Procurement Cycle in Supply Chain

procurement cycle in supply chain

Procurement Cycle in Supply Chain


The structure of the Procurement Cycle in Supply Chain department depends upon various factors like nature of the items Procured, volume, frequency of Procurement, inspection procedure, to be adopted etc. The structures and procedures followed also vary from company to company. An authority of amount to be spent on Procurement also may vary in different company. There is no standard method for organization activities of Procurement department but every company organize its activities best suited to itself.

However, broadly the various steps involved in can be as follows.

  1. Identification of need of materials in terms of quantity and quality.
  2. Intimation to Procurement department about need.
  3. Preparation of Procurement plan.
  4. Selection of waste source after proper scrutiny.
  5. Negotiation and finalizing of terms of purchase contract.
  6. Send purchase order to supplier.
  7. Call of timely delivery after receiving suppliers’ acceptance.
  8. Inspection of material received.
  9. Verification of suppliers’ invoice against purchase order and documentation of goods received.
  10. Payment to supplier against material received.

This is called as the purchase cycle following figure shows a typical purchasing cycle

Goals of Procurement Cycle

Procuring is the important function of materials management. An objective of the Procuring is to issue or continuous supply of raw materials, subcontracted items and spare parts to the production department. It also aims to reduce the ultimate cost of the finished goods by purchasing materials at right price, right time on right quality in right quantity from right source at right place through right mode of transportation. Right price means purchasing at lowest price by proper planning and through proper negotiation. Right quality means desire quality specifications should be made after due measurement. The specifications are laid down by user department while preparing indents. Sometimes drawings are also attached to indents. Right time is decided on the basis of lead time for different items. Lead time is the total time gap between identification of need of an item and the time at which item is available for use after arrival. The lead time consists of four components such as,

  1. Pre-contractual administrative time.
  2. Manufacturing time.
  3. Transportation time.
  4. Inspection time.

Right source is the one which is dependable and can supply items of consistent quality over period of time. Selection of right transportation method is also important, as transportation method will decide the time for transportation and the ultimate cost of the product.

Right quantity is to be decided after considering factors like availability of item, price structure, discounts, relationship with supplier and should be based on knowledge and experience of buyer. Negotiations are an integral part of purchasing. Availability, number of sources, price, delivery, penalty, discounts, transportation method etc. Are some of the parameters affecting process of negotiation.

Procurement Cycle Budget

Procurement Cycle budget indicates the requirements of direct and indirect material and purchased services as set out in production cost and capital expenditure budget. These requirements should be expressed in physical and fiscal terms to the extent possible. Main purpose of purchase budget is to plan purchases and place long term contract after considering relevant aspects. Second purchase is to plan cash requirement

Purchase Method / Procedures

User department authorizes purchase department to make purchases by three method such as,

  1. Through purchase requisition or materials indent form.
  2. Through permanent order card or travelling requisition.
  3. Through various part list made in conjunction with production department.

The Purchase Requisitions

The department needs material prepares material requisition usually on the materials indent form.

This requisition is generally, made in duplicate, one copy each for the department raising requisition and for purchase department. Purchase requisitions are signed only by the person authorized by the management. The authority to sign is generally linked to the seniority and the value of purchase made. The value limits linked to the seniority designation of the person like general manager, manager, deputy manager, officer etc. May be prescribed by the management. The name of authorizing officers along with their sanctioning financial limits must be available in writing with the purchase department. Generally capital equipment purchases are handled by top management.

Permanent Order Card (TR) Traveling Requisition

This method is used for those items, which are required to be purchase repeatedly in bulk quantities. Generally, these are items regularly stopped in stores. The travelling requisition is permanent card, which records all detail of the material. As most of the detail required are already available on this card, it saves time and reduces paper work. It also avoids errors, which may occur while translating the information into usual purchase requisition. It also automatically creates a record of transaction for a particular item.

The stock control clerk sends TR to the purchase department when the stock level reaches the reorder level. To avoid mistakes a colored strip is attached to the stock cards. On receipt of TR, purchase department finalizes the source, quantity to be ordered and passes the card further for typing of the purchase order. The number of purchase order is then entered on TR and it is returned to the stock clerk.

Bill of Materials Of Parts List

Bill of materials is a list of various materials, which are required to make a particular product. This is also called as part list. Production schedule is converted into the bill of materials which indicates materials required and the timing when they are required. This helps purchase department to exactly understand the quantity and timing of various materials required. Purchase department consultants stock control department for items, which are already in stock and purchases balance items. It is expected that the department making requisition should give all details to purchase department like specification, account head, functional requirements, etc. For better choice and reduced price.

