This document discusses various topics related to purchasing, including: - Centralized vs decentralized purchasing models and when each may be beneficial. Centralized purchasing can provide bulk discounts while decentralized is more responsive to local needs. - Viewing purchasing as a profit center rather than just a cost center, focusing on factors like quality, market information from suppliers, and developing long term business relationships. - Techniques like value analysis, quality circles, and zero defects programs involve grassroots worker participation to solve work problems. - Learning curves can reduce production costs over time and impact make-or-buy decisions based on order quantities. The right time to purchase considers needs, availability, and price. Maintaining supplier relationships and

1. CHAPTER 20: Purchasing
Responses to Questions
1. Purchasing is an activity of managing supplies and, while being so, it has
to be a window to the outside world. In a multiple plant situation there
could be two different kinds of purchasing activities: a) centralized and b)
local.
2. Traditional management practice viewed the function of materials
management as mainly a ‘cost center’ i.e. an activity that gives rise to
costs which had to be kept to a minimum. When a function is viewed from
the angle of only cost minimization, the focus is narrow and is limited to
only that activity. The more modern ‘profit centre’ view makes a materials
manager more aware of other factors in his business environment which
may enhance the profitability of the firm. For instance, he may now look at
suppliers as not only supplying materials but also giving a valuable input
of market information. He may look at suppliers as the company’s long-
term business associates. He may exercise as much concern about
improving the quality of supplies as their cost. Profit center view frees the
manager from limited thinking focusing merely on cost.
Operationalizing the profit center concept would require: (a) training and
(b) reorganizing the materials function.
Benefits are: improved profits, enhanced loyalty, improved quality, vital
information flows, enhanced market knowledge and awareness, and better
flexibility to respond quickly to market changes.
3. Response to Question No.2 answers this question.
4. The effort is to look at new solutions for problems that have been taken for
granted. Also VE, Quality Circles and Zero Defects involve the grass-root
level participation i.e. of workers in finding solutions to their work-related
problems. These are human empowerment programmes.
5. Check the electric plug for its components. What ‘value’ does each
component add? What is the cost of the component? Which one has high
cost / value ratio? Identify and think of different alternatives.
6. Centralized buying can help in getting bulk discounts. The buying process
will also get more systematized. Decentralized buying may not have these
advantages, but it is more in tune with or responsive to local needs. This is
a major advantage of decentralized purchasing.

2. 2
Hence for common items - across the plants - which are routinely used, a
centralized buying may be beneficial. For other items, one may have
decentralized buying.
7. Purchasing price, delivery schedules and the other conditions pertaining to
the product, its manufacture and delivery may have to be negotiated with
the suppliers.
8. A good vendor is one who is in tune with the buyer companies’
goals/needs. Multiple sourcing may increase the competition and thus put
pressure on the suppliers to give their best price, quality and delivery.
However, competitive pressure alone does not always generate the best
performance. Instead, a feeling of ownership and camaraderie could be a
better motivator. Hence, multiple sourcing may sometimes ‘alienate’ the
suppliers from the buyer company. This is a major minus point.
9. Learning can reduce the time taken (i.e. to produce) and hence labour
cost can come down. Hence, a larger order would mean lower costs for
the supplier. These lower costs can be passed on to the buying company.
Thus, ‘make or buy’ decision gets affected.
10.If the quantity is small, the decision is generally to ‘buy’ the item unless
sensitive proprietary knowledge is involved. Therefore, the make or buy
decision is usually for items required in sufficiently large quantities. If the
quantity is extremely large, the balance may swing in favour of ‘making’
the item.
11.If materials are bought later than when required, the purpose is not
served. If bought earlier, there are costs of inventory. Hence, the materials
are to be bought at the ‘right’ time.
Another meaning of ‘right’ time is with respect to the availability and price
of the material. During certain times, the materials are available at a low
price and are available in plenty. It may be wise to buy during those times
even if it entails costs of inventorying.
Availability, cost/price and requirement are the three important
considerations.
12.Forward Buying is one of the options. One may even keep inventory of
raw materials ahead of the requirement; this is an action against the future
shortages. A better policy would be to have dependable suppliers
integrated into the supply chain of the company.
13. Difficulties include:

