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Purchasing Methods

The document discusses 8 different methods for purchasing materials, including purchasing by requirement which involves buying goods when needed in the required quantity, market purchasing which aims to take advantage of favorable market situations, and speculative purchasing where goods are purchased at lower prices with the goal of selling them at a higher price later for a profit. Other methods covered are purchasing for a specific future period, contract purchasing, scheduled purchasing, group purchasing of small items, cooperative purchasing, and typical types of purchases.

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Anil Yellumahanthi
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324 views

Purchasing Methods

The document discusses 8 different methods for purchasing materials, including purchasing by requirement which involves buying goods when needed in the required quantity, market purchasing which aims to take advantage of favorable market situations, and speculative purchasing where goods are purchased at lower prices with the goal of selling them at a higher price later for a profit. Other methods covered are purchasing for a specific future period, contract purchasing, scheduled purchasing, group purchasing of small items, cooperative purchasing, and typical types of purchases.

Uploaded by

Anil Yellumahanthi
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Methods of Purchasing Materials (8 Methods)

Some of the methods of purchasing are discussed as follows:


Purchasing By Requirement
This method refers to those goods which are purchased only when needed
and in required quantity. The goods which are not regularly required are
purchased in this way. On the other hand it refers to the purchase of
emergency goods. These goods are not kept in store. Purchasing
department must be in knowledge of the suppliers of such goods so that
these are purchased without loss of time.

Market Purchasing

Market purchasing refers to buying goods for taking advantages of


favourable market situations. Purchases are not made to meet immediate
needs but are acquired as per the future requirements. This method will be
useful if future needs are estimated accurately and purchases are made
whenever favourable market situations arise. The market situation is
constantly studied for forecasting price trends.

The advantages of this method are: lower purchase prices, more margin on
finished products due to lower material cost and saving in purchase
expenses. This method suffers from some limitations: losses in case of
wrong judgment, fear of obsolescence, higher storing expenses due to
more purchases.

Speculative Purchasing

Speculative purchasing refers to purchases at lower prices with a view to


sell them at higher prices in future. The attention in this method is to earn
profits out of price rises later on. The purchases are not made as per the
production needs of the plant rather these are far in excess of such
requirements. A cloth mill may purchase cotton in the market when prices
are low with the attention of earning profits out of its sales when prices go
up.

Speculative purchasing should not be confused with market purchasing.


The former is done to earn profits out of future price rises whereas the
latter is concerned with purchasing for own needs when favourable market
situations exist. Though speculative purchasing may result in profits but
there are chances of prices going down in future, fear of obsolescence and
incurring higher storage costs.

Purchasing For Specific Future Period

This method is used for the purchase of those goods which are regularly
required. These goods are needed in small quantity and chances of price
fluctuations are negligible. The needs for specific period are assessed and
purchases made accordingly. The requirements for such purchases may be
assessed on the basis of past experience, period for which supplies are
needed, carrying cost of inventory etc.

Contract Purchasing

In the words of Spriegel it is “the purchasing under contract, usually formal,


of needed materials, delivery of which is frequently spread over a period of
time.” Under this method a specific quantity of materials is contracted to be
purchased and delivery is taken in future. Even though the goods are
procured in future but the price and other terms and conditions are fixed at
the time of contract. This method may be useful when price rises in future
may be expected and material requirements for future may be accurately
estimated.
Scheduled Purchasing:

Under this method the suppliers are supplied a probable time schedule for
material requirements so that they are in a position to arrange these in
time. An accurate production schedule is prepared for estimating future
material needs. The suppliers are informed of probable needs and orders
are sent accordingly. The schedule provided by the purchaser to the vendor
is not a contract. This is only a gentleman’s agreement for terms and
conditions of purchases. The main objectives of this method are: minimum
inventory, prompt service. low prices, quality goods etc.

Group Purchasing of Small Items:

Sometimes a number of small items are required to be purchased. The


prices of these items are so small that costs of placing orders may be more
than prices. In such situations the buyer places order with a vendor for all
these items. The purchase price is agreed to be by adding some
percentage of profit in the dealer’s cost. This method will be used only
when dealer’s records are open to inspection for determining his cost. This
type of purchasing reduces the cost of the buyer by eliminating much
clerical work

Co-operative Purchasing:

Small industrial units may join to pool their requirements and then place
bulk orders with dealers. This will help them in availing rebates on large
quantity purchases, cash discounts and savings in transportation costs.
After receiving the materials these are divided among the member units.
Co-operative purchasing helps small units in availing the benefits of bulk
purchasing.
TYPICAL TYPES OF PURCHASES

Type of Purchase Description Examples

Raw materials Items with a lack of processing by the supplier Chemicals, coal, lumber, copper, zinc,
into a newly formed product. Often these raw
materials are not of equal quality and are
purchased by “grade.”

Semi-finished products All items purchased from a supplier required to Components, subassemblies, assemblies,
and components support an organization’s final that are subsystems, and systems (seat assembly,
production. steering assembly, doors, and posts)

Finished products Products for internal use or products that require Furniture, computers, cars, and carts
no major processing before resale to the end
customer.

Maintenance, repair, and Items that do not go directly into an Spare parts, office and cleaning supplies
operating items (MRO) organization’s product but are required to run the
business.

Production support items Materials required for packaging and shipping. Tape, bags, inserts, and shrink-wrap

Services Services required to support the facility or the Customer support, temporary labor,
business. facilities, and legal

Capital equipment Assets intended to be used for more than one Machinery, computer systems, and
year. material-handling equipment

Transportation and third- A specialized type of service buying to manage Rail, truck, ocean, 3PL, and multimodal
party purchasing inbound and outbound material flows.

Sales /Mktg Support To Purchase various material or services which Foreign Tour / Pens/ Catalogue/ Gifts
Type of Purchase Description Examples

Purchasing are required for sales / mktg /Freebies etc

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