Contents of Purchase Order

Procurement department may send inquiries to probable suppliers to quote rates for supply of materials. Once the supplier is selected and rates are finalizing the purchaser gives purchase order to the supplier, which is a contract expressing terms and conditions of supply.

Generally purchase order contains details such as,

  1. P.O. Reference number.
  2. Description and specification of materials to be supplied.
  3. Quantity and delivery schedule, if any.
  4. Price discounts payment terms.
  5. Shipping transport instructions.
  6. Location where materials are to be delivered.
  7. Signature of materials manager.
  8. Other standard terms and condition usually printed on reverse sideThe P.O. Is in multiple copies. Original and one additional copy being sent to supplier for giving acceptance, and the balance copies one each to department raising acquisition accounts department and the receiving department or stores.

Follow Up

Items are classified into fast moving and slow-moving items depending upon their movement. Depending on the items, time and frequency of follow-up can be decided. In order to ensure selective follow-up p.o. Status reports are prepared. These are printed parts number wise or supplier wise to make necessary follow up.

Receiving Inspection

Receiving is an important control point in the purchase system. The materials received are checked for quantity and quality against the purchase order. A systematic record of consignment received, carrier details and description would enable quick identification of materials. Secondly, it can reflect the suppliers, which supply materials late or provide split deliveries.

Inspection of received materials should be done by the qualified and experienced staff in receiving department. After inspection goods received note GRN is prepared by the receiving clerk. If goods are rejected, rejection report is prepared. Similarly, a separate report is prepared for short received on excess supply.

Checking And Payment Of Suppliers Bill

The supplier sends the invoice for the material supplied for payment. This invoice / bill is checked by purchase department of accounts department against purchase order and GRN. Once the bill is checked the payment to the supplier is made by cheque.

It is expected that each organization should define its purchase policy giving broad statement of procedure on principles laid down to guide executive action. Policy gives direction and overall boundaries within which activities related to purchase function must occur.

It is obvious that once policy is finalized, operating procedures to implement policy must be develop. Operating procedures are expected to define a series of steps to be taken to accomplish a task. Hence, this should be a simple and result oriented. It is also necessary that these procedures should enable from communications between different departments and avoid burden of paperwork.

Special Procurement Cycle System

Forward Buying

Forward buying depends upon availability of item, the economic order quantity, discounts available, delivery schedule and funds available with organization. In manufacturing organization, speculative buying is not this sorted to, which generally aims at making capital out of price fluctuations. In commodities market “hedging” is common where contracts are sold on brought.

Tender Buying

Tender buying is generally undertaken by state, central, government departments and public-sector undertakings. Initially bids are sought from registered bidder, suppliers. These bids are evaluated by comparing quotations. Generally, order is given to the lowest bidder, however other aspects like quality, reliability of supplier are also considered.

Market Order

This is used for ‘c’ class items required frequently. This is a contract for supplying required quantity of items, say for one year, at fixed price. This system avoids paper work and enable to purchase material at lower prices due to quantity discounts. The delivery schedule should be incorporated in contract as per buyers needs

Zero Stock

Buyers firm does not stock any item but sailor holds inventory, due to which he charges higher price per unit for the item supplied. For buyer, this system avoids Procurement Cycle procedure, and fears of obsolescence of inventory. This also frees him to concentrate on other activities of organization.

Rate Contract

This system is mainly used in government departments and public-sector undertakings. Buyer and seller agree to the rates of items after negotiations. Rate contracts generally, indicate rates and not delivery period. Hence, suppliers demand higher rates for urgent deliveries. To avoid this problem, delivery of minimum quantity at the agreed rate is made. This is called as running contract. Railways dgs&d etc. Follow running contract system. The main advantage of this method is reduced reduction in internal administrative lead time.


When purchases are made from one customer in reference to other, it is called as reciprocal buying. Reciprocity encourages less efficient manufacturers and suppliers by assuring them gains, which would not have been possible by price and quality. Reciprocity should not be used in all purchases as it discourages competition and may lead to selective supplier and higher price.

Systems Contract

This is useful for items with low unit price and high quantitative demand. It primary aim to reduce administrative expenses coupled with necessary control. Original intent approved by appropriate authority is shipped back with the items, which avoids usual documentation like material requisition, purchase orders, follow up letter, etc. The contract mentions delivery period, price and invoicing procedures.

