Meaning and Definition of Purchasing
Purchase management defines the acquisition of various goods and services from the outside network. It is a routine function of any organization that also serves as one of the business’s strategic avenues. A business requires that various materials, parts, stores, equipment, and machinery be available at all times and at a reasonable price. This will assist management in achieving scale economies and being in a better position to compete.
According to Walters, purchasing function means “the procurement by the purchase of the proper material, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in proper quality and quantity at the proper time and at the lowest price, consistent with the quality desired“
What is Purchase Management?
Purchase management brings efficiency and effectiveness to the system of purchases. It is followed by the management and thereby assisting in carrying out the process of manufacturing.
The flow and the passage of the movement of the goods and the services are directed by the purchase management and alongside it maintains relations with the suppliers of the goods and the services. In order to reap the benefits of purchase management, one must possess the knowledge of applied laws, supply chain, logistics and transportation, and the related invoicing and the inventory procedure.
Thus, it can be concluded that purchase management is nothing but procuring the required material from the right vendor at a minimum price in the requisite quantity and that too at the right time. In the case of big organizations, there may be a number of vendors available to supply a particular product, and choosing one from them is a vital decision from the management’s perspective.
08 Key Objectives of Purchasing?
For a manufacturer, the purchasing of materials is the most important activity, which is undertaken with the following objectives in mind:
1. Availability Materials, Supplies, and Equipment at the Minimum Possible Costs:
Procurement of raw materials, supplies, and equipment, which together constitute inputs for a manufacturing unit, at minimum possible rates. It facilitates bringing down the overall input cost and cost of production. Reduce the cost of production leads to better profitability for the organization.
2. Enable Regular Flow of Production:
Incessant supply of various constituents of inputs ensures as and continuous production process. In turn, keeps the production cost in check, and thereby maintains the profitability level of the organization.
3. Increase Asset Turnover:
As a result of the purchase department’s ongoing hard work, not only investments are maintained at an appropriate level, but fixed assets are also created. However, as a prude measure, the investment in inventories/fixed assets needs to be kept at the minimum level with reference to the sales volume. This is achieved through efficient inventory management. With the augmentation of the turnover of assets, the organization’s profitability is also improved.
4. Develop Alternate Sources of Supply:
With a view to improving its negotiating power, it is desirable to the part of the purchasing department to explore the possibility of finding alternate suppliers of various inputs especially the basic raw material, and the cost of material is likely to come down.
5. Establish Cordial Relations with Suppliers:
Maintaining a cordial relationship with the suppliers goes a long way in creating an affirmative reputation for the organization in the market.
Such reputation may yield dividends in various forms like
(I) acquisition of supplies at the most competitive rates,
(ii) getting priority over others in supply of materials during a period of their shortage,
(iii) getting advance signals of an impending shortage of materials,
(iv) timely intimation of any innovation with regard to a substitute of the material currently in use,
(v)getting the facility of making payments with delay, in case of short-term liquidity constraints, etc.
6. Achieve Close Co-ordination with Other Departments:
The purchase department is required to function in close co-ordination with the following departments of the organization:
- Production Department:
The production department indicates the specifications (quality as well as quantity) of the materials required, the timeframe within which the supplies have to be received, and any specific items required, etc.
- Engineering Department:
The engineering department has to indicate the specifications in respect of various tools, machines, equipment, etc. to be purchased.
- Marketing Department:
The marketing department is required to give inputs in respect of sales projections, their impact on the level of production, and purchase of materials, and the impact of quality of inputs on quality of outputs and sales.
- Finance Department:
The finance department is needed in connection with the maintenance of the desired level of materials, raising of working capital finance through the hypothecation/pledge of goods, availing the discount on account of bulk purchase of materials, scheduling of capital as well as current investments, etc.
- Human Resource Department:
The Human Resource department has to play a crucial role in planning, training, and developing the Skills of people posted in the purchasing department. It is also responsible for maintaining a cordial relationship with vendors.
7. Train and Develop the Personnel:
The purchase department has to deal with persons showing varied human traits. The company needs to create a workforce of personnel with an innovative and imaginative mindset. This can be achieved through appropriate training and skill development of personnel on various subjects like:
b. Supplier Upgradation or Development
c. Quality Management System
e. Production Part Approval Process (PPAP)
f. 5S – Work Place Management System
8. Efficient Record Maintenance and Management Reporting:
Maintenance of records, which involves a lot of paperwork, is an important function of the purchasing department. Record keeping should be standardized with a view to maintaining uniformity in the system. As the purchasing department operates as an independent entity, there is also a need to have a system of reporting their major activities to the company’s management at regular intervals.
Purchasing is a market exploration operation that seeks out goods and services of desired quality, quantity, and price at the lowest possible price and at the earliest possible time. Suppliers who can provide standard items at a reasonable price are chosen.
Purchasing in a business is now a specialized function. It was discovered that by delegating purchase responsibility to a specialist, the firm can achieve greater purchasing efficiencies. Furthermore, purchasing accounts for more than half of the firm’s capital expenditure budget.