There is a number of method of purchasing materials like buying equipment, supplies, parts, materials, tools, and so on. There are various purchase models are given on the basis of the industry’s size, nature, and quantity of the material needed
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Purchasing by Requirements
“Hand-to-mouth buying” is the alternative name of this method. This is the method of buying in which purchases are done whenever there is a need for materials.
The different cases when this method of purchasing materials can be used are:
- Purchasing of those materials which are not commonly used.
- To facilitate the ad-hoc requirements of the production.
- When the prices are not stable or keep on changing or the requirements of the organisations are not constant, it is advantageous to buy the material in lesser quantities often.
Advantages of Purchasing by Requirements
- There will be a lesser amount of inventory carrying cost.
- Need of limited storage space.
- The requirement of lesser working capital.
- In case of job-order type production system where a number of products are made according to the customer’s orders, this type of purchasing is more appropriate.
Disadvantages of Purchasing by Requirements
- There will have a greater cost of distribution
- It is not able to fulfil the unexpected demand.
- The benefits of negotiations cannot be taken due to a lesser number of units.
Purchasing for Specified Period
This is the method of purchasing materials in which sufficient quantities of different materials, e.g., coolants, stationery, oil, and different other types of materials which are needed for the operation and maintenance of the offices, plants, and different organizations divisions are purchased which can fulfill the requirements of a certain time period. The time period is estimated on the basis of the production schedule.
Advantages of Purchasing for Specified Period
- Once the order is obtained, production can be initiated.
- It requires lesser working capital and storage space.
- It is easy to evaluate the cost which is not greatly influenced by the market variations.
The disadvantage of Purchasing for Specified Period
The reliance on a single source will be increased if the buying is done for a certain period.
This method enjoys the complete benefit of the current market situation and price variations. The calculation about the requirements of the analysis of market patterns for placing an order for the purchases. In order to fulfill the upcoming requirements, the buying is done well in advance when the prices are at a lower level and are expected to increase in the future.
Advantages of Market Purchasing
- Lower production cost and greater profits can be enjoyed by acquiring the materials when the prices are low.
- The overhead expenses are also limited to the lower level due to the buying of the quantities in a single order.
Disadvantages of Market Purchasing
- It incurs in greater inventory carrying cost.
- There will be the need for having large storage.
- Seizing of the organisation funds.
- There is a probability of huge losses in case of any judgmental mistakes.
For having the greater profits purchasing the materials in additional units during the lower prices, is done in speculative purchasing as opposed to market buying. The main focus while buying remains on the price patterns rather than the stringent material requirements of the firm.
Advantages speculative Purchasing
- There are chances of earning greater profits
- It results in lower overhead expenses.
Disadvantages of Speculative Purchasing
- There is a possibility of huge losses.
- It can result in outdated material.
- There will be a huge investment in inventories and excess carrying charges. iv) Possibilities of spoilage and wear and tear of the materials.
This is the method in which a supplier is given a contract to facilitate the material on the contract prices for a definite period of time (such as 3-4 years). By providing•a suitable notice period, the review of the contract can be done. Contracts are preferred by majorities of the firms which provide the supply of basic products, e.g., steel, pig iron, coke, coal, and so on in huge numbers for a specific time period.
Advantages of Contract Purchasing
- The requirements of having huge stocks are avoided.
- There will be no effect of market variation on buying.
- A lot of time can be saved which may be required to invite the quotations.
- It provides security of delivery of materials.
The disadvantage of Contract Purchasing
There may be irregular supply resulting in delayed production.
This is the buying method in which products are bought in groups or lots in the form of a single order rather than placing different orders for every individual product.
Advantages of Group Purchasing
- There is a reduction in clerical works.
- Minimization of charges related to delivery, packing, and other overheads.
- As each order is of high value, some discounted rates or rebates on the total order value can be provided by the suppliers.
Disadvantages of Group Purchasing
- Group Purchasing is a long-term commitment, so entry or exit is not possible for the group members at their own will.
2. This is a kind of compromise and thus lesser flexibilities can be faced by the different members in the benefit plan, In order to sustain and strengthen the group buying, there will be a need for time and energy to be invested.
Purchasing through Directorate General of Supplies and Disposal
In this type of buying different firms are contracted by the department for having the supply of a specific material to any government agency in a certain year on the pre-decided prices. This must be ensured by contracted firms that the supply of similar materials is not done by them at a lower price which is provided in the contract.
The orders are placed to the suitable firms by the different government departments which are in need of some materials which are bought at the rate mentioned in the contract.