Purchase Management is a function of materials management in a company. Their basic function is procuring the inputs for production function. This function encompasses suppliers in the market external to the organization and several internal to the organization.
Till recently, the purchasing process simply involved placing an order with the supplier who offered the lowest price. Nowadays, increase in competition and market demand and scarcity of resources have forced organizations to reexamine their purchasing activities. The purchasing department functions have expanded considerably and include activities such as verifying the credentials of suppliers, inspecting the quality of the material to be purchased, ensuring the timely delivery of the material, etc.
While the value of purchased items varies from industry to industry, it adds up to more than fifty percent of sales in all industries. Purchase management is regarded as a significant activity in many organizations because of the high cost involved in carrying out purchasing activities, increasing quality benchmarks, and increasing global competition. Purchase departments buy raw materials, parts, machinery, and services used by production systems. The objective of purchase management is to procure the right equipment, materials, supplies and services in the right quantity, of the right quality, from the right suppliers, at the right time, at the lowest price.
Importance of Purchase Management
Purchase management is considered to be very important function of materials management in a company. Its importance is felt even outside the formal scope of materials management. As the purchase decisions commit a very large portion of financial resource of the company purchase function is said to be highly important. Purchase personnel deal with large number of external agencies while performing their functions. Hence they represent company’s reputation in the outside world. As they negotiate and finalize deals worth lot of money for the company their integrity is of utmost importance for the organization.
Objectives or Goals of Purchase Management
Primary objective or goal of purchasing function is making inputs available to the conversion process at minimum cost to the final output of the company. Thus focus is on system output rather than on micro level objectives.
The inputs to be made available are raw materials, semi finished items, bought out items etc. There are certain parameters to be monitored for fulfilling the system objectives. We can call them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs are achieved primary objective is fulfilled:-
- Right Price: Right price is determined by costing the production process of the supplier. Right price is determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost. Tender system should be used to identify lowest responsible bidder rather than lowest bidder. Principles normally used to ensure right price are cost structure and learning curve.
- Right Quantity: Right quantity of purchase is the one that ensures no excess and no shortage. High priority items are subjected to EOQ analysis to determine the right quantity for purchase. This ensures overall minimum cost for inventory.
- Right Quality: In an item purchased should ensure adhering to mutually accepted standard by supplier and customer at the time of finalizing the purchase order. The accepted standard may be a drawing, a sample, a grade or a universal standard like DIN, IS, BS etc.
- Right Place: is the one where the item is going to enter the value stream. If the item is not available here, when needed, it is in short supply for the process.
- Right Time: is as decided by production schedule for meeting customer’s requirements.