THE PROCUREMENT PLAN NOTES

5.1 Introduction
One of the most important aspects of inventory control is to have the
items in stock at the moment they are needed. This includes going into
the market to buy the goods early enough to ensure delivery at the
proper time. Thus, buying requires advance planning to determine
inventory needs for each time period and then making the commitments
without procrastination. For retailers, planning ahead is very crucial.
Since they offer new items for sale months before the actual calendar
date for the beginning of the new season, it is imperative that buying
plans be formulated early enough to allow for intelligent buying without
any last minute panic purchases. The main reason for this early offering
for sale of new items is that the retailer regards the calendar date for
the beginning of the new season as the merchandise date for the end of
the old season.

For example, many retailers view March 21 as the end of the spring
season, June 21 as the end of summer and December 21 as the end of
winter. Part of your purchasing plan must include accounting for the
depletion of the inventory. Before a decision can be made as to the
level of inventory
to order, you must determine how long the inventory you have in stock
will last. For instance, a retail firm must formulate a plan to ensure
the sale of the greatest number of units. Likewise, a manufacturing
business must formulate a plan to ensure enough inventory is on hand for
production of a finished product.

In summary, the purchasing plan details:

When commitments should be placed; ! When the first delivery should
be received;
When the inventory should be peaked;
When reorders should no longer be placed; and
When the item should no longer be in stock.

Well planned purchases affect the price, delivery and availability of
products for sale.

What is a Procurement Plan?

A Procurement Plan defines the products and services that you will
obtain from external suppliers. A good Procurement Plan will go one step
further by describing the process you will go through to appoint those
suppliers contractually. Whether you are embarking on a project
procurement or organizational procurement planning exercise, the steps
will be the same. First, define the items you need to procure. Next,
define the process for acquiring those items. And finally, schedule the
timeframes for delivery. Procurement Plan helps the organization to
procure products and services from external suppliers. It provides firms
with a complete project procurement plan template, to help them to
quickly and easily create a Procurement Plan for the business.
By planning procurement carefully, the firm can buy the right products
for itself at the right price.

5.3 Importance of procurement plan
The Procurement Plan helps to:

Define your procurement requirements
Identify all of the items you need to procure
Create a sound financial justification for procuring them
List all of the tasks involved in procuring your products
Schedule those tasks by allocating timeframes and resources
Create a robust project procurement process for your business

Procurement Planning is critical if you want to get the most out of your
supplier relationships. By using this Procurement Plan template, you can
quickly and easily define your procurement requirements, the method of
procurement and the timeframes for delivery.

5.4 Strategic purchasing plan

Manufacturers that plan, manage, and control their materials management
and purchasing functions can significantly improve cash flow, profits,
and customer satisfaction. A strategic purchasing plan can achieve these
results. Establishing an effective strategic purchasing plan requires a
manufacturer to undertake a five-step process of developing goals for
improvement and monitoring its progress

Business Performance Measurement
The first step in developing a strategic purchasing plan is to establish
and evaluate the company’s materials management performance measurements
and identify areas of potential improvement; for example, inventory
turns and payable days as they relate to measurements of cash flow. For
every purchased product or service there is an opportunity for
improvement in areas such as
price, quality, service, delivery, consignment, and supplier-value
added. Profit improvement goals should be established to reflect what is
possible and not what is easily attained. Most organizations can expect
to achieve a 20 to 60 percent improvement for each performance
measurement, depending on the particular goal, the creativity utilized,
and the company’s commitment. It is important that current performance
levels and goals for improvement are communicated to employees. In
addition, suppliers should be advised of goals that affect them. A good
way to communicate these goals is to design a business performance
measurement matrix
Organizational Strengths
Once the manufacturer has identified the areas it wants to improve, it
must assess its organizational strengths to determine which assets will
be needed to achieve those goals. Assets useful in strategic purchasing
include material requirements planning software (MRP), business
forecasting/budgeting methods, floor plans that promote timely
communications, business teams, and cycle time compression. One of the
most important strengths a company has is its personnel. Every
organization has employees who not only understand the need for
improvement but can also convert goals into reality. Employees that can
accept responsibility for project leadership and completion should be
recruited to serve on cross-functional business teams that will pave the
way for the rest of the company.

