Purchase and

Material
Management
By Dr. Nitya Khurana
Assistant Professor
 Meaning of Material
Management
• Material management is the “process by which an organization is
supplied with goods and services that it needs when the material is
either consumed or incorporated into some product. The executives
who engage in materials management are concerned with three basic
activities i.e. buying, storage of material and movement”- Ammer
• Material management is defined as the planning, acquiring, storing,
moving and controlling of materials as per the requirement of the
organization.
 Objectives of Material
Management
PRIMARY OBJECTIVES
1. Low Prices- purchasing material at the least possible price as it
helps in reducing the production cost and improves profits
2. High Inventory Turnover- inventory turnover is the ratio of cost of
goods sold to cost of average inventory held in the organization
over a period of one year. A high inventory turnover ratio means
low capital tied up in inventory
3. Low cost of acquisition and Possession- efficient receiving, handling
and storing of materials results in low acquisition and possession
cost
 Objectives of Material
Management (Cont’d)
4. Continuity of supply- if continuity of material is not maintained, shortage of
material may cause idling of machines and labour. In continuous and mass
production system, this is extremely important because of automation in
production processes and lack of flexibility
5. Consistency in Quality- material management helps to ensure that quality of
material is maintained by the suppliers
6. Cordial supplier relations- maintaining cordial relations with the supplier
helps in getting prompt supplies from suppliers at reasonable prices and at
the right time.
7. Maintenance of Records- material management helps in maintain records
like quotation, tenders, invoices, inspection records, comparative statements.
This helps in keeping a check on employees who may have tendency to
favour suppliers in return for gifts and commissions.
 Objectives of Material
Management (Cont’d)
SECONDARY OBJECTIVES
1. Reciprocity- for e.g. a furniture manufacturer may try to sell hos products
to the supplier firm which supplies raw material to his firm
2. New material and products- the purchase dept. can help the R&D dept. by
informing them about the latest developments taking place in materials
and components being supplied by suppliers
3. Economic make or buy- purchase manager can furnish valuable info
regarding outside sources of supply to the committee of mangers
responsible for make-or-buy decisions
4. Economic Forecasts- forecasting future process, cost and general business
activity
5. Standardization- buy maintaining the quality of RM purchased
 Importance of Material
Management
• Lower prices for materials
• Faster inventory turnover
• Continuity of supply
• Reduced lead time
• Elimination of buck-passing
• Reduced material obsolescence
• Improved supplier relationships and better records and information
• Less duplication of efforts
 Functions of Material
Management
1. Material Planning and budgeting- anticipating future material needs
and necessary capital requirement for meeting such needs. A material
budget is a coordinated estimate of consumption and purchases of
materials in an organization for specified period
2. Procurement of material- procurement of right material, in right
quantity, at the right time and from the right supplier
3. Storage of material- preservation and safety of raw materials
Divide the stores according to commodities, products and location of workshop
Provide necessary racks and other storage arrangement
Ensure all items held in stock are classified and codified
Ensure every item has a bin card
 Functions of Material
Management (Cont’d)
4. Issue of Material- Issue means supply of material from stores to various
workshops of the organization. The store-keeper issues the item on the receipt
of requisition slip from the various workshops. He must keep a record of all
the requisition slips
5. Inventory control-
Determination of optimum levels of inventory
Determination of degree of control required for best results
Planning and designing the inventory control system
6. Vendor development- New and established vendors are evaluated in terms of
their plant capacity, financial conditions, performance, etc. Develop at least
two suppliers for each item being purchased. Vendors must be evaluated
before placing an order with them. The goods delivered by them must be
monitored to determine vendor rating
 Functions of Material
Management (Cont’d)
7. Material Handling- Moving, packaging and storing different types of
material i.e. raw material, purchased component, material in
progress, finished goods, packing material
8. Disposal of scrap- Scrap includes material wastage, spoilage,
irreparable parts of equipment, scrap tools, obsolete items, etc.
