Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations. Typically the word “purchasing” is not used interchangeably with the word “Procurement”, since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing.
Purchasing function, in a business environment, is one of the most critical functions as it provides the input for the organization to convert into output. Materials today are lifeblood of industry. They must be available at the proper time, in the proper quantity, at the proper place, and the proper price. Company costs and company profits are greatly affected by them as normally, a manufacturing organization spends nearly 50% of its revenue in purchasing.
Purchasing managers/directors, and procurement managers/directors guide the organization’s acquisition procedures and standards. Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process. The three departments do not all report to the same senior manager to prevent unethical practices and lend credibility to the process. These departments can be purchasing, receiving; and accounts payable or engineering, purchasing and accounts payable; or a plant manager, purchasing and accounts payable. Combinations can vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.
Historically, the purchasing department issued Purchase Orders for supplies, services, equipment, and raw materials. Then, in an effort to decrease the administrative costs associated with the repetitive ordering of basic consumable items, “Blanket” or “Master” Agreements were put into place. These types of agreements typically have a longer duration and increased scope to maximize the Quantities of Scale concept. When additional supplies are required, a simple release would be issued to the supplier to provide the goods or services.
A typical purchase department is usually engaged in purchasing a number of materials and services falling in different categories. The activities are performed regularly by purchase professionals with the objective of fulfilling organization’s materials and services needs.
Naturally, depending upon the nature of procurement, environmental practices etc the purchasing systems and procedures may also vary substantially. However, purchase procedure can be seen to have a bit of standardization across the globe and therefore a professional purchasing system does show following steps that eventually constitute a purchasing cycle.:
¾ Recognition & description of need
¾ Transmission of need
¾ Selection of source to satisfy the need
¾ Contracting with the accepted source
¾ Following up with the source
¾ Receiving and inspecting material
¾ Payment and closure of the case
Profit making Centre
Purchasing is responsible for spending nearly half of a company’s income for buying the input materials. Obviously, any saving achieved by it results into direct saving for the company and all such savings are a company’s profit Going by a thumb rule “even 1% saving achieved in Purchasing results in 5% profit for any organisation”.
Procurement vs. Purchasing
It is used to define one of several supply functions involved in logistics activities. In the broadest sense procurement includes the entire process by which all classes of resources (people, materials, facilities and services) for a particular project are obtained. Since purchasing is a unique function , it differs a bit from procurement in the sense that while procurement , with the same objective has a wider domain , purchasing with the same objective is included in it !
Types of purchasing
Considering the nature of business an organization has there could be different approaches & hence purchasing can be any of these types:
¾ Forward purchasing
¾ Tender purchasing
¾ Speculative purchasing
¾ Rate Contract
¾ Zero store buying
¾ Blankest order
¾ Forward Buying: