Independent Purchase department

why do we need separate Material management department in Indian Railways?

It is a question often asked in railways. Why engineering departments are not allowed to purchase for their requirement. Argument put forward is that Stores department introduces unnecessary red tape. Then why separate department?
Let us first look at other industries. Do they have material management department?
Answer is unambiguous YES. All private sector and even public sectors like ONGC, NTPC , SAIL , Foreign railways do have separate Material Management department. It is called material management department in India and Procurement department abroad. All business are administered by coordinating an integrating six functions:

1. Creation of idea or design function: importance is less when product is evolved or developed.
2. Finance
3. Personnel
4. Purchasing: acquisition of required material, services and equipment.
5. Manufacturing/operation: transformation of material into economic goods or services.
6. Distribution: marketing and selling of goods/services produced.



What are the functions carried out by this department?

Material management department of ONGC, NTPC , Other railways buys Materials, services and sells scrap. This is in contrast to Indian railways where only material purchase is conducted by Material management department whereas all services are purchased under heading of works contracts by executive department only.
Why service contracts are concluded by executive departments?
Answer to this question relates to first question. Executive departments see delegation of this function to stores department as curtailment of their powers.
Why separate and independent material management department is necessary?

1. Confusion of Purchase with personal buying

Purchasing is a difficult function to understand because almost everyone is familiar with another version, that of personal buying. A consumer point of view is characterised by a shopping basket philosophy. There are many suppliers of relatively common item and every consumer buys on a current need basis and is also final consumer of a product or the service.
With few exceptions, individual consumer has no power to influence price, method of marketing or manufacturer chosen by the supplier’s management. Individual consumer’s total purchase is very small portion of total sales of supplier.
Commercial material management presents a totally difficult picture. Needs of the organisation are specialised and volume of purchase tend to be large. The number of potential suppliers may be small and there may be very few consumers in the market. Many organisations acting as buyers are larger than their suppliers and many play multiplicity of role with respect to their sources.
Therefore, it is clear that organisations as customer are not at mercy of sellers but do have lot of bargaining power vs sellers.

2. Marketing department of sellers

Marketing department has specific function to promote the products to secure business. It is well known that marketing strategies are designed to create monopoly. For small customers, branding and advertising do the necessary job. But in case of organisational customers, large sums of money are involved. Thus suppliers have large stake in individual customer and marketing department frequently will resort to many kinds of strategies to secure wanted business. It is not reasonable to assume that marketing departments would wait for tenders and then quote the requirements, but they will make every effort to generate requirement form buyers as per their products. In other words, marketing personal try to influence the specifications of buyers.
In such an environment, the right to award or withhold business represents real power. Special expertise is required to assure proper satisfaction of needs on the one hand and the transparent systems and procedures to buy at lowest cost on the other to assure continually effective and acceptable performance.
Suppliers spend large sums annually to find ways and means of persuading their customers. Purchasing strength need to be pitted against this marketing strength to assure that buyer organisation’s need of future are adequately met. The material function should be staffed with people who can deal on an equal basis with this marketing force.

3. Engineering Vs Purchase

Engineers prefer to bypass the purchasing because they think that they could cut the red tape and do a better job. Hence there is minimum cooperation from engineering to purchase. The ability to influence specification, early involvement in capital project planning and awareness of engineering supplier contacts are three areas of major concern.

Specifications

Expensive designs instead of standard products (e.g. alloy steel in place of SS) cause lot of extra expenditure for the organisation. Despite continuous attempts to question specifications by purchasing officers, usual reply of designers is “my job is to design the equipment/project, yours is to buy what I tell you to get, where I want it and to look after necessary paper work. And if you don’t like it that way, I ‘ll be happy to look after whole thing myself.”
Early involvement in capital projects
Purchasing is seldom aware of new capital projects until engineering sends them necessary details for the final Purchase order. Frequently, by that time there is considerable pressure to do paperwork quickly to avoid delaying the project. Engineering handles all preliminary supplier contacts and price estimates without purchaser’s knowledge. Hence due to urgency, premium has to be paid for timely delivery and there is no time to search for alternate sources.

Duties of Material Management Department

Collection of data and estimates for project planning and preliminary estimating require flexibility and cooperation between purchasing and engineering departments.
• Care should be taken to prevent individual supplier doing considerable paperwork to supply initial estimates
• Care should be taken that specifications are not written to fit one supplier’s product to the exclusion of other suppliers in the field.
Need of purchase of services through independent material management department now
By its very nature purchasing is basis and integral part of business management. Service contracts were few in earlier years as raw materials like steel, oil etc were purchased and most of products were manufactured in-house.
However, after sixth pay commission, Increase in cost of manpower has shifted the focus from in-house manufacturing to outsourcing.
Therefore, purchasing/material management is assuming core role in operation of any organisation with maximum portion of cost being spent on this function. E.g in Indian railways approx 25000 cr are being spent annually on purchasing goods and services out to total budget of approx 60000 cr. Out of this works contracts constitute almost 50%.
As discussed already that purchasing department has be separate from engineering department, it is high time that service contacts are transferred to preview of material management department.