Supply Chain Management

1. Purchasing and Vendor
Management
Prepared by
Narendra Singh Chaudhary

2. Introduction
 Purchase is the procurement of
goods or services from some
external sources.
 Acquisition of some kind in lieu of
accepted price on consideration in
return.
 “Purchasing is the procurement of
the materials, supplies, machines,
tools and operation of a
manufacturing plant.”---------- Alford &
Beatty

3. Objectives of Purchasing:
 To acquire the goods or services at
minimum cost.
 To ensure the continuous flow of
production.
 To develop the main and attenuate
sources of supply.
 To ensure timely delivery.
 To make optimum utilization of capital.
 To acquire quality product so that quality
output is served to the consumer.

4. Types of Purchasing
 Purchase made as per requirement:
No purchase is made in advance.
Purchase is done as need arises.
Method usually applied for
emergency requirement or
infrequent goods.
 Contract Purchasing: Contract of
material is given to an agency. It
has an advantage that low price of
those materials whose cost
fluctuates highly.

5.  Market Purchase: Purchase is made
from the market to take advantage
of price fluctuations.
 Schedule Purchasing: It is a cyclic
purchase model. A schedule of
purchase is made and it is used for
those commodities whose price do
not fluctuate.

6. Purchasing Procedure
 Purchase Requisition: All the
departments of the organization are
asked to make a requisition for
purchase.
 Decision of Purchase: Collecting
requisition from various
departments and handed it to
Purchase department / committee
head. Purchase head decide what to
purchase and in what quantity.

7.  Study of Market conditions: Market
trends are analysed to generate an
idea of price and availability of
product.
 Selection of Vendors.
 Placing of Purchase order.
 Receiving of order.

8. Functions / Responsibilities of
Purchase Department
 Obtaining prices
 Selecting vendors
 Placing Purchase order
 Settlement of complaints
 Making and maintaining harmonious
relations with vendors.

9. Purchasing Management Process
 Purchasing Management Process
consists usually of 3 stages:
 Purchasing Planning
 Purchasing Tracking
 Purchasing Reporting

10. Purchasing Planning
Purchasing Planning may include steps as
follows:
 creating purchasing projects and tasks
 providing related information (files, links,
notes etc.)
 assigning purchasing tasks to employees
 setting task priorities, start/finish dates
etc.
 assigning supervisors
 setting reminders
 control and evaluation

11. Purchasing Tracking
 Purchasing Tracking consists of:
 Checking task's status and/or
history of changes
 Receiving status notifications
 Sorting, grouping or filtering tasks
by current status
 Highlighting overdue tasks,

12. Purchasing Reporting
 Purchasing Reporting includes:
 Comparing actual and estimated
values
 Calculating purchasing task and
project statistics
 Sorting, grouping or filtering tasks
by attributes
 Creating charts to visualize key
statistics and KPIs

13. Centralized Purchasing
 Centralized purchasing means buying and
managing purchases from one location for all
locations within an organization. This can also be
run by a central location buying in to a
distribution warehouse that feeds smaller
warehouses. This is called a hub and spoke
system. The responsibility and authority to
purchase, lease, or rent materials, supplies,
goods, equipment, or services are placed with the
Division of Finance and Operations, Purchasing
and Stores Department.
 Purchasing is centralized to:
 realize economy, efficiency, and effectiveness in
the procurement function;
 pursue quality assurance and standardization;
 maintain the highest standards of ethics;

14.  The control by a central department of all
the purchasing undertaken within an
organization. In a large organization
centralized purchasing is often located in
the headquarters. Centralization has the
advantages of reducing duplication of
effort, pooling volume purchases for
discounts, enabling more effective
inventory control, consolidating transport
loads to achieve lower costs, increasing
skills development in purchasing
personnel, and enhancing relationships
with suppliers.

15. Advantages of Centralized
Purchasing
 Volume purchasing – When the district is able to
purchase a single item in mass, vendors are often
willing to provide a discount. Purchasing in mass
to take advantage of discounts is called volume
purchasing.
 Warehouse – In order to take advantage of
volume pricing, the district purchases items in
bulk. Vendors typically require that the district
take delivery of the items in mass. These bulk
purchases are stored in the warehouse until the
items are requested by the sites.
 Save time in researching products – Individuals
spend hours to research the products and to find
best price. The purchasing department has
resources to help reduce the time to research
products.

