Methods of Purchasing
1. 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.
2. 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.
3. 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 where as 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.