Restraints limit the alternatives available to purchasing department for its decisions. Similarly, the type of purchasing procedure adopted will depend on the factors related to the demand for the item. In this section, we shall discuss some of these restraints and the demand factors.
Purchasing decisions are restrained by legal considerations, management policies, resource availability, market conditions and so forth.
Legal Consideration
The purchasing department commits a good deal of finance when a purchase order is placed. It is, therefore, necessary to have sufficient understanding about the legal aspects of purchase. The Indian Sale of Goods Act, 1930 and the Indian Contract Act of 1872 cover some of important legal aspects. The important relevant laws are (1) Law of Agency, (2) Law of Contract, (3) Law pertaining to Sale of Goods, including Patent Laws, Warrantees, Trademarks, etc., and (4) Arbitration. Professional legal advice related to these laws is a must for major contracts involving large sums of money or extending over a long period of time like imports. Indian Chamber of Commerce and International Chamber of Commerce have codified general business terminology to minimize the friction between buyer and seller. In addition to the legal precautions, emphasis should be on mutual trust and confidence.
Management Policies (Centralized vs. Decentralized Purchases)
Management may choose between centralized and decentralized organization or a mixture of these two for purchases. Centralized purchasing has economic advantage due to specialization and input standardization and thus, is an attractive strategy for multi-plant and multi-location activities using related items. In addition it offers:
- Development of specialized purchasing skills
- Consolidation of order quantities which can result in quantity and cash discounts
- Better control over inventory investment.
- Less overlapping and duplication of effort
- Uniform quality and less variety of materials
Centralized purchasing however, tends to be slow, rigid, and rule-bound, and may turn out to be very costly for low-value purchases. Also, if item required by various departments are unrelated and less frequently demanded, the advantages of centralization may be lessened. In such cases, management may decide to decentralize the purchase.
Resource Limitations
Finance is the major resource which can seriously influence the purchasing activities. The corporate finance is shared by all the departments of the organization and purchase department must operate within the allocated budget. This may lead sometimes to purchasing decisions somewhat less optimal than what it would have been had the purchase department been able to get the finance as and when desired. Thus sometimes the advantages of quantity discounts might have to be foregone in favour of overall financial planning of the organization. Other resources such as manpower, storage space, and handling equipments also place limitations on purchasing decisions.
Market Conditions
The market conditions relate to short-term market situations which are influenced by supply and demand as well as overall national economy. Thus during shortage, the reliability of supply may be considerably more important than the price. The purchasing strategies should, therefore, change to cope up with these situations, and ability to anticipate these conditions measures, to a good extent, professionalism acquired by purchase personnel.
Demand Factors
Based on the demand pattern, the items can be grouped into four basic categories:
Items Used Continuously: Items that are continuously used with a fairly predictable demand can be handled under blanket purchase orders (also known as open-end purchase orders) A contract is negotiated with supplier(s) for a fixed period of time (six months or one year) with quantities, delivery dates, discounts etc. The price may be fixed, or kept open in which case the market price at the time of delivery will be applicable. Blanket orders conserve the time and effort of the purchasing department,
Large Single Orders: The situation of large single orders usually occurs in case of special machinery or other special goods, such as computers, vehicles, buildings etc. Considerable planning and evaluation are involved. The suppliers submit their bids with all relevant details and purchases are negotiated by comparison and evaluation of the bids.
Small value Purchases: The low-cost infrequently used items are purchased usually by the concerned departments using petty cash or by identifying some small local supplier. For the value involved, it is not worth going through the complete cycle of purchase process.
Normal Purchases: Items other than mentioned above fall in this category and are handled by the normal procedure, i.e., following the complete cycle of the purchase process discussed above.
