Purchasing

Purchasing is a functional activity performed in virtually every business, organization, and household, where goods or services are acquired from an external source in exchange for money. It is an essential part of the supply chain process that involves sourcing and procurement.

Purpose and Role

The purpose of purchasing is to ensure that the organization has the right materials, goods, or services at the right time, in the right quantity, at the right price, from the right supplier, and at the right place. Its role is to meet the organization's operational needs and support its strategic goals, including cost control, quality management, and building relationships with suppliers.

Components

The purchasing process generally involves several key stages:

1. Need Identification: Recognizing the need for a product or service.
2. Supplier Identification: Finding potential suppliers who can fulfill the need.
3. Evaluation of Suppliers: Assessing the potential suppliers in terms of quality, price, delivery time, etc.
4. Negotiation: Finalizing the terms of purchase, including price, quantity, delivery, and payment.
5. Purchase Order Issuance: Placing the formal order with the chosen supplier.
6. Delivery and Inspection: Receiving and checking the purchased goods or services.
7. Payment: Settling the invoice from the supplier.

Importance

Purchasing is vital for various reasons. It ensures the uninterrupted flow of materials for business operations, helps to build strong relationships with suppliers, contributes to cost savings and efficiency, and can provide a competitive advantage when managed effectively.

History

Traditionally, purchasing was seen as a transactional process focused on buying goods and services at the lowest possible cost. However, over time, its strategic importance has been recognized, with an emphasis on building strong, collaborative relationships with suppliers, quality improvement, and integration with other business functions.

Benefits

1. Cost savings: Effective purchasing can result in significant cost savings through bulk buying, negotiating discounts, or finding lower-cost suppliers.
2. Quality control: Purchasing ensures the quality of the goods or services bought, which can impact the quality of the end product or service.
3. Risk management: By managing supplier relationships and performance, purchasing can help mitigate supply chain risks, such as disruptions or delays.

Cons

1. If not managed effectively, purchasing can lead to overstocking or understocking, both of which can disrupt operations and increase costs.
2. It can be time-consuming to source suppliers, negotiate terms, and manage supplier relationships.

Example

A restaurant needs to purchase ingredients for its dishes. The purchasing manager identifies suppliers who can provide high-quality ingredients at a competitive price, negotiates terms, places orders, checks the quality of the ingredients upon delivery, and arranges for payment.

See Also

1. Procurement: This encompasses acquiring goods and services, including purchasing, sourcing, supplier management, and contract management.
2. Supply Chain Management (SCM): Managing the flow of goods and services from suppliers to customers. Purchasing is a key component of this.
3. Inventory Management: This involves controlling and overseeing the ordering, storage, and use of components that a company uses to produce items it sells.
4. Strategic Sourcing: This approach to purchasing focuses on long-term goals, such as building relationships with suppliers and integrating purchasing with other business functions.
5. Supplier Relationship Management (SRM): This involves strategically planning and managing all interactions with third-party organizations that supply goods and/or services to maximize the value of those interactions.
6. Adversarial Purchasing