The major long term objective of purchasing is to aim at having at least two sources for each critical item. In this context, identifying potential and reliable sources, as well as maintaining up to date records on their suitability is vital to procurement operations.
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The success of a purchase executive depends a great deal on how well he has chosen his suppliers. They are high strength and they can become his weakness, by failing at critical moments. They can make or mar his carrier, as a purchasing executive acts as a buffer between the vendors and the organisation.
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Whether the items do not arrive in time, or they are of inferior quality or the price is high, the organisation’s production cost will increase due to increased idle time, or increased rejections, or high price of the inputs. The contribution in the form of profit or loss by a supplier cannot be measured easily, because it is in the form of an opportunity gained or lost.
Hence, a good supplier who is be able to maintain quality, quantity and time schedules at competitive prices, is an invaluable asset to the company so the right source should be identified, developed and nurtured well. While the manufacturer is often considered a normal source, occasionally, the local dealer can be considered a source if the requirements are too small.
Types of Suppliers:
The selection of the right source of supply is an important factor in obtaining the desired quality, quantity, price and service. There are following four types of suppliers:
(a) Manufacturers
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(b) Stockists or dealers
(c) Distributors or agents
(d) Sub contractors.
(a) Manufacturers:
Manufacturers are those who manufacture a product of their own. Buying from manufacturers is generally cheaper and more dependable as regards delivery and repair or service facilities than buying from distributors and stockists, but this is conditioned to some extent by the size of the order. For regular and large value requirements, contract arrangements with manufacturers would be advantageous.
(b) Stockists or Dealers:
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Stockists or dealers are those who stock and sell the products of others. Their prices are often higher than those of the manufacturers for the simple reason that the stockiest have to add their inventory carrying cost as well as profit to the prices at which they obtain the materials from the manufacturers.
Generally, small quantities of materials will not be supplied by the manufacturers. For example, for certain items of alloy steel, the manufacturers or the producers may require an order for a minimum quantity of 5 tons. If the annual requirements of the user are 500 kg, 5 tons is too large a quantity for him to obtain at a time.
On the other hand, the stockiest will order 5 tons from the producers and hold the stock with a view to supply to several customers in small quantities. In doing so he incurs inventory carrying cost.
Therefore, his price will be higher than that of the manufacturers. The buyer must then decide whether buying a larger quantity at a lower price or a smaller quantity at a higher price is worthwhile.
At times smaller quantities can be obtained cheaper from dealers because they may give away to their customers a portion of the discount and other advantages such as packing and delivery terms which they receive from the manufacturers as normal concessions on bulk purchase. Also very often dealers may be able to offer immediate delivery and a wider range of selection by virtue of their handling products of various manufacturers.
(c) Distributors or Agents:
Distributors are those who have the distributing rights of products manufactured by others. Certain manufacturers sell their product only through their distributors or accredited agents. In such cases, the buyers have no other choice than to obtain his requirements from the distributors.
(d) Sub-Contractors:
Sub-contractors (in manufacturing industries) are those who make the prime manufacturer’s requirements, mostly machined or fabricated parts, in order to manufacture a certain product in the prime manufacturer’s plant.