supplier. In addition, the criteria of service may include friendliness, responsiveness, and a
comprehensive understanding of an enterprise’s needs.

4. Convenience

Convenience is important for businesses in need of frequent supplies. You might also
evaluate how easy it is for you to order products, how quickly you get supplies, and how
willing the supplier is to accommodate your employer’s needs.

5. Social Responsibility

Social Responsibility means that suppliers whose values and mission align with that of the
company may be valued. The supplier’s involvement in society and contributions to
charitable organizations may also be part of his or her responsibilities.

6. Risk

Understanding the risk can help you determine if your supplier is a good one, given that they
are often relied upon to supply their customers’ products. You might analyze the risk of price
increases or supply availability.

Software Available for Managing Supplier Selection Criteria

1. Kissflow Procurement Cloud

Kissflow Procurement Cloud provides end-to-end procurement solutions to help with your
procurement process. It also helps improve vendor relationships, thanks to the software’s
ability to collect all vendor and supplier data into one platform. This makes it easier for users

30
to set up their metrics. The product software is easy to integrate with other accounting tools,
ERP systems, and other business software.

2. SAP Ariba

SAP Ariba is a cloud bases procurement software that provides spending management, and
supply chain services that allow suppliers and buyers to connect and do business, worldwide.
Provides other functions such as sourcing, contracting, supplier management, and payment
management.

3. Precoro

Precoro is a full-fledged procurement software that eliminates manual work processes to save
time, resources, and money. It is all about removing delays to make purchasing seamless and
secure.

4. GEP SMART

GEP SMART supplier collaboration software is an all-in-one platform that simplifies the
process of collecting, storing, sharing, and tracking supplier information. It offers a range of
tools to manage supplier relationships effectively, making it easier for vendors to provide
data and for manufacturers to collect it. The software automates data capture and standardizes
communication, resulting in accurate information that promotes smooth collaboration
between suppliers and manufacturers. Additionally, GEP SMART provides vendor
collaboration dashboards, allowing suppliers to manage their profiles, catalogs, and pricing.

This feature reduces the workload and administrative tasks for procurement teams, enabling
them to concentrate on essential supply chain operations. With GEP SMART, businesses can
streamline their supplier management processes and improve efficiency in their procurement
operations.

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Procurement Expert’s Advice on Supplier Selection Criteria

For this article, we asked an experienced procurement expert to share her insights to help
answer common questions about supplier selection criteria.

Joselina Peralta

Founder of STRACTIX

1. How can carefully selecting suppliers help maintain a strong and resilient supply
chain?

“Leveraging your supplier segmentation based on criticality, risks & impact, you can allocate
the right level of prioritization/focus to co-invest in the right partnerships, where objectives
are interlinked, affinity in values, ideology, culture, Talent retention, Innovation, CI culture,
Sustainability, Customer Centric, speed to market, etc., what are the contingency plans in
place, asset base management, OpEx culture, etc. which in turn, can enable creating +
fostering end to end(Yours and your suppliers operating as ONE enterprise) resilient supply
chains. Also, where the performance of the relationship is measured, not the suppliers!”

2. Based on your experience, what should people consider the most when making a
supplier selection criterion?

“Values, Ideology, Culture, ease of doing business, how they value the customer experience,
input, how they value their employee experience, what is their understanding and definition
of partnership, what are their views/expectations of collaboration, social responsibility,
justice, what is their reputation in the market and why they are interested in partnering with
your organization, what do they value the most about collaborating with your business, what
is exciting them the most about that proposition.”

3. Is it better to invest in supplier-selection-criteria-management software?

“In my humble 2 cents, No. Would put other areas where Tech may enable a better outcome.
In partnerships, the criteria are a function of who you want to be in a long-term commitment.
Based on common values, capabilities, Geo Position, Growth ambitions, ideology, culture,
Psychographic Profile of their leaders/ your leadership, etc, which is reflected in the org

32
culture. This will drive the best selection process. How to measure the relationship
performance would also be key. “

Conclusion

In conclusion, supplier selection is a strategic process that involves identifying, evaluating,

and choosing the most suitable suppliers. Setting well-defined criteria is crucial for effective
supplier selection, leading to improved procurement operations, cost efficiency, and
minimized risk. Considering factors like price competitiveness, capabilities, and ethical
practices ensures organizations align with reliable suppliers, contributing to overall success.

