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Unit 4: Purchasing Management

replenishment) varies and it equals the difference between the maximum level less the sum of Notes
stock “stock on hand” and “stock on pipeline”–

 Hand to mouth buying is too small.
 Scheduled buying can be either economic order quantity or small or larger than
EOQ.

 Forward buying is generally very large, covering a long period of consumption.
 Contract buying is receiving in staggered lots, each lot at times may equal EOQ.
Besides the above mentioned factors, consumption, market conditions, lead time, source
of supply (indigenous or foreign), etc., too influence the decisions of right quantity.

3. Right Price: Right price does not lower the price but the price minimizes the overall cost.
Right price is not very easy to determine. To arrive at the right price, the following
techniques are employed:
Negotiation is used:
(a) When there are limited vendors,
(b) When time available to purchase is short and,

(c) When items belongs to a fixed price category:
 Tender system is followed in public sector undertakings to identify the lowest
potential bidder.

 Learning curve is employed to determine the price of items with high labor
content.
4. Right Time: Right time and lead time are closely related. Right time implies that time at
which the goods requested should be received while lead time refers to the time between
the communication of the need for an item to be purchased by the indenter till the item is
actually received and is made available for consumption. The buying department has the
sole responsibility for developing lead time information for all items and make it available
to those concerned-mainly planning and stores-so that they indent their requirements
well in the advance and avoid the need for rush purchases.

Basic elements of lead time are:
(a) Time required by the indenter to communicate the requirement to purchase.
(b) Time required by the purchase to locate, select and develop the qualified sources of
supply including finalization of agreement, etc.
(c) Transit time for the purchase order to reach supplier.
(d) Time required by the supplier to route buyer’s order through his administrative
channels.
(e) Time required by the supplier to fill buyers order.
(f) Transportation time for the goods to reach buyers destination.
(g) Time required by buyers receiving department to collect materials from transporters
godowns, verify the quantity received and prepare necessary documents.
(h) Time required by the buyer’s inward inspection section to verify the quality of the
goods.

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