Presented to :- Presented by :-
Asstt. Pro. M. L. Meena Padamdhar garg (2011PME5258)
M. Tech MNIT Jiapur
WHAT IS VENDOR
Vendor means a person (or company) who sells and supplies
his (or its) products.
An intelligent purchasing involves the rational selection of
sources from which materials can be obtained. Considerable
efforts are needed in identifying, developing and evaluating
the prospective suppliers. It is also essential to continuously
appraise the performance of the current suppliers
A few questions are to be answered before
attempting to develop vendors
How much quantity is required to be purchased?
How much time is available for making such purchases?
Will the material be required repeatedly or occasionally?
What is the volume of purchase of the required materials?
Which is the industry producing the required materials?
What is commercial viability of the materials?
Based on the answers, a list of potential supplier is drawn.
For the purchase of items that are of repetitive nature, a
detailed evaluation procedure of suppliers is adopted. For a
one-time purchase, elaborate inquiries and evaluation
procedures may not be necessary.
Unless the item is costly and has a high technological
content, such as biological products. Effective negotiations
can avoid many difficulties in regard to supplies
VENDOR DEVELOPMENT INVOLVES
First Stage survey stage
Second Stage enquiry stage
Third Stage negotiation & selection stage
Fourth Stage experience & evaluation stage
Survey stage-source of information on
Survey stage-source of information on potential vendors
Survey involves collecting information on different suppliers
of the desired materials. The following sources may be
Trade directories: These give information regarding dealers
addresses, regional offices, names, types and range of
products including spares. Electronic digital interchange, for
example :- computer based trade directories, is useful source.
Trade journals:- These contain advertisements of the
materials related to specific industries, namely chemicals,
plastic , steel etc. these journals can be subscribed, relevant
information can be classified, indexed, updated and
maintained in proper files by the buyer.
Telephone directories :- These contain classified
advertisement arranged alphabetically, item-wise or group-
wise. Examples are, abrasives, air-conditioners, castings,
diamonds and so on. It is an easy and fast means of collecting
Suppliers catalogues :- many manufacturers periodically
publish catalogues and pamphlets giving details of the
products they manufacture. These catalogues contain
considerable technical information, specifications, prices etc.
Salesmen :- they trained person who continuously visit
customers for the possible business and orders. Through
their sales presentations, it is possible to collect the
information and clarify doubts. They help in expanding the
knowledge to a great extent.
Inquiry stage- selection of potential
After a list of possible suppliers is complied, the next step is
to inquire a few of them further. It involves a detailed analysis
of supplier’s activities furnished by vendors or collected by
Accreditation, FDA approval and certifications namely ISO
9000, 9002 etc, facilitate the selection. A comparison may be
made in regard to four aspects of competition
Time based competition (TBC) i. e, response time for
Internal facilities of vendors:- Adequate facilities are
essential for the manufacture and quality control of items.
These must be done under the supervision of qualified and
experienced staff. Additional facilities are to be explored for
the supply of items in time. Modern equipment, quality of
inputs, maintenance, size and capacity, layout ,
housekeeping and cleanliness are inspected
• Financial adequacy and stability:- the financial status of
the vendor company and relations with his bankers should be
explored, so that items can be produced and supplied
without any financial difficulties at any stage. For this
purpose, previous years balance sheets of the company are
Reputation of the vendor: Methods of selling and
distribution network are important. The supplier ‘s
reputation in the market in regard to prices and promises of
delivery dates should be considered.
Location of the vendor’s factory:- It should be nearer to
the buyers factory. If it is located at a very distant town.
Vendors representative should be available in the locality.
after sales service :- In case of equipment, after sales service is
essential. The availability of maintenance engineers in the
locality or town should be advantageous
Industrial relations: Industrial conflicts, frequent strikes, layoffs
etc, seriously affect the supplies. The industrial climate, work
culture, employer- employee relationship should be given
consideration. Hence, one has to very careful in dealing with such
companies. In addition, several other factors should be
a) Is the supplier a direct manufacturer or only a agent?
b) Is the buyer looking for one or more suppliers?
c) Whether the supplier is small or big?
Hence, full enquiry into all factors should be made in order to
arrive at a decision regarding the selection of sources.
Thus short listed suppliers are considered for the third stage.
Negotiation and selection stage-
finalization of vendors:
The vendors who are successful in the enquiry stage
may be called for negotiations in order to discuss
During this stage, various terms namely credit,
quantity discount, quality specifications etc, can be
Finally, a list of approved vendor’s drawn.
Accordingly, purchase orders are placed with the
Several aspects of buying techniques are used at third
Experience and evaluation stage:
At this stage, the buyer evaluates and appraises the
performance of the vendor. The objective is to improve the
performance of vendors in which they are deficient.
