What is Purchasing Management?
Purchasing management, also known as procurement management, refers to the process of planning, acquiring, and managing the goods and services required by an organization to support its operations. It involves various activities and tasks aimed at obtaining the right products or services, at the right time, and at the right cost.
The primary goal of purchasing management is to ensure that an organization has a steady supply of materials, equipment, and services needed to meet its production or operational requirements. It involves sourcing suppliers, negotiating contracts, and managing the overall procurement process to maximize value and minimize risks.
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Meaning of Purchasing Management
Purchasing is the process of procuring materials, supplies, tools, machineries and other equipment in order to maintain continuous operations of an organisation. According to Westing, Fine and Zenz, purchasing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, the follow-up to ensure timely delivery, inspection to ensure both the quantity and the quality, to control traffic, receiving, storekeeping and accounting operations related to purchases.
However, in the present time, the process of purchasing has moved on from being a transactional activity to a strategy-oriented activity. Nowadays, organisations look forward for reduced costs, higher-value products and sophisticated technology.
Types of Purchases
Purchasing today has become a specialised function with having a broad knowledge of markets. The purchase department needs to ensure that there is sufficient supply of materials to maintain a smooth flow of production or marketing of goods.
There are two types of purchases, which are explained as follows:
Individual Purchase
It includes types of items or products which are purchased for the personal use or consumption. Mainly there are four types of factors for individual purchase behaviour
- Cultural factors
- Social factors
- Personal factors
- Psychological factors
Organisational Purchase
Organisations purchase materials for the requirement of business or inputs to produce other products. Any organisational buying has to follow a particular structure that has been stipulated within the guiding principles of the firm.
The purchase process of an organisation is not limited to purchasing materials but also involves negotiations with external agencies, vendors, etc., to finalise the deal. Moreover, purchased goods must be of the specified quality and quantity in the said time at affordable prices. Purchasing decisions are critical for an organisation as they directly impact inventory levels.
Here, the role of purchasing management comes into picture. Purchasing management is a business discipline that allows organisations to manage purchasing functions effectively. It involves a systematic flow of materials and ensure smooth operations. At its core, purchasing management is all about saving money and increasing profits.
Roles of Purchasing Department
The important goals for the purchasing department of an organisation are as follows:
Right Price
The purchase department works at determining prices which help in reducing the costs during the process of production.
Right Quantity
The purchase department ensures perfect quantity of materials and that there is no shortage of materials or the required inputs for production. At the same time, it should also be considered that there is not an excess of purchase. The right quantity ensures minimum inventory with reduction in cost.
Right Quality
The quality of the product should be as per the requirement of the client. The accepted standard of the product should be on a mutual agreement.
Right Place
Right place is defined by the requirements of the product for production in the process of value stream of processes. The material availability at the right place is important for the process of production.
Right Supplier
Selecting the right supplier is one of the critical decisions made by the purchasing department. An ideal supplier is one that delivers goods on time and at an optimal price and ensures that the quality of goods is in compliance with the organisation’s standards. On the contrary, wrong selection of a supplier can adversely affect the satisfaction of deliverables to the customers as well as reputation of the organisation.
Right Mode of Transportation
The selection of the right transportation mode is crucial to any organisation. An effective use of transportation reduces shipping and logistics costs considerably. An organisation needs to consider various factors while selecting the mode of transportation to get products. Based on the type of consignment, budget considerations and the urgency of making delivery, each mode of transport has its own advantages and disadvantages.
Right Time
It is important for the inputs to be available at the right time for the process of production to take place smoothly. It is necessary to adhere to the production schedule for taking care of the needs of the client.
Importance of Purchasing Management
As discussed above, purchasing management is a prominent aspect of any organisation. Effective purchasing decisions can lead to significant cost savings for an organisation; on the other hand, poor purchasing strategies may result in huge losses for the organisation. Let us discuss the importance of purchasing management through the following points:
Cost Control
As mentioned earlier, selection of the right supplier is one of the critical functions of the purchasing management. Managers analyse suppliers based on various factors such as:
- Which suppliers are providing the required inputs for production?
- What is the cost at which they are providing the inputs?
- What is the reputation of a supplier in the industry?
- Whether the supplier is making on-time shipments?
- What are the provisions of warranties and other after-sales services?
After scrutinising a number of factors, a supplier is selected by an organisation. Since switching to different vendors can be a costly affair for the organisation, selecting a reliable vendor saves costs considerably.
Price Stability
Achieving price stability is the prime purpose of purchasing management. Frequent fluctuations in the cost of production can jeopardise the decision-making process of other departments too. For example, it would be difficult for the marketing department to quote the exact price of the product to customers; the finance department would not be able to estimate profits, while the accounts department would not get insight into the cash flow of the organisation.
