Materials today are lifeblood of industry. They must be available at the proper time, in the proper quantity , at the proper place, and at the proper price. Purchasing is the function of buying materials and services from external sources in an organization. It is one of the most critical functions as it provides the input materials to the organization for converting it into output products. Purchase management is the management of the purchase and procurement process and related aspects in the organization.
Purchase department buys raw materials, equipment, spare parts, consumables, and services etc. as required by the organization and hence purchase department has a very important role in the functioning of the organization. Purchase activity is one of the most crucial activity in the organization and needs an effective management. It is the main activity in the area of material management.
Often procurement and purchasing are used as synonym to each other. Procurement 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 the organization 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.
In a manufacturing organization, purchase is the first element which affects the product cost and hence has a big impact on the organizational profit. The organization needs an efficient and economic purchasing and procurement of its various supplies of materials from the suppliers. The purchase department which performs the function of purchasing and procurement of the materials is to function very efficiently. Purchasing is no doubt a vast and complex subject and as the competition among the organizations are growing, the purchasing function of the organization is also seeing a lot of evolution.
The objectives of purchasing is to buy materials and services covered under the following seven principles of purchase management. These seven principles are also known as 7 Rs. (Fig 1)
- Purchase of material at right quality
- Purchase of material in right quantity
- Purchase of material from the right source
- Purchase of material at the right price
- Delivery of material at the right place
- Delivery of material at the right time
- Delivery of material with the right mode of transport
Fig 1 7 Rs of purchase management
However, in general management parlance the objectives of purchasing are as follows.
- To support the operations of the organization by following the organizational policies with an uninterrupted flow of materials and services.
- To buy needed materials competitively and wisely and to obtain high quality supplies
- To optimize the inventory management in the organization and to avoid stock out situations
- To assure prompt and dependable deliveries and to develop reliable alternate sources of supply
- To develop good relationship with the suppliers and a good continuing supplier relationship
- To develop good and new suppliers
- To maintain proper and up to date records
- To contribute in product improvement and to make economic ‘make or buy decisions’
- To achieve maximum integration with the other departments of the organization
- To train and develop highly competent personnel who are motivated to make the organization as well as the purchase department succeed
- To develop policies and procedures which permit accomplishment of the preceding objectives at the lowest reasonable purchasing cost
The functions of purchasing include the following.
- The requisition of material is necessary by proper authority to initiate its purchase.
- To select proper supplier for the materials requisitioned, before placing an order.
- To negotiate about the price of the material from the supplier to ensure that the material is purchased at the cheapest price.
- To assure the quality of the material which should not be compromised with the cost of the material.
- To set the proper purchase policy and procedure.
- To derive the maximum value for each unit of currency spent in buying.
Purchasing is a complex area and tendering for good suppliers and the consequential negotiating of firm and favourable contracts needs special skills of the persons involved in purchasing. A poorly negotiated contract that ties the organization to a bad supplier and high prices can quickly damage the organization’s reputation and profit.
The whole system of purchasing , in terms of phases or grouping of related activities, can be classified in the following three systems.
- Pre ordering system
- Ordering system
- Post ordering system
Considering the operations of the organization, purchasing can have different approaches. These approaches are as follows.
- Tender purchasing (can be open, global, limited, or single tender)
- Negotiated purchasing
- Rate contract
- Automatic procurement or minimum stock purchasing
- Blanket order
- Repeat ordering
- Spot purchasing
- Risk purchasing
- Forward purchasing
- Speculative purchasing
- E procurement
The common factors required to be indicated for invitations of all types of tenders include the following.
- Proper nomenclature with clear specifications, user’s requirements, bill of materials, evaluation, testing and acceptance criteria including inspection process chart and test schedules.
- Clauses for security deposit and earnest money deposit (EMD)
- Delivery schedule
- Liquidated damages clause
- Payment terms
- Insurance, if required
- Inspection agency, as applicable
- Mode of dispatch with place of delivery
- Validity period of the quotation
- Requirement of installation, commissioning and training, if applicable
- Force majeure clause
Purchase cycle consist of the following steps.
- Receipt of the material purchase requisition (MPR) from the indenting department and review the requirement against available stocks.
