Price Forecasting (for Purchasing)

Cost aspects are useful when dealing with the supplier on a one-to-one basis. However there are very many situations, particularly regarding raw materials, where the material is subject to a multitude of economic factors which influence the price of the material. It becomes necessary on the part of the purchasing executive to take cognizance of and understand the price movements. Price forecasting, based upon the time series methods of computing trends, business cycles and seasonality’s or based upon the understanding of the influence of various economic/business parameters should be of some interest to the purchasing executive who would like to keep the costs low. The objective is to keep the cots of purchases reasonably low, and if the prices of the materials do ‘run away’, then to ensure the availability of supply of the material for the current and near future requirements.

Forward Buying: Is it Ethical or not?

In order to ensure near future availability, the buyer may have to take recourse to Forward Buying which means buying the quantities now, but for the requirements of a future period of time. However, when the material is bought for future and not for current requirements, it raises questions as to whether this amounts to: (1) hoarding, or (2) speculative buying. How ethical is the price consideration then? In a scarcity economy, the question assumes much importance. If the intention to purchase is solely to assure supplies for production, and making a speculative profit on the inventory of materials, then it is justifiable. It is the business of an industrial enterprise to produce goods, market them, and gain a profit on the output and not to make a profit on the raw materials inputs. The enterprise has thus an economic function to carry out. But, in carrying out that function how much of self interest should it serve? It is not easy to answer this question because there is a thin line between what is ‘to hoard’ and what is ‘to ensure future supplies to production operations’. The difficulty is compounded in a scarcity-prone economy. The best thing would, perhaps be to stick to the types of inventory norms as suggested by the Tandon Committee. Also, if there is monitoring to buy through an external agency such as bank (which supplies funds) it would standardize and regulate the ethical problem. With economic liberalization and, therefore, competition with the multinational corporations, prices and, therefore, costs have to be kept low. Hence, there is an increasing emphasis even in Indian organizations, in lean production that is, with minimal possible inventories of materials. The business imperative should put a damper on the speculative inventory, if any.

Make or Buy:

The purchase function would be incomplete if we do not make a mention of make/buy analysis. To put it briefly, a company should buy a component instead of making it:

1. If it costs less to buy rather than to manufacture the component internally
2. If the return on the necessary investment to be made to manufacture the component is not attractive enough.
3. If the company does not have the requisite skilled manpower to make the components
4. If it feels that manufacturing internally will mean additional labor problem
5. If adequate managerial manpower is not available to take charge of this extra work of manufacture.
6. if the component to be manufactured shows much seasonal demand or upswings and downswings of demand resulting in a considerable risk of maintaining inventories; also if the raw materials for the component faces much seasonal fluctuations which makes the manufacture of the product more risky for buying company.
7. There is no difficulty in transporting the component from the supplier to the buying company.
8. If the process of making the product is confidential or is patented.
9. If the same component is not needed year-in and year-out and there is much risk of technological obsolescence discouraging investment in capital equipment to manufacturer the component internally.

Make or buy is a strategic decision, and therefore much short term as well as long term thinking about various costs and other aspects needs to be done.

Thus, the role of the purchasing executive is as challenging as it is demanding because it requires an understanding of various functions within the company’s a sensitivity to feel the market m, the rigor to do a detailed analysis of the market forces now and later, the capacity to be a tough yet humane bargainer and negotiator, and excellent interpersonal skills to integrate conflicting viewpoints of a number of people with different objectives.