Purchasing managers strive to stabilise the cost of production using various ways; for example by:
- Indulging in price negotiations with suppliers
- Achieving the lowest price with suppliers
- Locking in the value for a lengthy contract
- Dealing with banks to hedge items with volatile prices in the form of a forward contract
Supply Chain Management
Managing the supply chain of an organisation is another KRA of purchasing managers. They are accountable for ensuring that all of the necessary materials are delivered by suppliers on time as per the expected standards of quality so that the production process remains smooth. If any of these shipments are delayed, it can have adverse impact on the production chain. For example, a shipment of faulty screws can halt the production process of a furniture manufacturing organisation.
Customer Satisfaction
Purchasing managers are responsible for shaping customers’ experiences; thereby ensuring their satisfaction levels. Customers feel satisfied if the quality products are delivered to them on-time and at nominal prices. In addition, high quality products can lead to repeat business for the organisation. Managers can select suppliers that provide high-quality materials at lower costs so that these cost savings can be issued to customers.
Aspects of Purchasing Management
Purchasing today has become a specialised function with having a broad knowledge of the markets. The purchasing department needs to ensure that there is a sufficient supply of materials to maintain the smooth flow of production. Purchasing management includes several aspects. Some of them are explained as follows:
Sourcing Strategies
Sourcing is the subset of purchasing. The term ‘sourcing’ refers to a process of developing a supply channel. In other words, sourcing is concerned with finding the best supplier for goods and services. It involves developing strong relationships with suppliers in order to maintain consistent quality and availability.
Some common examples of sourcing strategies are outsourcing (taking products and services from outside suppliers that were produced internally earlier); vertical integration (merging companies at different stages of production/distribution); single sourcing (purchasing from one supplier); multi sourcing (purchasing from a number of suppliers); and so on.
Social responsibility is a theory that is tied to ethics to encourage morally correct behaviour. Every action of an organisation has considerable effect on community. Socially responsible purchasing involves various processes, methods and rules which are necessary for ensuring a fair method of procuring. Organisations need to follow a strong code of ethics for identifying the vendors, negotiating and procuring goods.
The employees should be trained on a regular basis to practice ethical behaviour. For example, an organisation should make payments to concerned parties on time. A logical and valid reason should be shared with a party in case of any deductions in the payment.
Objectives of Purchasing Management
Purchasing management has evolved over the years and has contributed immensely in standardising the process of procuring goods or services for the organisations across the globe. Nowadays, every organisation depends on the purchasing department for meeting its business requirements while reducing investments in purchasing the right quality and quantity of products or services at the lowest price.
The purchase department helps in increasing the profitability of the organisation by controlling the costs, formulating effective purchasing management strategies and maintaining buyer-seller relationships. The purchasing department helps the organisation in identifying its needs and requirements. The department uses the organisation funds for buying the materials required for production and focus on adhering to given budgets.
Purchasing management aligns with the objectives of the organisation and works on formulating strategic decisions to increase the profits of the organisation. It is necessary for the strategic objectives to be aligned with the organisation goals for improving performance and to prevent unethical practices.
The main objectives of purchasing management are as follows:
- To Reduce the Costs
- To Ensure Regular Supply and Reduce Risks
- To Fulfil Business Requirements
- To Manage Long-term Relationships
- To Improve Quality
- To Encourage Innovation
- To Leverage Technology
To Reduce the Costs
The main objective of the purchasing department is to bring down the costs by identifying the right suppliers and getting the materials at the right price and quality. The purchase manager ensures maximum savings by effectively selecting the vendors who can supply material within the budgets.
To Ensure Regular Supply and Reduce Risks
The identification of suitable vendors for providing the goods and services helps in controlling and managing risks involved in supply chain management. The department ensures the right procedures and steps are followed while procuring materials for the organisation. The purchasing department ensures that the suppliers supporting the organisation should work ethically and not indulge in wrong unlawful practices.
To Fulfil Business Requirements
It is vital for an organisation to be involved with the right suppliers and vendors for ensuring that they supply the suitable goods and materials required for the organisation. This helps in controlling the prices and also fulfils the organisational requirements for achieving its objectives.
To Manage Long-term Relationships
Purchasing management involves outsourcing requirements to suppliers who are interested in doing business with the organisation. It looks at a mutual longterm relationship and sharing of benefits by working together. It is vital for the purchasing department to identify people who would be interested in long-term association with the organisation.
To Improve Quality
Purchasing management establishes the right metrics for quality and standardised performance levels. An organisation monitors and tracks the quality of products which should be produced according to the requirement of the client.
To Encourage Innovation
It is necessary for the purchasing department to work closely with the vendors and suppliers for providing goods and services which are innovative to give it a competitive advantage. The competitive advantage could be in terms of quality, feel, look, convenience, price, etc.
To Leverage Technology
It is necessary for the purchasing department to work with the latest technologies for the smooth working of its supply chain management. The latest technology such as ERP solutions is very effective in improving efficiency and managing the problems of inventory control. The efficiency of the supply chain management has increased with the implementation of the latest technology solutions which give the organisation a competitive edge.