To get all employees involved in the improvement process, a manufacturer
should implement a closed-loop management system that provides feedback
to employees, encourages the setting of goals, and emphasizes the
measurement of progress as it is made. This system can organize, train,
and mobilize all employees with a focus on improvement. Above all, the
crucial element for success in any strategic purchasing plan is
management’s commitment to the process. A philosophical commitment is
not enough-management must be ready to fully participate in the
strategic purchasing plan. All employees will be asked to change the way
they view the business and to develop a discipline of continuous
improvement, and unless management actively participates and
demonstrates its commitment, that change will not occur.

Supplier Integration
Suppliers are the single greatest underutilized business resource. Most
manufacturers fail to see suppliers as an extension of their
organization and don’t share information with them. A company’s
suppliers share in its success and can be willing and valuable
participants in the strategic purchasing plan. Suppliers are experts in
their particular businesses and have knowledge and expertise that can be
valuable to the company seeking improvement. The manufacturer should
inform current suppliers of the company’s strategic purchasing plan,
including the magnitude of improvement that is expected, and seek their
input. It’s also a good idea to contact suppliers that might want to
increase their level of business with the company and give them the
opportunity to participate.

Suppliers can contribute to a manufacturer’s success in several ways:
• Assist in the forecasting of high dollar and long lead time purchases.

Results:
• supplier may commit to stocking materials
• improved on-time delivery
• reduced setup charges
• reduced transportation costs (e.g., emergency delivery)
• Identify areas of excessive specifications and other areas of high
costs and provide input on lead time reduction.
• Aid in new product introduction.
• More accurate introduction lead times, estimated costs, and
design/costs/specification relationships
• Reduced time-to-market cycle

Strategy for Improvement
After investing considerable time and effort into identifying goals and
assessing its organizational strengths, a manufacturer must devise an
implementation strategy that will foster the success of the strategic
purchasing plan so that its efforts will not be wasted. A good method of
ensuring success is to begin the improvement process with the “low
hanging fruit”-that is, choose a goal that is sure to
be attained as the first step in the plan. When that goal is attained,
it will gain momentum for the plan and inspire confidence among
employees. It will also discredit any “doubting Thomases.”
Measure the Results
To ensure success, a method of measuring progress toward goals must be
established. Measurement is important because it creates discipline and
a routine of improvement. It identifies those teams and employees who
may require help and provides an opportunity to recognize and reward
achievement. To support the momentum and enthusiasm necessary for
success, incremental progress should be conveyed to employees. A
successful strategic purchasing plan is the result of a business that
understands the magnitude of
change required, has the conviction to commit to the change process, and
utilizes the tools and concepts of organized and controlled change
management. As a result, the manufacturer will become financially
stronger and more responsive to the marketplace, resulting in a larger
market share.

5.5 MATERIALS PLANNING
Production planning is an area for top management decisions through
which production plans, programmes and targets are spelled out.
Production planning process starts well before the completion date so
that sufficiently long time is given to the management to enable it to
consider “alternative courses of action and authorize major commitments
for materials, manpower, and plant facilities.”
Materials planning are a part of production planning. In fact for an
effective inventory control, production plans should be converted into
materials plans. This enables the management in clearly defining the
quantity and schedule of the equipments. In the integrated materials
arrangement, production and materials planning get a pride of place.
Inventories consume a larger part of working capital. For best possible
utilization of available capital resources, a material, planning is
resorted to. It enables the management to anticipate the future
materials demands. Such anticipation helps in managing the materials in
a manner in which it enables the organization to accomplish the given
objectives. Infact, materials planning provides a mechanism for
inventory control.

Materials planning defined
“Materials planning” is the scientific way of determining the
requirements of raw materials, components, spares and other items that
go into meeting production needs within the economic investment
policies.” As the definition goes, materials planning are a function and
are a system which evolves methodology to plan the requirements of
materials in a scientific manner. It is positively related with
production which follows market conditions and sales forecasts. Further
it cannot ignore the economy and the investment policy of the
organization. These two factors also go side by side.

Factors affecting Material Planning
The following are the two factors which affect materials planning
substantially:

The external Factors, and
The Internal Factors.