3. 3
a. Infrastructural / logistical bottlenecks and hence delays and
uncertainties in the supplies.
b. Quality of supplies has been a problem; but, of late, quality is
improving.
c. Business attitude is not yet very customer-oriented. This has been
a major problem. However, with rapid globalization this is
improving.
14.The dimensions of ‘quality’ in the purchasing perspective are not different
from other organizational perspectives. However, quickness of response
and flexibility are important considerations in selecting a vendor.
Purchasing would have done a ‘quality’ job if it gets supplies / materials
(a) on time,
(b) of the required technical quality,
(c) at a reasonable price/cost, and
(d) if it helped the firm in getting valuable information regarding the firm’s
business environment.
15.Intangibles are:
a. How has the vendor stood by the buying company even in difficult
times?
b. How has the vendor helped the buyer firm by supplying it
information about the market?
Loyalty, dependability and camaraderie are some of the intangibles.
16.Whether it is a ‘profit’ or ‘non-profit’ organization, every organization needs
to be efficient – in cost, time and quality; Purchasing function should not
differ.
17. (1) There is Forward Buying as described in the chapter.
(2) There are techniques of Volume Timing of purchases.
However, these would need some estimate/forecast of the price
behaviour.
18. From the given data, we have:
Fixed Costs, F = 40 lakh
Assuming every percent utilization as 1 unit of production, we have:
Revenue per unit, R = 160 = 2 lakh
80
Variable cost per unit, v = (140-40) = (100) lakh = 1.25 lakh
80 80

4. 4
Hence, Break Even Point = F = 40 = 53.5 units
R-v (2 -1.25)
= 53.3 % capacity utilization.
19.
It is given that at the 50th
assembled unit, the average of labour cost is 3
hours and that a 90% learning curve applies.
Now, log Cn = log C1 – b. log n ; therefore,
log (3) = log C1 – b log (50) .
Since C2 = 0.90 & C4 = (0.9)2
& C8 = (0.9)3
:
C1 C1
C
1
Generalizing, we have Cn = (0.9)log
2
(n)
C1
i.e. log10 (Cn/ C1) = log2 (n). log10 (0.9)
= log2 (n) . (– 0.04576)
= log10
(n)
. (– 0.04576)
_________
log10
(2)
= log10
(n)
. (– 0.04576 )
( 0.3010 )
= - 0.1520 log10
(n)
Thus, for 90 % learning curve, b = 0.1520.
Cost for the 1st
item can be found easily now:
log10 (3) = log10 (C1) – 0.1520 log10 (50)
Hence, log10 (C1) = 0.4771 + 0.1520 (1.6990)
= 0.4771 + 0.2582
= 0.7353
Hence, C1 = 5.4363

5. 5
Cost for the 5th
unit : Computations
Cost for the 5th
unit will be found by finding the difference between the
cumulative cost for 5 units and 4 units.
log C5 = log C1 – b. log 5
= (0.7353) – (0.1520) (0.6990)
= 0.6291
Hence, C5 = 4.2570 (This is the average cost)
Cumulative cost of 5 units = (4.2570) (5) = 21.2850
log C4 = log C1 – b. log 4 = (0.7353) – (0.1520) (0.6021)
= 0.6438
C4= 4.4035 (This is the average cost)
Cumulative cost of 4 units = (4.4035) (4) = 17.6141
Hence, cost of the 5th
unit = 21.2850 - 17.6141
= 3.6709
Cost for the 25th
Unit: Computations
log C25 = (0.7353) – (0.1520) (log 25)
= (0.7353) – (0.1520) (l.3979)
= 0.5228
Hence C25 = 3.3327 (This is the average cost)
Cumulative cost of 25 units = (3.3327) (25) = 83.3182
log C24 = (0.7353) – (0.1520) (log 24)
= (0.7353) – (0.1520) (1.3802)
= 0.5255
Hence, C24 = 3.3535 (This is the average cost)
Cumulative cost of 24 units = (3.3535) (24) = 80.4843
Hence, Cost of 25th
unit = 83.3182 – 80.4843
= 2.8339
The costs of other (100th
, 200th
and 500th
) units can be found similarly.
Average Cost of 100 units is: (C25) (0.90 x 0.90) = 2.6995