The evaluation is done especially on two counts, namely
quality (judged by rejection of lot- size ) and delivery (
judged by delays on delivery).
A few ways by which a vendor can be evaluated are
1) categorical method
2) weighted point method
3) cost ratio method
Categorical method : The buyer prepares a list of factors,
which are considered necessary for evaluation.
At periodic intervals, say once in three- months , the buyer
prepares a performance report.
The format such a report is given :
1. Supplies as per
9 8 7
6 5 4
3 2 1
2. Deliveries are as per
3.Rigorous follow up are
4.Solves his raw material
problem on his own
5.Willing to accommodate
schedules are suddenly 19
9 8 7
6 5 4
3 2 1
6. Helps in
7. Behavior is
8. Reasonable in
Each supplier is evaluated and a number-score is calculated.
Then, it is converted into word rating. The conversion of
scores is as follows:
50-60 Very poor
Weighted point method : this type of evaluation involves a
point rating based on the quality of goods received, the
promptness of deliveries made and the quality of the service
rendered by the vendor.
The point may be assigned as follows:-
Quantity 50 points
Delivery 30 points
Price 20 points
Total points 100 22
The performance of each factor is separately quantified.
For example, consider the quality aspect, Assume that 160
lots were received during a year and 16 lots were rejected on
account of poor quality, the number lots accepted will be 144.
Quality rating = Number of lots accepted× rating points
(i.e., 50 Number of lots received
quality rating = 144 × 50 = 45 160
similarly delivery rating can be obtained using below
Delivery rating = number of lots delivered in time × rating
points total number of lots delivered
The price rating is calculated using equation
Price rating = least offer received × rating points supplier’s
Cost – ratio method : it is an intricate system of determining
the actual costs incurred in purchasing, follow up,
transportation, packing, duties, receiving etc,
Based on these costs, the unit cost incurred by the buyer is
calculated, the higher the cost, the lower the supplier’s
comparative rating .
For example, costs relating to quality works out to be Rs
2,000 and the total worth of material purchased is Rs 2.0
lacks per year Quality cost ratio = 2,000 : 2,00,000, (i.e., 1%)
Similarly, when the cost of delivery is Rs. 1000 then Delivery
cost ratio = 1,000 : 2,00,000 (i.e., 0.5%)
Similarly, all types of costs can be calculated. These ratios
must be maintained as minimum of possible.
. Using the methods mentioned above, a buyer can exercise
better judgment over retaining the vendors.
However, many non- quantifiable factors namely integrity,
behavior, attitudes towards progressiveness etc., should also
be given importance.
Thus, the buyers experience and judgment would ultimately
We can understand vendor rating by this example:
Ex. The following information is available on 3 vendors: A,
B and C. Using the data below, determine the best source of
supply under weighed point method and substantiate your
Vendor A: Delivered 56, lots 3, were rejected 2 were not
according to the schedule.
Vendor B: Supplied 38, lots 2 were rejected 3 were late.
Vendor C: Finished 42, lots 4were defective 5 were delayed
Give 40 for quality and 30 weightage for service.
Solution: Quality performance (40% weightage)
= (quality accepted/total quantity
X, Adherence to time schedule(30%)
=(no. of delivery on the scheduled date/total
Y, Adherence to quantity schedule(30%)
=(no of correct lot size deliveries/tot no of scheduled
Total Vendor Rating =X+Y
Vendor A= (53/56)*40+(54/56)*30 =66.78
Vendor B=(36/38)*40+(35/38)*30 =65.52
Vendor C =(38/42)*40 +(37/42)*30 =62.62
So Vendor A is selected with best rating.
BUYING TECHNIQUES :
Purchasing involves procurement of materials, machinery an
services needed for production and maintenance.
The purchasing department procures the right kind of
material (quality ) , in right – quantities, at right time and
makes them available for the production.
It also concentrates on the right source and economic
procurement, while procuring the materials, the company
pays the price.
Price is defined as the amount of money at which a thing is
valued or the value that a seller sets on his goods in the
Price is a greatest variable in purchasing. Very often price is
qualified by terms, best price, lowest price, economic price
In order to determine the right price, the buyer should be
conversant with business trends, trade cycles, supply and
demand, price advances and declines, quantity discounts .
Quotation is an inquiry to know whether the vendor can
supply the desired material and if so, by what price.
Quotation are invited on a prescribed form or format from
the selected sources for the required items.
The quotation also includes the terms and conditions
namely taxes, freight, cartage etc.
At the top of this form, the words ‘THIS IS NOT AN
ORDER’ is printed
A minimum of three quotations each in duplicate is
required from different suppliers.