Leasing, Make or Buy Decision,

Make or buy decision, leasing

Purchasing Decisions Make or Buy, Buy or Leasing and Sub-Contracting

Make or buy decision, leasing

Make or buy decision, leasing; Manufacturing company cannot produce by itself all the components required by it sometimes it may have capacity to produce still a decision has to be made weather it is economical to produce in house or buy it from outside

Factors in favour of making components in house

  1. It is cheaper in cost as compared to buying from outside
  2. Excess plant capacity available which can absorb overheads
  3. Extensive investments beyond capacity of supplier required to create facilities to produce CC specialised items
  4. The item has relatively large and consistent demand
  5. Supplier not interested due to small quantity required
  6. Company has necessary equipments expertise which can be utilised for family to produce an item similarly closely allied to its main products components
  7. very big items which are difficult to transport
  8. Company intends to maintain secrecy of product design and manufacturing prices
  9. Existence of only 1 non dependable supplier in terms of quality delivery schedule financial stability etc
  10. Company may be interested in forward or backward integration
  11. To utilise the existing manpower effectively in recession Times
  12. To reduce ultimate cost of product by reducing expensive in exercise duty is sales tax octroi etc

Factors in favour of buying a component from outside sources

  1. Cheaper in cost as compared to a in house production
  2. Necessary space equipments time and manpower skills not available in house
  3. Company does not want to make new investments which can be am used beneficially elsewhere
  4. Existing facilities can be used more profitable by produce other components
  5. Legal barriers prevent company to produce in house for example environment problems patents etc
  6. Inconsistent demand
  7. Supplier specialises in that component and can give better quality
  8. Availability of good number of suppliers offering better selection choice
  9. Status of Industrial Relations in company

Make or buy decision should be evaluated continuously as Technology as well as internal and external environment of company is changing continuously for this purpose and analysis of the present and future market and economic Trends supplier evaluation new development in the raw materials and processes etc is necessary

Engineering units generally preferred to buy them to make due to following factors

  1. Components manufacturing specialist for that product can produce at much lower price than producing in house
  2. Such specialist manufacturer keep track of new technologies and can make necessary investments to ensure good Returns
  3. Parent company sets up ancillary units which are joint venture of partnership companies e.g. Telco have set up ancillary units like Tata toyo Limited JBM tools PVT Ltd etc which produce specialised components for a Telco
  4. Due to less inventory new concepts like just in time total quality management tqm etc  can be taken up

Buy or lease decision


Leasing the international accounting standard 17 define sleeves as an agreement whereby the lesser conveyor to the lessee for rent the right to use an asset for an agreed period of time this includes a contract for the hire of an asset which provides for giving the higher an option to acquire title to the Asset upon the fulfillment of certain agreed conditions

The point to be noted here is that the easy pace lease rental 2 laser over a period of time and prefix rate at fixed interval ownership of acid remains with laser or Lisa gets only right to use that asset

Types of leases

  1. Financial lease

 This transfers majority of the risks and rewards pertaining to the ownership of an asset though its title may or may not be subsequently transferred. in this these the rental Evil during the period recover the capital cost of the acid and contributes to the prophets of laser this enables laser light of the acid and dispose it off the way he likes

In this leaves the lesser retains the ownership of the assets during the lease period through a purchase option or reduced rentals may be provided after the lease period during the leaves period primary period laser receives the cost of the Asset and his profit next paragraph

During secondary period the lease may be continued on payment of substantially lowered rental through the list is the legal owner the risk and reward incidental to ownership pass on to the lessee hence lassey is supposed to pay for the insurance maintenance of the Asset etc

This release this Lizy is non cancellable were both sides except in the event of default according to provisions of the law during the primary period of leaves the least she has the exclusive right to retain position and to use the assets object to complying with the terms of the lease agreement

  1. Operating leases

In this type of lease the owner lesser of an asset agreement to leave the acid for specified period for an agreement some to be paid as rentals and who Returns all this and rewards incidental to ownership

In this lease the lesser maintenance that’s at least in good condition and retains ownership of an acid during and after the lease period the Lizzie has the exclusive right to passes and use the assets the lazy period is generally shorter up to 1 year the lease rentals over one single leaves period generally do not cover the cost of the Asset

Advantages of leasing

  1. Burden and cost of likely obsolescence shifted to the laser
  2. Leasing is better option on short term basis then out right purchase of an acid in rapidly changing technological environment
  3. Enables organisations with uncertain incomes the use of an asset
  4. It is more flexibale than ownership
  5. Allows companies to expand gradually as they cannot invest in assets
  6. Leasing offer sometimes cost savings over direct borrowings allow
  7. Allows companies to expand gradually as they cannot invest in assets
  8. Lease financing is better option when an equivalent amount of Dept finance is not available
  9. enable to avail certain tax benefit as lease payment is tax deductible
  10. Leasing reduces the risk of obsolescence of assets
  11. More preferred by institutional in inventor who want to earn higher rate of return on their assets
  12. Preferred by companies who operate within Limited working capital
  13. Leasing companies provide asset along with labour so lazy need not face Union and Labour problems