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 SECTION FIVE

PRICING: FACTORS AFFECTING PRICING

Introduction

Price can be defined as the monetary considerations asked for or exchanged for a specific unit
of goods or services offering some utility. For consumers or buyers, the price is a package of
expectations and satisfactions. According to some authors, for consumers, price means a
sacrifice of purchasing power as amount spent on purchasing one product will not be
available for something else. Role of price is important in production, exchange, consumption
and distribution. Price is the base for consumer decision-making. Consumers compare the
prices (among other things like product features) of alternative items and make a final choice.

Pricing is the act of determining product value in monetary terms before it is offered for sale.
Prof. K C Kite defined pricing as a managerial task involving pricing objectives, identifying
the factors influencing price, asserting their relevance, determining product value in monetary
terms and formulating pricing policies and strategies. Pricing decision is important as price of
the product affects producers, sellers and consumers. Price is important variable as it
determines firm’s sales volume, sales revenue, profitability and return on investment.

Pricing Objectives

Pricing of products cannot be done unless pricing objectives are set. These objectives act as
benchmark for fixing price, framing policies and formulating strategies. These objectives also
act as standards for measuring managerial performance in crucial areas. The pricing
objectives should be consistent with the overall organizational objective and compatible with
prevailing external environment. The firms can have variety of pricing objectives. However,
some of the common pricing objectives are described as below:

 Profit Maximization: This is the most common objective of every firm. Firms want
to maximize profit through price under given set of marketing conditions. However, it
can be a long-term objective as in short run and in initial stages of product life cycle,
profit maximisation objective cannot be achieved. In the short run, some tactics
including cut in prices may be required to increase sales or capture more market
which will help in maximizing profits in the long run. In initial stages of product life

34
 cycle, market penetration is necessary which is possible only with low prices. Further,
profit maximization objective is not set in relation to single product only but to whole
product line.
 Market Share: A firm may aim to achieve a particular market share called as target
market share by using price as an input. Target market share, usually expressed as a
percentage, implies that portion of industry sale which a firm wishes to attain. Market
share as pricing objective is important for firms in developing countries as in such
countries market share acts as a barometer for measuring economic development.
Price is an important variable to increase or maintain market share but sometimes it is
used to reduce market share so as to restrain a firm from becoming a ‘dominant
undertaking’ under MRTP Act 1969. Thus, market share as pricing objective is
important for firms desiring to attain a target market share.
 Target return on investment: The pricing objective of the firm may be to achieve a
certain rate of return on capital employed over a period of time. For this, prices are so
fixed that overall sales revenue generated during the financial year will become
sufficient enough to cover total cost and provide desired return on investment. This
objective is relevant for firms which are selling in markets where currently there is
little or no competition.
 Meeting or Preventing Competition: The firm may aim at meeting competition or
preventing the competition through the instrument of price. The objective of meeting
competition is set by firm who is not price leader. Such firm will set prices at par or
little less than the competitors to neutralize the competitive impact. On the contrary,
the objective of preventing competition is set by the firm who has substantial control
in the market and wants to restrict the entry of competitors by making drastic price
changes. However, such practice is restrictive trade practice. Therefore, generally
firms do not clearly set it as objective but their actions show their such intentions.
 Resource mobilisation: Generating funds for expansion or development purpose can
be another pricing objective. In such cases, prices will be fixed in such a manner that
sufficient resources are made available for the desired purpose. Prices will be
deliberately set high. Public sector undertakings usually have this pricing objective.
 Maintaining the loyalty of middlemen: The pricing objective may be to maintain
loyalty of middlemen in the chain of distribution. This is done by fixing price in a
way that it will leave sufficient margin for middlemen. The price structure which will

35
 allow huge trade discounts will boost the morale of middlemen and they will be
motivated to sell more of firm’s brand.
 Enhance the image of firm: The firm may aim to maintain or enhance its image
through correct pricing. The firm with reputation may sell high quality product at high
price due to customer’s perception of reliability, better quality and better service.
Thus, prices are set high for standardized and branded products ensuring same or
higher level of customer satisfaction every time. This enhances the reputation of firm.

