methods of buying

7/29/2019 Methods of Buying

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METHODS OF BUYING

Presented By :

Sneha Patil – 1261

Shweta Kawde - 1118



INTRODUCTION

• Buying means

“ Purchasing goods of right quality, in rightquantities, at the right time and at the right

place” • The buying department is responsible to provide

goods and services required by the company atthe least cost.

• Request to procure may be received either fromstores department or any other functionaldeartments



FACTORS INFLUENCING SELECTION

OF BUYING METHODS

• Nature of Item

• Regularity of its Demand

• Quantities required

• Susceptibility to price variations



BUYING METHODS

1. Hand To Mouth Buying

• Also called “buying according to therequirements”

• Frequent purchases in small quantities

•Purchases made only when demand arises

• To cover immediate requirements

• The purchase manager does not keep a buffer.



2. FORWARD BUYING

• Also called Market Purchasing

• Refers to procurement of sufficient quantity of

an item in advance of its needs, and when

prices are low

• Purchases made to cover production

requirements for a considerable period

• Quantity purchased is large



3. SPECULATIVE BUYING

• Refers to buying large requirements of an itemwhen its price is low with the intension to sellbulk of it at higher price for speculative profit

• Purchases are not related to company’sproduction programme

• Does not base decisions on quantity. Its single

aim is to make speculative profits• Company is adversely affected if price does

not rise according to expectations.



4. Reciprocal Buying• It means purchasing from one’s customer in

preference to other.

5. Concentrated Buying• Purchases are made from very limited sources

or even from a single source.

6. Diversified Buying• The buyer purchases goods from a large number

of sellers



PURCHASING UNDER DIFFERENT

CIRCUMSTANCES

• The Buying decisions can take place under the

following conditions :

o Buying under certainty

o Buying under risk

o Buying under uncertainty.

• Decision making (of buying) under such circumstances followthe route as below:

o identification of several decision alternatives, called strategicranking of strategic accounting to desirability, based onthe pay-off of each strategy.

o Selection of the optional strategy



Buying Under Certainty

• Concerns items which are required regularly

and therefore need to be stocked



Cont..

• The salient features of the decision process of

buying are :

o Items have definite consumption pattern.

o Procurement lead time is fairly constant( it

may vary within a limited range)

o Lead time and rate of usage of items called

consumption per period can be ascertained

from past historical data



Cont..

• Typical examples of materials being

purchased under this category:

o Buying of routine items (i.e. regular

consumption items)

o Purchase of capital equipment



Cont..

• Techniques used:

o EOQ

o

Safety Stocko Replenishment Systems



EOQ

• The quantity to be purchased should neither besmall nor big because costs of buying and carryingmaterials are very high.

• EOQ is the size of the Lot to be purchased which is

economically viable.• This is the quantity of materials which can bepurchased at minimum costs.

• Generally , EOQ is the point at which inventorycarrying costs are equal to order costs.

•

In determining EOQ cost of managing Inventory ismade up of two parts i.e. ordering costs & carryingcosts.



Cont..

A)Ordering Costs: – These are the costs which are associated with the

purchasing or ordering of materials. These costs

include:• Expenses incurred on transportation of goods

purchased.

• Inspection costs of incoming materials.

•

Cost of stationery , typing , postage ,telephonecharges.etc.



Cont..

B)Carrying Costs:

– These are the costs for holding the inventories.

These costs include:

• The cost of capital invested in inventories. An interest

will be paid on the amount of capital locked-up in

inventories.

• Cost of storage which could have been used for other

purposes.

• The loss of materials due to deterioration and

obsolescence.



Cont..

• Where,

– A = Annual Demand Or Usage

–

O = Ordering Cost – C = Carrying Cost

2EOQ =

AO

c



Determination of Safety Stocks:

• Safety stock is a buffer to meet some unanticipated

Usage.

• The usage of inventory cannot be perfectly

forecasted. It fluctuates over a period of time.• The demand for materials may fluctuate and

delivery of inventory may also be delayed & in

such a situation the firm can face a problem of

stock-out.

• In order to Protect against the stockout arising out

of usage fluctuations, firms usually maintain some

margin of safety or safety stocks.



Replenishment Systems

• Replenishment System is a means to decide

“when to order?” and “how much to order?”

• Two Main Systems

– Fixed Order Quantity System

– Fixed Order Interval System



Buying Under Risk

• Purchase situations who’s demands are not known with

certainty

• No single value of demand can be forecasted

• The salient features are :

o The buying decision has more than one alternative.

o All possible outcomes of each decision alternative are known

o Each outcome can be assigned a definite probability by thedecision maker, from past historical, or, market research date.

o The decision criteria for selecting the best alternative is based

on

EMV (Expected Monetary Value)



Cont..

• Typical examples :

o Determining the requirements of safety

stock of an item.

o Determining the quantity to be purchased of

the item involving one time purchase decision,

e.g., Christmas Trees, Umbrella, crackers etc.

o Determining the order quantity of the parts



Cont..

• Techniques used :

o Expected Monetary Value (EMV) Method

a) Set up a payoff matrix,

b) Determine EMV

c) Selection of optimum alternative based on

EMV



• Decide the optimal stock policy for the

following:

– Sales price per unit = Rs. 200

– Purchase cost per unit = Rs. 100

– Salvage value on unsold item = Rs. 50

– No penalty for unsatisfied demand.

Demand Analysis :

Demand 10 20 30 40 50

Probability 0.2 0.3 0.3 0.1 0.1



Solution :• Profit : Rs. 100

• Loss : Rs. 50

• Draw Payoff Matrix :

Demand Prob 10 20 30 40 50

10 0.2 1000 500 0 -500 -1000

20 0.3 1000 2000 1500 1000 500

30 0.3 1000 2000 3000 2500 2000

40 0.1 1000 2000 3000 4000 3500

50 0.1 1000 2000 3000 4000 5000

EMV 1000 1700 1950 1750 1400



• Optimal EMV = 1950

• Therefore, Optimal Stock Level = 30 units



Buying Under Uncertainty

• This category encompasses these buying decision whereeven the probabilities of the different event cannot beestimated.

• Such a situation occurs when there is no past experience,or, historical data to enable competition of probability of the events.

• The salient features are :

o The buying decision has more than one alternative

o All possible outcomes of each alternative are known

but occurrences of the outcomes are uncertaino There are different decision criteria for deciding which

decision alternative is the best



• Techniques :

oMaximum (gain) criteria, or, minimax (loss)

criteria.

oMaximum (gain) criteria, or, minimum (low)

Criteria.

o Hurwicz Alpha Criterion.

o Laplace Criteria

o Regret Criteria



THANK YOU

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