Disadvantages of leasing

  1. Cost of living high on long term basis
  2. In case of Wrong Turn and non cancellable lease Alizee is required to face the danger of Excellence obsolescence
  3. Lease rentals being fixed lazy cannot enjoy the benefit of decreasing interest rates
  4. when the lessee Enter into leasing agreement it is difficult to understand the implications of financial resources
  5. lessee cannot take advantage of and potential capital gain in case real estate value increases during lease period
  6. The interest cost of lease financing is generally higher than that of debt financing
  7. Ownership of asset remains with laser hence we cannot benefit from increase in value of property due to inflation and demand

Contents of the lease agreement 

The lease agreement generally contains information of following

  1. The least transaction
  2. Title identification and ownership of an asset
  3. Cost of maintenance and use
  4. Liabilities of the lazy
  5. Liabilities of the laser
  6. Default of the leases
  7. Remedies in event of default
  8. Arbitration


Subcontracting in walls procuring parts and components required to produce main product from outside sources

For example Bajaj Auto Limited manufacturers scooter and motorcycles Bajaj Auto Limited broke your large number of components and parts required to manufacture scooter on motorcycle from outside resources the main reason for subcontracting is to reduce costs the small manufacturers overhead Bangalore he can supply the same components that much lower cost than producing in house

This is a common practice in large automobile and Engineering companies Tu subcontract large number of components to small scale manufacturers who specialise in particular line activity se casting forging auto Electricals rubber parts transmission products like there’s police etc

Subcontracting in was following activities

  1. Vendor development – Various actions related to this activity can be given below
  • Identification of vendors
  • Guidance two vendors to procure the required components of desired quality and price
  • Optimisation of number of vendors
  • Evaluating of  vendors
  • addition and deletion of vendors

Before selecting the vendor companies first evaluate their strength capabilities by Reference visit to their factory they inspect the facilities available for production quality control etc now add a large companies are trying to reduce the number of vendors and new suppliers are not encouraged unless they have something special than others new suppliers are asked to root their products through selected few when does the intention behind this is to reduced administrative time and cost spent on dealing with large number of surplus secondly companies want to develop strong business relationship with selected few vendors

  1. Purchase formalities-This includes routine formalities like sending enquiries obtaining quotations placing orders follow-up and receiving and inspection
  2. Systems-Standardizing the designs of the components needed frequently enables to develop specialised skill of vendors it is also expected that purchasing procedure should also be standardizedVarious areas in which purchaser in large company should provide attention in subcontracting are as follows
  3. Establishing delivery schedule-This is necessary to receive uninterrupted flow of components from window to the company or desired time company is expected you sufficient Lead time as well as necessary drawings and designs to winter to ensure getting deliveries as perfect delivery schedule
  4. Prompt payment to vendor on delivery
  5. Ensuring quality standards-For obtaining desired quality from supplier it is necessary that company provides guidance Technology know how and test facilities to vendor when not available with him sometimes companies may provide raw material and to the necessary to produce the desired component in such case company pays the full cost of the tools required by vendor for producing the components required by the company the vendor is responsible for maintaining the tools in good condition it is expected that the vendors should send back the tools along with the components produce to the company on completion of orderSometimes the cost of tools is bore by Inder and the company on mutually agreed terms
  6. Record Keeping –Company is expected to keep records of all new raw materials paint Saint to vendor and received back from him similarly annual or 6 months is stock level maintaining Binder for all goods supplied by company should be recorded this is necessary from audit point of you

Procuring, Materials Management

Procuring, Materials Management

Procuring and Supply Chain Management.

Procuring,Supply Chain Management is a total concept involving and organizational structure unifying into a single responsibility the systematic flow and control of material and identification of the need through customer delivery.

The Supply Chain management contributes to increased profitability by coordinated achievement of at least materials cost. This is achieved by optimizing capital investment, capacity of personal, consistent with the appropriate customer service level.

Supply Chain Management is an organizational concept in which a single manager has authority and responsibility for all activity for all activities, principally concern with the flow of material into organization. i.e. purchasing production planning and scheduling incoming traffic inventory control receiving and store normally are included

Supply Chain Management – Scope

The scope of materials management is very vast however, we can broadly identify the following functions of material management

1.Inventory Control

This function covers aspects like setting inventory levels, ABC analysis, fixing economical ordering quantities, verifying safety stock levels, lead time even analysis and reporting.