In economic terminology, external factors may be termed as macro factors
which may be enumerated as under:

National Economy
Price Trends.
Monetary and Fiscal Policy of the Government:

Credit Regulations,
Direct and Indirect Taxes,
foreign Exchange regulations,
Import Policy, and
International Market, etc.

Business Cycles, and
Other factors which usually fall under factors not within the reach
of the organization, that is, uncontrollable factors.

The internal factors, affecting materials planning may be termed as
micro factors or incorporate factors, are as listed below.

Corporate objectives and plans;
Technology available;
Market demand
Lead time and rejection rates
Working capital available
Nature of the inventory required and help;
Plant capacity and its utilization
Inventory levels;
Seasonal variations and market supply position;
Information and data available;
Delegation of power;
Communication system
Warehousing facilities available; and
Overall materials policy

5.6 Purchasing and Materials planning
Main job of purchasing personnel is to get materials when needed and pay
for them as little as possible considering quality, quantity and other
requirements and prices trends. It is the efficiency of the purchasing
personnel which makes the real difference on the profit by the
industrial unit as well as a commercial unit. Specific technical
knowledge cost analysis; value analysis and good judgment go a long way
in making a purchasing efficient.

But conservative thinking that purchasing function is an order – placing
activity still holds good. The modern thinking is yet to penetrate and
wipe off the outside manufacture and hence we have to view it from
materials planning point of view. This takes for granted a closer tie
between purchasing and other functions. A close liacon between other
departments of the organization on
the one hand materials department is a prerequisite for an effective
materials planning. For smooth and an interrupted operation of the
organization, it is necessary that every – one in the organization
should be actively involved in the attainment of the objectives of the
organization. It is this involvement which is important for any
effective material planning since all the departments of the
organization are somehow or other related to what is required and
procured for the efficient running of the whole organization.

Here, we are faced with an awesome question: “in view of the wide
diversity of responsibility( of the purchasing personnel)…., is it
possible to formulate any unified procedure o the basis of which we may
determine what is considered to be the escape of the purchasing for
materials planning?”

Certainly it is possible. What is required is that we should follow well
recognized principles of sound purchasing procedures, which are listed
below.

The ascertainment of the need,
an accurate statement of the character and the quantity of goods desired,
The transmission of requisition,
Negotiation for possible sources of supply,
Analysis of the proposed purchase, selection of Vendors and placing
of the supply order,
the follow up of the order,
The checking got the invoice,
The receipt and inspection of goods delivered, and
Completion of the records.

For any effective materials planning, it is necessary that purchasing
functions should be well – organized and the department should follow
well – recognized principles.

Materials planning should be such which may enable the materials manager to cope
with the demand for materials and as when it comes to him. Materials are
basic to profitability. Raw materials, purchased materials
and other supplies are cost centre of the demand for materials planning
is done in close cooperation and consultation with the purchasing
department is we- equipped with the economies of purchasing. Hence,
materials planning may carry meaning and prove result – yielding if
purchasing department of the organization is actively associated at all
the stages and at all the levels.

5.7 TECHINIQUES OF MATERIALS PLANNING
The under mentioned two techniques are usually used for materials planning:

Bill of Materials Technique, and
Past consumption Analysis Technique.

Bill of Materials Technique
A bill of materials indicates the name, part, and usage of each
component and the sub- assembly in which it is to be used. Each product
has a bill of materials since each of the products has its own
equipments dependent on its design and according to the engineering
designs and the components consisting of standard parts need for
particular product to be manufacture. If a chair is to be prepared it
can be split into legs , arms, seat, back rest. Each of the parts of
the chair will have separate specifications and naturally each may have
its own manufacturing design. According to the specifications and
design, the bill of materials will be drawn on such composite
information for the product – the chair in this case. In a bill of
materials for a product, the components required may be procured
according to the specifications.

When any of the units of the organization receives a work order or
production programme is finalized, the concerned foreman prepares a list
of all the materials required for the execution of the order or
manufacturing of the product as per production programme. The list of
materials so prepared is known as a bill of Materials which includes all
the details as regards to quality,
quantity, code number, and other necessary specifications, etc.