16. Disadvantages of Centralized
Purchasing
 Good processes are not without their
shortcomings. Listed below are some of the
challenges of buying in a school district and
suggestions on how to help the Purchasing
department minimize their effects.
 Extended procurement time – One problem that is
commonly associated with centralized purchasing
is the perception “it takes too long”. In reality,
the purchasing department processes vendor
requisitions typically within one (1) day. Typically
the delay in the request is either: time spent to
research the product, funding sources (account
code check and budget approval), vendor stock
status, and shipping.

17. Decentralized Purchasing
 Decentralized purchasing refers to purchasing
materials by all departments and branches
independently to fulfill their needs. Such a
purchasing occurs when departments and
branches purchase separately and individually.
Under decentralized purchasing, there is no one
purchasing manager who has the right to
purchase materials for all departments and
divisions. The defects of centralized purchasing
can be overcome by decentralized purchasing
system. Decentralized purchasing helps to
purchase the materials immediately in case of an
urgent situation.

18. Advantages Of DP
 Materials can be purchased by each
department locally as and when
required.
 Materials are purchased in right
quantity of right quality for each
department easily.
 No heavy investment is required
initially.
 Purchase orders can be placed
quickly.
 The replacement of defective

19. Disadvantages Of DP
 Organization losses the benefit of a bulk
purchase.
 Specialized knowledge may be lacking in
purchasing staff.
 There is a chance of over and under-
purchasing of materials.
 Fewer chances of effective control of
materials.
 Lack of proper co-operation and co-
ordination among various departments.

20. Purchase Functions
 Procuring Materials-One role of the purchasing
department is to procure all necessary materials
needed for production or daily operation of the
company or government organization. For a
manufacturing company, this might include raw
materials such as iron, steel, aluminum or
plastics, but it also might include tools,
machinery, delivery trucks or even the office
supplies needed for the secretaries and sales
team. In a retail environment, the purchasing
department makes sure there is always sufficient
product on the shelves or in the warehouses to
keep the customers happy and keep the store
well-stocked.

21. Evaluating Price
 A purchasing department also is charged with
continuously evaluating whether it is receiving
these materials at the best possible price in order
to maximize profitability. This can be challenging
for a small business that may purchase in lesser
quantities than a larger vendor and which thus
may not receive the same type of bulk discounts.
 A purchasing department in a small business
needs to shop around to find the best vendors at
the most reasonable prices for the company's
particular size orders. Purchasing department
staff may communicate with alternate vendors,
negotiate better pricing for bulk orders or
investigate the possibility of procuring cheaper
materials from alternative sources as part of their
daily activities.

22. Paperwork and Accounting
 Purchasing departments handle all of the
paperwork involved with purchasing and delivery
of supplies and materials. Purchasing ensures
timely delivery of materials from vendors,
generates and tracks purchase orders and works
alongside the receiving department and the
accounts payable department to ensure that
promised deliveries were received in full and are
being paid for on time.
 In a small business, this means working closely
with the accounting department to ensure that
there is sufficient capital to buy the items
purchased and that cash is flowing smoothly and
all payments are made on time.

23. Policy Compliance
 The purchasing department also must
ensure that it is complying with all
company policies. For example, in a small
business, individual staff members may
communicate with the purchasing
department about purchasing needs for
things such as office supplies or
computers. Before making a purchase,
the purchasing department must ensure
that it heeds the proper protocols for
purchase and budget approval and must
ensure that any items are purchased in
accordance with the overall purchasing
policy of the organization.

24. Vendor Rating
 Vendor ratings are used to rate vendors as
entities; however, they are also used to rate
different aspects of a vendor, such as its strategy,
organization, products, technology, marketing,
financials or support. Vendors with a clear focus,
solid products and an advantageous market
position may be rated "positive" or "strong
positive." Vendors or product lines that lack these
qualities may be rated "caution" or "strong
negative."
 Vendors that have potential, but which we believe
should be very carefully evaluated, are rated
"promising.“ Additionally, vendors that are rated
a "strong negative" are put on a vendor alert list,
while vendors that are rated a "strong positive"
are put on a vendor opportunity list.
 These vendors, in particular, will be closely
monitored.

