Method of purchasing

Methods of Purchasing

It is an essential prerequisite of large-scale produetion that continuity of supplies should be maintained. It is as important as the cost of production, Running out of raw materials means danger of stoppage of work. Accumulation of raw materials is also not preferable because it will involve
greater investment. Both these conditions will increase the cost. So, purchasing policy or procedure should be established to avoid these situations, Purchasing policy or methods vary from organisation to organisation depending upon the nature of demand and conditions, Principal methods of
purchasing are as follows:

1. Purchase by requirements. Under this system,purchases are also made as and when required from open market. This system is generally relied upon where goods are not regularly purchased. Such goods are used so infrequently that they are not kept in stock in huge quantity, Such stock can be purchased on week to week or month to month basis. In such purchases it is necessary to rely uponthe supplier who can supply such materials regularly and promptly and also continuity of supply can be maintained
even in odd times,

2. Contract purchasing, Generally, the knowledge of buyer about the market conditions cannot be relied upon for
a long period because there are several factors which are not constant. In such cases, he may contract for future de livery buying a sufficient supply to cover his needs over a
period of time subject to review and cancellation with an appropriate period of notice. According to Alford and Beatty,”All purchasing is by contract but the term, contract purchasing is applied to that special type of contract which calls for deferred delivery over a period of time.” Spriegel defines the terms as “the purchasing under contract, usually consists of needed materials, the delivery of which is frequently spread over a period of time.” This method has the prime benefit to the purchaser because such contracts are generally entered into at a time when prices are low. This also has the advantage of avoiding the necessity for carrying stock by the user because provision is made in the contract for the delivery of materials to meet scheduled future requirements. It provides a measure of stability to supplier This method is particularly useful in cases where the materials are available in abundance at low prices in seasons and the prices fluctuate much. Floor mills, motor car manufacturers, and coal consumers generally purchase their requirements according to this method,

3. Speculative purchasing. Under this method a supply generally in excess of the requirements over a considerable period of time is purchased at one time and possession taken especially when market seems to be low with an intention of selling the excess quantity of materials at future date at a profit. This practice is current in case of stable commodities and for major process industries such as cotton and woollen textile mills. This method offers a great advantage of earning large profits and providing security against shortage if market goes favourably but involves large financial risk too, if market turns bearish or where the buyer has no sales contract at hand to cover the resulting product.The contract is essentially of a speculative nature. The riskis usually covered by ‘hedging’ if there is an organised market for the commodity for future trading.

4. Purchasing for a specified future period. Under this method, materials are purchased in bulk for a specified future period to maintain the flow of production. Goods to be purchased are such which are used regularly and price variations are not very great. Most of the goods are bought by this method.

5. Market purchasing. Such types of purchasing are generally made to take the advantage of price fluctuations.

The purchases are affected at lower prices to attain the greater margin of profits in finished goods and to have savings in purchasing expenses. The disadvantages of this method is that such a purchasing may not suit entirely the needs of production. Again price expectations may not be realised and may result in losses. This method is suitable in case of goods involving major price fluctuations.

6. Scheduled purchasing. This is a very scientific method of purchasing. Under this method purchases are scheduled and made according to coordinate the present and future requirements of production. Vendors are given approximate estimates of purchase requirements over a period of time in advance. In the words of Spriegel “Scheduled purchasing is closely related to carefully controlled production. This method ensures the adequate supply of raw materials at scheduled time and prevents excessive purchases as well as purchasing below the requirements. Thus, it ensures flow of production.”

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