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  Important Issues in Material Procurement

Important Issues in Material Procurement

Ø  Economic Order Quantity: One significant question that is to be answered through the Purchase Manager is at any one time how much to purchase? Alternatively, at any one point of time how much quantity is to be ordered? Whether there are some costs related with the ordering quantity excepting the purchase price? It will be note that to the ordering quantity there are costs attached. There are two types of these costs, the ordering cost and the carrying cost. The cost of placing an order is known as ordering cost. Alternatively, it can be said that while an order is placed, the company has to acquire specific costs at the time of order. These costs involve costs such as stationery costs, handling and transportation costs, costs incurred for inviting quotations and tenders etc. The more increment is the frequency of order, the more increment is these costs.

Ø   Fixation of Level: other significant aspect of material procurement is not to purchase very much or so much little. Likewise the timing of the purchase is also important. Fixation of levels of materials is completed accurately with these purposes in mind. The following levels of materials are fixed for accomplishing objectives such as avoiding overstocking, making sure that the material is ordered at right time and also avoiding lack of materials.

  • Maximum Level: This is the greatest level of material further which the inventory of material is not permitted to increase. Clearly this level is fixed with the purpose of avoiding overstocking. This level is rigid after taking into consideration the use of material and the re-order period. Mathematically the level is fixed like under.

Maximum Level = Re-order Level + Re-order Quantity - [Minimum Consumption* Minimum Reorder period]

  • Minimum Level: This level is fixed along with the purpose of preventing shortage of material. If production is delayed because of shortage of material, there will be great loss to the company. In order to prevent this, the minimum level is fixed. So it should be kept in mind that the stock does not fall below this level. The minimum level is rigid in the following manner.

Minimum Level = Ordering Level - [Average rate of consumption Re-order period]

  • Re-order Level: This level is fixed for deciding the time of placing an order. If the stock of materials arrives at this level, fresh order is placed that's why by the time the material is procured, the level of material might fall up to minimum level but not below of that level. This level is set in the following manner.

Re-order Level = Maximum Usage per Period * Maximum Re-order Period

  • Average Level: This level is the average of the maximum and minimum level and computed in the following manner.

Average Level = Maximum Level + Minimum Level / 2

Ø   Danger Level: Generally the danger level of stock is indicated below the safety or minimum stock level. Occasionally, relies on the practices of the firm and conditions prevailing, the danger level is determined among the re-order level and minimum level.

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