Once the production programme is finalized, each product is exploded
(split) into its basic requirements with the help of it’s of materials.
The number required per item is multiplied by the number to be produced
in order to arrive at the total requirement. The total requirements are
further adjusted for various losses. Rejections should also be provided
for. Every care should make for them. Provisions for stock and lead time
consumption should be made. Taking all these provisions into
consideration the bill for materials should be drawn for each component
and then through multiplication process total requirement should be
obtained.

The bill of materials – known as BOM – is the simplest technique of
materials planning .BOM with required lead -time and necessary
contingency provisions is drawn which eventually turns into indents for
procurement. it also acts as a guide to delivery and inventory
requirement. BOM, therefore, helps in keeping watch over the delivery of
matching equipments, spare part, and components and also over materials
directly going into production. It enables the evaluation of the
progress of the project undertaken and ensures the flow of need
materials. Such an avoidance of capital blockage saves and diverts the
working capital and reduces the inventory carrying cost to a larger extent.

Explosion of Bill of materials
Explosion of bill of materials refers to splitting of the requirements
for the product to be manufactured into its basic components; then by
multiplication process we get the total equipments. This is very
effectively done with the help of “demand forecasts”. As we have seen
earlier, the very basis for material planning is the forecast of demand
for the end products. For calculation of equipments for various materials, explosion charts, are conveniently used by the materials department. An explosion chart is a series of bills of materials grouped together by combing the requirements for a particular end – product or group of end – products. The above
discussion may best be explained with help of the following chart;

Period and Suitability of BOM Technique

Bill of materials technique is ideally suited to engineering industries
– both heavy and light since her large numbers of components are
required for manufacturing or assembling and end-product which certainly
required from various sources, which, as we have seen, is a convenient
method of knowing the total requirements for an end product. There may
be controversy so far as the period is concerned. It may vary from a
month to a year depending upon the reliability of information and
forecasts made. A forecast tends to become less
reliable as the period goes on increasing.

Forecasts amply prove that they are reliable only to the extent to which
the information and data are reliable. If prejudices and personal pride
has not crept in and the fed data are nearly absolute, unbiased, and are
based on sound judgment, then the forecasts may serve the purpose well
and period may even exceed one year. But seldom had these conditions
adequately fulfilled. It is because of this reason that ideal period for
materials planning are advocated to be of three months. Planning on a
quarterly basis is also safe in the present state of Kenyan economy in
which inflationary pressure is upsetting all calculations and market
conditions are far from satisfactory from both demand and supply points
of view.

Owing to error in forecasting or change in the market conditions and the
national or state policy the materials (either all or some of them) may
either be in short supply or in excess. This surely would upset the
plans, programmes and schedules. A materials planning done on a
quarterly basis may rectify the errors, apply the correctives and bring
the operation on the right track which in case of annual (or more)
planning is rather difficult, if not altogether impossible.

Past Consumption Analysis Technique
Where materials are consumed on continuous basis, the technique of past
consumption analysis for materials planning is conveniently used by the
organization. According to this technique, future projection is made on
the basis of the past consumption data, which is analyzed taking into
account the past as well as future production plans. Statistical tools
like mean, median, mode and standard
deviation are used in analyzing the past consumption, projecting the
future and tackling mild as well as wild fluctuations in consumption.
This technique can be successfully used in process industries. This
technique can be fruitfully used for materials being used on continuous
basis for which no straightforward norms of consumption can be easily
worked out in the organization, and also for those materials which are
either used directly or indirectly in the production process.

GUIDELINES FOR MATERIALS PLANNING

Though for every organization guidelines cannot be provided in a limited
treatise like the present one but some of the general guidelines can be
given which can be kept into mind and effectively used by a materials
planner for effective and reliable planning.