Some other functions of Supply Chain managements are below

  • -Receiving and inspection of incoming materials.
  • -Inward and outward transportation to various departments.
  • -Materials handling.
  • -Disposal of scrap, obsolete material, old equipment and machinery, surplus material.
  • -Value analysis.

2.Planning and Programming of SCM

This is accomplished with the help of sales forecast and production plans. Supply chain planning and programming involves identifying the individual requirements of parts, preparing materials budget, forecasting the level of inventories, scheduling the order and monitoring the performance in relation to production and sales.

3.Stores | Warehousing

Warehouse is responsible for physical control of materials, preserving materials, minimization of defects and damages through timely disposal and efficient handling. Stores also maintain proper record of materials, ensures proper location and stacking of materials. The physical verification of stocks and the reconciling them with book figures is also responsibility of stores.


These consists of selection of source of supply, deciding terms of purchase, placement of purchase orders, follow up and maintaining good relationship with supplies, approval of payments to supplier besides evaluating and rating suppliers.

Objectives of Supply Chain Management

Prominent objective of Supply Chain management is as under,

  1. To ensure continuous and uninterrupted production or services operations by maintaining steady flow of SCM.
  2. To reduce the cost of material by purchasing various material of right quality and right quantity from source at right price at appropriate time.
  3. To achieve economies in the cost incurred on material, after their purchase through storage, processing and warehousing till the finished goods ultimately reach customers.
  4. To minimize working capital requirements through proper and scientific inventory control.
  5. To keep watch on new products available in the market.
  6. To increase competitiveness of manufactured goods by reducing their price through cost reduction and value analysis.
  7. To identify import substitute product to reduce overall requirement of foreign exchange and dependence on foreign suppliers.
  8. To ensure co-operation and co-ordination among all departments within the company to meet material management objective and corporate and functional levels.
  9. To supply better quality raw materials or components with ultimate aim to improve quality of end products.
  10. To conserve materials resources within an organization with a view to conserve natural resources.

Procurement, Structure Of Supply Chain Department.

Procurement, Structure Of Supply Chain Department

We are going to discussed Procurement and  how supply chain department has to have close interaction with other departments in company for achieving desire goals of company and cannot afford to work in isolation.

 Procurement, Structure Of Supply Chain Department

Supply chain management being a critical function has to be handled by a competent person who should be part of the top management team. In view of this importance, the head of the material management function generally directly reports to the managing director like other departmental heads, viz, marketing, production, finance, personal, etc.

However, there can be little variations in organization plan depending upon the view and nature of operations of the organization.

The internal structure of the supply chain management department can be,

1.Structure based on commodities.
2. Structure based on location.
3. Structure based on functions.

Detail of each is,

Structure based on commodities.

Various items required by the organization are classified into different groups such as raw materials, spares, components, finished goods, important items, etc. The responsibility of age group is given to different individual.For example, carbide tools manufacturing company may have commodity groups for steel, carbide inserts, imported items and brought out components like shims, screws, levers, etc.

This structure avoids duplication of efforts as each commodity purchase is handled by a separate individual. Besides, the individuals are in charge of group can develop good rapport with the commodity market handled by him.

Secondly, this structure enables standardization and bulk buying in each group.

Structure based on location.

This structure is preferred when organisation has several plants spread across different location in the country.The decentralized supply chain management setup has separate materials manager at each location. This enables reduction in cost and time of procurement besides faster coordination with other departments like production, marketing etc.

An organization can also have an option of centralized supply chain management department instead of decentralized set up at each location. The advantage of this is the reduction in cost due to centralize bulk buying for requirements of all plants at different locations. Secondly it is possible to transfer material from one place to another in case of emergency or excess supplies.

Some organizations may develop system combining the advantages of centralization and decentralization. In this system, central supply chain management staff located at headquarters exercises control at policy level in terms of overall guidelines, procedures and system to be followed by decentralized departments at different plant locations.

The departments and plant are expected to report periodically to the centralised materials department and headquarters. The departments at plant level are given financial limits for the purchases by them, beyond which permission from headquarters is necessary. The items common to all plants is purchased by headquarters, which enables substantial saving due to bulk buying’s.

Structure based on the function.

In this structure the groups are formed on the basis of different functions like purchase, transport, receiving, stores, etc.

Each function is headed by a separate individual who reports directly to materials manager, example purchase activities for different plants will be looked after by one individual.

Similarly transport requirement for all plants will be looked after by another individual.

Composition of purchase department.

The composition of purchase department will depend upon requirements and the kind of activities involved in the organization. Purchase department also need support services like typing, clerical, statistical information, etc.

In large companies purchase department is supported by cost analysts, economists and legal advisers.


Relationships with other departments.

Purchase department should have continuing relations with only not only other departments in organization but also with its suppliers.

