31 PURCHASING METHODS

N. Rekha

Introduction

The term purchasing comprises of a number of activities all directed towards the acquisition or procurement of food and related materials for the operation of a catering organization. Purchasing is a major factor for the survival of any establishment especially in the increasingly competitive environment of today. In modern industry there is a whole new profession of purchasing agents on whom organizations rely for the resources , at the best possible value for money .Much time and effort is spent on marketing a business but purchasing which can make significant contributions to profits is often neglected. In the words of Alford and Beatty,”Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant”. Sound purchasing practices the act of buying materials for the right quality, in the right quantity, at the right time, at the right price, from the right source with its delivery at the right place. .

Objectives

• To provide an uninterrupted flow of materials and services for institution operations
• To find reliable alternative sources of supply
• To buy the best value: a combination of right quality at the best price with the best supplier service
• To maintain good relations with vendors
• To develop satisfactory sources of supply and maintain good relations with them.
• To develop good procedures, together with adequate controls and purchasing policy

Principles of Purchasing

The principles of purchasing are based on the commitment of the organizational funds to those items which are in highest demand for that amount of money , in order to make the establishment profitability and success. Nine basic principles of purchasing have been enumerated as discussed below:

1) Continuity of supply: This is of critical importance for minimizing or elimination disruption in food production activities.

2) Minimum Investment in Stocks: Costs of space which can be alternatively utilized for profitable activities, along with storage and handling costs amount to sizeable blockage of capital . Therefore quantities to be stocked need to be considered very carefully while purchasing.

3) Security of Stocks: Forward buying has to be carefully balanced with present usage requirements. Security refers not only to guarding of stocks from pilferage or theft but also preventing spoilage or deterioration of quality in storage.

4)  Maintenance of quality: The objective of purchasing is to procure those goods which are more suited to production requirements for end use , rather than those which rank highest in absolute quality ,in terms of standard quality , marks, grades or brands.

5)  Procurement at lower cost: In the matter of buying materials the principle should be to purchase at the lower ultimate cost rather than lowest initial cost. This does not mean getting cheap, non-standard materials, but reflects the bringing down of procurement prices through negotiations or cutting on packaging costs while still maintaining quality standards.

6)  Avoidance of Duplication and waste: Interaction between purchasing production and user departments is important to achieve reduction of food waste and duplication of procurement time and effort which can result from sudden changes in production policy shifts. Needs must be viewed for short, medium and long term production so that people responsible for purchasing can plan procurement in advance to meet those needs.

7)   Maintenance of Competitive position: Those who are incharge in purchasing department should have a thorough knowledge of the market environment and the purchasing policies of those offering similar goods and services to their customers . A purchasing manager who can communicate to production and service departments in advance can maintain the competitive position by drawing attention to costs, quality and prices that the market will take.

8)   Image with supplier: It is important to set up a value based image through high ethical standards that are then reflected in a suppliers response to the purchasing manager , staff and the organization as a whole .A supplier feels a sense of loyalty to the organization if it deals with justice and honesty and not a sense of exploitation through corruption and bribery. A good image will enable valuable information to be received from suppliers on new products, cheaper substitutes, new market ideas or materials that could lower costs or improve the products. The organization will experience less difficulty in procuring foods during shortage supply of materials, getting a price advantage during seasons of glut from loyal suppliers.

9) Harmonious Environment: Development of relationship that lead to harmony and cooperation both within the organisation and outside it results in a sense of mutual trust and respect among all associates. The effective commitment of organization and the whole team works together toward the growth of organization is bound to succeed.

PURCHASING FUNCTIONS

Purchasing activities are planned according to the rules and regulations of each establishments. The following are the general functions of purchasing

• Recording the specifications for each type of dish on the menu developed with the guidance of people who prepare the meals.
• Proper storing of materials to prevent any damage or wastage.
• Storing of things according to the utility.
• Rotating use of packed things so that older stocks are used first.
• Developing specifications for food items.
• Liaising with suppliers and user departments.
• Placing orders.
• Receiving of the materials.
• Proper inspection of goods.
•  Accepting or rejecting delivery of goods.
• Maintaining inventories.
•  Maintaining safety and security of stores , by keeping an eagle eye.
• Disposing off obsolete equipment and waste materials
• Control of stocks
•  Staff management

Purchasing Policy: Every establishment sets its own purchasing policies according to its specific needs for different types of food and related materials . Whatever the policies has laid down, the methods of buying depend largely on the quantities of the various items required at one time.

