1. Q. Definition of purchasing. Discussed the basic elements involved in the purchase cycle.

Role of procuring in logistics management:

Ans: - Purchasing aims at anticipating requirements, sourcing and obtaining supplies, moving
supplies into the organization and monitoring the status of supplies as current assets.

Purchasing derives its importance to an organization from cost efficiency

and operational effectiveness

Procurement (Or purchase) process

The purchasing function has gradually evolved. As organizations increasingly outsource many
activities and introduce automation the money spent on purchases increase as compared to
expenditure on labors. Hence purchasing activity is receiving more and more attention.

Because of the advancement in computer and information technology many routine purchasing
activities such as purchase order placement expediting matching documents and calling to check
stock have either been eliminated or are now possible on-line with electronic data interchange.

1. Identify (or re-evaluate) need: the procurement activity is usually initiated in response to a new or an
existing need of user. In some instances existing needs may have to reevaluate because of change
in them.

2. Decides and evaluate user requirement: the requirement to satisfy the identified need must be
defined in measurable terms. For example the technical specification must be established so that
the procurement professional can communicate the same to potential suppliers.

3. Decide whether to make or buy: the firm should first decide whether to make or buy the product or
service to satisfy the user’s needs. Even to make a product the firm may have to purchase some
inputs from outside suppliers.

4. Identify the type of purchase: three types of purchases are: a) straight buy or routine purchase .b)
modified re-buy which requires a change to an existing supplier or input, c) new buy which results
from a new user need.

5. Conduct a market analysis: all possible suppliers that might be able to satisfy the user’s needs must
be identified. Possible new suppliers may be included in the list of potential suppliers.

6. Identify all possible suppliers: all possible suppliers that might be able
to satisfy the user’s needs must be identified.
7. Prescreen all possible sources: prescreen reduces the number of
possible suppliers to those that can satisfy the user’s demand.

8. Evaluate the remaining supplier base: from the pool of suppliers that can meet the user’s demands,
choose the supplier or suppliers that can best meet the user’s negotiable requirements or desires.

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9. Choose a supplier: the actual choice of the best supplier is based upon criteria to be discussed
subsequently such as quality reliability total required price and so on.

10. Make a post purchase evaluation: the supplier’s performance must be evaluated to determine
whether it has truly satisfied the user’s needs.

Basic elements involved in the purchase cycle:

There are some basic elements in the purchase transaction that is common to all. In summary these
are as follows:

 The need for the materials is recognized and their requirements are determined.
 Specifications for each item are spelt out.
 The need is transmitted to the purchase department.
 A purchase plan is made out.
 A suitable source is selected for the supply after due investigation. This can be on the basis
of tenders. Sometimes a source will have to be developed.
 Rates and terms and conditions of purchase are negotiated and finalized.
 A purchase order is prepared and sent to the supplier. The purchase order would spell out
the terms and conditions of the purchase contract.
 The supplier's acceptance of the purchase order is obtained.
 Follow up is done by the purchase department with the supplier to ensure prompt deliveries
of the right quality of materials.
 The materials, when received, are inspected against specifications. Sometimes it is
inspected at the vendor's factory and often is at the time of receipt.
 The supplier's invoice is checked against the purchase order and goods received are
documented.
 A check is issued to the supplier towards payment for supplies received. This is offer
referred to as the purchasing cycle.

Role of procuring in logistics management:

Purchasing is responsible primarily for inbound (upstream) channel activities where as logistics
spans both inbound and outbound relationships and flow of materials.

The efficient and effective sourcing (finding potential suppliers) and purchasing of goods and
services at right cost in right time with right quality and quantity enables an organization to achieve
competitive advantage and reduces overall cost of operations.

The factors considered in vendor selection:

1) Quality: it is the most important factor in vendor selection. Quality often refers to the specification
that a user desires in an item such as technical specifications, chemical or physical properties. The
actual quality of vendors product is compared with the specifications desired by the user, other

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 additional factors related to quality are: a) life of the product, b) east of repair and maintenance, c)
ease of use, d) dependability

2) Reliability: it comprises delivery and performance history. Consistent on time deliveries are
required to prevent production shut downs resulting from extended supply lead times.

3) Cap ability: this is concerned with the potential vendors production facilities and capability
management and organizational capabilities and operating controls.

4) Financial consideration: this includes the price charged by the vendor and the vendor’s financial
position.

4) Desirable qualities: these factors may be desirable but not essential. One such factor that affects
vendor selection decision is vendor’s attitude. The geographical location where vendor is located
affects the transportation cost.

Other factors include

a) Ability to fill rush orders,
b) Meet delivery dates,
c) Provide shorter delivery lead-times and d) utilize greater vendor buyer operation
and so on.