Procurement and engineering

Engineering department is responsible for preparing the technical specifications for company’s products and the materials required to produce product these products for maximizing profits.

The material specified by the engineering department must be both economical to procure and economical to fabricate and similarly these should be available from more than one supplier/ producer.

Generally, there has to be greater understanding between these two departments on their concepts of materials problems. Engineers may look for more safety, quality and performance, while purchaser may look for cost and timing and stick to closer performance requirements than higher safety.

Hence, dilemma of cost vs safety may crop up. In such circumstances, mutual understanding and willingness to give and take is necessary between purchase and engineering department to arrive at mutually satisfactory solution.

 Procurement and operations/ production.

The purchase department procures the goods and materials needed for production, after receiving material requisition from them.

If production department finalizes its production schedule last minute and does not allow purchase department sufficient time then such purchases may be very costly and increase final cost of company’s products.

Such situation leaves inadequate time for selection of good supplier and negotiate, the price. As against this, sometimes production department summit production schedule/ requisition to purchase department and purchase department fails to procure the necessary goods and materials.

This may result in starvation of raw materials required for production department and production of goods, which are not in demand.

Material shortages in process industries are very serious which may result in the complete production stoppage.

A good coordination between production and purchase department may lead to selection of proper materials and reduction in final cost of production.

Purchase department should also ensure timely supply of maintenance spares and materials to maintenance department, which is responsible for ensuring uninterrupted production.

Procurement and marketing .

Marketing department relies on the efficiency of purchase and production department when it commits delivery dates and quality standards to the customer the cost of finished products also depends upon the costs going for purchase of raw materials.

Similarly purchasing production sales cycle depends upon sales forecast given by marketing department.

This forecast decides the production schedule, which is the basis for purchase schedule. Hence it is necessary that marketing department summit accurate forecast.

Any changes in sales forecast should be immediately intimate to production as well as purchase department. Similarly purchase department should immediately inform marketing department about any increases in raw material prices, which can be used by marketing department for seeking price increase from its customer.

Purchase department can also access to its sales department by serving as a practical sales laboratory.

Many manufacturers and suppliers approach purchase department for selling their goods and services.

Therefore, officers in the purchase department can act as source of information to marketing staff to develop and refined their company’s sales policies and procedures.

Procurement and finance

Success of the business depend upon goods good financial planning. Accurate sales forecast and purchasing schedule unable to plan working capital needs and the cash required at given moment. Finance department is responsible for making prompt payment to the suppliers, which creates healthy relationship between purchaser and supplier. However, to affect this purchase department must give sufficient advance notice to finance department to organize the requirement of fund. Finance department also keeps watch on purchase transaction viz.

It sees that company’s policies, rules and regulations are adhered to when purchase transaction take place. Sometimes to take advantage of low prices of materials available in market, the purchase department me make large purchases, however, before this it should consult finance department about availability of finances and excess load on these treasuries.As against this, if finance department does not make available funds for such low-price purchase opportunity, the company may have to pay higher price for same materials at a later date.

Hence, close cooperation between purchase and finance department is necessary to manage working capital and to take benefit at right buying opportunities.

Procurement and planning

Purchase department can assist planning department to draw a realistic short term and long-term plans for the company based on their knowledge of the market.Purchase department can feed planning department accurate forecast about the position of materials supplies, market and new products introduced into the market.

As against this planning department should take purchase department in full confidence about plans chalked out by company.

Procurement and legal 

Purchase department being responsible for materials purchases, enters into a legal contract between them and suppliers, through purchase order.It is necessary that purchase department should understand legal implications of various clauses in purchase order.

Here, legal department can readily assist purchase department to draft and interpret correct clauses in purchase order or contract so as to protect interest of the company as well as purchase department.

Procurement and personnel department 

For efficient functioning purchase department should be equipped with the right kind of staff in terms of their knowledge and skills.Personnel department can correctly assess their needs, recruit and train search stuff for purchase department.


Logistics , Supply Chain Management

Logistics , Supply Chain Management

Logistics and Supply Chain Management.

Historic Development.

Logistics and Supply Chain Management has been discussed in trade books and textbooks since the past two centuries. The concept of evolution of logistics and supply chain management is of recent origin and has roots in USA.

The first college textbook on purchasing was authored by prof. Howard t. Lewis of Harvard business school in 1933. Prof. Howard t. Lewis also envisaged in large companies need for creation of separate senior level post for control of materials function covering areas like purchasing, inventory control, receiving, inspection, warehousing, etc.

The importance of materials management, improved means of transportation and communication and technological changes in industries brought in the concept of ‘scientific management’ in USA.