Pricing Procedure

After laying down the objectives, the price of the product is determined. It is the base price
which is set initially and quoted to buyers. This price is subject to changes as per policies and
strategies of firm to meet specific market situation. The pricing procedure consists of the
following steps:

(i) Collecting the necessary information: First of all, a strong and upto date information
base is developed to take an effective decision regarding price. Information about cost of
production, government regulations, collaboration arrangements and industry practices are
collected. The cost of production indicates the expenses incurred to make the product.
Obviously, the price should not be fixed below cost. It will lead to losses to firm. The price
control measures of government should be studied. Upto date information about various laws
affecting price or seller’s pricing policies is of utmost importance and needs to be collected.
Restrictions imposed by foreign collaborators of the firm are required to be thoroughly
studied. Sometimes agreements with suppliers also affect pricing decisions. So, these should
be considered to create a sound information base. Further, it is equally important to have
knowledge about practices and methods of pricing adopted by other members of industry.

(ii) Selecting the target market: It is important to select the market where marketing
manager wants to sell the product. The paying capacity, willingness to pay, buying pattern,
buying motives, price sensitivity and attitude about firm of customers / consumers in the
target market affect the pricing decision.

(iii) Estimating demand: Next step, is to estimate the demand of the product. For this, there
is need to know the expected prices for which survey may be conducted of competitors’
price, potential buyer or even test marketing can be initiated. Then, there is need to determine

36
the sales volume at different prices. So, demand schedule is developed which indicates
demand as reflected in sales volume at different prices. Thus, sales forecasts, intermediaries’
opinion and degree of market competition will help in determining total demand.

(iv) Anticipating competitive reaction: It is essential to anticipate the reaction of

competitors at present and in future as it has great impact on pricing decision of the firm. The
firm may face competition from similar products like car manufacturer faces competition
from other car manufacturer; from close substitutes like motorcycle manufacturer face
competition from scooter manufacturer; or even from unrelated product seeking same
consumer’s disposable income.

Competitors’ reaction may be instant or delayed. In instant reaction, competitor changes price
quickly so as to be at par with the firm or capture a large market share. In delayed reaction,
competitor watches the market reaction and then reacts if he seeks any opportunity or feels
threat. To know the competitors’ reaction, it is essential to collect information about
competitors regarding their cost structure, production capacity, market share, promotional
strategies and various marketing policies.

(v) Understanding the internal environment: The next step is to study and understand the
internal environment of the firm in terms of labour relations, production capacity, contracting
facilities, ease of expansion and supply of inputs. Sometimes, inefficiencies in internal
environment lead to more wastages or increased overheads due to idle plant, idle labour or
penalties etc. These inefficiencies result in increased cost of production per unit. So prices are
to be fixed higher in such circumstances to cover the cost.

(vi) Considering components of marketing-mix: In this stage, there is need to consider the
other components of marketing mix such as product, distribution channels and promotion for
determining price. The price of the product is influenced by the degree of perishability of
product. Faster the perishability of product, lower will be the price. Thus, price is affected by
nature of product i.e. whether product is durable or perishable, old or new, consumer product
or industrial product. Apart from this, strength, composition and quality of product do affect
its price. The length of distribution channel affects the pricing decision. Longer channel
would require higher list price so as to provide a sufficient margin for middlemen. Likewise,
more promotional efforts would require higher price to cover promotional expense.

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(vii) Selection of pricing policies and strategies: Pricing policies and strategies provide
guidelines for setting as well as varying the prices as per specific market need. There are
number of pricing policies available and a firm can choose suitable policies. Keeping in mind
the pricing objectives, a suitable pricing strategy should be selected. Skimming pricing
strategy is characterized by high prices. It can be used if the new product is distinctive and
consumers are not price sensitive. Penetrating pricing strategy is characterized by low initial
prices. It can be used if consumers are price sensitive or there is possibility of high
competition.

