Centralized purchase

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2. An Experience Contribution by Nagesh Talekar
“Purchasing is a spending Function and
every rupee saved in purchasing goes
directly to the profit column of the concern.”

3. An Experience Contribution by Nagesh Talekar
When an Organisation has several plants located in different
geographical regions, there are two alternatives. One, to have a
centralised purchase department located at the headquarters. The
other, to have a decentralised purchasing department set up in
each plant.
Joint Managing Director
Executive Staff
Centralised Purchase
Purchase In-Charge
Dharwad Plant
Purchase In-Charge
Verna Plant
Purchase In-Charge
Bangalore Plant

4. An Experience Contribution by Nagesh Talekar
Combining the requirements of Plants and buying in bulk leads to substantial
reduction in purchase cost.
There is only one department dealing with limited items, a high order of
purchase skill can be expected.
Inter-Plant transfer of materials in an emergency is possible.
Surplus Materials in one Plant can be utilized in meeting the requirements of
another.
The Centralised Purchase Department at Headquarters may lay down common
policies, procedures and systems for all the plants.
A periodic reporting system may be established between the plants and the
Centralised Purchase Department at Headquarters.
Organisations having Multi-plant operations would benefit by adopting a
judicious blend of decentralised setup with centralised control.

5. An Experience Contribution by Nagesh Talekar
Material Requisition
PO Copy
Enquiry
QuotationPlant
Centralised
Purchase
Domestic
Supplier
Overseas
Supplier
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Enquiry
Purchase Order
Quotation
Payment
Follow Up

6. Purchasing, in ordinary sense, is the procurement of raw materials, components,
consumables, machines, equipments, etc. on payment. In the present
environment of frequently varying price conditions and increasing material
variety and competition, the purchasing function needs professionalism to
reduce the total investment in purchase while making the required materials of
right quality at right price available on time.
Bulk Order Quantity is a quantity which is larger than the Economic Order
Quantity and which combines the ordering quantity of more than 1 order so as
to round off to 3,6, or 12 monthly requirements and place a single order for the
total requirement of the period as decided. It differs from 1 item to another
depending upon the market conditions, financial commitments, production
programmes, and storage facilities available.
Bulk order gives better purchase price, reduced procurement cost and reduced
operation in the purchase organisation. But bulk order increases the inventory
carrying cost and financial commitment.
Maintenance of regular flow of materials for production activity is the main aim
of any purchase organisation. For this, right quantity of materials is to be
purchased. The decision of right quantity is related to the period for which it is
to be purchased and also to the minimum total cost which may obviate
shortages. Excess purchases should be avoided as they result in overstocking,
and capital is unnecessarily blocked and inventory carrying cost goes up. This
naturally needs avoidance.
It is not always possible to strictly adhere to the economic order quantity and
bulk order quantity because of varying market conditions, uncertain
consumption, uncertain lead time, uncertain availability of funds, uncertain
order from the market and consequently uncertain production schedule, etc. In
Such cases one has to apply one’s own discretion and fix an Arbitrary Order
Quantity from time to time.
An Experience Contribution by Nagesh Talekar
Purchase Tasks
At Right Time
In Right Quantity
From Right Source
At Right Place
At Right Price
Of Right Quality
Purchasing principles are usually epitomised as buying materials of right
quality, in right quantity, at the right time, at the right price, from the right
source and also at right place.
The right quality is that which can be purchased at the lowest cost to fulfill the
need or satisfy the intended function for which the material is being purchased.
For building goodwill, right production, avoidance of waste, standardisation
and better results from men and machine, right quality purchases are very
essential.
We have to take into consideration the order quantity which is defined as the
quantity that is ordered at a given time. The order quantity is further divided
into three classes
Economic Order Quantity where the total cost i.e., ordering cost + inventory
carrying cost should be least and minimum. Ordering cost and inventory
carrying cost are equal.
The right time for the procurement of an item is said to be the point of minimum
stock, the point at which the materials are expected to arrive in the plant.
Price per unit of an item comprises the unit purchase price, transportation cost,
handling cost, inspection, insurance and the administrative variable cost. The
right price simply means the lowest possible total price for the organisation
Right source relates to the supplier. Right source for the procurement of the
material is the supplier who can supply the material of right quantity, of right
quality as ordered, at the time which asked to supply, at an agreed price, at the
place of delivery.
Right Place to mean at the place of delivery. FOB, FOR prices, Freight is based
on point of destination.

7. An Experience Contribution by Nagesh Talekar
The Centralised Purchase Department at Headquarters has to work
in close coordination with all Decentralised Purchase Departments
at Plants and Finance Department at Headquarters. Only an
atmosphere of mutual trust will ensure that these departments will
work towards the total organisational objectives.
Dharwad
Plant
Centralised
Purchase
Finance
HO
Bangalore
Plant
Verna
Plant

8. An Experience Contribution by Nagesh Talekar
 Lead Time Index =Average Lead Time (Current Year)
Average Lead Time (Previous Year)
 Order Cost Index =Total Purchase Department Cost
Total No. of Orders Placed
 Rush Order Cost (Index) = Price Paid for Rush Order Material
Price Normally Paid for this Material
 Process Time Index =Total Time Taken To Process Indents
Total No. of Indents Processed
 Purchase Efficiency =Total Purchase Value
Total Expenses of Purchasing Dept.