Assignment
You have been appointed as manager of material management department of a construction firm. The company is asking you to prepare a manual on procurement of materials. Prepare a manual on procurement of material by covering the following.
You have been appointed as manager of material management department of a construction firm. The company is asking you to prepare a manual on procurement of materials. Prepare a manual on procurement of material by covering the following.
1. Factors to be considered for purchasing
2. Source selection
3. Selection of Suppliers
4. Scrutiny of offers
5. Final purchase
6. How to develop purchasing policies and procedures
7. Formulation strategies for improving efficiency of
procurement of materials department.
Material Management
Material management covers a wide scope. It include
procuring materials, their transportation, storage, issuing material to various
sites for use in construction, maintaining records and data for effective
control and to provide useful guide for future.
Procurement
It means acquiring goods
and/or services from an outside source, it deals with acquiring material
necessary for construction from suitable source. Basically
it is concerned with buying or purchasing and is concerned with the relevant
aspects like identifying sources, determining the price, etc., it has a wider
scope of identification of better substitute material as well as helping in
arriving at decisions as to whether to buy or to produce certain items. Its aim
is to contribute to the overall reduction in material cost through efficient
procurement processes.
FACTORS TO BE CONSIDERED FOR PURCHASING
A decision to purchase the material involves
certain factors like:
i.
Quantity of material to be purchased
ii.
Time of delivery
iii.
Place of the delivery
iv.
The price
v.
Receiving and inspection
vi.
Transportation
Quantity of material to be purchased
It depends on stocks in hand and inventory policies
Time of delivery
It depends on various things as describe below:
·
The time the purchaser needs to complete the
formalities like preparing detailed documents, inviting quotations, scrutiny
and acceptance of the offer and placing the order.
·
The time the supplier needs to arrange for the
supply, which involves the acceptance of the order from the purchaser,
procuring the material from the manufacturer and processing it if necessary.
·
The time involved in loading, transporting and
unloading, if the supplier is not delivering the material at the finally
indicated place and therefore involves transportation.
·
The materials have to be tested before finally
accepting them and it also involves time and has to be considered.
Place of
delivery
Place of
delivery would be the main storage, regional storage or site storages. This
would depend on the location of the source and cost and time of transport.
The price
The aim of
the purchaser should be to purchase the materials at the most competitive
prices. This is usually achieved by inviting open quotations. In some
organisations, one of the requirements is to invite public quotations from the
interested suppliers. This results in expenditure incurred in publishing
advertisements, possible delay and some unknown and un-resourceful suppliers
submitting offers. Where public advertisements are not a necessity, advantage
of competitive rates can be obtained by sending out inquiries to suppliers who
are known or dependable.
Receiving
and inspection
In a large
organisation a separate section may have to be created for this function, but
obviously the function is closely related to purchasing. The person responsible
for this function must closely compare the material received with the details
mentioned in the orders placed with the supplier. They have therefore had with
them an authentic copy of the order and samples, if any. The points to be noted will be quantity, colour,
finish, size and strength or some other attributes. In some cases tests will
have to be carried out in the laboratory as per prescribed procedure.
In some
cases material received may be as per the order and samples prescribed. But
sometimes it may not. In all such cases a report is prepared and copies are
sent to the accounts department and stores department. In cases of material is
not in the acceptable form the purchase department sends a rejection advice to
supplier.
Transportation
Depending on
the terms of agreement the materials obtained from the supplier will have to be
transported to the place of storage. Purchase department has to organise the
transportation. Transportation from stores to worksites is generally looked
after by the construction unit.
Depending on
the quantity of the materials transportation unit may have to be created. The
main responsibilities connected with transportation are:
·
Selecting mode of transport and routes
·
Fixing of agencies
·
Fixing rates
·
Auditing freight charges
·
Minimising transportation cost by arranging the
various suppliers so as to synchronise their transportation.
SOURCE SELECTION
In order to obtain the best results, the purchasing
activity must be based on a systematic procedure which covers all the aspects
related to purchasing. Normally, each organisation establishes a purchase
procedure.
The source selection is depending on the nature and
the size of the organisation and also depending on the magnitude and variety of
material handled by the organisation.
The purchase procedure may be formalised in the
form of codes or manuals. Small and proprietary organisations may follow an
informal procedure.
Depending on the material to be procured,
information about the sources of supply can be collected from a number of
sources as describe below:
·
Personal knowledge of the purchase officer
This is satisfactory in small purchases and when a
few items of simple nature are involved. Information is available on the basis
of memory of the purchase officer or his personal inquiries.
·
Catalogues, trade journals, trade directories.
The manufacturers of materials supply the relevant
information in the form of catalogues, which serve as a useful guide for the
purchase department.
·
Advertisements of the manufacturers or suppliers
Suppliers often advertise their material in news
paper or magazines. Though the details given in the advertisement may have a
considerable element of exaggeration to influence the prospective buyer, the
advertisements would serve the purpose of identifying the source of material
·
Advertisement by purchasing organisation
This is considered to be the most reliable source
of knowing not only the sources of supply but getting all the relevant details
such as quantity available, delivery time, price, terms & condition of
payment, etc.
SELECTION OF SUPPLIERS
The purchasing department is interested in buying
materials of the required quality in the required quantity at a particular time
and at the most competitive price. Though the price is an essential criterion,
it cannot be the only criterion of selecting a supplier as a good and
satisfactory supplier. Perhaps, a possible and objective approach to this
problem would be to introduce quantitative assessment of the various factors
other than price into the purchase formula. This approach is known as vendor
rating or suppliers’ quality assurance scheme. This approach helps in
evaluating the factors of quality and delivery time offered helps in evaluating
the factors of quality and delivery time offered by supplier and evolving an
objective rating for the supplier.