(viii) Price determination: For determining the price, the management should use all
decision inputs and determine a suitable price. The price may be determined on the basis of
cost of production, competitive prices or forces of demand and supply. It is necessary that the
price should be checked against pricing objectives to determine the consistency of price with
pricing objectives and narrow down their difference. It is also desirable to test market validity
of price through test marketing for its wider acceptance in actual market.

Before quoting the price as list price to consumer, a feedback of consumers’ reaction (in test
market) and intermediaries’ reaction should be taken and accordingly a realistic price should
be fixed and quoted.

Factor Affecting Pricing Decisions

Pricing decisions play a significant role in designing marketing mix. These decisions
interconnect marketing actions with financial objectives of the company. Marketing
manager decides the price of the product keeping in mind the impact of various internal and
external factors. Internal factors are within the control of marketing manager; however, he
has no control over external factors.

Various internal and external factors which impinge on the pricing decisions of a
company/firm have been described as follows:

I. Internal factors: Internal factors affecting pricing decisions include cost of production,
pricing objectives, product life cycle, marketing mix, pricing policies and product
differentiation. A brief explanation of these factors is given as follows:

38
  Pricing Objectives: A company lays down objectives which act as benchmarks
against which the prices are fixed. These act as standards. So, every pricing decision
should consider various pricing objectives of the company which may be price
stability, sales maximization, profit maximization, increased market share, meeting
competition or earning a target rate of return. Prices should be fixed in such a way
that pricing objectives are achieved as far as possible.
 Cost of Production: Cost is an important consideration while fixing the price of
product. Both cost and price have a close relationship. Many companies use cost plus
method. While some companies use demand or competition-based method for price
fixation. Whatever may be the method of pricing, the aim should be to cover the cost
of production and make some surplus. Therefore, product cost should be given due
consideration at the time of determining its price.
 Product life cycle: Every product pass through different stages i.e. introduction,
growth, maturity and decline. Each stage of product life cycle has a great influence on
pricing decisions. Prices should be consciously decided during each stage to achieve
marketing objectives.

In the introductory stage, the prices are fixed low so that product can easily enter the market.
During growth stage, the prices can be raised to some extent. As the product reaches maturity
stage, attempt is made to keep the same prices or lower down the prices to meet competition.
In the declining stage, there is cut in prices to maintain demand. However, in case of
innovative products, high price can be fixed at the introductory stage which will be lowered
down in subsequent stages of product life cycle.

 Marketing Mix: Marketing mix is an effective blend of product, price, place and
promotion. These four elements are well coordinated in marketing programme to have
synergic effect. Price is an important component of marketing mix. Pricing decision
will definitely have bearing on other elements of marketing mix.

An organization can raise price of product if it wishes to generate more funds or it can cut
down price in case it wants to attract more customers. Price change in either way will not
bring fruitful results if such price decision is taken, in isolation, without considering it a part
of total marketing programme. For effective results, price decisions should be coordinated
with product, place and promotion decisions. For example, a firm wishing to increase price
may add new features to the product or increase promotional expenditure.
39
  Pricing Policies: Pricing policies are the general guidelines which provide a
framework to the marketing manager to fix prices in a way that will match market
needs. Policies act as guide to thinking. So due to this obvious reason, pricing
decisions should be taken as per the pricing policies of the organization.
 Product differentiation: Product differentiation is the ability of manufacturer to
create distinctiveness of product through design, shape, package, colour or brand
name. Product differentiation allows a marketer to fix higher price when it is done
better than competitors. Especially, product differentiation is good weapon in hands
of manufacturers of consumer goods. They can set higher price for their unique
product, better quality or attractive package. Customers are willing to pay more price
for highly differentiated product.

II. External Factors: These are the factors which are beyond the control of company but
have significant influence on its pricing decisions. These factors need careful analysis and
interpretation. Some of the important external factors are described below:

 Competition: No organisation can remain unaffected by its competitors. It has to plan

its move and counter moves as per the level of competition prevailing in the market
unless it has monopoly.

