PURCHASE POLICY

6.1.0 Features of Purchase Policy :

Purchase of materials, which was earlier regarded as routine activity has now become a professional function (which requires special skills and expertise) due to rapid changes in technologies and business environment.

A professional purchaser has to purchase materials

• of Right Quality (Just adequate quality)
• in Right quantities (Neither too much nor too little )
• at Right prices (Competitive but not unworkable)
• with Right delivery (With right mode of transportation at desired place on required time)
• from Right sources (Reliable sources having adequate potential, know-how, facilities and Financial capability and record of good performance).

These 5 Rights are popularly known as 5 R's of purchases.

6.1.1 In Railways' purchases, we are spending public money and therefore, every purchaser is expected to follow Canons of financial propriety. It is also to be seen that purchase policy is so framed that it is within the framework of Constitution of India and the provisions of various Public acts are not infringed. Therefore, all the purchases made by us are within the framework of

• Contracts Act-1872, 
• Sale of Goods Act-1930, 
• Arbitration Act, Limitation Acts etc.

6.1.2 In addition to the above broad guidelines, our purchase policy has to be in line with the overall purchase policy of Government of India. Some of the salient features of our purchase policy are briefed below:

(a) Indigenous development : In our purchases, we always give first preference to goods manufactured in India out of Indian raw materials, provided quality of the materials and delivery terms are suitable. Thus, order of preference will be as under--

- Articles produced in India out of indigenous raw material.

- Articles produced in India out of imported raw material.

- Articles imported but held in stock in India

- Imports

(b) Development of Small Scale Industries / Khadi & Village Industries Corporation (KVIC) / Women's Development Corporation etc.:

• Our purchase policy is so regulated that fruits of industrialization reach the grass-root level. Therefore, lot of emphasis is given to development of above industries. To meet this purpose the items of stores other than textiles items reserved for purchase from Handloom Sector have been categorized under 2 broad heads, 

1. Those reserved for exclusive purchase from Small Scales Sector Units / women's development corporations; 
2. Unreserved.

• All items of hand spun and hand woven khadi are reserved for exclusive purchase from KVIC. All items of handloom textiles are reserved for exclusive purchase from KVIC and to the extent KVIC can not supply these would be purchased through ACASH (Association of Corporations and Apex Societies of Handloom).
• In respect of unreserved item price preference to the extent of 15% over the lowest acceptable offer from the large scale industry may be given to KVIC / Women Development Corporation / Small ScaleUnits.
• In railways for price preference up to 15% only those SSI Units are considered who are registered with NSIC (National Small Industries Corporation). 

Ref. Railway Board's letter No.89/RS(G)/363/5 dt:18.04.90 and dt.16.11.89.

(C) Encouragement to Public Sector : Purchase preference is given to public enterprises. If the quoted price of the public sector enterprise is within 10% of the lowest valid price bid, other things being equal purchase preference may be granted to the public enterprise concerned at the lowest valid price bid

Ref. Board letter No.92/RS(G)/363/1/PES dt:06.03.92.

6.2.0 Types Of Stores Contracts :

Stores Contracts can be classified as -

(a) Rate Contracts

(b) Running Contracts

(c) Fixed delivery Contracts

6.2.1 Rate Contracts: These are generalized contracts entered into with suppliers for a specified period of time (normally 1 or 2 years) for specific items identifying all terms & conditions including the price, but quantity and consignee are not identified.

• The contracts authorize supply orders being placed by nominated officers for specific quantities to be supplied to specific consignees on the rate contract terms and conditions and price without the need to go through the whole procurement procedure.
• Thus, the rate contracts save lot of time in routine purchase work. As specific quantities to be drawn are not advised in the contract (only to meet legal obligation, a meager quantity valuing about Rs.2000 to Rs.10000 may however be specified), supplier has to take a definite amount of risk because if he gets orders for lesser quantities than anticipated by him, he cannot claim any damages.However the purchaser has to obtain an acceptance of his supply order, by the supplier.

6.2.2 Running Contract : In rate contracts, suppliers are not sure of order quantities and therefore they do not want to take risk by making investments in Machinery & Plant and Raw materials required for manufacture of goods. They, therefore, insist that some estimate of quantity to be purchased should be provided in the contract. Therefore, if in a contract entered for a specific period of time, like Rate Contract, if we give an indication of minimum quantities to be purchased, the Contract is known as running contract. Generally running contracts have liberal quantity tolerance clauses according to which quantities can be increased or decreased by 25 to 30% For running contracts also separate supply orders for actual drawal of the materials are required.

6.2.3 Fixed Quantity Contracts : In these contracts all the terms and conditions including quantity in definite terms, consignee and delivery period/date are specified at the contract stage itself. The contract is generally not spanning over a long period like Rate/Running Contract and no subsequent supply order is required to be placed. These contracts lack the flexibility of Rate & Running Contract but contract administration is easy. In Railways, most of our contracts fall in this category only.

