As mentioned earlier, the basic objective of the purchasing function is to ensure the continuity of supply of raw materials, sub-contracted items, and spare parts and at the same time to reduce the overall cost of the project. To achieve this, there are a large number of well defined elements such as right price, right quality, right contractual terms, right time, right source, right material, right place, right mode of transportation, right quantity, and right attitude. For effective purchasing function, all these elements need to be considered jointly. A diagram indicating these elements is shown in Figure . The details of some of the important elements are given in subsequent paragraphs.
Right Price
It is the primate concern of any organisation to get an item at the right price. But the right price need not be the lowest price always. While it is very difficult to determine the right price, general guidelines can be had from the cost structure of the product. The tender system of buying is normally used in most of the organisations but the objective should be to identify the lowest responsible bidder and not the lowest bidder. The concept of "learning curve" also helps the purchase agent to determine the price of items with high labour content. Sometimes, price negotiation also helps to determine the right prices.
Right Quality
Right quality implies that quality should be available, measurable and understandable as far as practicable. The quality particulars are normally obtained from the indents. Drawings are also attached to the indents, particularly for spare parts.
Right Time
For determining the right time, the purchase manager should have lead time information for all products and analyse its components for reducing the same. Lead time is the total time elapsed between the recognition of the need of an item till the item arrives and is provided for use. While determining the purchases, the buyer has to consider emergency situations like floods, strikes etc. However, rush purchase should be resorted to only in exceptional.
Right Source
The source from which the material is procured should be dependable and capable of supplying items of uniform quality. The buyer has to decide which item should be directly obtained from the manufacturer.
Techniques such as value analysis enables the buyer to locate the right material. Right mode of transportation have to be identified as this forms a critical segment in the cost profile of an item. It is an established fact that the cost of the shipping of ore, gravel, sand etc. is normally more than the cost of the item itself.
Right Quantity
The right quantity is the most important parameter in buying. Concepts such as economic order quantity, fixed period and fixed quantity systems serves as broad guidelines to ensure right quantity. But still, the buyer has to use his knowledge, experience and commonsense to determine the quantity after considering factors such as price structure, discounts, availability of the item, favourable reciprocal relations, and make or buy consideration.
Right Place
Right place means the right place of delivery. Every purchase contract, in addition to time of delivery, must clearly state the place of delivery and such other terms like free delivery or ex-factory delivery. Generally, FOB (Free on Board), FOR (Free on Rail), CIF (Cost, Insurance and Freight) paid terms are part of the price agreement.
Fundamental Objectives of Purchasing
Fundamental objectives of purchasing may be enumerated as follows :
- to maintain continuity of supply to support the scheduling of the project,
- in doing so, minimum investment in stores and materials inventory must be ensured, consistent with safety and economy,
- duplication of purchases, wastes, obsolescence and costly delays must be avoided,
- proper quality standards based on suitability criteria, must be maintained,
- materials must be procurement the lowest possible cost, consistent with quality and service requirements, and
- it must maintain, in-so-far as materials costs are concerned, organisation's competitive position in the market.
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