Competition affects the pricing decisions of management. Management has to consider the
pricing policies, objectives, strategies, strengths and weakness of competitors while
determining price of the product. The level of competitors’ reaction to particular price is also
assessed while fixing price. Thus, prices are fixed high, low or same as that of competitors’
price depending upon the nature and intensity of competition. In monopolistic conditions,
prices are determined by keeping in mind the competition with that of substitute products.

 Economic conditions: Inflationary or deflationary conditions prevailing in the

economy affect the pricing decisions. During inflation, high prices are fixed to meet
the rising costs. In boom period, the prices are increased to cover increasing
distribution and promotion cost and to earn sizable profit. However, during recession
period, prices are reduced to a considerable extent.
 Government regulations: Government regulations influence the pricing decisions of
a firm. The firm has to set prices within the framework of government regulations. In
case prices are fixed by government, it has no choice than to accept it. The

40
 Government has framed laws to restrict monopoly and unnecessary price hikes. Thus,
a firm cannot fix higher prices at its own.
 Distribution Channel: The use of intermediaries (wholesalers, retailers, distributor,
sole agent) for distribution of goods is an important factor that influences pricing
decisions. Intermediaries facilitate the flow of goods from manufacturer to final
consumer. They are rewarded with commission or trade discounts. To cover this
commission or trade discounts, high prices are fixed. Thus, pricing decisions are
affected due to channel structure. Longer the channel of distribution (distributor,
wholesaler, retailer), higher will be the price and vice-versa. But it does not mean that
shorter distribution channel should be used so as to fix low price of product. Rather a
sound channel management is required.
 Image of the company: Market image of an organisation in terms of reliability,
quality, durability, after sale services, product mix and technology affect its pricing
decisions. An organisation enjoying better image among customers can fix higher
price as the customers will be willing to pay higher price for perceived better quality
or better services of the organisation.
 Consumer behavior: Buying pattern of consumer has impact on pricing decision of
an organisation. If consumers buy the product frequently, lower price may be fixed. It
will result in more sales and high overall profit.
 Composition and strength of buyers: Organised buyers have influence on the
pricing decisions of an organisation. If the buyers are large in number but
unorganized, they will do little to influence price. However, few buyers who place
large orders or are large users will have impact on the pricing decisions. The pricing
decisions are also affected by the composition or class of consumers i.e. industrial
users or house hold users. The price will be different for both classes of consumers.
 Suppliers: The price of product is directly affected by cost of raw materials or
various fabricated parts. Obviously, the suppliers of these inputs will influence the
pricing decisions. If suppliers raise the price, the manufacturers are forced to raise the
price of final product.
 Elasticity of demand: Price elasticity of demand has considerable influence on
pricing decision. Price elasticity of demand implies a relative change in demand due
to change in price. If the demand of product is elastic, then a firm has to fix lower
price. On the contrary, if demand is inelastic, higher price may be fixed as customers
are not sensitive to price.
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Role of Pricing

Pricing is important marketing function and it affects consumers, middlemen and

manufacturers. Proper pricing contributes to the success of marketing strategy. Pricing helps
in number of ways as discussed below:

 Regulating demand: Price is used as an instrument to influence and regulate

demand. In case of surplus production, price may be reduced to create more demand.
Similarly, when there is insufficient production, price may be increased to discourage
demand. In developing countries, price plays a special role in regulating demand.
 Facing competition: Each firm in the market is affected by moves or actions of its
rival firms. When rival firms use tactics such as price reduction to capture more
market share, the firm has to react to such situation to stay in market. Price reduction
or adjustments in price structure are made to meet competitive maneuvers.
 Increase in profitability: Price affects the profitability of a firm through sales
revenue. It is used as a weapon to increase profitability. In case of competition, a
small change in price may result into increased profitability provided other things
remain constant.

Summary

Price can be defined as the monetary considerations asked for or exchanged for a specific unit
of goods or services offering some utility. Pricing is the act of determining product value in
monetary terms before it is offered for sale. Pricing decision is important as price of the
product affects producers, sellers and consumers.