A long lead time
Lead time should be kept as long as possible to provide cover for the
unforeseen circumstances which may crop up during the planning period.
Analysis of operating environment
Careful analysis of operating environment of the firm is a must in order
to guard against possible demand fluctuations and seasonal variations.
A shorter plan period
A shorter materials plan period ensures reliability. Fortnightly or
monthly materials plan period is an ideal one. However, in Kenya
quarterly plans are popular though a quarter is not considered to be a
shorter period for a materials plan this is sorter one. For a quarterly
materials plan analysis of operating environment becomes more or less a
necessity. Also lead time calls for proper scrutiny
and sound judgment.
Computerization
Computerization of materials planning process saves time and energy and
helps in accurate forecasting. A system effecting saving in time and
energy and offering better scope for accurate forecasting is naturally
ideal for any materials planning particularly when materials planning
are being done in advesse conditions and where economy is fast changing
and is not conducive to desired and healthy growth of industries, trade
and commerce. In such an economy one is required to handle wild demand
fluctuations, and a materials manager, in such a situation, is left with
no alternative but to revise his materials plans off and on with every
demand fluctuation and change in economic situation. Here
computerization of materials planning process comes to the rescue of a
materials planner. Computerization of the process may help in effecting
a change even within the shortest period of 24 hours. Obviously
computerization goes a long way in proving the utility of materials
planning and its fruitfulness in production planning programming and
scheduling.

MATERIALS BUDGETING

A budget is a co-ordinated financial estimate of the income and
expenditure of an organization related to a specified future period. It
may be defined as “Budget is a plan of action quantified in money terms
for some future period”
A budget serves the following purposes:-

Planning the activities of various departments,
Controlling such activities of the departments
Fixation of objectives and targets of all such activities of the
departments
Closely watching the performance of various departments
Detection of deviations etc, if there is any and
Application of correctives so as to help in achieving the objectives
and targets.

Materials budgets
A materials budget is coordinated estimate of the consumption and
purchases of materials in an organizations relating to a specified
period. The purp9ose of a materials budget is:-

To plan and control purchases
To asses and make a provision for the financial requirement of such
purchases
To plan and control the production schedule.
To watch the activities of the purchases and materials control
departments.
To suggest ways and means of improvements in the next budget estimate.

Factors governing drawing up of a materials budget

The following are the main factors which govern drawing up a materials
budget

The past rate of consumption and its ratio with production. The rate
of consumption plays a vital role in framing a materials budget
since it is a factor which gives two important points for careful
study so as to help forming correct estimate of materials for the
ensuing period that is period-to-period consumption of materials in
relation to production programme and the product produced. And
period-to-period investment made. The ratio of consumption and
consequent production is also important as it helps in taking a
decision on the future course of action, particularly production
planning, purchases and sales planning which
are directly dependent on this ratio.
The production program me of the future specified period for which
the materials budgets is intended. Production programme is obviously
one of the important factors of the materials budget. It is the very
basis of a materials budget. No one can plan anything or estimate a
future course of action unless he is in the know of the objectives
and targets to be achieved. And for achieving the target a budget is
required. The rate of consumption may remain more or less the same
for a labourer or a machine, but it often varies with the variance
in production programme. The rate of consumption is directly related
to the
production programme which one has set for oneself and a materials
budget is governed and guided by this factor to a great extent.
The financial burden and investment pattern. No amount of good
intention on the part of production programmes will help them in
achieving targets and objectives unless backed by a good financial
commitment and a well-set out investment pattern. The main task of
the framers of materials budget is to allocate available funds in a
manner in which maximum value is extracted from them without
disturbing the production programme. Here the efficiency of the
framers is put to test and the very success of a budget depends on
the proper allocation of funds. The means in every organization are
scarce and the uses numerous. Tactful and intelligent utilization
will lessen the financial burden and set out a well-planned and
effective investment pattern.
The materials cost. This factor too affects the materials budget in
the sense that it directly influences the financial commitment of
the organization. A study, therefore, of the cost trend of the
materials is required. Future trend has also to be studied and
incorporated while preparing a materials budget.
The demand and supply curve. Here also study of market conditions
pertaining to the demand and supply trend is to be made before
venturing to draw up a materials budget as the production schedule
and financial commitments have to be adjusted according to the trend
in the market. A forecast, correct one, may for a long way in
achieving the purpose of materials budgeting. While setting a demand
curve due care should be taken of the storage loss due to
circumstances beyond human control, such as floods, transport
bottlenecks, war etc.