Purchasing Process

Purchasing process gets started only when a need is identified, after which a number of steps need to be followed before the item can be procured. This process requires the interaction and coordination between staff, suppliers, stores, accounts and inventory managers depending on the type of the establishment.

PURCHASING METHOD:

• Direct Delivery
• Open Market Buying
• Formal Buying
• Negotiated Buying
• Wholesale Buying
• Blanket Order Purchasing
• Stockless Purchasing
• Contract Purchasing

  DIRECT DELIVERY:

Direct delivery is a method which involves direct delivery of food and drink from the manufacture, who may be referred to as a national supplier.

OPEN MARKET BUYING:

In this method of purchasing the buyer invites quotations from supplier for items according to required specifications. The supplier is selected on the basis of his samples, prices, delivery schedule and other service offered. Contact with suppliers is made by visits to markets, on telephone or by visits of sellers to the food service establishment. Open market buying an informal method and can easily be adapted to individual establishments. It is generally used for purchasing of perishable foods like fruits, vegetables, meat etc. This also enables the caterer to pick up smaller quantities of items to suit stock holding levels, so important for items used occasionally or less routinely.

In fact, very small establishments which are family enterprises often buy directly from wholesale markets, food stores and cooperatives , and transport the quantities required to the establishment. This helps to appreciate and be aware of the changes in market situations, and make the best of use of prices and commodities by using instant discretion in purchase.

In larger establishments where suppliers are involved in the purchasing, it helps to use price quotation and order sheets for recording the prices quoted in the time bound contract with a supplier.

COMPETETIVE BID BUYING OR FORMAL PURCHASING

Regular quotations are invited from dealers according to the written specification for each item to be purchased. These requests for offers (bids) may be made through newspapers or they may be passed to the interested dealers.. Along with specifications the buyers also include in their requests, conditions like last date for quotations ,general time between order and delivery ,mode of delivery ,terms of payment ,willing -purchasing policy of each establishment.

The quotations received are kept sealed till the date of opening which is also indicated in the buyer’s requests. They are then opened by the purchasing manager in the presence of the bidders and representatives from the user department, accounts and administrative staff, who witness the quotation accepted. Normally, the quotation which has quoted lowest price will be accepted.

This mode of buying are generally adopted by government organisations for which central purchasing is done, such as for hospitals or homes for the handicapped or government schools. This is suitable for large catering establishments.

NEGOTIATED BUYING:

In this method an agreement is created by mediating between the buyer and the seller relating to the price and quantities, usually this method is adopted for the supplies that are in limited supply where both the buyer and the seller are eager to get the product quickly. Negotiated buying therefore involves taking quick decisions in a fluctuating market . Here the buyer contacts the seller directly. This method is faster, more flexible and informal than the formal buying.

This method is adopted when purchasing food items directly from farmers or manufactures but this is generally possible only for very large establishments because the contracts with manufactures would have to be for large quantities, e.g. one complete manufacturing lot. The advantage is obtained in terms of quality as well as in price, but the storage costs will increase . Two types of contracts may be signed between the buyer and seller:

(a) A ‘Firm At Opening Price’ (FAOP) contract: In this contract the buyer agrees to take the supplies at a price established in the future when yield is known, rather than at pre-season prices when the contract is made. Such an agreement is therefore firm but not signed till the seasonal yield is known.

(b) A ‘Subject to Approval of Price’ (SAP) : In this case the buyer has the option of rejecting the order if the price fixed in the future is not accepted to him.

WHOLESALE BUYING:

Wholesale buying is a method of purchasing where the contract is signed with a wholesaler for the purchase of items at a specific rate for future, along with the quantity required and when. This is method is suitable for larger organizations or central purchase departments. The wholesaler offers more frequent delivers than the manufacture, but within a much more confined area. Normally caterers tend to use a combination of manufacture and wholesaler as the supply sources, depending on the requirements.

BLANKET ORDER PURCHASING:

This method involves giving an agreement to provide a definite quantity of listed items for a period of time at an agreed rate if the price is not settled at the time of placing the order. The another category of blanket order agreement is to furnish all the requirements for particular items for a specific period. Here the amount is not fixed again until the time period has elapsed. This method is best for items that are required in small quantities but more frequently and where the usage rate cannot be accurately forecasted.

