PURCHASING NOTES

INTRODUCTION TO PURCHASING:

Definition and scope of purchasing:

Purchasing is defined as a process of acquiring goods, services and works in return for a price. All organisations invariably need input of goods and services from external suppliers or providers and to this extent therefore, purchasing function plays an integral part in ensuring the goods/services are provided to the company. The role and contribution of purchasing has increased quite steadily over the second half of 20th century with interest in the activity taking place in the last few years.

The reasons behind this paradigm shift based on importance and recognition of purchasing entail:

  1. New management concepts
  2. Advanced technology
  3. Government policies
  4. Fewer but larger suppliers
  5. Competition hence the need for quality

The scope of purchasing function is in line with the following activities:

  1. Coordination with user departments to identify purchase needs
  2. Identification of potential suppliers
  3. The conduct of market studies for important materials
  4. Negotiation with potential suppliers
  5. Analysis of proposals
  6.     Selection of suppliers
  7. Issuance of local purchase orders
  8. Administration of contracts and resolution of related problems
  9. Maintenance of a variety of purchasing records
  10. Payment approval and follow up
  11. Inspection and acceptance

Objectives of purchasing:

Purchasing objectives can be seen from two sides:

  • General objectives (managerial level)
  • Functional objectives (operational level)

The general objectives are the five rights:  that is acquiring materials of:

  • The right quality
  • From the right supplier
  • In t he right quantity
  • At the right time
  • At the right place

The perfection of the above purchasing rights invariably creates a desired service level necessary for optimal supply of materials.

The functional or operational level objectives of purchasing:

  1. To support the company operations with uninterrupted flow of materials and services
  2. To buy competitively-keeping abreast of the forces of supply and demand
  3. To buy wisely-Continual search for better values of quality, service, price relative to the buyer’s needs
  4. To keep stock investment and losses at a practical minimum
  5. To develop effective and reliable sources of supply
  6. To develop good relationships with the supplier community and good continued relationship with active suppliers
  7. To achieve maximum integration with other departments of the firm
  8. To handle the purchasing function proactively in a professional and cost effective manner.,

 

Impact of purchasing and supplies management on organisational efficiency and profitability:

The concept of best practices in purchasing and supply management (PSM) has become the focus of much interest in recent years. This concept asserts that successful organizations employ certain activities or processes in line with purchasing that bring forth a high degree of value creation in business transaction. The distinct effects of purchasing and supplies function involve the following:

IMPORTANCE OF PURCHASING

  1. Through negotiation purchasing department enables the company to have enormous direct savings resulting to profitability in the long-run.
  2. Purchasing department does supplier appraisal an attribute that makes the company to deal with the only pre-qualified suppliers who add value in return. This function brings forth some semblance of efficiency/profitability in return.
  3. Purchasing department ensures that the company has supply continuity an aspect that ensures that the production performs its work continuously. To this extent therefore the company gains efficiency/profit in return once all the activities have been made.
  4. Establishment of supplier development by the purchasing department enables a company to have the right materials hence this affects the profit margins in the long run. The issue of efficiency is being put forth since the supplier(s) will be reliable.
  5. Purchasing department act as a link between the buying company and the external entities (suppliers) hence provide any useful information for decision making thus this creates efficiency in the business transaction.
  6. Purchasing department prepares proper documentation and procedures based on acquisition of goods and services hence bring forth efficiency, fairness and transparency.
  7. Purchase department coordinates with accounts department to ensure suppliers are paid on time and ensure the right quantities of goods are delivered to the company hence this brings efficiency in the production line.
  8. Purchasing department carries out research in order to increase the knowledge on the market opportunities hence make the right decisions when acquiring goods and services.
  9. Purchasing department initiate purchasing and supply training activities to increase competence of its staff which in turn creates efficiency.
  10. Purchasing department implement proper purchasing policies and other appropriate strategic purchase decisions which bring forth efficiency in return.

 

Relationship between the purchasing and supply function with other departments:

Some issues on which interaction and cooperation may take place between purchasing and other company departments include the following:

 

  • Purchasing and finance/accounts department:
  • Finance/accounts department prepares budget allocation for goods/services to be purchased in a given time period
  • The purchase department establishes and forwards to finance/accounts department value analysis report for goods/services to be purchased
  • Finance/accounts department briefs the purchasing department on issues based on supplier payment
  • Purchasing department gives accounts department information based on damaged items and obsolete items
  • Purchasing department gives out information based on stock movement to the accounts department
  • Purchasing/supplies department works together with accounts department during stock taking exercise which is based on assessing the variance status of the company’s inventory.
  • Stores personnel who works under purchasing/supplies department works together with the accounts personnel when it comes to the issue of receiving goods from the supplier(s). The accounts personnel checks whether the amount indicated in the invoice correspond with the amount indicated in the local purchase order (LPO).

 

  • Purchasing and design department:
  • Preparation of specifications for purchase of materials and components
  • Quality assurance or defect prevention
  • Value engineering and value analysis
  • Information to departments regarding availability of materials, suppliers and costs
  • Agreement of alternatives when specified materials are not available
  • Creation of library of books, catalogues, journals and specifications for joint use by the design and purchasing departments

 

  • Purchasing and production (User department)
  • Preparation of material schedules to meet just in time requirements
  • Ensuring that delivery schedules are maintained
  • Control of inventory to meet production requirements
  • Disposal of scrap and obsolete items
  • Quality control or defect detection and correction
  • Approval of ‘first-off samples’
  • Make or buy decisions
  • General involvement in such techniques and systems as optimised production tech nology, computer integrated technology, materials requirement planning (MRP) and manufacturing resource planning (MRP 2)

 

  • Purchasing and human resource development:
  • Purchasing professionals gives out technical expertise when a prospective purchasing staff is being interviewed for a job.
  • Human resource personnel liaise with purchasing managers on checking the performance of purchasing employees through job appraisal analysis.
  • Human resource development relates with purchasing department when it comes to issues of arranging training and seminars for the purchasing staffs.
  • Human resource development work hand in hand with purchasing department through provision of motivational incentives for the purchasing staffs. This entail the acknowledgment of best employees through giving out Awards, presents and so on.
  • Purchasing department works also with human resource development on disciplinary matters of the employees.

 

  • Purchasing and marketing:
  • Provision of sales forecasts on which purchasing can base its forward planning of materials, components etc
  • Ensuring that through efficient buying, purchasing contributes to the maintenance of competitive prices
  • Obtaining materials on time to enable marketing and production to meet promised delivery dates to the end-customer
  • Exchange of information regarding customers and suppliers
  • Mar keting implications on partnership sourcing

 

  • Purchasing and information technology department (IT):

Purchasing department and IT have an increasing number of interdependencies. In some cases IT function is outsourced by the purchasing function. To this extent therefore its performance is evaluated accordingly by the purchasing department. Also the manager of IT works closely with purchasing manager to develop automated procedures and reports in line with purchasing. To add on that IT department establishes computer devices to purchase and to this extent the IT manager prepares purchase order requisition (POR) for such items and forwards the same to purchasing department. On the other hand the purchasing department sources for such devices on behalf of the IT department.

 

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