Statistical quality control that is SQC found increasing use as the industries started mass production. SQC was adopted by industries in Britain in 1930’s while japan started to use the same after few years.

However, it was observed that senior management of the company is concentrated on other department like marketing, finance, R&D etc. Rather than purchasing, similarly skill staff was also not made available even though purchasing was responsible for chunk of the cost of the goods sold.

The quality of finished product was dependent upon the purchased materials, which in turn also have an impact in the profit of the company.

Between 1960’s and 1970’s is inventory was managed by using “Kardex” system. During this period buyer was mainly focus on “purchase price” and was concerned for continuous production rather than management of inventory.

In the beginning of 1980’s the company started marketing and procuring on international scale. The use of computers was started for the management of inventory. Management started understanding importance of controlling the cost of materials and reducing the overall cost of the product through automation of production process.

Due to this transitions role of purchasing and evolution of logistics and supply chain management function increased in organization. Inventory control leads to increase in profits of many companies. The inventory was control by using technique like just in time (JIT) and computerized materials requirement planning (MRP).

Skilled staff was now being assigned to materials function. MRP action reports replaced Kardex cards. In nutshell, the importance of materials management function was duly understood for the functional success of the organization.

Purchase management started increasing use of electronic purchasing system and Japanese system like kaizen, Kanban, quality circle, etc. Along with this, materials department started having first group of people.

who were mainly responsible for operational part of purchasing and another group of people who were responsible for department of supply function. these second group viz.,

supply managers started taking care of new product development, selecting sources, managing costs and developing strategic alliance with suppliers.

Sometimes, supply managers also participate in strategic planning of an organization. Supply strategy is one of the important strategy for formulating business plan of an organization along with other three strategies viz. Production, marketing and finance.

Objectives of logistics and supply chain management.

In earlier days performance of purchase department was measured on the basis of the change in the purchase price of materials, success in continuously feeding materials to production department and cost of running own department. However nowadays purchase and supply function is also expected to take care of such as,


Procuring defect free materials.


Reducing overall costs of acquiring, moving, holding, and converting purchased products and services.


Reducing the time required to bring new product to the market.


Providing appropriate technology on time and controlling the technology when dealing with outside suppliers.

Continuity of Supply.

Maintaining study materials to avoid in an uninterrupted supply

To sum of materials management is also related to other field of business activities and the other departments in the company.

Hence, materials management staff requires combination of technical expertise, and leadership communication and team skills, which help to achieve common goals set by organization.

DGS&D- Public e-procurement

DGS&D- Public e-procurement

DGS&D- Public e-procurement

The DGS&D,

the Director General of supplies and disposals is the central agency (DGS&D- Public e-procurement), which buys material on behalf of Government of India.

It services various government departments like Ministries, public sector undertakings, Railways, state governments, local public bodies and Quasi public bodies like municipalities, district boards, etc. being a central purchase organization.

It has brought in substantial standardization of the procedure for tendering and contracting. DGS&D is accountable to Parliament for its actions.

Organization structure of DGS&D

It is headed by director general, who is supported by one additional director general and five Deputy Director Generals. Its headquarter is at Delhi and regional offices are at Kolkata, Mumbai, Chennai and Kanpur.

Besides, for Overseas purchases it has offices in London and Washington. It has four wings viz. supplies, inspection, progress and disposals. How you were supplies wings is main stay of the organization.

This thing has 11 directorates under it, dealing in different types of goods. In order to deal with homogeneous groups of item at one place, grouping at the purchase directorate has been made.

The Planning and development division rationalizes specifications and draw comprehensive program for receipt and booking of indent of common user item.

The O and M branch devises procedure, systems and effective control necessary to improve efficiency. The statistical branch maintains the up to date statistics of the requirements and publishes the annual report and directory of government purchases.

The inspection wing checks specifications of the supplies made by the suppliers and monitors the quality during the manufacturing process. It also gives technical advice to the various user departments.

The progress being keeps track of the supply position after contract is placed and makes efforts to expedite the supply.

Three branches of these Wings our defense, Railways and general. This week has number of field offices spread all over the country.

The disposal wing Shoulders as the responsibility of disposal of surplus materials. A limit of rupees 10000/-  has been set for disposal of Stores buy indenting department themselves. The annual value of disposal by this wing is estimated to be rupees 50 cores.

Public Relations directorate handles complaints from suppliers and also gives solutions to solve their problems. It also gives advice on procedural matters and disseminate information about working of DGS&D. besides, DGS&D also has a contract officer, legal adviser and liaison with Railways and defense.

The organization also has cost accounts branch, Deputy Secretary for internal and Finance matters and a purchase advisory Council under the chairmanship of minister of supply.