26.  Vendor rating is the result of a
formal vendor evaluation system.
Vendors or suppliers are given
standing, status, or title according
to their attainment of some level of
performance, such as delivery, lead
time, quality, price, or some
combination of variables.

27. CRITERIA FOR EVALUATION
 Vendor performance is usually
evaluated in the areas of pricing,
quality, delivery, and service. Each
area has a number of factors that
some firms deem critical to
successful vendor performance.

28. Pricing factors include the following:
 Competitive pricing. The prices paid should be
comparable to those of vendors
 providing similar product and services. Quote
requests should compare favorably to other
vendors.
 Price stability. Prices should be reasonably stable
over time.
 Price accuracy. There should be a low number of
variances from purchase-order prices on invoiced
received.
 Advance notice of price changes. The vendor
should provide adequate advance notice of price
changes.

29.  Sensitive to costs. The vendor should
demonstrate respect for the customer
firm's bottom line and show an
understanding of its needs. Possible cost
savings could be suggested. The vendor
should also exhibit knowledge of the
market and share this insight with the
buying firm.
 Billing. Are vendor invoices are accurate?
The average length of time to receive
credit memos should be reasonable.
Estimates should not vary significantly
from the final invoice. Effective vendor
bills are timely and easy to read and
understand.

30. Quality factors include:
 Compliance with purchase order. The
vendor should comply with terms and
conditions as stated in the purchase
order. Does the vendor show an
understanding of the customer firm's
expectations?
 Conformity to specifications. The product
or service must conform to the
specifications identified in the request for
proposal and purchase order. Does the
product perform as expected?
 Reliability. Is the rate of product failure
within reasonable limits?

31.  Reliability of repairs. Is all repair
and rework acceptable?
 Durability. Is the time until
replacement is necessary
reasonable?
 Support. Is quality support available
from the vendor? Immediate
response to and resolution of the
problem is desirable.
 Warranty.
 State-of-the-art product/service.

32. Delivery factors
 Time
 Quantity
 Lead time
 Packaging
 Documentation
 Emergency delivery

33. Service factors to consider
 Good vendor representatives have sincere desire
to serve. Vendor reps display courteous and
professional approach, and handle complaints
effectively. The vendor should also provide up-to-
date catalogs, price information, and technical
information. Does the vendor act as the buying
firm's advocate within the supplying firm?
 Inside sales. Inside sales should display
knowledge of buying firms needs. It should also
be helpful with customer inquiries involving order
confirmation, shipping schedules, shipping
discrepancies, and invoice errors.

34.  Technical support. Does the vendor provide
technical support for maintenance, repair, and
installation situations? Does it provide technical
instructions, documentation, general information?
Are support personnel courteous, professional,
and knowledgeable? The vendor should provide
training on the effective use of its products or
services.
 Emergency support. Does the vendor provide
emergency support for repair or replacement of a
failed product.
 Problem resolution. The vendor should respond in
a timely manner to resolve problems. An excellent
vendor provides follow-up on status of problem
correction.

35. Measurement criteria 7 C's.
 Competency—managerial, technical,
administrative, and professional
competence of the supplying firm.
 Capacity—supplier's ability to meet
physical, intellectual and financial
requirements.
 Commitment—supplier's willingness to
commit physical, intellectual and financial
resources.
 Control—effective management control
and information systems.

36.  Cash resources—financial resources
and stability of the supplier. Profit,
ROI, ROE, asset-turnover ratio.
 Cost—total acquisition cost, not just
price.
 Consistency—supplier's ability to
exhibit quality and reliability over
time.

37. Benefits of vendor rating systems
 Helping minimize subjectivity in
judgment and make it possible to
consider all relevant criteria in
assessing suppliers.
 Providing feedback from all areas in
one package.
 Facilitating better communication
with vendors.
 Providing overall control of the
vendor base.

38.  Requiring specific action to correct
identified performance weaknesses.
 Establishing continuous review
standards for vendors, thus
ensuring continuous improvement
of vendor performance.
 Building vendor partnerships,
especially with suppliers having
strategic links.
 Developing a performance-based

39. TECHNIQUES OF VENDOR
RATING

40. CATEGORICAL PLAN
 Under this method the members of the buying
staff related with the supplier are required to
assess the performance of each supplier.
 Members:- Receiving section, quality control
department, manufacturing department etc.
 The rating sheets are provided with the record of
the supplier, their products and the list of factors
for the evaluation purposes.
 The members of the buying staff are required to
assign the plus or minus notations against each
factor.