5.10 Materials budgeting and accounting
From the above it is evident that accounting has to play a very
important role in materials budgeting. The adequate help of cost and
stores accounting by way of providing up to-date, reliable and required
data to the materials control department enables it to base it forecasts
on the data so supplied. The cost and stores accounting are both to
supply the required information. Both of them are complementary to each
other in this respect. To watch the performance and to suggest
corrective measures, the help of accounting has to be taken. Hence
accounting and materials budgeting together for achieving the set
objectives of the organization.

Materials’ budgeting helps in controlling the cost and thus makes the
organization cost conscious. Cost consciousness in turn makes the
organization productivity conscious. Every material requisition is
considered according to its necessity, every man-hour is utilized to its
fullest capacity and every shilling spent is made to prove its worth.
This is achieving through cost and result analysis which is possible
only through accounting. Since materials budgeting aims at cost
reduction, accounting again comes to the fore for making the budget
result, producing.

Techniques of drawing up materials budgets
One of the following positively correlated techniques is generally made
use of for drawing up a materials budget

Budget summaries
Manufacturing and trading account
Savings on investments in materials

Budget summaries
Budget summaries are summaries of various individual budgets of the
organizations. They placed in proper relationship with one another. They
are viewed and analyzed and help is taken from them in arriving at a
certain conclusion for the purpose of incorporation of a figure in a
budget estimate. A material budget is grown up in relation to
production, sales and purchase budgets. Budgets
summaries help in correlating each one of them in broader perspective as
budget summaries, usually accompanied by reports, which at a greater
length, deal with the variances and their reactions, and are helpful in
drawing conclusion for the next budget estimates.

The merits of the technique

Budget summaries are concrete numerical standards which provide a
good base for the next budget estimates
Budget summaries describe the position briefly and are arranged in
such and analytical and comparable from that they help in drawing
conclusions correctly.
Budget summaries throw light on the activities of various
departments. This makes planning effective. Also objectives get
correct definition. Thus implementations part of the budget
estimates becomes an easy task.

The limitations of the technique

Budget variations are always there. The variations may be of minor
as well as of major nature. Budget summaries may give equal
importance to both types of variations which ought not to have been
treated on equal terms. The conclusions and consequently, next
budget estimates may give a picture which may not be a true one.
Budget figures are often manipulated so as to balance the
requirements and funds available. This may result in faulty
conclusions and thus the next budget estimate may also become
faulty. In such cases, budgetary control may also be a troublesome
and irksome job.
Budget summaries are merely numerical standards. They speak only
about estimates and a little bit of performance, but they do not
ensure profitable operations. No clear picture thus emerges from
budget summaries so far as the profitable operation the business is
concerned.

Manufacturing and trading account
This technique is comparatively result-oriented as it is based on the
performance of the budget viss-vis the results. This account reveals in
detail various items relating to the opening stock purchases expenses on
purchases, production, closing stock, working –in-progress, etc, and
finally the cost of production and profit made out of manufacturing and
trading process. This account is a
good base, rather a good applied technique for budget estimates. Of
course, budget summaries cannot be done away with. The positive help
such summaries are of immense value for the framers of materials budget.

The merits of the technique

This technique is result-oriented and thus a good base for budget
estimates
It stresses profitability aspect on each of the correlated budgets
of the various departments.
Thus efficiency and performance become the keynote of various budgets.
Pro rata analysis of the result is possible. Thus periodical and
flexible budgets become a possibility.

The limitations of the technique

It involves much paper work and thus becomes too heavy a burden for
an organization of relatively small size.
There may be cases in which proper allocation of expenses to one or
other of the items may not be feasible. Wrong inferences, thus may
be drawn.
The result-oriented budget framing technique may result in
interdepartmental rivalry which ultimately may not prove to be good
for the organization as a whole.

Savings on investments in materials
The overall performance of an organization can be judged by the profit
it has made during a specified period and a budget is a means to setting
the objective of profit-making in a right perspective through its
estimates based on returns on investment. The materials budget consumes
the major portion of funds available in the organization; hence it is
appropriate to measure the performance of materials budget by finding
out the savings on the investments made in the past and possible
expected savings in future. The amount of savings achieved by any
materials budget effectively is the success of any materials budget and
this can be better judged by the ratio of savings and investment in
materials.
The ratio of savings achieved to total investment as budget may be
analyzed on the basis of the following equations.
Saving = Savings X Value of materials utilized
Investment Value of materials utilized Investment
Or
Value of products – cost of products = Value of materials utilized
Value of materials utilized Investment

The merits of technique

Objectives are clearly defined, which give a realistic approach in
materials budgeting.
It can also be effectively used in other inter-related departments
As detailed analysis is possible, a remedial action for disturbing
trends may be taken.
It makes possible the effective use of scarce means available to the
organization.

