Specialized purchasing procedures

The material requirements are broadly classified into two – (1) direct materials and (2) maintenance, repair and operating materials. The characteristics of these two groups of materials differ substantially and hence their procurement efforts need district treatment. The purchasing procedure mostly deals with the purchase of direct materials while the specialized purchasing procedure describes the procurement of indirect materials such as stores and supplies. It is highly desirable to have a distinct treatment for the procurement of supplies because:

1) The cost of paper processing for placing the order is very high. Such costs can be reduced by placing a large order for the non-recurring items such as suppliers.
2) The inventory carrying costs is another consideration. It is the cost of interest on locking up of the funds in inventories, storing cost, insurance cost etc. It represents some 15% to 20% of the average stock holding.
3) Like direct materials their needs are not directly affected by the research and development. They are more or less standardized commodities.
4) Under the ‘principle of exception’ the efforts of the buying staff can be saved for the purchase of such items which can be utilized effectively for the purchase of some important items.

The following are certain specialized procedures which are employed in buying the standardized indirect materials such as stores and supplies:

1) Blanket order
2) Stockless buying
3) Systems contracting
4) Small order purchases

Blanket orders: The blanket order is a type of standing order with the supplier for the supply of the materials according to the requirements of the buyer. The deliveries are scattered over the contractual period, usually one year. The blanket order procedure is advisable for materials of low value but having a high annual usage, the arte of usage of which cannot be planned precisely.

Some important terms of the blanket order needs special considerations. Regarding the type of materials to be supplied, the clarification should be sought as under:

1) Specific description of materials
2) General ,category of the materials
3) All materials that the supplier is able to furnish

Regarding the price, the agreements should be sought on any of the following lines:

1) Fixed price contract during the contractual period.
2) Market price at the time of delivery
3) The specification of ceiling price which cannot be crossed without fresh negotiations.

The timings of delivery can be agreed upon as under:

1) Delivery of standard quantity at regular time intervals. E.g. 500 units on 1st day of every month.
2) Delivery as per the specified schedule
3) Delivery as per the demand from the buyer.

Stockless purchasing: As the name suggests, the buyer is not required to maintain the stock of these items. The onus of the maintenance of the stock rests wit the supplier. The financial incidence of the storing and inventory carrying is borne by the supplier. The supplier locates the materials at his own plant or at buyer’s plant. If the inventories are maintained at supplier’s plant, the physical distance of supplier’s plant should be considered while deciding about the supplier. Where the materials are located at buyer’s plant, it is known as consignment buying.

System contracting: A system contracting incorporates the characteristics of blanket order and stockless buying still it is different from them. Like blanket contract, the periodic contract is made with the vendor, and like stockless buying, the buyer is not required to maintain the safety stock. The system contract is unique in the sense that it is long term contract as compared to blanket order or other types of arrangements.

Small order purchases: It is a common experience of all companies that they need certain items of non-recurring nature which involve very insignificant cost. Such items are sometimes available from some corner supplier and hence they cannot be clubbed with some other large orders. Moreover, they cannot be pent up for the purpose of accumulating the need for forming a sizable order. It is also not wise to stock them for future needs. The cost of the materials to be purchased does not justify the paper cost of the purchasing. So such items are purchased without undergoing the formal purchase procedure. Such purchases are also known as a paperless purchasing. The popular methods of such purchases are (1) Purchases under the petty cash system where indirect cash purchases are for small items, (2) Purchasing through telephone orders wherein no formal purchase orders are sent to the suppliers, (3) Purchasing under the cash on delivery (COD) system wherein the purchases of certain major items are made on cash basis. The cost of order placing, invoicing and account processing is reduced substantially.