Principles of Purchasing/ 6 Laws of Purchasing:
6 R’s of purchasing
i) Right quality: The ability to “accomplish or be capable of doing a certain thing” is the definition of quality.
-in other words, quality refers to a thing’s usefulness in achieving a particular goal.
-Quality can be specified in different meanings, i.e., dimension, power, tolerance, harness, etc.
-Quality should be correctly specified.
-Right quality is described as neither being too high nor too low.
ii) Right quantity: purchaser must buy the materials in the right quantity to ensure that there is no stoppage of production or, no extra stockpiling. The proper quantity is still another crucial purchasing factor. Quantity decisions are influenced by the “replenishment method “and “buying methods”.
Broad recommendations are provided by replenishment techniques including “re-order level,” “two-bin system,” “review system: optional replenishment,” and “review system: compulsory replenishment.”
Buying methods followed by the buyer influence order quantity. “For example re-order quantity under:
- Hand-to-mouth buying is too small.
- Scheduled purchases may be smaller than or larger than the economic order quantity (EOQ).
- In general, large amounts of Forward purchasing are made to cover a long period of consumption.
- Contract purchases are delivered in a series of lots, some of which may occasionally total the EOQ.
Besides the above-mentioned factors, consumption, market conditions, lead time, source of supply, etc influence the decision of the right quantity.
iii) Right price: it is the purchaser’s skill to determine the optimum price for a valued product. It does not necessarily imply the cheapest price, but rather the price that reduces overall costs. The right price is not that easy to determine. The technique of:
- Negotiation: It is used when there are limited vendors, and /or time available to make a purchase is short, and/or items belong to a fixed price category.
- Tender system: It is followed in public sector organizations to identify the lowest potential bidder.
- Learning curve: It is used to calculate the cost of goods with a high labour component.
iv) Right sources: The ideal source must meet the following prerequisites.
- Must be fully capable of producing and delivering the ordered goods.
- He has to protect both the buyer’s and his own interests.
- He must help the customer with market research as well.
- Must be gentle and improve himself to cope with the condition.
- He must be a man of integrity.
v) Right time: Time is a very essential component in the case of any business. The right time and lead time are closely related. Right time implies the time at which the goods requested should be received while lead time refers to the time that elapses between the communication of the need for the item by the indenter to purchase till the item is actually received and is made available for consumption. The basic elements of lead time are:
- The amount of time the indenter needs to communicate the need to buy.
- Time required by purchase to locate, select, and develop a qualified supply source including the agreement on contractual terms.
- Transit time for a purchase order to reach the supplier.
- Time required by the supplier to fill buyers’ orders.
- Time required by the supplier to route the buyer’s order through his administrative channels.
- The amount of time it will take for the items to travel to the buyer.
- The time required by the buyer’s receiving department to collect materials from transporters goes down, verify receipted quantities, and prepare necessary documents.
- The amount of time needed for the buyer’s internal examination to confirm the items’ quality.
- Time required by the leading stores to take possession of the goods, deposit them into appropriate bins, and update stock cards.
vi) Right term: It is concerned with legal terms and conditions.
Note: Among these 6 R’s the first 5 R’s are the most important. When we are talking about the 5 Rs of purchasing we have to mention Right Quality, Right Quantity, Right Price, Right Time, and Right Sources.