- Reconcilement of needs and the availability of budget
- Choosing of the procurement method
- Sending of the enquiry as per the selected method of procurement
- Receipt of quotation from the suppliers
- Making of comparative statement of thee received offers
- Negotiations with the suppliers with respect to terms and conditions and price
- Selection of the supplier
- Issue of purchase order or signing of the contract. The purchase order or the contract is to have clear material specification and other supply terms
- Monitoring of the order status
- Ensuring timely inspection and receipt of the materials
- Receipt of invoice and ensuring payments to the supplier as per purchase order/contract terms
- Proper record keeping during the complete cycle
Important points which are to be remembered during the purchasing activities are as follows.
- Complete and clear material specification
- Inviting quotations from capable and reputed organizations
- Comparison of offers based on basic price, freight and insurance, taxes and other levies
- Quantity, payment and any other discounts
- Payment terms
- Delivery period and performance guarantee
- Vendor reputation with respect to reliability, quality, technical capabilities, convenience, availability, after-sales service, and sales assistance
- Short listing for better negotiation terms
- Ensuring receipt of order acknowledgement
Sometimes organization is to carry out ad hoc purchases. These are purchases that are not available from the normal suppliers or purchases that are not normally made. To ensure that the purchasing strategy is adhered to, these purchases are very heavily monitored and controlled.
For an organization engaged in a continuous set of activities, where inputs are processed , on a regular basis for producing outputs , formalized systems and procedures are required to run its purchasing function as well as for ease in operation and accountability. Formal procedures are required to be laid down for initiating purchase, selecting suppliers, placing purchase orders, follow-up, receiving materials and so on. These are standard procedures which are made for the standardization and streamlining of purchasing activities. These standard procedures are often called organizational purchase manual.
Purchase procedures are the rules and regulations that define the organizational purchasing activities and keep purchasing legal and appropriate. These procedures also describe the ethics that purchasing personnel in the organization must embrace. These procedures are evolved to streamline the purchasing activities in the organization and remove adhocism while adhering to current regulatory policies of the land. These procedures eliminates the purchasing activities based upon assorted management instructions issued from time to time. These procedures also obviate procedural delays while ensuring uniform purchase activities based on organizational policies and values. These procedures details what can and cannot be done as well as how each activity must be undertaken. Most of the organizations publish their purchase procedures so that all can see them. Purchasing procedures remove need for taking approvals for every purchase activities. Approvals becomes necessary only if there are deviations from the purchase procedures.
Historic developments in purchase management
Corporate purchasing dates back to its history sometimes in late 1890s. Purchasing was mainly used then as different department except some railroad organizations. Even during early 1900s purchasing was considered to be a clerical work. During the period of two World Wars, purchasing function increased due to the importance of obtaining raw materials, supplies, and services needed to keep the factories and mines operating. During 1950s and 1960s purchasing continued to gain stature as the techniques for performing the function became more refined and as the number of trained professionals increased but still purchasing agents were basically order-placing clerical personnel serving in a staff-support position.
In the late 1960s and early 1970s, purchasing personnel became more integrated with a materials system. As materials became a part of strategic planning, the importance of the purchasing department increased. In the 1970s the oil embargo and the shortage of almost all basic raw materials brought much of business world’s focus to the purchasing arena. The advent of just-in-time purchasing techniques in the 1980s, with its emphasis on inventory control and supplier quality, quantity, timing, and dependability, made purchasing a cornerstone of competitive strategy.
During early 1990s, value proposition in purchasing increased. People realized that by letting purchaser negotiate and ask for discount bring lots of cost reduction. Cost savings became a buzz word and of course control over the buying process remained one important function of purchasing. During late 1990s the purchasing evolved into strategic sourcing. It has become an organization wide process that continuously improves and re-evaluates the purchasing activities of the organization. More emphasis is now on supplier data base. Contracts are now sourced for long term basis to have better cost. Supplier relationship building and supplier management has started. In the past decade of 2000s, purchasing evolved from a myopic view on cost to a much broader terms. Some of the new developments which are widely used now are as follows.
- Assessment of a organization’s current spend – spend analysis
- Assessment of the supply market – low cost sourcing
- Procurement technology evolved – SAP, ERP
- Total cost analyses
- Identification of suitable suppliers. – supplier management
- Strategic sourcing
- Data mining and benchmarking
- Implementation of new supply structure – lean purchasing
- Integrating purchasing activities with the supply chain management