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.
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