6.3.0 Purchase Agencies : All the items on Railways are not purchased by Zonal Railways only. To get advantage of purchasing in bulk quantity, the items which are used by all Government departments are generally purchased through Directorate General of Supplies & Disposals (DGS&D) which is a purchasing agency of Government of India.

6.3.1 Directorate General Of Supplies & Disposals :For many general items, DGS&D is in a position of clubbing the requirements of al Government departments and therefore, purchase the items at much economical prices. For many common user items, such as ceiling fans, cables, torch cells, refrigerators, air-conditioners, industrial gases, cleaning items, calculators, vehicles, etc., DGS & D enter into rate contracts. These contracts provide a list of officers who can place further supply orders against these contracts. These officers are known as Direc Demanding Officers (DDOs). All the Controllers of Stores of Railways are DDOs for most of the rate contracts. DGS&D also enter into running contracts for many items such as timber, paper etc. All fixed quantity contracts entered into by DGS&D are known as Acceptance of Tender (AT).

For DGS&D items the requirements are consolidated in the COS's office and the indents are placed on DGS&D duly certifying for funds as per the laid down time table given in the Program - cum - vocabulary book.

6.3.2 Railway Board : Many items of imports involving large sums of foreign exchanges and some critical items are arranged through Railway Board. Items arranged through Railway Board are generally critical items for which adequate manufacturing capacities in the country do not exist. Some of those items are like WTA, Steel, Rolling Stock, TL Items, Oils, lubricants, Textiles etc.

6.3.3 Other Railways/Production Units : Some of the items are centrally procured by some Railways or production units to meet the requirement of all Indian Railways. For example, many components of diesel locomotives & ICF coaches are procured through DLW and ICF Madras respectively.

6.3.4 Other Agencies : The other agencies of purchases include Sleeper Pool Committee for purchasing sleepers, Government Medical Store, Central Organization for Modernization of Workshops (COFMOW) for M & P items required for workshops modernization.

6.4.0 Methods Of Purchases : There may be three methods of purchasing the materials:

(a) Through tender systems

(b) Ab-initio negotiations

(c) Repeat Orders

6.4.1 Tender System : For purchasing materials, we have to enter into contracts with suppliers. Two essential elements of a contract are offer and acceptance of offer. By way of tenders, suppliers submit (tender) their offers for supplying materials to purchaser. To purchase the material at competitive prices, we have 3 tender systems in vogue:

(a) Advertised Tender or Open Tender system : As the name implies, in this system, we publish our tender notices in public newspapers or periodicals so that anybody who is in a position of supplying that material can purchase the tender documents from COS's office and can submit his tender. As wide publicity is given to the requirement, we generally get most competitive offers. Bu due to various reasons, in this system, time taken in purchasing the material is large.

• In Railways, we adopt this system only when estimated purchase value of the item is more than Rs.3 lakhs.

(b) Limited Tender System : Purchase through advertised tender is time consuming process and therefore, when the purchase value is less than Rs.3 lakhs or if the item is urgently required, we invite tenders from a limited number of firms. These firms are normally our approved suppliers, but in certain cases, limited tenders can be invited from unregistered firms also with the approval of the competent authority. Different forms of limited tender are :

(i) Ordinary limited tenders -- when separate tender inquiries are sent for each item;

(ii) Weekly Stores Bulletin -- All COSs publish a weekly bulletin containing purchase requirements of all purchase sections. This bulletin, containing details of about 200 to 300 items is posted to all registered suppliers who are subscribers for the bulletin.

(iii) Special Limited Tenders -- These are limited tenders issued for the item whose estimated value is more than Rs. 3 lakhs. We resort to this system in case of all safety items items urgently required and items having only limited sources of supply.

(c) Single Tender : In this system, tender inquiry is sent to only one firm. This is resorted to in the following situations:

(i) There is only single supplier of the item i.e. the item is of proprietary nature

(ii) Item is extremely urgently required and there is no time to go for limited tender inquiry.

(iii) Items of petty value where it may not be economical to go for competitive offers.

6.4.2 Ab-Initio Negotiations : In some cases, there may be a tendency on the part of the suppliers to quote higher rates in tender to meet many unforeseen situations. But if a face to face dialogue is held in the beginning itself, it may be possible to settle at a much better price that we would get through tenders. Therefore, instead of inviting tenders, we may call the likely suppliers and negotiate for the terms and conditions. For implementing this system, purchaser should have technical and commercial knowledge about the item being purchased and also good negotiating skills. In Railways, we do not follow this system, but Railway Reforms Committee has recommended to follow this system for some of the items.

6.4.3 Repeat Orders : If we already have an outstanding order, our additional requirement may be covered by increasing the quantity against this order. This concept may be further extended to place repeat order against the old complied orders. This system is very useful and efficient as no. of purchase formalities can be avoided. However, we have to ensure that earlier orders were placed on competitive basis at most economical prices. We may also provide for a price variation formula in the contract, to take care of the inflation.