The quotations are valid for at least one month from date of
Quotation is not a purchase order
Generally materials are bought by one of the following
Spot quotations :-The buyer can go to the market and
collect minimum of three quotations from three different
suppliers and takes spot decision.
This type of practice is not possible in the purchase of
This method is suitable for the purchasing of office
stationery and computer peripheries.
The purchasing department selects the suppliers form the
approval list and accordingly does the purchasing.
Floating a limited enquire :- This method is used when the
value of purchases is small. The company sends letters to a
few reliable vendors requesting for prices, analytical reports,
and other details for a particular material.
A purchase enquiry form is usually prepared for this purpose.
The quotations are collected in duplicate at least from three
After getting quotations, these are opened and a comparative
statement is made.
It is analyzed in the light of following points:-
1. Price of the material - Material specifications (quality)
2. Place of delivery - Delivery period –
3. Taxes - Terms of payment –
4. Validity of tender - Guarantee period etc.
The comparative statement helps in studying and comparing
different quotations at a glance.
Thus a quick decision can be taken as with whom to place
order for the purchase of a material. 37
A tender is a written letter or a published document ( in news
papers) that is aimed at finding the price for procuring
certain materials or for getting a particular job done within
the desired period and under specified conditions.
Tenders are invited from recognized or registered firms. A
few types of tenders are given below;-
- single tender
- open tender
- closed tender or limited tender 38
. Single tender : Single tender is invited from one reliable
supplier, under certain conditions.
It is applicable to proprietary items, high quality items and
also C- items such as clips, pins, pencils etc., when items are
Open tender : Open tender method is used when the value
of purchases is high. When supply sources are not known or
intended to locate more supply sources, open tender ( or
public tender ) is used. Open tenders are very expensive.
The buyer is not aware of the capability of the supplier.
Therefore, tenders are invited from recognized or registered
Open tender is also called press tender, because it is
published in the news papers, trade journals etc 40
• Negotiations may be defined as an art of arriving at a
common understanding through bargaining on the
essentials of contract such as delivery, specifications, prices
Negotiations with the concerned vendor(s) are often
necessary before finalizing a purchase contract. The purpose
is for fixing and finalizing prices of materials, terms and
Need for negotiations :-
In most cases, purchase orders are decided on the basis of
quotations. Negotiations are required when a change in the
scope of a contract is warranted. Negotiations are considered
essential in the following conditions:
- prices are related to large volumes or to a large value.
- terms and conditions are required for large volumes.
- contract is desired for a longer period.
Variations in quantity to be purchased are possible.
Changes in drawing and specifications are necessary.
Changes in transportation, packing and delivery points are to
When no acceptable quotations are received from the
Process of negotiations : negotiations take place between two
individuals or two sets of individuals.
Communication is an important ingredient in the art of
Through the communication of ideas, the purchasing
department persuades and convinces the vendors to agree
with their view point,
So that an agreement can be reached. Negotiations should
attempt at a ‘win-win, situation to both parties. It is mutually
Discounts are defined as the cash concessions offered by the
vendor in the payment price, on the goods purchased, in
order to enhance the volume of business opportunities.
Reasons for offering discounts :- when large orders are
placed, the seller is able to obtain economies in production,
packaging, billing, selling etc.,
When the bills are cleared immediately after delivery, the
supplier gets finance for his activities.
Similarly transportations costs and other costs provide
The supplier is prepared to give a part of his savings to the
Thus discounts are usually offered by a majority of suppliers.
Types of discounts :
Materials may be purchased in three ways.
1. Volume contract
Volume contract : this type of contract is employed to cover
total purchase of ampoules, bottles and other accessories.
Because of a large order, the seller is able to obtain
economies in production, packaging, billing, selling etc
Volume contract discount may be defined as a method of
offering discount proportionate to the quantity of goods or
volume of material ordered.
In this system, the manufacturer (buyer) estimates its
annual consumption of a class of products and signs an
agreement with the supplier
Such contracts are executed for a period of one year.
The advantage of this type of purchase is that contract price
is usually protected from an increase (or decrease) of prices.
In some cases, the buyer directly pays to the supplier.
In case of government purchases, payment is made through
Director general of supplies and disposals (DG, S & D ) Cash
discount : The normal credit period is 90 days for the
payment of bill.
Cash discount is a method of offering discounts depending
on the time of payment made on the delivery.
Cumulative discounts: in this case, quantity might not be
fixed in the contract.
Cumulative discounts may be defined as a method of
offering proportionate discount on the basis of actual
purchases and appropriate to the quantity range in an year.
For example, buying is continued during the course of the
year, but the price will be reduced beyond a certain volume.
Consignment terms : This is frequently used in retailing
In consignment terms, the buyer ( usually a trader ) pays the
price after selling the goods.
A pharmaceutical company may agree or consignment terms
of payment with a chemist’s shop