scrap may be disposed off through (a) inviting offers from scrap
dealers (b) Annual contract (C) Public auction
9. Transport and Traffic Management-
Safe, rapid and economical transportation of incoming and outgoing materials
Negotiation with carriers
Correspondence and claim settlement
Phases in Material Management
• Planning- planning requirement for stock of RM, tools, general
supplies, etc., as well as handling, classification and codification
• Purchasing- developing source of supply, finalizing prices, placing
orders, obtaining resources at the right time
• Storekeeping- receiving, storing, issuing and material handling within
the stores
• Traffic- clearing incoming material, both inland and foreign and
dispatching goods
 Factors responsible for providing
economy in Material Management
• Substitute lower cost material where possible
• Reduce waste
• Eliminate unnecessary product features
• Negotiate
• Leverage supplier- pay slightly higher price for quicker delivery or better payment terms
• Buy Need, not potential- Just in time to reduce investment in inventory
• Trade time for discount- receive material as per supplier’s schedule instead of your own
cycle time to obtain lower price. Price benefit should be more than your carrying cost
• Buy Bargains- at times unbelievable bargains appear in the market
 Factors responsible for
providing economy in Material
Management (Cont’d)
• Provide Warehouse and Distribution Services- if you have excess space, offer
your main suppliers a regional warehouse capacity in return for reduced prices for their
purchases
• Offer Quick payment for lower prices
• Negotiate long term supply agreement- e.g. offer to use supplier exclusively for a
specific period in return for lower prices
 Meaning of Purchasing
• In a very narrow sense, purchasing refers merely to the act of buying
an item at a price
• In a broader sense it is a managerial activity which goes beyond the
simple act of buying. It includes the planning and policy activities such
as proper selection of material, sources from which materials are to
be bought, the follow-up activity to ensure proper delivery, etc.
 Classification of purchasing
goods
• Raw material- Materials which have not undergone any conversion
like coal, iron, food grains
• Supplementary Material- Materials which are not absorbed physically
in the end products like lubricants, polishing materials etc.
• Semi-finished Products- Parts or products which have been processed
partially and will be processed further at a later stage of production
like steel, rolled wires
• Components- manufactured products which will not undergo further
processing but may be assembled with other products or sub-
assemblies like car engine, motor, batteries
 Classification of purchasing
goods (cont’d)
• Finished products- Products which are purchased and sold after
negligible value addition along with other finished or manufactured
goods like a mobile dealer also sells mobile covers
• Capital Equipment- products that are not consumed immediately but
replaced after their purchase value is depreciated over a period of
time, e.g. machines, furniture, photocopier
• Maintenance, Repair and Operating Material- indirect materials or
consumables which are necessary for keeping the machined in good
working conditions like cleaning material, office supplies
• Services- activities executed by suppliers or contractors on contract
basis like cleaning service, transportation service
 Objectives of Purchasing
• To maintain uninterrupted supply of material to support production schedule
• To keep inventories as low as consistent with manufacturing requirements
• To develop satisfactory source of supply
• To secure good vendor performance like timely deliveries and good quality
• To identify new materials and products which may be required by the company
• To avoid duplication, waste, obsolescence and surplus of material
• To establish standards of quality in materials
• To establish good systems and procedures together with adequate control
 Functions of Purchasing
• Obtaining Materials
• Purchasing at competitive prices
• Cost reduction
• Proper utilization of funds
• Dealing with the vendors
• Following up on delivery promises
• Authorized purchases only against purchase requisition
• Selecting and Training of purchasing personnel
 Purchasing Cycle
1. Recognition of Need- Need is identified by a purchase requisition
which may be issued by the store or routed through the store by
department requiring the material.