Procurement price/cost:

1. Basic input cost: in the primary price of the product or materials as paid by the buying
firm. This price is sought by buyers by bidding, negotiating or in requests for quotes.

2. Direct transaction costs are the costs of detecting. Transmitting the need for and processing
the material flow in the process of acquiring the goods. It includes the process of detecting
inventory need, requisition, placing the order, receiving order acknowledgement, and
handling shipping documents etc.
3. Supplier relationship costs are the costs of creating and maintaining a relationship with a
supplier. These include travel: supplier education, traffic engineering research and product
development in both firms.

4. Transportation costs: two key cost aspects of the inbound transportation flow are: 1) the actual
transportation cost and 2) the sales/FOB terms. Four transport options are: supplier-selected for-
hire carrier or private carrier and buyer selected for-hire carrier or private carrier
5. Q uality control costs include the cost of conformance, non- conformance, appraisal and
ultimate use costs.

6. Operations/logistics costs include four key areas: (a) receiving and make-ready costs. (b) Lot-
size costs. (c) Logistics costs. These four key areas are briefly discussed in the following
paragraphs.

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7. Receiving and make-ready costs are the costs of those flow activities that occur between the
inbound transportation delivery of a good and it availability for me in production processes, the
costs considered are cost of unpacking, inspection, counting, sorting, grading, removing and
disposing packaging materials and moving the good to the point of use.

8. Lot-size costs directly affect space requirements, handling flow, unit price and related cash
flows (i.e. cost of inventories).

9. Production costs are affected by quality of raw material nature of production processes etc.

10.Logistics costs are cost factors, which are affected by product size, weight volume and shape
and their resulting impact upon transportation, handling, storage and damage costs.

Make Buy Decision:

Important decisions of make buy decisions one of the crucial questions to be faced by the materials
manager is whether to own equipment or lease it. If the decision is to own, then, the question arises
as to whether to make the item in the factory workshop facilities or buy the same from the vendors.
The tendency all over the develop countries is to buy/subcontract as much as possible.

The influencing factors in formulating make/buy policy include the

Following:

1. Availability of the plant facilities

2. Cost of manufacturing items
3. Time for manufacturing
4. Price of buying
5. Total lead time for buying
6. Quality level
7. Possibility of exposing process trade secrets
8. Attitude of work force
9. Procedure for buying
10. Procedure for fabricating
11. Anticipated discount cash flow of funds to be invested
12. Anticipated useful life of the equipment
13.Specialize skills available in the plant
14. Production capacity
15. Technological innovation
16.Seasonal/cyclical sales
17. Employee goodwill
18. Product guarantee/liability
19. Volume of the component as compared to the volume of the business
20. Competitive market
21. Excesses factory overhead or creeping overhead
22. Manufacturing stagnation
23.Reliability of suppliers

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24. Quest for challenges and professional excellence this factors have to be evaluated by the cost
accounting and purchasing department.
Total Procurement Price

Procurement price or cost- of all the factors that will be considered in the vendor selection
decision, price or cost is one significant factor that is widely discussed by purchasing professionals.

Basic input cost- in the primary price of the product or material as paid by the buying firm. This
price is sought price by buyer by bidding, negotiating or in request for quotes.

Direct transaction cost- are the cost of detecting, transmitting the needs for and processing the
material flow in the process of acquiring the goods. It includes the process of detecting inventory
need, requisition, placing the order, receiving order acknowledgement, handling shipping
document, etc.

Supplier relationship cost- are the cost of creating and maintaining a relationship with a supplier.
These include travel, supplier educations, traffic, engineering research, and product development in
both firms. Transportation cost: two key cost element of the inbound transportation flow are:

A] The actual transportation cost and

B] The sales \FOB terms. four transportation options are: supplier- selected for ²hire carrier and
buyer selected for ² hire carrier or private carrier. The sales terms define the ownership of the firm
during transportation as well as invoice payment requirements.
Quality control cost-

Includes the cost of conformance, non-conformance, appraisal and ultimate use cost.

Operation \ logistic cost includes for key area.

a) Receiving and make-ready cost,

b) Lot-size cost
c) Production cost
d) Logistics cost.

These 4 key areas are briefly discussed in the following paragraph: Receiving and make-ready cost
are the cost of those flow activities that occur between the inbound transportation delivery of the
good and its availability for use in production process’s processes. The costs considered are the
cost of unpacking, inspection, counting, sorting, grading, removing, and disposing packing
materials and moving the good to the point of use.
Lot-size costs directly affect space requirements, handling flow, unit price and the related cash
flow [i.e. cost of inventories] Production costs are affected by quality of raw materials, nature of
production processes etc.

Logistic cost are cost factor which are affected by product size, weight, volume and shape and their
resulting impact upon transportation, handling, storage and damage cost.