Guidelines for procurement of material

Basic criteria for purchase operations

Marketing or selling is our principal activity, and purchase is a supporting activity. We purchase material for resale after bottling for a margin, therefore what we purchase and how much we purchase will depend on, what we intend to sell, and how much we will be selling in a specific period. Therefore, there cannot be absolute purchase norms, but these are linked and related to the sale budget.

The two objective of our material management system are as under:-

  1. Our plants should maintain uninterrupted supply line to meet demands of our distributors, dealers and consumers and there should be no failure on our part. Towards this end, in addition to meeting the supply demands, we must also carry a marginal base stock with us, referred as minimum inventory.
  2. Inventory holding involve huge outlay of working capital and holding cost. The holding cost of inventory in Indian conditions is estimated at 30% of the annual turnover. Prevailing interest rate on working capital are extremely high. Prudent inventory management presupposes minimum quantum of funds blocked in current assets, representing inventory and receivables. Assessment of our company’s efficiency and productivity in management is done by external agencies like commercial banks and financial institutions studying our inventory management system, as one of the parameters.

Therefore, our purchase policies should be based on

  1. Our current sales turnover.
  2. Reflecting an efficient inventory management system, which enables us to hold enough stocks to keep our supply line, but not more than enough stocks, which causes a drain on our profitability.

To carry-out efficient purchase operations, the section should know the following:-

  1. When to purchase?
  2. How much quantity to purchase?
  3. What to purchase?
  4. From whom to purchase?
  5. At what rate to purchase?

We not take up purchase guidelines one by one.

  1. When to purchase?

Purchase order should be placed at the correct point of time, taking into account the delivery period involved, so that by the time the stocks are received, our stocks on hand at the center do not reach below the bottom level of minimum stock holding.

  1. How much quantity to purchase?Our product cost at a point includes the material cost and the cost of transport of the material to the point. Both have to be kept at the minimum. Buy the quantity, which will provide the lowest unit-price and where the cost of transport per unit will be minimum. Keeping in view the following:-
    1. Point-wise inventory planning

    Company has different material holding and supply centers. Each of our bottling centers is one such center. We also hold stocks in separate licensed godown. We have accepted distinct supply obligations at each of these centers.

    1. Maximum/minimum & re-order levels

    At each of these centers, we accept minimum holding levels, so that there is no failure in supply by us and a maximum holding line, so that our inventory system is not deemed inefficient and not competitive. In between the maximum and minimum level, purchase orders are placed at a point called the re-order level.

    1. Delivery period

    When we place order for purchase of material. There is a time gap for the material ordered to reach us. This is referred as the delivery time. We fix the re-order level in such a manner, that after placement of order and the lapse of the delivery time, the stocks ordered are received by us, do not go below the minimum holding level.

    1. Economic quantity for purchase

    At a time we have to place order for a minimum quantity, but suppliers frequently offer quantity discount, if a minimum quantity is purchased from them. Transporters will charge full freight charges for the vehicle capacity, whether we carry full load or half load. However, accessories like valve, regulators can be taken as per demand of our customers.

    1. Assess first demand level to calculate supply obligation

    With the understanding of the above concepts of holding levels, economic quality for purchase, and delivery time, we should first assess the demand to be met for different products by each of our supply centers, when the demand is consent, we can easily fix the quantum of each holding levels, but when the sales are firstly increasing these holding levels cannot be static. As a way out the practice is to fix holding levels on a floating basis, as so many days or weeks turn-over of the particulars stocks.

    1. Maximum/ minimum holding levels for godown and for bottling plants

    Bases on the above assessment we may accept a 3 days turnover of inventory as the minimum levels to be held at each of our godown and the maximum not to exceed 7 days turnover of stocks. For the bottling plants, we may fix a 10 days stock holding as the minimum and 21 days stock hold as the maximum, in any case not beyond the licensing limit. The application of these concepts should be perfected based on working experience and if the norms could be improved by the purchasing section on these holding levels, by reducing the maximum holding levels and/or the minimum holding levels, it will be a case of efficiency in systems application. We can also project our demand for the coming month by collecting approximate quality to be intended from the each distributors and arriving at the total demand.

  1. What to purchase?

Today’s market is global and the catchword in trade and industry is “quality”. We have to respect I.S.I standard. We have to give a premium value to our trade-mark Premier in terms of quality products. Buy only material that satisfy our quality standards.

  1. From whom to purchase?

Survey sources of supply of standard products and shortlist minimum two dependable supply sources and fix date contract with them. We may arrive at rate-contract and restrict mainly with these two suppliers, and make only emergency purchases from the others, when the main supplier are not in a position to supply us for a short-period.

  1. At what rate to purchase?

The buyer looks to both product and price. We must buy the quality product at the most competitive market price. Try to get cash & quantity discount which is easily available in the market. Basically the same objectives policy and norms for execution applies in respect of all purchases, like stationary & store purchases.