2. Description of Need- Purchase requisition descries the required item.
In case of any discrepancy, even minor, the buyer must seek
clarification from the originating department rather than making self-
judgements. This will have in avoiding any possible delay
3. Selection of Source- Usually, the purchasing dept. maintains a list of
approved suppliers. In some cases advertisement may be issued to
invite tenders. The source selected must be reliable, fair in dealings,
should have adequate know-how of the industry, should be able to
provide material as per buyer’s specifications.
 Purchasing Cycle (Cont’d)
Another important factor to be considered is whether to have a single or
multiple suppliers. Single suppliers are used when
There is only one exclusive supplier in the market
A supplier gives outstanding quality
The order is too small to be fragmented
Concentrating purchases may lead to benefits like lower cost or savings in freight
Deliveries can be easily scheduled
On the other hand, multiple suppliers have the following benefits
Assurance of supply is increased
Dependence on one firm is reduced
Competition among suppliers put you in a better bargaining position
When quantity ordered is very large then multiple suppliers may become
neccessary
 Purchasing Cycle (Cont’d)
4. Determination of Price and Availability-
Vendor Catalogues
Negotiation
Inviting Tenders and Quotations
5. Placing the Order- Even if the order is placed over telephone or
email, it must be supported by an authorized purchase order. Order
acknowledgement must also be received from the supplier
6. Follow up and expediting- To ensure that items ordered are
delivered by time. Action will have to be taken in case the delivery
date is to be extended or there is any cancellation of orders
 Purchasing Cycle (Cont’d)
7. Checking the Invoice and Approval- Checking the invoice and
approving the payment. The bill sent by the supplier is compared
with the purchase order and goods received note
 Principles of Purchasing
5 R’s of Purchasing
 Buying the right quality
 Buying the right quantity
 Buying from the right source
 Buying at the right place and time
 Buying at the right price
 Principle of Right Quality
• Best quality is not the right quality
• Quality if superior for a given job is a waste and avoidable expense
• Quality if inferior is an expense not worth it
• Standards and specifications determine the quality of material to be
procured
• These depend on
Design of the product
Economic manufacturing in consideration of Production requirement
Consumer acceptance in consideration of market possibilities
 Principle of Right Quantity
• Purchases less than the required quantity may lead to shortages and excess
orders may result in over-stocking, higher inventory carrying cost and
blockage of capital
• Order quantity is divided into following three cases
Economic order Quantity- Two factors determine EOQ i.e. procurement cost and
carrying cost.
Procurement cost include cost of obtaining quotation, preparation of order and its
placement, receiving and inspection, salary of men involved in these processes.
Carrying cost include insurance premium, depreciation and obsolescence cost, storage
cost
These two factors operate in opposite direction. If procurement is made in one single
order, the procurement cost will reduce buy carrying cost will rise and visa-versa. The
quantity at which procurement curve and carrying cost curve intersect is the EOQ
 Principle of Right
Quantity(Cont’d)
Bulk Order- Bulk order quantity is larger than EOQ, and combines the
ordering quantity of more than one order so as to round off to 3, 6 or 12
monthly requirement and place a single order for total period so decided.
Bulk order gives better purchase price and reduced procurement cost.
However, it increases carrying cost and financial commitment. Investment can
be reduced by staggering delivery

Arbitrary Order Quantity- in cases of varying market conditions, uncertain

consumption, uncertain lead time, uncertain availability of funds, uncertain
production schedule one has to apply one’s own discretion and fix arbitrary
order quantity from time to time.
