The basic ingredient of an efficient purchasing process is the rational selection of the source of supply, i.e., to find capable and willing vendors and to conclude an agreement with them on the pertinent factors of quality, service and prices. In most businesses, it is quite possible to purchase products from several vendors. This raises two important questions:
- Whether purchasing from several vendors is profitable;
- What type of vendor is the most satisfactory source of supply. Number of Vendors
The question of whether the company should have a number of vendors from whom it should procure most of the materials it requires should be given careful consideration, failing which the entire production process may run into difficulties. In regard to the number of vendors, the policies of companies vary considerably. For instance, a medium-size chemical manufacturing company for a number of years followed the policy of procuring materials from a number of vendors. Later, it went through financial difficulties, and regretted the policy of utilizing the services of a large number of vendors. Since it used to make small purchases from a variety of vendors, it did not get any credit facility. Instead, each vendor pressed for urgent and immediate payment. Had this firm concentrated on one or two vendors, it might have induced the latter to liberalize their credit policies for it.
The companies that buy large quantities of merchandise quite often deal with one supplier. By doing so, they are able to secure favorable prices, better quality of goods, regular supplies etc. The danger of reliance of this practice is that if, due to any unavoidable circumstances, such as labor trouble, power cut, mechanical failure, transport bottlenecks, the vendor fails to maintain a constant supply, the production process of the company would be adversely affected.
Most firms follow the policy of dealing with a number of vendors and, at the same time, concentrate the bulk of their purchases with one vendor. They find it desirable to procure about 75% to 80% of their total requirements from one vendor who happens to be a desirable source in terms of price, quality and delivery. The remaining part is procured from several other suppliers.
Though the placing of small orders with a large number of vendors is certainly not economical, the fact remains that it serves two distinct purposes:
- The main supplier is always on his toes, for the manufacturer is in close touch with the market and can shift to another supplier if the terms of trade, the quality of merchandise, and service are more profitable elsewhere;
- If the main supplier is unable to supply goods due to any reason, the manufacturer can
readily procure his requirements from the other vendors.
Factors Affecting Selection of Vendors
We have already discussed the fact that a variety of advantages and disadvantages limit the
number of vendors when purchases are made. It is very desirable to weigh the advantages of better quality and low price against the disadvantages of shifting to a small vendor, if the original one is unable to cater to the requirements of the firm. The various problems arising out of this resolve themselves into the following questions:
- Can a limited number of vendors supply the variety of products required?
- What are the advantages of utilizing the services of many vendors?
- Which trade concessions and special services will result from concentration?
After seeking answers to these questions, the management should design policies about vendors.