Methods of Buying
The buying department of the company is responsible to provide goods and services
required by the company at the minimum cost and optimum quantities. The request to
procure may be received either from stores department or from one of the functional
departments.
Such requests may be received:
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Either for direct materials or for indirect materials.
Either for production items or for non-production items
Either for low priced items or for expensive items
Either for items sold at premium or for items sold at discount
Either to meet immediate needs or satisfy needs at a later date
Either for seasonal items or for non-seasonal items.
Different Methods of Buying:
1) Tender Buying:
Government department and public sector undertakings in India follow this method of
buying. Private sector organizations to adopt tender buying if the value of the
purchase exceeds the prescribed limits, say Rs. 25000 or Rs. 50000 fixed by the
management as policy decision. Salient characteristics of the system are:
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The buying department establishes bidders’ list and invites them to submit
bids.
Bids on receipt are evaluated by comparison and the right supplier is selected.
Advantage of the method:
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Tender buying is the purchaser’s most important single tool to select qualified
supplier on the basis of competitive prices.
It eliminates possibility of favoritism, patronage, and personal preferences.
Disadvantage of the method:
Tender buying is costly and time consuming and therefore used by private sector
undertaking only when the value of purchase is high.
2) Group purchasing
Group purchasing refers to ‘buying of items of trivital value in a single purchase
order.’
Characteristics
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Minimum and maximum levels are fixed for each item within each classified
group.
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Stocks on hand are reviewed periodically, say once a month or once in 12
months.
Quantity equal to the difference between the ‘maximum level’ and stock on
hand is procured for each item
3) Hand to mouth buying
Hand to mouth buying also called buying according to the requirements refers to the
frequent purchases of an item in small quantities.
Characteristics
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Purchases are made only when demand arises.
Purchases are made to cover immediate requirements.
Quantity purchased is generally small though at time at large quantity may be
purchased.
The terms of contract is negotiated.
Advantages
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Lower inventory investment.
Low carrying charges.
Reduced deterioration and obsolescence of materials.
Limitation of losses from price declines.
Disadvantages
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Comparatively higher price due to urgencies and loss of quantity discounts.
Possible losses occasioned by an upward jump in prices.
Acceptance of sub standard goods in emergency.
4) Scheduled buying
Scheduled buying is the process of procuring an item in staggered deliveries
according to the delivery schedule furnished to the supplier by the buyer.
Characteristics
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A purchase order covering annual requirements is placed with the supplier.
The supplier is given the estimate of the procurement needs covering a
mutually agreed period of time.
Fresh delivery schedules are given to the supplier prior to completion of the
previous schedule.
Monthly deliveries are usually specified except for perishable material, bulky
items and others required in large quantities or where supplier has setup
production facilities especially for the buyer.
Advantages
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Both buyer and seller enjoy the savings resulting from regularity of production
and small inventories.
Buyer is assured of supply of goods while supplier is assured of business.
Supplier can effectively plan his factors of production while buyer can plan his
requirements of finance.
5) Blanket orders
Blanket orders refer to the purchase of variety of items from single sources, usually a
middleman.
Characteristics
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A blank order specifies the category of items covered by the order,
The items covered by the order generally have low unit value.
More than one middleman may be selected to avoid hold-ups in case of nonavailability of an item with one.
Source: Scribd.com