Pricing of products cannot be done unless pricing objectives are set. These objectives act as
benchmark for fixing price, framing policies and formulating strategies. Common pricing
objectives of different firms can be profit maximization, target market share, target return on
investment, meeting or preventing, competition, resource mobilization, maintaining the
loyalty of middlemen and enhance the image of firm. After laying down the objectives, the
price of the product is determined. The price determination process consists of the various
steps such as (i) Collecting the necessary Information (ii) Selecting the target market (iii)
Estimating demand (iv) Anticipating competitive reaction (v) Understanding the internal

42
environment (vi)Considering components of marketing-mix (vii)Selection of pricing policies
and strategies and (viii) Price determination.

Pricing decisions play a significant role in designing marketing mix. These decisions
interconnect marketing actions with financial objectives of the company. However, these
decisions are affected by various internal and external factors like pricing objectives, cost of
production, product life cycle, marketing mix, pricing policies, product differentiation,
competition, economic conditions, government regulations, distribution channel etc. Pricing
is important marketing function. It helps in regulating demand, facing competition and
increasing profitability. Hence, pricing decisions should be taken very carefully by
considering various factors to achieve desired results.

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 SECTION SIX

RIGHTS OF PROCUREMENT

Introduction

Procurement objectives and analysis of the procurement function are normally set against the
five rights of procurement. Over the years this approach has been highly successful, but as
the role of procurement develops, so does the interpretation of the five rights.

The five rights of procurement are:

Quality

Quality traditionally referred to the quality of the product or service ordered and the standards
required. Although the quality of the product or service is relevant, today’s approach
considers greater aspects of quality including the need for Total Quality Management
(TQM). The philosophy behind quality in the promotes the theory that quality should
permeate every area of an organisation and its supply chain. Modern theory behind the five

44
rights of procurement supports this view and opens up a wide range of areas that need to be
considered.

Quality objectives no longer only apply to the material or product. It now includes:

 Quality of relationships
 Quality of communication
 Quality of process
 Quality of management
 Quality of (company) image.

Quantity

Quantity always dictated that the buyer should buy the right quantity of product or service.
Too much or too little could result in higher costs or unfulfilled orders. This still rings true,
yet there are more aspects to quantity that the procurement professional needs to consider.
With the focus on the triple bottom line, (also known as the three P’s: People, Profit, Planet),
there are a number of considerations that need to be taken into account. It is not just the
product that must be of the right quantity.

Quantity objectives as part of the five rights of procurement, no longer only apply to the
material or product. It now includes:

 Quantity of Orders
 Quantity of Staff
 Quantity of Suppliers
 Quantity of Products
 Quantity of Customers.

Price

Price is important to everyone and not least to procurement. Procurement professionals are
taught to aim for a competitive price. Price involves costs which need to be taken into
account. But not only the costs incurred by the product or service. There are the costs
involved in moving the products or service through the supply chain along with the price we
pay to transport them through the environment.

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Price no longer only applies to the amount paid for materials or product in the five rights of
procurement. It now looks at the costs involved in:

 The cost of the procurement department

 The cost of acquisition and operation
 The cost of holding and moving stock
 The price to the environment
 The price to society.

Place

Place has usually referred to goods and services being delivered to the right place. ‘Last mile’
is a term used in supply chain management and transportation planning to describe the
movement of goods and services from a transportation hub to a final destination. This
emphasises the focus on the right place in today’s supply chains. But it’s not just where the
goods and services are going to. There are more places to consider.

Place no longer only applies to the delivery of materials and products. It now includes:

 The source from which materials are acquired

 The other sources in the chain
 The location of the procurement function
 The location of the customer
 The location of the other activities involved in the supply network

Time

Time waits for no man. And we no longer wait to consider the time of delivery as the only
aspect of time that needs to be considered. Time and money are often considered together and
in modern times this is no exception. Time spent on analysing time is never wasted.
Therefore the procurement professional needs to think about other areas of time.

Time no longer only applies to the lead-time required for materials and products. It now
includes:

 Time of order

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  Time spent negotiating
 Time spent ordering
 Time spent with suppliers
 Time management
 Time spent analysing.

Summary

Each of the five rights of procurement must be viewed from a broader angle taking into
account the wider implications of quality, quantity, price, place and time. Only then will we
achieve the greatest success and understand the true meaning of the five rights.

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