What are the five principles of purchasing?

What, when, how, how much, from whom, and to what price to buy, are decisions that must be made in the purchasing department, and the Tightness of the decisions determines how well the responsibility is fulfilled.

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Strictly speaking, they are not “steps” in purchasing. The purchasing policy followed by any organisation to be successful, must be based upon the following principles of purchasing:

1. Principle of right quality

2. Principle of right quantity

3. Principle of right source

4. Principle of right price

5. Principle of right time

6. Principle of right place

7. Principle of right terms.

1. Principle of Right Quality:

Right quality implies that quality should be available, measurable and understandable as far as practicable. In order to determine the Quality of a product, sampling schemes, will be useful.

The quality particulars are normally obtained from the indents, and experience indicates that a substantial portion of the indents prepared by the user departments are invariably incomplete.

Such incomplete indents often cause unnecessary delays in procurement as the indenter has to be referred to, and if not referred, results in heavy rejection. Drawings are also attached to the indents, particularly for spare parts.

Since the objective of purchasing is to ensure continuity of supply to the user departments, the time at which the material is provided to the user department assumes great importance.

2. Principle of Right Quantity:

The right quantity is the most important parameter in buying. Concepts, such as economic order quantity, economic purchase quantity, fixed period and fixed quantity systems, will serve as broad guidelines.

But the buyer has to use his knowledge, experience and common sense to determine the quantity after considering factors such as price structure, discounts, availability of the items, favourable reciprocal relations, and make or buy considerations.

Developing the right attitude too is necessary as one often comes across such statements. “Purchasing knows the price of everything and value of nothing.” We buy price and cost. “When will our order placers become purchase managers”? “Purchasing acts like a post box.” Purchasing should, therefore, keep ‘progress’ as its key activity and should be future-oriented.

The purchase manager should not follow the safe and well-trodden path, instead, he should be innovative and his long-term objective should be to minimise the cost of the ultimate product.

He will be able to achieve this if he arms himself with techniques such as value analysis, materials intelligence, purchase research, SWOT analysis, purchase budget, lead time analysis, etc.

The buyer has to adopt separate policies and procedures for capital and consumer items. He should be able to distinguish between indigenous and international purchasing procedures. He should be aware of the legal and contractual aspects in international practices.

3. Principle of Right Source:

The source from which the material is procured should be dependable and capable of supplying items of uniform quality. The buyers have to decide which item should be directly obtained from the manufacturer. In emergencies, open market purchases and bazar purchases are resorted to.

Techniques such as value-analysis will enable the buyer to locate the right material. Right modes of transportation have to be identified as this forms critical segment in the cost profile of an item. It is an established fact that the cost of the shipping of ore, gravel, sand etc., is normally more than the cost of the item itself.

Specifying the right place of delivery, say, head office or works, would often minimise the handling and transportation costs. Similarly, packaging forms an important aspect in the cost of an item; for instance, in toothpaste, the tube is costlier than the paste it holds.

4. Principle of Right Price:

It is the primary concern of any manufacturing organisation to get an item at the right price. But right price need not be the lowest price. In this context it may be worth remembering John Ruskin’s famous statement: “There is hardly anything in the world that somebody cannot make a little cheaper and the man who considers price alone is the lawful prey, while it is very difficult to determine the right price, general guidance can be had from the cost structure of the product.

The ‘tender system’ of buying is normally used in public sector organisations but the objective should be to identify the lowest responsible bidder and not the lowest bidder. The technique of ‘learning curve’ also helps the purchase agent to determine the price of items with high labour content. The price can be kept low by proper planning and not by rush buying. Price negotiation also helps to determine the right prices.

5. Principle of Right Time:

For determining the right time, the purchase manager should have lead time information for all products and analyse its components for reducing the same. Lead time is the total time elapsed between the recognition of the need of an item till the item arrives and is provided for use.

Obviously, this covers the entire duration of the materials’ cycle and consists of pre-contractual administrative lead time, manufacturing and transporting lead time, and inspection lead time.

Since, the inventory increases with higher lead time, it is desirable to analyse each component of the lead time so as to reduce the first and third components which are controllable. While determining the purchases, buyer has to consider emergency situations like floods, strikes etc.

He should have contingency plans when force majeure clauses become operative, for instance, the material is not available due to strike, lock-out, floods, and earth-quakes. However, rush purchase should be resorted to only in exceptional cases.

6. Principle of Right Place:

After all a buyer would like to have the products at the required place or at a place that is most convenient to him from the point of view of the location of store houses and/or plant location.

7. Principle of Right Terms:

The terms and conditions governing the contract must be notified at the time of tendering. The terms and conditions governing the contract, as finally accepted by the purchaser, must be incorporated in the contract. They should be practical and unambiguous.

Sometimes, the terms stipulated by a buyer are too rigid. Usually, good suppliers will try to avoid such buyers. In the bargain the company loses because business then has to be transacted with such parties who accept the company’s terms.

Their prices, obviously, will not be quite competitive nor will their service be so satisfactory. The company should, therefore, ensure that the terms stipulated are not one sided and are not unreasonable. Otherwise good suppliers may move away.

It would be a good idea if the terms and conditions are reviewed periodically with reference to the stipulations may by the vendors in their tenders to see whether it is essential in the company’s interest to revise a few conditions to the mutual advantage of both the company and the vendors.