A blanket order is contracted usually for one year,although variations may exists between establishments. The description of orders in this method may be handled in any of three ways.

(1)   Itemization of all possible products covered.

(2)   Broad description of goods such as crockery, cutlery, detergents etc.

(3)   General orders to cover all items that a supplier can provide.

Prices are also fixed according to the method of ordering specified in the contract. A firm price may be quoted against each specific item or market price at time of supply on a maximum ceiling price as written in the contract. If the ceiling price is crossed then it is treated as a new single-purchase transaction and dose not come under the purview of the blanket order purchasing contract.

This method is useful as it eliminates the routine administrative work of ordering and carrying products in stock which are only a phone call away. Lower prices too can be negotiated because supplier keeps the stock often at earlier prices even though current prices may be higher in the market when the order is placed.

STOCKLESS PURCHASING:

This is a type of purchasing where the buyer does not keep the stock of goods ordered, instead the supplier warehouses them for the buyer. Sometimes the consignment may be kept with the buyer but it belongs to the supplier, in such cases the term consignment buying is used.

For this type of purchasing to operate smoothly there must be perfect understanding between buyer and seller. The prices charged in this system may be quoted slightly higher since the supplier bearing the warehousing and inventory costs. But the total capital of the buyer which is usually fixed in stocks is much less. Here, a backup minimum inventory is maintained by establishment to protect against unforeseen delays in production, delivery or a sudden increase in requirements

Generally, stockless purchasing applies to off-the-shelf items like essences, processed foods and mixes, snacks, biscuits, ready meal items and so on. Such items are commonly used by other establishment as well as the general consumer, all though the buyer may purchase it at frequent but intervals.

CONTRACT PURCHASING:

Contract purchasing helps the buyers and the sellers to improve the re-ordering of items that are repeatedly called for with very less administrative expenses. Agreement is put for long term and therefore the supplier are not changed frequently. The rate of usage and frequency of ordering over the contract period need to be known under the system contract. This method of purchasing is most commonly used for the purchase of housekeeping supplies.

The supplier is a specialist in the supply for the quantities demanded and offers and discounts to the buyer on the total contract.

The supplier usually assists the buyer in analyzing requirements of materials covered by the contract so that the contract details will reflect the products variations and prices most suitable to him. The rate of usage and frequency of reordering need to be known over the past contract period.

Such standardization is acceptable to the buyer for maintaining the quality of the end products. Immediate requisition is past on to the vendor and there is no need for copies. The requisition is numbered serially throughout the contracted period and deliveries arranged when required after pricing the requisition slip. Most arrangements have a clause to deliver at 24hour notice as if from a storeroom.

Periodic payment is made even though every requisition represents and involves.

The systems approach has a number of advantage such as:

• Deliveries are within a 24 hour work period.
• Time spend with the buyer is reduced.
•  Lower prices.
• Lesser cost on space and staff.
• Errors during ordering are reduced.
• Wastages due to changes in requirements are eliminated.
• The seller also gains through establishing a long lasting relationship instead of just taking orders.
• Savings on paper work, extra trips and therefore transport expenses leading to profitability and convenience for both sides.

CENTRALIZED PURCHASING: This type of purchasing is done mainly by the chain hotels. They purchase items for all their main properties together. This method helps them to source the items at a cheaper price as the quantity of the order is more resulting in economy of volume.

PETTY CASH SYSTEM: In this method of purchasing item quantities in the store are checked on a daily basis and only items falling short are purchased. This method operates as a petty cash system. It is effective for purchasing small order from local market in exchange for bill so that a cash payment is made.

AUCTION BUYING: The process of buying and sale of goods and services for bid, taking bids and then selling the goods to the highest bidder. This method is useful for purchasing furniture and equipment that are not obsolete. Sometimes certain export shipments that were rejected by the originally intended buyer are also auctioned to other buyer.

Summary

The purchasing process thus requires the interaction and coordination between staff of user departments, suppliers, stores, accounts and inventory managers, depending on the size of the establishment.

Web links

• purchasing.umn.edu/purchasing-methods-procedures.html
• https://eli.ctas.tennessee.edu/reference/purchasing-principles-and-techniques https://www.purchasing-procurement-center.com/purchasing-strategies.html
• https://www.maastrichtuniversity.nl/sites/default/files/2013/batoev.pdf
• www.mymarketresearchmethods.com/new-market-research-methods-techniques/
• www.groningerhomes.com/services/consult/purchasing-cost-control