41.  The periodic meetings, usually at the
interval of one month, are held by senior
men of the buying staff to consider the
individual rating of each section.
 The consolidation of the individual rating
is done on the basis of the net plus value.
 The suppliers are assigned the categories
such as “preferred, neutral or
unsatisfactory.”

42.  This is a very simple and inexpensive
method. Its quality heavily depends on
the experience and ability of the buyer to
judge the situation. As compared to other
methods, the degree of subjective
judgement is very high as rating is based
on personal whim and the vague
impressions of the buyer. The rating is
done on the basis of memory, and thus it
becomes only a routine exercise without
any critical analysis.

43. COST RATIO PLAN
 Under this method, the vendor rating is done on the
basis of various costs incurred for procuring the
materials from various suppliers.
 The cost-ratios are ascertained for the different rating
variables such as quality, price and timely delivery
etc.
 The cost-ratio is calculated in percentage on the basis
of total individual cost and total value of purchase.
 For example :-
 The total delivery cost is Rs. 5000 and the total
purchases are Rs. 1,00,000, then delivery
 cost-ratio will be :
 5000*100 = 5 %
 100000

44.  All such cost-ratios will be adjusted with the
quoted price per unit. The plus cost ratio will
increase the unit price while the minus cost ratio
will decrease the unit price.
 The net adjusted unit price will indicate the
vendor rating. The vendor with the lowest net
adjusted unit price will be the best supplier.
 Under this method, the most strategic issue is the
identification of various costs and their allocation
among different variables and suppliers. Certain
important heads of quality costs and delivery
costs can be listed as under :

45.  WEIGHTED-POINT METHOD
 Attributes for quality, price and delivery are separately
identified.
 Relatives weightages of attributes are assigned by the
process of grading.
 Quality Q-Factor comparison
 Points
 Q1=Accepted without remarks 100
 Q2=Accepted with some rejections 60
 Q3=Accepted due to acute shortage 40
 Q4=Totally rejected 0
 Accepted rate=(Accepted lots/Total lots) *100
 It will be multiplied by the weighted-point of quality
factor.

46.  Price P-Factor comparison
 P=Pa-Po/Po*100
 Where Po=lowest price
 Pa=accepted price
 Points
 P1=20% 60
 P2=60% 40
 P3=75% 30
 Net price=(Lowest net price/Respective net
price)*100
 This % will be multiplied by the weighted point of
price

47.  Delivery D-Factor comparison
 D=No. of scheduled delivery/No. of
actual deliveries*100
 Points
 • D1=90-100% 100
 • D2=60-75% 60
 • D3=40-50% 50

48. Critical Incident Method
 Records of events and occurrences
of buyer-vendor relationship is
maintained
 They reflect positive and negative
aspects of actual performance.
 Improved performance
 Determining the competence of a
vendor

49. Checklist System
Vendor rating is done on the basis of:
 Financial strength
 Size
 Product service
 Price
 Quality

50. Store management
 Store management is the management of
business unit containing the storage,
packaging, distribution and sales of
goods. These goods can be anything from
raw materials to finished products. Goods
like vegetables, clothes, shoes,
medicines, electronics goods or any other
products which need to be stored and
managed appropriately.

51.  Store management personnel have the
responsibility to look after the daily operations
and works of a store. A store manager needs to
be equipped with all the information in relation
to:
 Sales,
 Finance,
 Customer care,
 House keeping,
 Special requirements of storing goods,
 HR and legal aspects of store management,
 Keeping inventory,
 Handling grievances of customers as well as
employees and
 Advertising and marketing

52. Functions of Store Management
 Store management involves a lot of
administration. Keeping inventories, maintaining
environment depending on type of goods,
financial aspects of related to stores such as
payments of goods, employees etc and customer
services are part of store management
profession.
 A person with extraordinary communication skills
has a good chance to succeed in this profession,
as it helps in communicating with the customers
and clients a lot. Similarly, a person needs to
have good interpersonal skills in order to maintain
a cordial environment with the colleagues and
subordinates.