 Principle of right source
• Right source is the one who can supply
Right quality ordered
In right quantity ordered
At a right time at which purchase dept. has asked for the supply
At an agreed price
And who is in the position to honour commitment
• There are four types of suppliers i.e. manufacturers, commission
agents, wholesaler or retailer
• The different categories of suppliers can be found using
advertisements, tenders, price lists, telephone and trade directories,
trade associations, etc
 Principle of right source
(Cont’d)
Factors guiding source selection
• Location of supplier
• Production capacity of supplier
• Internal facilities like technological development, quality control and
inspection method, standard of plant maintenance
• Labour relations- wages system, labour policy, incentive scheme,
working conditions, morale of workforce
• Financial position of supplier
• Number of suppliers- single or multi
 Principle of right time
• Speculative purchases- When purchases are made purely from the
point of view of taking advantage of a speculative rise in prices of the
commodity with the intension of reselling (e.g. gold)
• Forward Purchases- goods are purchased in excess of demand to
counter future rise in price
• Hand to mouth purchases- goods are purchased as and when need
arises
 Principle of right price
• Right price is not necessarily right price
• Right price is a combination of various factors like delivery time, product
quality, business relations, distance, standard or non-standard material,
credit availability, after sales services
• Prices are determined by making a comparative statement using the
following documents
Catalogue, price lists
Telephonic quotations
Previous purchase records
Letter of offer from supplier
Samples and related price cards
tenders
 Principle of right price (Cont’d)
• Tender is a written document from the supplier quoting the prices,
terms and conditions of supplying material of desired specification.
Four types of tenders are
Single tender- details and requirements are communicated to a single trusted
supplier
Limited tender- Details are communicated to a limited suppliers who are on
approved suppliers list
Open or Advertised Tender- Common system for those items which are to be
purchased for a large value and/or difficult to obtain.
The global tender- insertions of advertisement not only in home country but
also in foreign countries
 Steps in Purchasing
1. Purchase Requisition- PR is prepared by inventory control division
either on the basis of periodical review or specific request for
material. Information provided of PR
• Complete specification of item
• Quantity Required
• Quantity in stock
• Quantity outstanding from previous purchase order
• Previous purchase order reference and date
• Previous price
 Steps in Purchasing (Cont’d)
2. Request for Quotation/Tenders- request for quotation to be sent to
selected vendors. Request for quotation must include
• Specification of the item
• Last date by which quotation is to be received
• Expected delivery schedule
• Important terms and condition
• Methodology of sending quotation ( e.g. telephone or sealed envelope)
3. Suppliers Quotation- Referred to as submission of quotation. It is a
legal document and requires preservation
 Steps in Purchasing (Cont’d)
4. Comparative Statement- Comparative statement of quotations with
view to comparing prices, terms, product specification. It provides
additional info such as supplier name and previous purchase
history. The order is usually placed to the lowest bidder. If the
lowest quotation is by-passed then reasons for the same have to be
mentioned.
 Steps in Purchasing (Cont’d)
5. Purchase Order- is a commitment of the buyer to the supplier and
once accepted by the supplier, it also becomes a binding commitment
from supplier to the buyer. It contains the following details
• Address of vendor and vendor code
• PO number and date of issue
• Date of delivery
• Agreed payment terms
• Units ordered
• Unit rate
• Unit of measurement
• Item description
• Currency rate for PO
 Steps in Purchasing (Cont’d)
6. Receipt and Inspection Material- On arrival of material at the
warehouse, the material must be checked at the truck itself for
ascertaining the outward condition of the packages. If damaged
package is observed, the details are noted and signature of the
truck driver bringing the material is obtained on the delivery note.
Detailed inspection is carried out after all the boxes have been
opened. Material are counted for correct quantity delivered. In case
of short or wrong supply a discrepancy report is prepared.
 Steps in Purchasing (Cont’d)
7. Invoice or Bill- Supplier dispatched the bill with the material. Before
the payment is dispatched, the store department must enclose a
certificate to the effect that material have been received in ordered
quantity and quality. The bill is scrutinized by the purchase dept. If
approved, it is passed on to the accounts dept.
 Methods of Purchasing
1. Purchasing by Requirement
2. Market Purchasing
3. Speculative Purchasing
4. Purchasing for Specific Future Period
5. Contract Purchasing
6. Scheduled Purchasing
7. Group Purchasing of Small Items
8. Cooperative Purchasing