So far as quality is concerned, a method that could
be followed may consist of recording the material received from the supplier
over a certain period, say a year at regular intervals. The quantity and value
of the material rejected in each consignment is carefully noted. The rate of
rejection can also be noted and supplier can be assigned suitable rating. Some
of the aspects that need to be considered are:
i.
Delivery met without any follow up?
ii.
Reliability as regards the quality of the material
delivered
iii.
Promptness in attending to any complaints etc.
SCRUTINY OF THE OFFERS
After the quotations are received from a number of
suppliers, they are carefully compared.
It is necessary to look out for following aspects:
·
Conditions for the payment
·
Place of delivery
·
Whether the supplier has proposed any changes by
way of modification, deletion or addition of any condition and specification.
The effect of these changes in terms of money has
to be evaluated so that a realistic comparison of the rates can be obtained.
Normally, the lowest rate is accepted.
It must be mentioned that a mere offer of supply in
response to invitation from the purchaser is not binding on both the parties.
Only when an offer is accepted and the order is communicated it constitutes an
agreement and is binding on the parties, purchaser and supplier.
FINAL PURCHASE
Purchasing the material is naturally a part of the
procurement process. Purchasing the material along the correct lines is the
most important factor contributing to effective and efficient materials
management.
Purchasing of materials has some basic steps:
i.
Assessment the requirement of the materials.
ii.
Ascertaining the need of the materials.
iii.
Decision to meet the requirement by purchasing the
material.
iv.
Identifying the possible sources and selecting the
one that is appropriate.
v.
Negotiating the price and terms of payment
vi.
Determining its quality and quantity
vii.
Buying the material
viii.
Getting the delivery of the material.
The purchase department should maintain a list of
suppliers and regularly update it. The past performance of the supplier must be
carefully observed and recorded. All the aspects like technical, financial and
time have to be considered. The purchase department should get regular feedback
from the concerned department like construction site, accounts department etc.
to assess the suppliers’ performance.
Rating of the suppliers on the basis of the
performance may result in ‘black listing’ some names, which means the concerned
supplier’s name may be removed permanently or at least for a certain temporary
period from the approved list of suppliers.
For important works relying only on one supplier
may not be advisable and particularly if the quantity of the material to be
purchased is large. Selection of two or more suppliers may be desirable.
Depending on the magnitude of material, it might also be desirable to explore
the possibility of buying directly from the manufacturer rather than from a
distributer.
The point of view of the legal department, the law
of contract assumes considerable importance as all the transaction start from
the agreement between the purchaser and the supplier. The law of the contract
aims at ensuring the realisation of reasonable expectations of the parties
entering into contract. The law of contract determines the circumstances in
which the promise shall be binding on the person making it. The contract act,
(1872) lays down the general rules related to the contracts.
As per the section 6 of the Indian law of contract,
an agreement that can be enforced by law is a contract. The law consists of a
number of limiting principles, subjects to which the parties may create rights
and duties for themselves, which the law will uphold.
A contract has been defined as an agreement
enforceable by law or a legally binding agreement between two or more parties
by which, rights are acquired by one or more to act or forbearance on the part
of each other or others. Thus, these are the element of a contract: Agreement
and Legal enforceability.
Agreement is also known as promise. Agreement or
promise consists of two steps
i.
A proposal is made to a person
ii.
The person to whom the proposal is made signifies
his assent to the same.
The accepted proposal is a promise. Agreements,
which cannot be enforced legally, do not become a contract. So a contract
therefore has proposal, its acceptance and legal enforceability. All contracts
are therefore agreements but all agreements may not necessarily be contracts.
The contract is considered valid if it satisfies
the conditions:
i.
Offers: there must be a lawful proposal from one
party to the other.
ii.
Acceptance: the proposal made by one party must be
accepted by the party to whom it is made. The terms to offer must be definite.
The acceptance must be in the prescribed mode and it must be free and not under
any pressure. The acceptance must be communicated to the party making the
proposal.
iii.
Legal relationship: the agreement must create a
legal relationship between the parties.
iv.
Legal consideration: the agreement must be
supported by a lawful consideration, which may be in the form of a return. In
other words, one party to the contract agrees to give something in return of
what it receives. Thus, if a party agrees to do something but does not get
anything in return, it cannot be enforced by law and is not a contract.
v.
Competency; the parties entering into a contract must
be competent. Competency is indicated by age, sound mind and not being
disqualified otherwise b law. Lunacy, minority, drunkenness, bankruptcy,
senility the causes preventing from entering into a contract.
vi.
Lawful object: the object purpose of the contract
must not be forbidden by any law.
vii.
Possibility of performance: the offer must be such
that it is possible to perform it. Agreement may be impossible of performance
because of vague and ambiguous terms & task itself may be unattainable.
viii.
Formalities: as far as possible the agreement must
satisfy the legal formalities such as, it should be writing, should be duly
registered and have necessary witnesses or attestations or supporting
documents.
For a major contract involving large sums of money
in the purchase of materials and in contracts extending over long periods and
also in contracts, involving parties in different countries, the importance and
necessity of professional legal advice need not be overemphasised. Contract
should be standardised after legal advice. Important contracts should be always
be finalised in consultation, with competent legal professionals. All the same,
it should be remembered that despite all care and precautions, certain
loopholes may be left or certain unexpected situations may crop up which may
lead to difference of opinions, different interpretations, conflict a of
interests. The main emphasis has therefore to be on mutual understanding,
trust, confidence and the parties should strive for the common goal of
satisfactory and successful completion of the contract.
No comments:
Post a Comment