6. 6
log C99 = (0.7353) – (0.1520) (log 99) = 0.4320
Hence, C99 = 2.7040
Cumulative Cost of 99 units = (2.7040) (99)
= 267.696
Cumulative cost of 100 units = 2.6995 X 100
= 269.950
Hence, cost of the 100th
unit = 269.950 – 267.696
= 2.2540.
20.It is the labour cost that is subject to the learning curve. There is a printing
error and the learning curve of 90 % is assumed to be applicable.
For 700 units the Learning Curve Table shows a value of 0.3694. This is
the average cost.
Hence, the total labour cost for 700 units
= (700) (0.3694) (Rs.400)
= Rs. 1,03,432 …. labour cost
Materials cost = (700) (Rs. 600) = Rs. 4,20,000.
Hence, Total cost = 1,03,432 + 4,20,000
= Rs. 5,23,432.
Adding a mark-up of 15 %, the agreed price for 700 units should be
= (5,23,432) (1.15)
= Rs. 6,01,947 …. answer.

7. 7
Chapter 20: Purchasing
Objective Questions
1. Bayesian Analysis is of use in Purchasing, because:
a. it helps in finding alternative materials of the
required quality.
b. it helps in analyzing the vendor performance.
c. it helps in selecting a vendor.
√d. none of the above
2. Learning Curve is a useful technique for:
a. improving the quality of supplies.
√ b. price negotiations.
c. forward buying.
d. none of the above.
3. When a firm uses only a small quantity of a standard item:
a. it usually decides to manufacture it internally.
√b. it usually decides to buy the item from outside.
c. the price is of little consequence.
d. none of the above.
4. Four units are made in a total of 4 hours. If an 80 % learning
curve applies, how much total time will the production of 8 units
take?
a. 5.12 hours
√b. 6.40 hours
c. 7.20 hours
d. none of the above
5. Value Analysis is useful in Purchasing because:
a. it determines the value and, therefore, the
purchase price of an item.
b. it helps in weeding out suppliers who are not
performing satisfactorily.
c. it identifies products that could be discontinued
from the firm’s product mix.
√ d. none of the above.
6. Purchasing may need to coordinate with:
a. Production Planning and Control
b. Inventory control
c. Product Design

8. 8
√d. all of the above
7. ‘Brain Storming’ is a part of:
a. Bayesian Analysis
√b. Value Analysis
c. Learning Curve
d. all of the above
8. VA/VE stands for:
√a. Value Analysis / Value Engineering
b. Vendor Analysis / Vendor Effectiveness
c. Vector Analysis / Vector Engineering
d. none of the above
9. A company could buy a component instead of making it if:
a. the return on the necessary investment to be
made to manufacture the component internally is
not attractive.
b. the company does not have the requisite skilled
manpower to make the component.
√c. a & b
d. none of the above
10. In the modern Global Supply Chains, the purchasing function
has the job of:
a. vendor development.
b. placing orders and noting receipts of supplies.
√c. a & b
d. none of the above
11. Three units are made in 3 hours; if a 90 % learning curve
applies, the next 3 units are made at an average of:
a. 0.95 hours per unit (correct to two decimals)
b. 0.90 hours per unit (correct to two decimals)
√c. 0.80 hours per unit (correct to two decimals)
d. 0.76 hours per unit (correct to two decimals)