Representatives of trade, industry Indenters are member of this Council. This Council work as a catalyst to increase efficiency of organization and help to change the organization in tune with the social economic environment in country by advising on procurement policy and procedures.

Purchasing procedure

DGS&D give the top preferences to the raw materials and items manufacturers in India, followed by items fully or partly manufactured in India using imported materials then for items manufactured abroad but stocked in India and lastly for imported items manufactured overseas.

The payments are made in Rupees and deliveries are taken in India except in exceptional cases. DGS&D also encourages purchases from small scale units by giving them price preference of 15% Vis a Vis offers from units in organized sector.

Once the indent is registered in the central indent section after checking, it is sent to the tender enquiry section of the concerned purchase directorate. Then depending upon the value, nature and delivery period for the goods to be purchased the quote for the tenders are invited.

The tenders may be advertised tenders, Limited tender on single tender for proprietary article, once the contract is placed after evolution of tender, the supplier calls inspectors for the inspection. The inspected stores are then dispatched to the consignee by the supplier.

The supplier takes 4 to 6 weeks to commence supplies. Sometimes, if necessary, DGS&D assist supplier to get critical raw materials required to produce the item to be purchased. Generally DGS&D takes about 10 to 12 week to places contract after receipt of indent.

Registration of suppliers

DGS&D maintain a list of registered suppliers. Manufacturers, stockiest of indigenous and imported materials, sole selling agents of Indian manufacturers and Agents of overseas manufacturers can registered with DGS&D. both Indian and foreign firms can register with their names as per the prescribed form of DGS&D.

The applications are scrutinized and evaluation of suppliers in terms of plant machinery available, technological strengths, funds position and the standing in the market is undertaken.

The quality of the product is also inspected by personal visit to the factory. After approval, the firm is included in the list of registered suppliers. Incidences of adhoc purchases from the registered suppliers on a limited tender basis is also observed many times.

Advantages of registration are as follows.

  1. The first preference is given to the registered firms.
  2. Demands, which are not advertised are fulfilled by registered firms.
  3. For advertised demands, copies of the notice are sent to the registered supplier.
  4. Rate contract and running contract items are generally reserved for registered suppliers.
  5. Demands for supplies, which have operational priority are reserved for procurement from Register firms.
  6. Generally all routine demands are fulfilled through registered suppliers. Similarly about 70 to 80% of the urgent demands are reserved for supply from registered suppliers.
  7. No security deposit is required to be made by the registered suppliers.
  8. Registered firms with DGS&D may be exempted from payment of security deposit even by public sector undertakings and state government departments.
  9. Registration with DGS&D enhances overall image of the supplier Organization in the market.

Types of contracts

Rate Contract (R.C.)

This is a contract for supply of goods of specified rate during the period covered by the contract, generally one year. RC is generally made with only those suppliers whose capacity to deliver the goods as per demand of indenters has been verified.

The main advantage to the intent is that he can procure goods as and when wanted without doing elaborate paperwork and without losing time.

The supplier is assured of substantial demand during the period and can enjoy benefit of economies of large scale production. Generally, order or RC are placed for minimum total value, which is specified in the tender enquiry for RC and also in the rate contract.

Running contract (RG/C)

This type of contract is for the supply of an approximate quantity of stores at specified price during period covered by contract, generally one year.

DGS&D combines approximate requirements of number of indenters for certain period and any of these indenters can demand his requirements at any time or specified period, from the supplier directly or through intent on DGS&D.

Ihe purchaser has the right to take a certain quantity (generally 25%) more or less than the approximate quantity mentioned in the contract. generally about 75% of the contractual quantities are taken before the expiry of the contract.

Payment procedure

The payments are decentralized and can be obtained from regional offices also. Generally, the terms of contract are as follows.

  1. 95% on proof of inspection or dispatch or a provisional certificate from the consignee in case of local deliveries.
  2. 5% after receipt of stores in good condition by the consignee.

Pay and Accounts Officer arranges is the payment of supplier’s bill within 2 to 3 weeks of their presenting, if they are in order.

For C.I.F. contracts, 95% of the price will be paid in India on presentation of shipping documents along with the inspection certificate.

Balance 5% will be paid on receipt of the stores in accordance with the terms of the contract in good condition by the consignee and introducing the certificate of such a seat endorsed on one copy of the inspection note.

Ministries and government departments on their own also make purchases of high values, other than DGS&D purchases, mainly for projects. Government and public sector undertaking purchases being be bureaucratic and time consuming, there is lot of scope for improvement and bringing professional approach. This can be achieved through professional training and adapting to the modern method and technologies.