The limitations of the technique

It lays too much emphasis on the financial aspects. Other important
factors which may curtail the investment and achieve savings are not
taken care of.
The savings so arrived at are based on past performances. Future
budgeting is based on calculations. But the circumstances in which
the savings are achieved may not be present in the budget year in
question. The result, thus, may be misleading.
Much paper work, labour and calculations are required, but they may
not worthwhile for a small-sized business.

Before choosing any one of the techniques discussed above, the framers
of materials budget should take into consideration the points enumerated
below.

The objective and policies of the organization. Budget is a means
and not an end in itself, hence a well defined objective and policy
will ensure effective materials budgets, otherwise, it will simply
be a waste of time, money and energy.
The period of budget: budget, whether material or any other, may be
of short term or long term. Generally, a materials budget is of
short term. The short term may also be of three months, six months
or even one year. This makes a materials budget more effective and
result producing.
The data available. As has been discussed in the foregoing pages,
the data, if available as required, may make or mar the success and
the effectiveness of a budget. In all the three techniques discussed
above the availability of reliable, perfect, up-to-date and
analytical data is very essential.
Flexibility of budget. The flexibility of budget, particularly
materials budget, is one of the important points to be taken note
of. The materials are subject to various kinds of losses during the
storage process, their demand may increase or decrease according to
changes in the production schedule. This requires flexibility so as
to make adjustments according to circumstances.
Repetition of past targets. Business is a growing and going venture.
Repetition of past targets in any budgetary provision is always in
bad taste. It reflects the unconcerned attitude of those who are
responsible for running the organization. A change towards
betterment should always be the motto of the framers of any kind of
budget.

Purchasing Plan and Materials Budget can only be fixed to the accuracy
of Sales and Production
Forecasts – normally not accurate to annual basis but requirement
adjustment throughout the production year
Materials Budget contains information concerning:
• Estimated materials prices for the period
• Timing of purchases to establish obligation rates for the period .
Forward buying can be arranged commensurate with planning levels and
accuracy.
• Forward buying attempts to purchase quantities to levels approximating
foreseeable requirements.
• “Hand to Mouth” buying is buying material to satisfy current operating
requirements, oftentimes at less than optimum economic quantities.

Forward buying consists of advanced arrangements such as:
• Blanket Purchase Agreements
• Contract Purchases (IDIQ, Requirements, etc.)
Long term forward buying arrangements should include provisions to
mitigate risks associated with market volatility (swings either upward,
to protect supplier, or downward, to protect buyer)

Market Stability influences purchase timing
• Stable markets may allow orderly purchases of uniform quantities
• Unstable markets may provide opportunities to be either seized or avoided
• Proper market timing can be a hedge against rising prices of commodities
Volume purchased can influence prices (and also the cost of capital)
while avoiding the negative impact of numerous small purchases.
Acquisition strategy and contract type are important here.
It is important to emphasize that Strategic Materials Planning considers
long-term material requirements and market projections
• In strategic materials planning, the focus is on the corporate
position over the long haul, not short term gratification
• Potentially critical materials for future needs are identified and
sources developed
• Consumer demand and product/materials innovation must be considered
• Political and economic environments in source countries must be assessed
• Competitor demands for like commodities must be considered
• Strategic materials planning should maximize benefits derived from
second or alternative sourcing agreements by injecting competition,
ensuring product availability
• Materials projected in short supply should be considered for
substitution/replacement and vice versa
• Make or buy decisions should be included where outsourcing of
components is a concern or potentially risky

THE PURCHASING AND NEW PRODUCT DEVELOPMENT NOTES

THE PURCHASE DESCRIPTIONS NOTES

THE PROCUREMENT PLAN NOTES

STANDARDIZATIONS AND SIMPLIFICATIONS OF MATERIALS AND COMPONENTS NOTES